-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DCOKUjuVng6pTK5TIQWKGidwFwcunxg2PSJD9oXe5e+OpP6KHRGA4mq9DZQum2Wc 6vnDsk5qEzfLiAFzrdeVbw== 0000950144-98-008415.txt : 19980716 0000950144-98-008415.hdr.sgml : 19980716 ACCESSION NUMBER: 0000950144-98-008415 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980531 FILED AS OF DATE: 19980715 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN HEALTHCORP INC /DE CENTRAL INDEX KEY: 0000704415 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOSPITALS [8060] IRS NUMBER: 621117144 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19364 FILM NUMBER: 98666591 BUSINESS ADDRESS: STREET 1: ONE BURTON HILLS BLVD CITY: NASHVILLE STATE: TN ZIP: 37215 BUSINESS PHONE: 6156651122 MAIL ADDRESS: STREET 1: ONE BURTON HILLS BLVD CITY: NASHVILLE STATE: TN ZIP: 37215 10-Q 1 AMERICAN HEALTHCORP INC. 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, 1998 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 10, 1998 there were outstanding 8,100,836 shares of the Registrant's Common Stock, par value $.001 per share. 2 PART I. ITEM 1. FINANCIAL STATEMENTS AMERICAN HEALTHCORP, INC. CONSOLIDATED BALANCE SHEETS ASSETS
May 31, August 31, 1998 1997 ----------- ----------- Current assets: Cash and cash equivalents $10,183,178 $12,226,821 Accounts receivable, net 4,166,054 3,469,839 Other current assets 871,250 1,307,075 Deferred tax asset 1,306,000 1,306,000 ----------- ----------- Total current assets 16,526,482 18,309,735 ----------- ----------- Net assets of discontinued operations -- 16,407,271 ----------- ----------- Property and equipment: Leasehold improvements 174,380 77,434 Equipment 4,810,904 3,581,093 ----------- ----------- 4,985,284 3,658,527 Less accumulated depreciation (2,282,522) (1,851,087) ----------- ----------- Net property and equipment 2,702,762 1,807,440 ----------- ----------- Long-term deferred tax asset 2,881,000 691,000 ----------- ----------- Other assets, net 213,360 309,998 ----------- ----------- Excess of cost over net assets of purchased companies, net 11,560,694 11,847,358 ----------- ----------- $33,884,298 $49,372,802 =========== ===========
2 3 AMERICAN HEALTHCORP, INC. CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY
May 31, August 31, 1998 1997 ----------- ----------- Current liabilities: Accounts payable $ 1,004,920 $ 785,674 Accrued salaries and benefits 1,525,256 1,457,139 Accrued liabilities 1,253,665 1,240,660 Unearned contract fees 1,610,599 2,251,176 Income taxes payable 437,606 885,950 Current portion of other long-term liabilities 412,656 125,000 ----------- ----------- Total current liabilities 6,244,702 6,745,599 ----------- ----------- Other long-term liabilities 2,356,861 2,186,481 ----------- ----------- Stockholders' equity Common stock $.001 par value, 15,000,000 shares authorized, 8,096,089 and 8,051,559 shares outstanding 8,096 8,052 Additional paid-in capital 23,993,251 18,142,278 Retained earnings 1,281,388 22,290,392 ----------- ----------- Total stockholders' equity 25,282,735 40,440,722 ----------- ----------- $33,884,298 $49,372,802 =========== ===========
3 4 AMERICAN HEALTHCORP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended May 31, May 31, ------------------------ ---------------------------- 1998 1997 1998 1997 ---------- ----------- ------------ ------------ Revenues $9,470,527 $ 7,246,162 $ 25,670,256 $ 22,578,382 ---------- ----------- ------------ ------------ Expenses Salaries and benefits 6,257,112 5,399,511 17,877,387 16,154,469 Other operating expenses 2,867,164 2,126,648 7,249,717 6,249,424 Depreciation and amortization 295,870 331,290 920,846 1,006,769 Interest -- 3,455 113 5,513 Spin-off stock option adjustment -- -- 5,770,000 -- ---------- ----------- ------------ ------------ Total expenses 9,420,146 7,860,904 31,818,063 23,416,175 ---------- ----------- ------------ ------------ Income (loss) before