<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended FEBRUARY 28, 1999
Commission File Number 000-19364
---------
AMERICAN HEALTHCORP, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 62-1117144
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
One Burton Hills Boulevard, Nashville, TN 37215
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(615) 665-1122
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---------- ----------
As of April 9, 1999 there were outstanding 8,233,684 shares of the Registrant's
Common Stock, par value $.001 per share.
<PAGE> 2
PART I.
ITEM 1. FINANCIAL STATEMENTS
AMERICAN HEALTHCORP, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
========================================
February 28, August 31,
1999 1998
========================================
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 11,470,148 $ 13,243,571
Accounts receivable, net 4,985,312 3,623,461
Other current assets 1,593,382 798,714
Deferred tax asset 998,000 998,000
----------------------------------------
Total current assets 19,046,842 18,663,746
----------------------------------------
Property and equipment:
Leasehold improvements 366,157 191,950
Equipment 6,842,229 5,828,698
----------------------------------------
7,208,386 6,020,648
Less accumulated depreciation (2,779,478) (2,336,242)
----------------------------------------
4,428,908 3,684,406
----------------------------------------
Long-term deferred tax asset 2,753,000 2,753,000
----------------------------------------
Other assets, net 245,039 290,513
----------------------------------------
Excess of cost over net assets
of purchased companies, net 11,274,030 11,465,139
----------------------------------------
$ 37,747,819 $ 36,856,804
========================================
</TABLE>
2
<PAGE> 3
AMERICAN HEALTHCORP, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
=================================
February 28, August 31,
1999 1998
=================================
<S> <C> <C>
Current liabilities:
Accounts payable $ 884,998 $ 1,015,918
Accrued salaries and benefits 2,276,533 2,985,589
Accrued liabilities 1,550,089 2,163,963
Income taxes payable 1,190,217 1,054,407
Current portion of other long-term liabilities 485,489 584,805
---------------------------------
Total current liabilities 6,387,326 7,804,682
---------------------------------
Other long-term liabilities 2,489,492 2,446,089
---------------------------------
Stockholders' equity:
Common stock
$.001 par value, 15,000,000 shares
authorized, 8,310,494 and 8,125,507
shares outstanding 8,311 8,125
Additional paid-in capital 24,662,307 23,719,833
Retained earnings 4,200,383 2,878,075
---------------------------------
Total stockholders' equity 28,871,001 26,606,033
---------------------------------
$ 37,747,819 $ 36,856,804
=================================
</TABLE>
3
<PAGE> 4
AMERICAN HEALTHCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
=============================== ===============================
Three Months Ended Six Months Ended
February 28, February 28,
1999 1998 1999 1998
=============================== ===============================
<S> <C> <C> <C> <C>
Revenues $ 12,238,955 $ 8,454,077 $ 24,073,844 $ 16,199,729
------------------------------- -------------------------------
Expenses:
Salaries and benefits 7,877,997 6,089,759 15,365,159 11,620,275
Other operating expenses 2,690,777 2,187,726 5,579,568 4,382,553
Depreciation and amortization 434,567 303,796 839,553 624,976
Interest -- 113 256 113
Spin-off stock option adjustment -- -- -- 5,770,000
------------------------------- -------------------------------
Total expenses 11,003,341 8,581,394 21,784,536 22,397,917
------------------------------- -------------------------------
Income (loss) before income taxes and
discontinued operations 1,235,614 (127,317) 2,289,308 (6,198,188)
Income tax expense (benefit) 519,000 (12,000) 967,000 (2,278,000)
------------------------------- -------------------------------
Income (loss) from continuing operations 716,614 (115,317) 1,322,308 (3,920,188)
Income from discontinued operations,
net of income taxes -- -- -- 56,483
------------------------------- -------------------------------
Net income (loss) $ 716,614 $ (115,317) $ 1,322,308 $ (3,863,705)
=============================== ===============================
Basic income (loss) per share:
From continuing operations $ 0.09 $ (0.01) $ 0.16 $ (0.49)
From discontinued operations -- -- -- 0.01
------------------------------- -------------------------------
$ 0.09 $ (0.01) $ 0.16 $ (0.48)
=============================== ===============================
Fully diluted income (loss) per share:
From continuing operations $ 0.08 $ (0.01) $ 0.15 $ (0.49)
From discontinued operations -- -- -- 0.01
------------------------------- -------------------------------
$ 0.08 $ (0.01) $ 0.15 $ (0.48)
=============================== ===============================
Weighted average common shares
and equivalents
Basic 8,291,652 8,072,065 8,219,924 8,064,625
