<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 MAY 31, 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 July 12, 1999 there were outstanding 8,444,077 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>
===================================
May 31, August 31,
1999 1998
===================================
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 12,262,581 $ 13,243,571
Accounts receivable, net 4,903,767 3,623,461
Other current assets 1,546,636 798,714
Deferred tax asset 998,000 998,000
-----------------------------------
Total current assets 19,710,984 18,663,746
-----------------------------------
Property and equipment:
Leasehold improvements 356,033 191,950
Equipment 7,765,881 5,828,698
-----------------------------------
8,121,914 6,020,648
Less accumulated depreciation (3,099,911) (2,336,242)
-----------------------------------
5,022,003 3,684,406
-----------------------------------
Long-term deferred tax asset 2,753,000 2,753,000
-----------------------------------
Other assets, net 460,627 290,513
-----------------------------------
Excess of cost over net assets
of purchased companies, net 11,178,475 11,465,139
-----------------------------------
$ 39,125,089 $ 36,856,804
===================================
</TABLE>
2
<PAGE> 3
AMERICAN HEALTHCORP, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
===============================
May 31, August 31,
1999 1998
===============================
<S> <C> <C>
Current liabilities:
Accounts payable $ 898,811 $ 1,015,918
Accrued salaries and benefits 2,954,941 2,985,589
Accrued liabilities 1,320,264 2,163,963
Income taxes payable 1,205,041 1,054,407
Current portion of other long-term liabilities 484,757 584,805
-------------------------------
Total current liabilities 6,863,814 7,804,682
-------------------------------
Other long-term liabilities 2,630,947 2,446,089
-------------------------------
Stockholders' equity:
Common stock
$.001 par value, 15,000,000 shares
authorized, 8,409,065 and 8,125,507
shares outstanding 8,409 8,125
Additional paid-in capital 24,630,958 23,719,833
Retained earnings 4,990,961 2,878,075
-------------------------------
Total stockholders' equity 29,630,328 26,606,033
-------------------------------
$ 39,125,089 $ 36,856,804
===============================
</TABLE>
3
<PAGE> 4
AMERICAN HEALTHCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended May 31, Nine Months Ended May 31,
=============================== =================================
1999 1998 1999 1998
=============================== =================================
<S> <C> <C> <C> <C>
Revenues $ 12,496,866 $ 9,470,527 $ 36,570,710 $ 25,670,256
------------------------------- ---------------------------------
Expenses:
Salaries and benefits 8,103,157 6,257,112 23,468,316 17,877,387
Other operating expenses 2,582,984 2,867,164 8,162,552 7,249,717
Depreciation and amortization 453,147 295,870 1,292,700 920,846
Interest -- -- 256 113
Spin-off stock option adjustment -- -- -- 5,770,000
------------------------------- ----------------------------------
Total expenses 11,139,288 9,420,146 32,923,824 31,818,063
------------------------------- ----------------------------------
Income (loss) before income taxes and
discontinued operations 1,357,578 50,381 3,646,886 (6,147,807)
Income tax expense (benefit) 567,000 48,000 1,534,000 (2,230,000)
------------------------------- ----------------------------------
Income (loss) from continuing operations 790,578 2,381 2,112,886 (3,917,807)
Income from discontinued operations,
net of income taxes -- -- -- 56,483
------------------------------- ----------------------------------
Net income (loss) $ 790,578 $ 2,381 $ 2,112,886 $ (3,861,324)
=============================== ==================================
Basic income (loss) per share:
From continuing operations $ 0.09 $ 0.00 $ 0.26 $ (0.49)
From discontinued operations -- -- -- 0.01
------------------------------- ----------------------------------
$ 0.09 $ 0.00 $ 0.26 $ (0.48)
=============================== ==================================
Fully diluted income (loss) per share:
From continuing operations $ 0.09 $ 0.00 $ 0.24 $ (0.49)
From discontinued operations -- -- -- 0.01
------------------------------- ----------------------------------
$ 0.09 $ 0.00 $ 0.24 $ (0.48)
=============================== ==================================
Weighted average common shares
and equivalents
Basic 8,393,828 8,089,595 8,277,892 8,072,948
Fully diluted 8,988,060 8,736,825 8,906,025 8,072,948
</TABLE>
4
<PAGE> 5