income taxes and discontinued operations 50,381 (614,742) (6,147,807) (837,793) Income tax expense (benefit) 48,000 (203,000) (2,230,000) (203,000) ---------- ----------- ------------ ------------ Income (loss) from continuing operations 2,381 (411,742) (3,917,807) (634,793) Income (loss) from discontinued operations, net of income taxes -- (1,023,498) 56,483 (531,634) ---------- ----------- ------------ ------------ Net income (loss) $ 2,381 $(1,435,240) $(3,861,324) $(1,166,427) ========== =========== ============ ============ Basic and diluted income (loss) per share: From continuing operations $ 0.0 $ (0.05) $ (0.49) $ (0.08) From discontinued operations -- (0.13) 0.01 (0.07) ---------- ----------- ------------ ------------ $ 0.0 $ (0.18) $ (0.48) $ (0.15) ========== =========== ============ ============ Weighted average common shares and equivalents: Basic 8,089,595 8,032,095 8,072,948 8,016,482 Diluted 8,736,825 8,032,095 8,072,948 8,016,482
4 5 AMERICAN HEALTHCORP, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED MAY 31, 1998
Additional Common Paid-in Retained Stock Capital Earnings Total ------- ------------ ------------ ------------ Balance, August 31, 1997 $ 8,052 $ 18,142,278 $ 22,290,392 $ 40,440,722 Exercise of stock options 61 237,463 -- 237,524 Repurchase of stock (17) (156,490) -- (156,507) Spin-off stock option adjustment -- 5,770,000 -- 5,770,000 Distribution of AmSurg stock -- -- (17,147,680) (17,147,680) Net loss -- -- (3,861,324) (3,861,324) ------- ------------ ------------ ------------ Balance, May 31, 1998 $ 8,096 $ 23,993,251 $ 1,281,388 $ 25,282,735 ======= ============ ============ ============
5 6 AMERICAN HEALTHCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended May 31, ------------------------------ 1998 1997 ------------ ------------ Cash flows from operating activities: Net loss $ (3,861,324) $ (1,166,427) Income (loss) from discontinued operations 56,483 (531,634) ------------ ------------ Net loss from continuing operations (3,917,807) (634,793) Income tax benefit (2,230,000) (203,000) ------------ ------------ Loss before income taxes (6,147,807) (837,793) Noncash expenses, revenues, losses and gains included in income: Depreciation and amortization 920,846 1,006,769 Spin-off stock option adjustment 5,770,000 -- Decrease (increase) in working capital items (600,599) 984,326 Other noncash transactions 508,609 241,266 ------------ ------------ 451,049 1,394,568 Income taxes (net paid) (554,625) (45,638) Increase in other assets (62,825) (150,019) Payments on other long-term liabilities (32,435) (274,363) ------------ ------------ Net cash flows provided by (used in) operating activities (198,836) 924,548 ------------ ------------ Cash flows from investing activities: Acquisition of property and equipment (1,360,670) (1,095,573) Investment in discontinued operations including spin-off costs (496,411) (932,182) ------------ ------------ Net cash flows used in investing activities (1,857,081) (2,027,755) ------------ ------------ Cash flows from financing activities: Exercise of stock options 168,781 273,718 Repurchase of stock (156,507) -- ------------ ------------ Net cash flows provided by financing activities 12,274 273,718 ------------ ------------ Net decrease in cash and cash equivalents (2,043,643) (829,489) Cash and cash equivalents, beginning of period 12,226,821 12,561,703 ------------ ------------ Cash and cash equivalents, end of period $ 10,183,178 $ 11,732,214 ============ ============