Fully diluted 9,045,549 8,072,065 8,865,008 8,064,625
</TABLE>
4
<PAGE> 5
AMERICAN HEALTHCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1999
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained
Stock Capital Earnings Total
===================================================================
<S> <C> <C> <C> <C>
Balance, August 31, 1998 $ 8,125 $ 23,719,833 $ 2,878,075 $ 26,606,033
Exercise of stock
options 186 942,474 -- 942,660
Net income -- -- 1,322,308 1,322,308
-------------------------------------------------------------------
Balance, February 28, 1999 $ 8,311 $ 24,662,307 $ 4,200,383 $ 28,871,001
===================================================================
</TABLE>
5
<PAGE> 6
AMERICAN HEALTHCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
=================================
Six Months Ended
February 28,
1999 1998
=================================
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,322,308 $ (3,863,705)
Income from discontinued operations -- 56,483
---------------------------------
Net income (loss) from continuing operations 1,322,308 (3,920,188)
Income tax expense (benefit) 967,000 (2,278,000)
---------------------------------
Income (loss) before income taxes 2,289,308 (6,198,188)
Noncash expenses, revenues, losses and gains
included in income:
Depreciation and amortization 839,553 624,976
Spin-off stock option adjustment -- 5,770,000
Increase in working capital items (3,610,369) (900,660)
Other noncash transactions 498,979 346,047
---------------------------------
17,471 (357,825)
Income taxes (net paid) (579,521) (543,543)
Increase in other assets (70,614) (63,121)
Payments on other long-term liabilities (353,300) (34,091)
---------------------------------
Net cash flows used in operating activities (985,964) (998,580)
---------------------------------
Cash flows from investing activities:
Acquisition of property and equipment (1,435,754) (479,231)
Investment in discontinued operations including
spin-off costs -- (584,424)
---------------------------------
Net cash flows used in investing activities (1,435,754) (1,063,655)
---------------------------------
Cash flows from financing activities:
Exercise of stock options 648,295 128,957
Repurchase of stock -- (100,944)
---------------------------------
Net cash flows provided by
financing activities 648,295 28,013
---------------------------------
Net decrease in cash and cash equivalents (1,773,423) (2,034,222)
Cash and cash equivalents, beginning of period 13,243,571 12,226,821
---------------------------------
Cash and cash equivalents, end of period $ 11,470,148 $ 10,192,599
=================================
</TABLE>
6
<PAGE> 7
AMERICAN HEALTHCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) INTERIM FINANCIAL REPORTING
The accompanying consolidated financial statements of American
Healthcorp, Inc. and its subsidiaries (the "Company") for the three and six
month periods ended February 28, 1999 and 1998 are unaudited. However, in the
opinion of the Company, all adjustments consisting of normal, recurring accruals
necessary for a fair presentation, have been reflected therein.
The continuing operations of the Company consist primarily of Diabetes
Treatment Centers of America, Inc., a wholly-owned subsidiary. The Company's
discontinued operations represent AmSurg Corp. ("AmSurg"), formerly a
majority-owned subsidiary. The net assets and operations of AmSurg are shown as
discontinued operations due to the distribution of all the AmSurg common stock
held by the Company to the Company's shareholders on December 3, 1997.
Certain financial information which is normally included in financial
statements prepared in accordance with generally accepted accounting principles,
but which is not required for interim reporting purposes, has been omitted. The
accompanying consolidated financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended August 31, 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The continuing operations of American Healthcorp, Inc. (the "Company")
primarily consist of Diabetes Treatment Centers of America, Inc. ("DTCA"), a
wholly-owned subsidiary that is a national provider of diabetes patient services
to hospitals and managed care payors designed to enhance the quality and lower
the cost of treatment of individuals with diabetes.
The Company's discontinued operations represent AmSurg Corp.
("AmSurg"), formerly a majority-owned subsidiary that develops, acquires and
operates physician practice-based ambulatory surgery centers and specialty
physician networks in partnerships with surgical and other group practices. In
March 1997 the Company's Board of Directors approved a plan to distribute, on a
substantially (approximately 98.5%) tax-free basis, all of the shares of AmSurg
common stock owned by the Company to the holders of Company common stock (the
"Distribution"). The Distribution was completed on December 3, 1997. The Company
has received a letter ruling from the Internal Revenue Service confirming the
substantially tax-free nature of the Distribution.