AMERICAN HEALTHCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED MAY 31, 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 339 1,364,820 -- 1,365,159
Repurchase of stock (55) (453,695) -- (453,750)
Net income -- -- 2,112,886 2,112,886
---------------------------------------------------------------
Balance, May 31, 1999 $ 8,409 $ 24,630,958 $ 4,990,961 $ 29,630,328
===============================================================
</TABLE>
5
<PAGE> 6
AMERICAN HEALTHCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended May 31,
===================================
1999 1998
===================================
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,112,886 $ (3,861,324)
Income from discontinued operations -- 56,483
-----------------------------------
Net income (loss) from continuing operations 2,112,886 (3,917,807)
Income tax expense (benefit) 1,534,000 (2,230,000)
-----------------------------------
Income (loss) before income taxes 3,646,886 (6,147,807)
Noncash expenses, revenues, losses and gains
included in income:
Depreciation and amortization 1,292,700 920,846
Spin-off stock option adjustment -- 5,770,000
Increase in working capital items (3,019,682) (600,599)
Other noncash transactions 620,380 508,609
-----------------------------------
2,540,284 451,049
Income taxes (net paid) (1,021,700) (554,625)
Increase in other assets (320,831) (62,825)
Payments on other long-term liabilities (354,032) (32,435)
-----------------------------------
Net cash flows provided by (used in) operating activities 843,721 (198,836)
-----------------------------------
Cash flows from investing activities:
Acquisition of property and equipment (2,331,758) (1,360,670)
Investment in discontinued operations including spin-off costs -- (496,411)
-----------------------------------
Net cash flows used in investing activities (2,331,758) (1,857,081)
-----------------------------------
Cash flows from financing activities:
Exercise of stock options 960,797 168,781
Repurchase of stock (453,750) (156,507)
-----------------------------------
Net cash flows provided by
financing activities 507,047 12,274
-----------------------------------
Net decrease in cash and cash equivalents (980,990) (2,043,643)
Cash and cash equivalents, beginning of period 13,243,571 12,226,821
-----------------------------------
Cash and cash equivalents, end of period $ 12,262,581 $ 10,183,178
===================================
</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 nine
month periods ended May 31, 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.
(2) STOCK REPURCHASE
In January 1998, the Company's Board of Directors authorized the
repurchase and cancellation of up to 400,000 shares of the Company's common
stock. The authorization enables the Company to make repurchases from time to
time prior to January 1, 2000. As of May 31, 1999, the Company had repurchased
134,320 shares at a cost of $1,139,757.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The continuing operations of 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, 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.
7
<PAGE> 8
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 Securities
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 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; the impact of future state and federal healthcare legislation and
regulations on the ability of the Company to deliver its services or on the
financial health of the Company's customers and their willingness to purchase
the Company's services; 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 nine month periods ended May 31, 1999 and 1998.
<TABLE>
<CAPTION>
Three months ended Nine months ended
May 31, May 31,
=============================================
1999 1998 1999 1998
===================== ==================
<S> <C> <C> <C> <C>
DTCA Hospital Contracts 43% 62% 46% 71%
DTCA Managed Care Payor Contracts 56 37 53 27
Other 1 1 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
8
<PAGE> 9
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.
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 May 31, 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 May 31,
==================
1999 1998
==================
<S> <C> <C>
Hospital Contracts 58 53
Hospital sites where services are provided 77 66
</TABLE>
The components of changes to the total number of DTCA hospital
contracts and hospital sites under these contracts for the three and nine months
ended May 31, 1999 and 1998 are presented below.