6 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, 1998 and 1997 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, 1997. 2. AMSURG - DISCONTINUED OPERATIONS On March 7, 1997, the Company's Board of Directors approved a plan to distribute on a substantially 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 to shareholders of record at November 25, 1997 based on an amended plan of distribution was completed on December 3, 1997. The terms of the Distribution provide that the Company and AmSurg bear their own expenses in connection with the Distribution. The effect of the Distribution was a one time charge to retained earnings of $17,147,680 which represents the Company's investment in AmSurg. 3. EARNINGS PER SHARE For the three and nine month periods ended May 31, 1998 and 1997, the Company has reported earnings per share under Financial Accounting Standard No. 128 ("FAS 128") "Earnings per Share". The presentation of basic earnings per share is based upon average common shares outstanding during the period. Diluted earnings per share is based on average common shares outstanding during the period plus the dilutive effect of stock options outstanding. Calculation of diluted earnings per share for the nine month period ended May 31, 1998 and the three and nine month periods ended May 31, 1997 does not include 647,230 and 217,692, respectively, in common stock equivalents relative to outstanding stock options as their effect would be antidilutive. 7 8 4. 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, 1998 the Company has repurchased 16,956 shares at a cost of $156,507. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The continuing operations of American Healthcorp, Inc. (the "Company") consist primarily 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 represented 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 of 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, which is described in more detail in an Information Statement provided to all holders of the Company's common stock during November 1997, 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 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: DTCA's ability to renew contracts for hospital-based treatment centers on terms that are acceptable to DTCA; DTCA's ability to execute contracts for new hospital-based treatment centers and for diabetes healthcare management agreements; DTCA's ability to effect estimated cost savings under certain managed care agreements or to effect such savings within the time frames contemplated by DTCA; the ability of DTCA 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 DTCA has executed an agreement; 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 DTCA; DTCA's ability to enroll additional lives under existing per member per month contracts; and DTCA's ability to attract and/or retain and effectively manage the employees required to implement the managed care agreements. The Company undertakes no obligation to update or revise any such forward-looking statements. 8 9 DTCA The principal sources of revenues for DTCA were its operating contracts for hospital-based diabetes treatment centers. 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. The following table presents the number of DTCA contracts in effect and the number of hospital sites where DTCA provided services or was in the process of initiating operations as of May 31, 1998 and 1997. The number of 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. In addition, DTCA also provides osteoporosis services at four other DTCA diabetes center hospital locations.
As of May 31, ============================================================== 1998 1997 ============================================================== Hospital Hospital Contracts Sites Contracts Sites -------------------------------------------------------------- Hospital contracts/sites 50 54 59 63 Network contracts/sites 3 12 2 11 -------------------------------------------------------------- Total contracts/sites 53 66 61 74 ==============================================================
9 10 The components of changes to the total number of DTCA hospital contracts during the quarters and the nine months ended May 31, 1998 and 1997 are presented below.