Management's Discussion and Analysis of Financial Condition and Results
of Operations contains forward-looking statements which are based upon current
expectations and involve a number of risks and uncertainties. In order for the
Company to utilize the "safe harbor" provisions of the Private Litigation Reform
Act of 1995, investors are hereby cautioned that these statements may be
affected by the important factors, among others, set forth below, and
consequently, actual operations and results may differ
7
<PAGE> 8
materially from those expressed in these forward-looking statements. The
important factors include: the Company's ability to renew contracts for DTCA
hospital-based treatment centers on terms that are acceptable to the Company;
the Company's ability to execute contracts for new DTCA hospital-based treatment
centers and for managed care diabetes and cardiac disease population management
services; the Company's ability to effect estimated cost savings and clinical
outcome improvements under managed care contracts or to effect such savings and
improvements within the time frames contemplated by the Company; the ability of
the Company to negotiate favorable fee structures, including per member per
month payment terms, with managed care payors; unusual and unforeseen patterns
of healthcare utilization by individuals with diabetes in the HMOs with which
the Company has executed a diabetes population management contract; the ability
of the HMOs to maintain the number of covered lives enrolled in the plans during
the terms of the agreements between the HMOs and the Company; the Company's
ability to implement its backlog of contracted lives within anticipated time
frames contemplated by the Company; the Company's ability to successfully
implement its cardiac disease population management program; the Company's
ability to attract and/or retain and effectively manage the employees required
to implement its agreements with hospitals and managed care organizations; the
impact of existing and any future litigation or judicial or administrative
proceedings; and the Company's ability and the ability of its customers and
vendors to prepare their mission-critical information technology resources to
handle Year 2000 processing requirements. The Company undertakes no obligation
to update or revise any such forward-looking statements.
The following table sets forth the sources of the Company's revenues by
customer type as a percentage of total revenues from continuing operations for
the three and six month periods ended February 28, 1999 and 1998.
<TABLE>
<CAPTION>
Three months ended Six months ended
February 28, February 28,
-------------------------------------------
1999 1998 1999 1998
------------------ -----------------
<S> <C> <C> <C> <C>
DTCA Hospital Contracts 46% 76% 48% 77%
DTCA Managed Care Payor Contracts 53 22 51 21
Other 1 2 1 2
------------------ -----------------
100% 100% 100% 100%
================== =================
</TABLE>
DTCA hospital-based diabetes treatment centers are located in and
operated under contracts with general acute care hospitals. The primary goal of
each center is to create a center of excellence for the treatment of diabetes in
the community in which it is located and thereby increase the hospital's market
share of diabetes patients and lower the hospital's cost of providing services
to this population. Fee structures under the hospital contracts consist of
either fixed management fees, incentive-based fees or a combination thereof.
Incentive arrangements generally provide for fee payments to DTCA based on
changes in the client hospital's market share of diabetes inpatients and the
costs of providing care to these patients. The form of these contracts includes
various structures ranging from arrangements where all costs of the DTCA program
for center professional personnel, medical director fees and community relations
are the responsibility of DTCA to structures where all DTCA program costs are
the responsibility of the client hospital.
8
<PAGE> 9
The following table presents the number of DTCA hospital contracts in
effect and the number of hospital sites where DTCA services were provided under
the terms of these contracts or was in the process of initiating operations as
of February 28, 1999 and 1998. The number of hospital contracts and hospital
sites for these periods includes two Arthritis and Osteoporosis Care Center
("AOCC") contracts with hospitals to provide comprehensive arthritis and
osteoporosis services that are operated by DTCA.
<TABLE>
<CAPTION>
As of February 28,
--------------------
1999 1998
--------------------
<S> <C> <C>
Hospital contracts 57 56
Hospital sites where services are provided 74 72
</TABLE>
The components of changes to the total number of DTCA hospital
contracts and hospital sites under these contracts for the three and six months
ended February 28, 1999 and 1998 are presented below.
<TABLE>
<CAPTION>
Three months ended February 28,
---------------------------------------------
1999 1998
---------------------------------------------
Hospital Hospital
Contracts Sites Contracts Sites
-------------------- -------------------
<S> <C> <C> <C> <C>
Total contracts/sites at
beginning of period 57 74 58 74
New contracts/sites
signed 3 9 1 1
Contracts/sites
discontinued (3) (9) (3) (3)
-------------------- -------------------
Total contracts/sites at
end of period 57 74 56 72
==================== ===================
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
Six months ended February 28,
---------------------------------------------
1999 1998
---------------------------------------------
Hospital Hospital
Contracts Sites Contracts Sites
---------------------- ---------------------
<S> <C> <C> <C> <C>
Total contracts/sites at
beginning of period 57 72 58 74
New contracts/sites
signed 4 12 3 4
Contracts/sites
discontinued (4) (10) (5) (6)
Total contracts/sites 57 74 56 72
</TABLE>
During the three month period ended February 28, 1999, six contracts
were renewed for DTCA hospital-based diabetes treatment centers. During the
remainder of fiscal 1999, there will be 10 hospital contracts which will reach
the end of their terms unless renewed.