<TABLE>
<CAPTION>
Three months ended May 31,
========================================
1999 1998
========================================
Hospital Hospital
Contracts Sites Contracts Sites
------------------ ------------------
<S> <C> <C> <C> <C>
Total contracts/sites at
beginning of period 57 74 56 72
New contracts/sites signed 3 5 -- --
Contracts/sites discontinued (2) (2) (3) (6)
----------------- --------------------
Total contracts/sites at end
of period 58 77 53 66
========================================
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
Nine months ended May 31,
=========================================
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 7 17 3 4
Contracts/sites
discontinued (6) (12) (8) (12)
-------------------- ------------------
Total contracts/sites 58 77 53 66
========================================
</TABLE>
During the three month period ended May 31, 1999, two contracts were
renewed for DTCA hospital-based diabetes treatment centers. During the remainder
of fiscal 1999, nine hospital contracts will reach the end of their terms unless
renewed.
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 nine month periods ended May
31, 1999 compared to the three and nine month periods ended May 31, 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 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
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<PAGE> 11
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 May 31, 1999, DTCA had contracts with seven managed care payors
to provide diabetes population disease management services in 35 HMO markets
compared with contracts with four payors in 19 markets as of May 31, 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 May 31, 1999 and 1998 is presented on the following table.
<TABLE>
<CAPTION>
================================================================
At May 31, 1999 1998
================================================================
<S> <C> <C>
Covered lives under management:
Diabetes NetCare(SM) contracts 47,999 41,356
Diabetes NetLink(SM) contracts 49,985 1,954
-----------------------
Total covered lives under management 97,984 43,310
=======================
</TABLE>
In addition, covered lives at May 31, 1999 in the table above does not include
approximately 28,000 Diabetes NetLink(SM) contract lives under existing
contracts that are scheduled for implementation subsequent to May 31, 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 current participants in its diabetes population management
programs also have cardiac disease.
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 cannot 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.
Although the Company has credible data regarding its performance with diabetes
patients who have cardiac disease, the Company's population based Cardiac
Healthways(SM) product is new to the industry. As a result, the Company
anticipates that it may have to assume more risk of performance in
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<PAGE> 12
its initial cardiac contracts than the Company has assumed in its current
diabetes contracts, and, therefore, the profitability of these contracts during
initial periods may be adversely affected.
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.
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 proprietary 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
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<PAGE> 13
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 June 30, 1999, the Company has completed the inventory and
assessment phases of its Year 2000 Project for its critical components of
operations. Remediation efforts on previously non-compliant critical components
are substantially complete. Testing on the majority of these components has also
been completed and implementation of the remediated components is currently
underway. The Company believes that all such remediation and testing projects
are either on schedule or are ahead of the original schedule as identified in
its Year 2000 Project plan. As part of its Year 2000 Project, 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
June 30, 1999, this upgrade project is proceeding at or ahead of schedule and
certain components of the upgraded electronic medical record that have been
remediated and tested are currently being implemented.
The Company has also surveyed 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. While not all responses have been received to date, no
potential compliance problems have been identified with customers or critical
vendors.
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 $300,000 in operating
expenditures, which represents approximately 15% 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 $215,000 in Year 2000 Project operating expenditures were incurred
during the nine month period ended May 31, 1999. No expenditures were incurred
for the Year 2000 Project during the nine month period ended May 31, 1998. In
addition, the Company expects that there may be limited 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.
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<PAGE> 14
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 nine month periods ended May 31, 1999
increased 32% and 43%, 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 90,000 lives and 83,000 lives for the three and nine
month periods ended May 31, 1999, respectively, from approximately 33,000 lives
and 18,000 lives for the comparable three and nine 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 26% and 47% less during the three and nine month periods ended May 31, 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 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 nine month periods
ended May 31, 1999 were 9% and 8% less, respectively, than hospital contract
revenues for the comparable periods last year on slightly higher average number
of contracts in operation for the three month periods and approximately the same
average number of contracts in operation during the nine month 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 offset somewhat by lower revenues from hospital contract operations.