For the Three Months Ended May 31, ============================================================== 1998 1997 ============================================================== Hospital Hospital Contracts Sites Contracts Sites -------------------------------------------------------------- Total contracts/sites at beginning of period 56 72 60 72 New contracts/sites signed - - 2 3 Contracts/sites discontinued (3) (6) (1) (1) -------------------------------------------------------------- Total contracts/sites 53 66 61 74 ============================================================== For the Nine Months Ended May 31, ============================================================== 1998 1997 ============================================================== Hospital Hospital Contracts Sites Contracts Sites -------------------------------------------------------------- Total contracts/sites at beginning of period 58 74 61 72 New contracts/sites signed 3 4 4 6 Contracts/sites discontinued (8) (12) (4) (4) -------------------------------------------------------------- Total contracts/sites 53 66 61 74 ==============================================================
During the quarter ended May 31, 1998, one contract was renewed for a DTCA hospital-based diabetes treatment center. During the remainder of fiscal 1998, nine contracts will reach the end of their terms unless renewed or extended. 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. Two of the contracts that will expire during the remainder of fiscal 1998 are with hospitals owned by Columbia/HCA Healthcare Corporation ("Columbia"). During the past two years, the majority of 10 11 contracts that were up for renewal with Columbia hospitals have been discontinued and during the nine months ended May 31, 1998, three contracts with Columbia hospitals that were subject to renewal during the quarter have been discontinued. The Company is currently in discussion with Columbia to renew or extend the two contracts which expire during the remainder of fiscal 1998; however, the outcome of these discussions cannot be predicted. While DTCA's revenues and profits have historically been generated primarily by its operating contracts with hospitals, the Company believes that the substantial portion of its future revenue and profit growth will result from healthcare management contracts with managed care payors for their enrollees with diabetes. During June 1996, DTCA entered into disease management agreements with Principal Healthcare, Inc. ("Principal") to provide comprehensive healthcare management services through DTCA's NetCareTM product. The Principal agreements originally encompassed six market sites with an additional HMO contract site being added during the first quarter of fiscal 1997. During the quarter ended May 31, 1998, services were provided to approximately 7,900 individuals with diabetes at these seven HMO sites. The Principal agreements have initial terms of five years and provide that DTCA is at risk for the costs of its program and that Principal is at risk for all of their members' healthcare costs. Under the original Principal agreements, cost savings produced by DTCA's management program are shared according to formulae set forth in the agreements. During the quarter, six of the Principal HMOs where DTCA has a contract were acquired by Coventry Healthcare Corporation. The remaining site was sold to United Healthcare, Inc. on July 1, 1998. DTCA has restructured its agreement at the site sold to United Healthcare to provide for a payment to DTCA that is primarily a per member per month fee structure. Discussions are underway with Coventry that may result in a restructuring of the remaining HMO contract agreements; however, the outcome of these discussions cannot be predicted at this time. During June 1996, DTCA also entered into a contract with Health Options, Inc. ("Health Options"), an HMO subsidiary of Blue Cross and Blue Shield of Florida, to provide comprehensive healthcare management services through DTCA's NetCareTM product at a Health Options HMO site. An additional Health Options HMO site was added during the second quarter of fiscal 1997. These original agreements are structured in a similar fashion to the Principal agreements discussed above. DTCA's services are being provided to approximately 3,000 Health Options members at these two sites. During the second quarter of fiscal 1998, DTCA entered into another contract with Health Options for its NetCareTM product at a third HMO site which has approximately 10,000 commercial and Medicare members with diabetes. In contrast to DTCA's two other contracts with Health Options, DTCA is compensated under this contract primarily through a per member per month payment for all members who elect to participate. A portion of this payment is at risk subject to the achievement of specified outcomes measures. This contract began operation on March 1, 1998 and approximately 3,000 members were enrolled as of May 31, 1998. During September 1997, DTCA signed an agreement with CIGNA HealthCare ("CIGNA") to provide diabetes disease management services for members at six CIGNA HMO markets that encompass approximately 22,000 members with diabetes. Under the three year agreement, DTCA provides, through a fee-based arrangement, a tailored version of its NetLinkTM telephone-based diabetes management program. These services, which are provided from a telephone service center located in Nashville, Tennessee, are designed primarily to improve blood glucose management for diabetes patients and to monitor and promote compliance with certain standards of care for diabetes patients. The services do not encompass comprehensive management of all healthcare services such as that provided under