During the three month period ended February 28, 1999, five contracts
with hospitals owned by Columbia/HCA Healthcare Corporation ("Columbia") reached
the end of their terms. Three of these contracts were terminated and two of
these contracts were renewed. During the remainder of fiscal 1999, there are no
additional contracts with hospitals owned by Columbia that will expire.
The Company periodically renegotiates existing DTCA hospital contracts
and, in that connection, has historically agreed to reduce its fee structure in
certain of these contracts in order to maintain favorable long-term client
relationships with these hospitals. The Company anticipates that it will
continue to make such fee reductions or center contract restructurings which
will have a negative impact on the Company's revenues and profitability.
DTCA's revenue growth for the three and six month periods ended
February 28, 1999 compared to the three and six month periods ended February 28,
1998 resulted primarily from the growth in DTCA's managed care diabetes
population management operations. DTCA has developed and implemented diabetes
disease management contract services which are designed to assist managed care
payors in reducing the total costs and improving the quality of care for
individuals with diabetes enrolled in their plans, and believes that a
substantial portion of its future revenue growth will result from healthcare
management contracts with managed care payors. Implementation of DTCA's first
management contracts with managed care payors occurred in fiscal 1996.
Pursuant to DTCA's diabetes population management contracts, DTCA
provides a core group of diabetes clinical and support staff that are
responsible for coordinating and supporting the management of the treatment of
individuals with diabetes in accordance with treatment standards and protocols
that have
10
<PAGE> 11
been developed by DTCA and have been approved by the medical leadership at each
managed care plan The actual treatment of the individuals is provided by
physicians and hospitals who are part of the payor's network of providers.
Services provided under contracts for DTCA's Diabetes NetCare(sm) product
comprise its most comprehensive product offering and includes DTCA professional
staff on-site at the HMO location to assist in the delivery of this service.
Services provided under DTCA's Diabetes NetLink(sm) product are provided
telephonically and via mail by a team of diabetes treatment and support staff
from a telephone center located in Nashville, Tennessee, and are designed
primarily to monitor and promote compliance with certain standards of care for
diabetes patients, to improve blood glucose management and to support the case
management activities of the HMO. Diabetes NetCare(sm) and Diabetes NetLink(sm)
contracts with managed care payors are based on per member per month payments to
DTCA for the HMO's enrollees who have diabetes and are enrolled in DTCA's
programs. These contracts are generally for terms of three years with provisions
for subsequent renewal and typically provide that between 15% and 30% of the per
member per month fee is at risk subject to DTCA's performance against clinical
and financial cost savings criteria.
As of February 28, 1999, DTCA had contracts with seven managed care
payors to provide diabetes population disease management services in 35 HMO
markets compared with contracts with three payors in 16 markets as of February
28, 1998. The number of covered lives under management pursuant to these
contracts for its Diabetes NetCare(sm) and its Diabetes NetLink(sm) products
which have been implemented as of February 28, 1999 and 1998 is presented on the
following table.
<TABLE>
<CAPTION>
At February 28, 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Covered lives under management:
Diabetes NetCare(sm) contracts 49,037 10,070
Diabetes NetLink(sm) contracts 35,640 --
------------------------------------
Total covered lives under management 84,677 10,070
====================================
</TABLE>
In addition, covered lives at February 28, 1999 in the table above exclude
approximately 43,000 Diabetes NetLink(sm) contract lives under existing
contracts that are scheduled for implementation subsequent to February 28, 1999.
The Company's growth strategy is primarily to develop additional
relationships with managed care payors responsible for the healthcare costs of
individuals with diabetes and to further develop and expand its hospital-based
diabetes treatment center business. The Company has also been evaluating
opportunities to develop or acquire capabilities in chronic disease management
areas other than diabetes. In this regard, the Company announced in March 1999
an expansion of the Company's population management product offerings through
the addition of a new managed care program for enrollees with cardiac disease.
This new program, Cardiac Healthways(sm), is modeled after the Company's
diabetes programs. The Company believes it has been able to achieve excellent
financial and clinical outcomes in the management of its diabetes managed care
contract enrollees who have both diabetes and cardiac disease. Approximately 15%
of the Company's 84,000 current participants in its diabetes population
management programs also have cardiac disease.
11
<PAGE> 12
Cardiac Healthways(sm) has been developed internally and all costs
associated with its development have been expensed in the period incurred. This
program was developed primarily by existing staff and, therefore, the amount of
incremental cost for its development was not material. Because Cardiac
Healthways(sm) will continue to be developed and marketed primarily by existing
Company staff, material incremental costs will not be incurred until
modifications are made to the Company's electronic medical record software
application to incorporate the cardiac disease program. These costs are
estimated to be between $500,000 and $1,000,000 and will be capitalized and then
amortized over a three year period. The Company does not anticipate incurring
these costs until after it obtains its first Cardiac Healthways(sm) managed care
contract.