14
<PAGE> 15
Salaries and benefits for the three and nine month periods ended May
31, 1999 increased 30% and 31%, 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 65% and 64% for the three
and nine month periods ended May 31, 1999, respectively, from 66% and 70%,
respectively, 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 nine month periods ended May
31, 1999 decreased 10% and increased 13%, respectively, from the comparable
periods last year. The decrease for the quarter was primarily the result of
lower employee recruiting and relocation expenses as well as lower legal
expenses associated with the civil whistleblower lawsuit during the current
period when compared to the same period last year. The increase in other
operating expenses for the nine months ended May 31, 1999 resulted primarily
from increased materials and other costs associated with increases in the
average number of lives enrolled in DTCA's managed care payor contracts as well
as from consulting fees associated with the Company's Year 2000 Project offset
somewhat by lower employee recruiting and relocation costs during the current
period. Other operating expenses as a percentage of revenues decreased to 21%
and 22%, respectively, for the three and nine month periods ended May 31, 1999
from 30% and 28% for the comparable periods last year primarily as a result of
improved revenue performance at DTCA's managed care contract operations. 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 $453,147 and
$1.3 million, respectively, for the three and nine month periods ended May 31,
1999 from $295,870 and $920,846 for the comparable periods last year principally
resulted from increased depreciation expense associated with equipment and
computer-related capital expenditures for the Company's 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.
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
15
<PAGE> 16
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 nine month periods
ended May 31, 1999 was $567,000 and $1.5 million, respectively, compared to an
income tax expense of $48,000 and an income tax benefit of $2.2 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 nine month periods ended May 31, 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 nine
month period ended May 31, 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 nine months ended May 31, 1999 generated
$843,721 in cash flow. Investing activities during this period used $2.3 million
in cash which consisted primarily of the acquisition of property and equipment
purchases for DTCA primarily associated with its expanding managed care contract
operations. Financing activities for the nine months ended May 31, 1999
generated $507,047 in cash flow resulting from proceeds from the exercise of
options to purchase the Company's common stock of $960,797 offset by the
Company's repurchase of its stock, which reduced cash by $453,750.
The Company believes that cash flow from DTCA operating activities and
the Company's available cash balances of $12.3 million at May 31, 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
diabetes managed care contract 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 May 31, 1999,
the Company had repurchased 134,320 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.
16
<PAGE> 17
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.
ITEM 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
ITEM 5. Other Information.
Not Applicable.
17
<PAGE> 18
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 July 15, 1999 By /s/ Henry D. Herr
--------------------- --------------------------------
HENRY D. HERR
Executive Vice President
Finance and Administration,
(Principal Financial Officer)
Date July 15, 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 NINE MONTHS ENDED
MAY 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-1-1998
<PERIOD-END> MAY-31-1999
<CASH> 12,262,581
<SECURITIES> 0
<RECEIVABLES> 4,903,767
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 19,710,984
<PP&E> 8,121,914
<DEPRECIATION> (3,099,911)
<TOTAL-ASSETS> 39,125,089
<CURRENT-LIABILITIES> 6,863,814
<BONDS> 0
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0
<COMMON> 8,409
<OTHER-SE> 29,621,919
<TOTAL-LIABILITY-AND-EQUITY> 39,125,189
<SALES> 0
<TOTAL-REVENUES> 36,570,710
<CGS> 0
<TOTAL-COSTS> 31,630,868
<OTHER-EXPENSES> 1,292,700
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<INTEREST-EXPENSE> 256
<INCOME-PRETAX> 3,646,886
<INCOME-TAX> 1,534,000
<INCOME-CONTINUING> 2,112,886
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