The Company currently does not have any contracts for its Cardiac
Healthways(sm) program and, while it can not forecast accurately when, if ever,
a contract for these services would be placed in operation, the Company does not
anticipate revenues from Cardiac Healthways(sm) to begin until fiscal 2000.
In November 1994, the Company received an administrative subpoena for
documents from a regional office of the Office of the Inspector General ("OIG")
of the Department of Health and Human Services in connection with an
investigation of DTCA under certain federal Medicare and Medicaid statutes. On
February 10, 1995, the Company learned that the federal government had declined
to take over and pursue a civil "whistle blower" action brought under seal in
June 1994 on behalf of the government by a former employee dismissed by the
Company in February 1994. The Company believes that this lawsuit triggered the
OIG investigation. The civil suit was filed in June 1994 against the Company,
DTCA, and certain named and unnamed medical directors and client hospitals and
was kept under seal to permit the government to determine whether to take over
the lawsuit. Following its review, the government made the determination not to
take over the litigation, and the complaint was unsealed on February 10, 1995.
As a result of the resolution of preliminary motions in this case, the Company
was dismissed as a defendant. DTCA remains as a defendant. Various procedural
motions on this case are pending resolution before the discovery stage of the
case can proceed.
The Company has cooperated fully with the OIG in its investigation, and
believes that its operations have been conducted in full compliance with
applicable statutory requirements. Although there can be no assurance that the
existence of, or the results of, the investigation would not have a material
adverse effect on the Company, the Company believes that the resolution of
issues, if any, which may be raised by the government and the resolution of the
civil litigation would not have a material adverse effect on the Company's
financial position or results of operations except to the extent that the
Company incurs material legal expenses associated with its defense of this
matter and the civil suit.
YEAR 2000 COMPLIANCE PLAN
Historically, many computer programs have been written using two digits
rather than four to define the applicable year, which could result in the
program failing to properly recognize a year that begins with "20" instead of
"19". Potential system failures or miscalculations are generally referred to as
Year 2000 issues. While the Company's business does not involve the sale of
computer services or medical equipment that might be affected by Year 2000
compliance, the Company does make extensive use of information technologies to
support its operations.
12
<PAGE> 13
In particular, the Company's managed care operations are structured
around its electronic medical record capability and various data interchange
capabilities with its managed care customers. The underlying electronic medical
record system upon which the Company's propriety standards of care are built is
licensed from an outside software company.
The Company has initiated an extensive effort to address Year 2000
compliance. This Year 2000 Project addresses software applications, information
technology hardware, other infrastructure and customer and other third party
relationships and data exchanges. The structured approach of this Project
includes (1) compiling an inventory of affected technology, systems and
processes; (2) assessing Year 2000 compliance for critical components of the
Company's operations and selection of appropriate remediation efforts where
required; (3) remediating, converting or replacing each critical non-compliant
component; (4) testing each critical component for compliance; and (5)
implementing remediated and tested components. Because the Company is highly
dependent, particularly in its managed care operations, on the ability of its
customers to provide DTCA with enrollment, claims and other data which is
utilized by the Company to provide services under its contracted service
agreements, the Year 2000 Project also includes activities related to
coordinating and, in some cases, testing compliance of key data exchange systems
with the Company's customers.
As of March 31, 1999, the Company has completed the inventory and
assessment phases of its Year 2000 Project for its critical components of
operations. Remediation efforts have begun to address most non-compliant
critical components. The Company believes that all such remediation projects are
either on schedule or are ahead of the original schedule as identified in its
Year 2000 Project plan. In addition, the Company has identified the electronic
medical record utilized in its managed care operations as its primary
mission-critical component and has initiated a planned upgrade of this software
capability to a version of the base electronic medical record that the third
party provider of this platform represents as Year 2000 compliant. This
conversion is expected to position the Company to realize significant operating
enhancements for the system in addition to Year 2000 compliance. As of March 31,
1999, this upgrade project is proceeding at or ahead of schedule and certain
components of the upgraded electronic medical record are currently being tested
for functionality.
The Company has also begun surveying its customers and critical vendors
to determine their readiness for Year 2000 compliance. The Company believes that
the survey and follow-up with its customers and critical vendors will be
completed by August 1999.
Pursuant to its Year 2000 Project plan, the Company expects to have all
of its critical systems and processes Year 2000 compliant by August 31, 1999.
Some non-critical systems may not be addressed until after that date or until
after January 2000; however, the Company believes that the potential failure of
some or all of these non-critical systems does not pose a material threat to its
operations. The Company believes that it will incur up to $400,000 in operating
expenditures, which represents approximately 20% of the Company's information
technology operating budget for the fiscal year ending August 31, 1999, to
support the Year 2000 Project through completion. This estimate is based on
presently available information and will be updated as the Company continues its
assessment and proceeds with implementation of the Year 2000 Project. Most of
these expenditures will be made during the year ended August 31, 1999.
Approximately $176,000 in Year 2000 Project operating expenditures were incurred
during the six month period ended February 28, 1999. No expenditures were
incurred for the Year 2000 Project during the six month period ended February
28, 1998. In addition, the Company expects that there may be limited
13
<PAGE> 14
amounts of equipment and infrastructure capital expenditures that will be
accelerated because of Year 2000 compliance issues. However, because the
majority of its information technology and infrastructure capital expenditures
for its managed care operations have been made within the last two years and
primarily have included equipment which the Company believes will prove to be
Year 2000 compliant, the Company currently anticipates that accelerated capital
expenditures because of Year 2000 issues will be less than $200,000.
While the Company anticipates that a significant focus of its managed
care information technology system development resources throughout the
remainder of fiscal 1999 will be directed toward Year 2000 compliance efforts,
the Company believes that it has the resources and capabilities to support
current customer information technology needs and also believes that its ability
to add new managed care business and hospital center business will not be
negatively impacted by its Year 2000 efforts.
The Company anticipates preparing contingency plans by September 30,
1999 to address potential Year 2000 compliance-related failure of the Company's
critical systems or Year 2000 compliance-related failures of the Company's
customer or critical vendor systems. Costs associated with implementing such
contingency plans cannot be estimated at this time. While the Company believes
that it has the resources and the capabilities to adequately address Year 2000
compliance, there can be no assurance that its efforts will not incur unexpected
difficulties that impact the Company's ability to make its critical systems Year
2000 compliant or that one or more of its customers or critical vendors will
experience unexpected difficulties that impact their ability to be Year 2000
compliant. The failure of the Company's electronic medical record and/or
associated patient data systems, the failure of the systems of one or more of
its large managed care customers, the failure of a significant number of its
hospital customers or the failure of one of its critical vendors to be Year 2000
compliant that cannot be corrected within a relatively short period of time
would very likely negatively impact the ability of the Company to provide
services and earn revenue and/or receive cash payments from its customers. Such
failures that could not be corrected within a relatively short period of time
would likely have a material negative impact on the Company's operations and
financial position regardless of the effectiveness of the Company's contingency
plans.
RESULTS OF OPERATIONS
The continuing operations of the Company represents the results of
operations of DTCA and the corporate costs of American Healthcorp, Inc. Included
in the results from discontinued operations are charges to AmSurg for general
management, administrative and accounting services provided by the Company.
Charges to AmSurg for such services approximated the Company's cost.
Revenues for the three and six month periods ended February 28, 1999
increased 45% and 49%, respectively, over the same periods in 1998. This
increase in revenues resulted primarily from an increase in the average number
of lives enrolled in DTCA's managed care diabetes population management
contracts to approximately 82,000 lives and 79,000 lives for the three and six
month periods ended February 28, 1999, respectively, from approximately 11,000
lives and 10,000 lives for the comparable three and six month periods,
respectively, during the prior year. This increase in lives under management was
primarily the result of new managed care contracts signed during fiscal 1998.
The average revenue per member per month for enrollees under DTCA's managed care
contracts was 57% and 53% less during the three and six month periods ended
February 28, 1999, respectively, than during the prior year periods. This
decrease in average per member per month revenue occurred primarily as a result
of a greater mix
14
<PAGE> 15
of the lower-revenue Diabetes NetLink(sm) lives in the fiscal 1999 periods when
compared with the fiscal 1998 periods and also as a result of higher revenues
for the Diabetes NetCare(sm) lives during the prior year periods attributable to
contract structures which shared healthcare cost savings and which have been
replaced with per member per month fee structures in the 1999 periods. Revenues
from DTCA's hospital contract operations for the three and six month periods
ended February 28, 1999 were 13% and 7% less, respectively, than hospital
contract revenues for the comparable periods last year on approximately the same
average number of contracts in operation during both periods. This reduction in
hospital contract revenue is due primarily to contract fee reductions and to a
greater mix of relatively newer contracts with somewhat lower fees in the 1999
periods compared to the 1998 periods. The Company anticipates that DTCA revenues
for the remainder of fiscal 1999 will increase over fiscal 1998 revenues
primarily as a result of additional lives enrolled under its existing diabetes
population management contracts with managed care payors as well as from any
additional lives from new managed care payor contracts that may be signed during
the remainder of fiscal 1999, offset somewhat by lower revenues from hospital
contract operations.
Salaries and benefits for the three and six month periods ended
February 28, 1999 increased 29% and 32%, respectively, primarily from higher
staffing levels associated with increases in the number of lives enrolled in
DTCA's managed care payor contracts and from increased employee incentive
compensation associated with improved operating performance during the current
year. Salaries and benefits as a percentage of revenues decreased to 64% for
both the three and six month periods ended February 28, 1999 from 72% for the
comparable periods last year primarily as a result of improved revenue
performance at its managed care contract operations. The Company anticipates
salaries and benefits expense to increase during the remainder of fiscal 1999
compared with fiscal 1998 primarily as a result of increased staff required for
expected increases in the number of lives enrolled under DTCA's managed care
contracts.
Other operating expenses for the three and six month periods ended
February 28, 1999 increased 23% and 27%, respectively, primarily from higher
costs associated with increases in the average number of lives enrolled in
DTCA's managed care payor contracts. Other operating expenses as a percentage of
revenues decreased to 22% and 23%, respectively, for the three and six month
periods ended February 28, 1999 from 26% and 27% for the comparable periods last
year primarily as a result of improved revenue performance at DTCA's managed
care payor contracts. The Company anticipates other operating expenses will
increase during the remainder of 1999 compared with fiscal 1998 primarily as a
result of increased costs associated with anticipated increases in the number of
lives enrolled under DTCA's managed care payor contracts as well as from
increased expenses associated with planned improvements in the Company's
information technology capabilities including the costs associated with its Year
2000 compliance efforts.
The increase in depreciation and amortization expense to $434,567 and
$839,553, respectively, for the three and six month periods ended February 28,
1999 from $303,796 and $624,976 for the comparable periods last year principally
resulted from increased depreciation expense associated with equipment and
computer-related capital expenditures for its diabetes population management
operations for managed care payors. The Company anticipates depreciation and
amortization expense to increase during the remainder of fiscal 1999 compared
with fiscal 1998 primarily as a result of increased information technology and
other capital expenditures associated with expected increases in the number of
covered lives enrolled under DTCA's managed care payor contracts as well as from
growth and improvement in the Company's information technology capabilities.
15
<PAGE> 16
During the three month period ended November 30, 1997, the Company
recorded a non-recurring stock option expense adjustment of $5.8 million
associated with adjustment of these options as a result of the Company's
Distribution of AmSurg common stock to the Company's stockholders. Pursuant to
the terms of the Company's stock option plans, the number of shares issuable
pursuant to the Company's outstanding stock options and the exercise price per
share were adjusted to maintain the value of the options subsequent to the
Distribution at the pre-Distribution level. This adjustment had the effect of
reducing the average exercise price of outstanding options to $3.27 per share
from $8.62 per share and resulted in an additional 254,000 shares being subject
to options. Additionally, all outstanding options became fully vested. As a
result of this adjustment of the stock options, generally accepted accounting
principles required that the Company record non-cash compensation expense and an
equal increase in stockholders' equity (additional paid-in capital) in an amount
equal to the difference between the aggregate exercise price of outstanding
options to purchase shares of the Company's common stock having an exercise
price below the market price of the Company's common stock and the aggregate
market price for such shares immediately prior to the Distribution. The
compensation expense and associated increase in additional paid-in capital were
recognized because generally accepted accounting principles require such
recognition when an adjustment results in a change in the ratio of the exercise
price to the market price per share even though no change in the aggregate value
of the options has taken place.
The Company's income tax expense for the three and six month periods
ended February 28, 1999 was $519,000 and $967,000, respectively, compared to an
income tax benefit of $12,000 and $2.3 million for the comparable periods last
year. The increase in the income tax expense between these periods resulted
primarily from an income tax benefit of $2.2 million associated with the stock
option expense adjustment recorded during the quarter ended November 30, 1997 as
well as from additional income tax expense resulting from improved profitability
before consideration of the stock option expense adjustment during the three and
six month periods ended February 28, 1999. The differences between the statutory
federal income tax rate of 34% and the Company's effective tax benefit rates
during both periods are due primarily to the impact of state income taxes and
the amortization of excess costs over net assets of purchased companies which
are not deductible for income tax purposes.
The results of operations from discontinued operations for the six
month period ended February 28, 1998 include the Company's share of AmSurg's net
income based on the Company's percentage ownership of AmSurg as well as the
Company's expenses associated with the Distribution which totaled $345,000
during that period.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities for the six months ended February 28, 1999
utilized $1.0 million in cash flow. Cash flow from operating activities for the
first two quarters of each fiscal year is normally negatively impacted by the
timing of expenditures for annual employee incentive compensation and certain
annual insurance payments made during the first quarter of the fiscal year.
Investing activities during this period used $1.4 million in cash which
consisted of the acquisition of property and equipment purchases for DTCA
primarily associated with its expanding managed care payor operations. Financing
activities for the six months ended February 28, 1999 generated $648,295 in
proceeds from the exercise of options to purchase the Company's common stock.
The Company believes that cash flow from DTCA operating activities and
the Company's available cash balances of $11.5 million at February 28, 1999 will
continue to enable the Company to fund DTCA's current working capital needs,
including the working capital and capital expenditures associated with its
16
<PAGE> 17
diabetes managed care payor operations, the development of its Cardiac
Healthways(sm) capabilities and the costs associated with the Company's Year
2000 compliance efforts. In addition, the Company may also utilize its cash
resources to fund repurchases of the Company's common stock; as of February 28,
1999, the Company had repurchased 78,820 shares of stock pursuant to an
authorization to purchase up to 400,000 shares as approved by the Company's
Board of Directors in January 1998.
PART II
ITEM 1. Legal Proceedings.
In November 1994, the Company received an administrative
subpoena for documents from a regional office of the Office of
the Inspector General ("OIG") of the Department of Health and
Human Services in connection with an investigation of DTCA
under certain federal Medicare and Medicaid statutes. On
February 10, 1995, the Company learned that the federal
government had declined to take over and pursue a civil
"whistle blower" action brought under seal in June 1994 on
behalf of the government by a former employee dismissed by the
Company in February 1994. The Company believes that this
lawsuit triggered the OIG investigation. The civil suit was
filed in June 1994 against the Company, DTCA, and certain
named and unnamed medical directors and client hospitals and
was kept under seal to permit the government to determine
whether to take over the lawsuit. Following its review, the
government made the determination not to take over the
litigation, and the complaint was unsealed on February 10,
1995. As a result of the resolution of preliminary motions in
this case, the Company was dismissed as a defendant. DTCA
remains as a defendant. Various procedural motions on this
case are pending resolution before the discovery stage of the
case can proceed.
The Company has cooperated fully with the OIG in its
investigation, and believes that its operations have been
conducted in full compliance with applicable statutory
requirements. Although there can be no assurance that the
existence of, or the results of, the investigation would not
have a material adverse effect on the Company, the Company
believes that the resolution of issues, if any, which may be
raised by the government and the resolution of the civil
litigation would not have a material adverse effect on the
Company's financial position or results of operations except
to the extent that the Company incurs material legal expenses
associated with its defense of this matter and the civil suit.
ITEM 2. Changes in Securities.
Not Applicable.
ITEM 3. Defaults Upon Senior Securities.
Not Applicable.
17
<PAGE> 18
ITEM 4. Submission of Matters to a Vote of Security Holders.
(a) The Annual Meeting of Stockholders of American
Healthcorp, Inc. was on January 15, 1999.
(c) Nominations to elect Thomas G. Cigarran and Dr. C.
Warren Neel as Directors of the Company were voted
upon at the Annual Meeting of Stockholders. The
results of the election of the above mentioned
nominees were as follows:
<TABLE>
<CAPTION>
For Against Withheld
--- ------- --------
<S> <C> <C> <C>
Thomas G. Cigarran 6,480,936 - 9,650
Dr. C. Warren Neel 6,480,936 - 9,650
</TABLE>
ITEM 5. Other Information.
Not Applicable.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
There have been no reports on Form 8-K filed during the quarter for
which this report is filed.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
AMERICAN HEALTHCORP, INC.
-------------------------
(Registrant)
Date April 14, 1999 By /s/ Henry D. Herr
------------------------------ ------------------------------------
HENRY D. HERR
Executive Vice President
Finance and Administration,
(Principal Financial Officer)
Date April 14, 1999 By /s/ David A. Sidlowe
------------------------------ ------------------------------------
DAVID A. SIDLOWE
Vice President and Controller
(Principal Accounting Officer)
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AMERICAN HEALTHCORP INC. FOR THE SIX MONTHS ENDED
FEBRUARY 28, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 11,470,148
<SECURITIES> 0
<RECEIVABLES> 4,985,312
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 19,046,842
<PP&E> 7,208,386
<DEPRECIATION> 2,779,478
<TOTAL-ASSETS> 37,747,819
<CURRENT-LIABILITIES> 6,387,326
<BONDS> 0
0
0
<COMMON> 8,311
<OTHER-SE> 28,862,690
<TOTAL-LIABILITY-AND-EQUITY> 37,747,819
<SALES> 0
<TOTAL-REVENUES> 24,073,844
<CGS> 0
<TOTAL-COSTS> 20,944,727
<OTHER-EXPENSES> 839,553
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 256
<INCOME-PRETAX> 2,289,308
<INCOME-TAX> 967,000
<INCOME-CONTINUING> 1,322,308
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,322,308
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.15
</TABLE>