the Principal 11 12 and Health Options agreements. A portion of the fees paid to DTCA for these services are at risk of repayment unless certain standards of care and cost reduction targets are achieved as measured as of each contract site year-end. As of May 31, 1998, implementation was complete at one of these six markets and it is anticipated that the program will be in operation in the remaining five CIGNA HMO markets by the end of calendar 1998. During the third quarter of fiscal 1998, the Company signed a comprehensive diabetes disease management contract with Highmark Blue Cross Blue Shield ("Highmark"). Under the terms of the contract, DTCA will provide its NetCareTM diabetes disease management services to Highmark's managed healthcare plans covering approximately 1.2 million enrollees located in Pittsburgh, Erie and Johnstown, Pennsylvania, and surrounding areas in the western part of the state of Pennsylvania. These plans include approximately 40,000 enrollees with diabetes, who are insured under either commercial or Medicare risk plans. DTCA will be compensated under the three-year contract through a per member per month payment, a portion of which is tied to performance. The contract was effective April 1, 1998 and approximately 30,000 diabetes members were enrolled in the program as of May 31, 1998. In early June 1998, DTCA also signed a managed care payor contract with WellPath of Carolina, Inc. This Diabetes NetLinkTM population management contract is scheduled to begin operation September 1, 1998. DTCA will be compensated on a per member per month basis under this contract and initially anticipates approximately 1,700 diabetes lives to be under DTCA management. For the quarter ended May 31, 1998, DTCA's managed care payor operations, including the overhead costs related to the managed care operations and the costs associated with marketing efforts to enter into additional disease management contracts, reduced the Company's pretax profitability by approximately $322,000. This compares to a reduction in DTCA's pretax profitability of approximately $1.0 million from managed care payor operations for the immediately preceding fiscal quarter ended February 28, 1998. This improvement resulted primarily from the addition of new managed care contracts during the third quarter of fiscal 1998 which were structured primarily on a per member per month fee basis. The Company's growth strategy is primarily to develop new relationships directly with managed care payors and others who are ultimately responsible for the healthcare costs of individuals with diabetes and to further develop its hospital-based diabetes treatment business. Pursuant to its strategy with managed care payors, DTCA is expected to provide management services designed to improve the quality of care for individuals with diabetes while lowering the overall cost of care. DTCA fees under these arrangements with payors may take the form of shared savings of overall diabetes enrollee healthcare costs, capitated payments to DTCA to cover DTCA's services to enrollees but not the responsibility for enrollee healthcare claims or some combination of these arrangements. However, the Company believes that the majority of future managed care disease management contracts that will be signed by DTCA will be similar in the per member per month structure to the latest Health Options contract, the CIGNA contract and the Highmark contract and will not entail the level of initial operating losses the Company has incurred with respect to the Principal and two initial Health Options agreements. 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 12 13 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. Various preliminary motions have been filed regarding jurisdictional and pleading matters, resulting in the filing of a number of amended complaints and the dismissal of the Company as a defendant. DTCA continues to be a defendant. All of these preliminary motions have now been resolved and the lawsuit has entered the discovery stage. The Company 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 will 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 will 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. RESULTS OF CONTINUING OPERATIONS DTCA represents the continuing operations of the Company and includes the results of operations of two Arthritis and Osteoporosis Care centers and corporate costs attributable to DTCA. Revenues for the quarter and nine months ended May 31, 1998 increased 31% and 14%, respectively, over the same periods in 1997. The principal sources of the increase in revenues were managed care payor contracts and new hospital contracts offset by reductions in revenues from discontinued hospital contracts and reduced same hospital contract revenues. Increases in managed care payor revenues from the comparable periods resulted primarily from new managed care payor contracts with fees based principally on per member per month payment structures. Revenues for future periods for the managed care contracts will be dependent primarily upon DTCA's ability to generate health care cost savings under its shared cost savings contracts, DTCA's ability to enroll additional lives under its existing per member per month contracts and DTCA's ability to sign and implement additional managed care contracts. Same hospital contract revenues for the quarter and nine months ended May 31, 1998 were 10% less than both the 1997 periods. These same hospital revenue decreases were principally a result of contract rate renegotiations and restructurings. The Company believes that the impact of hospital contract restructurings will negatively impact same hospital revenue comparisons during the remainder of fiscal 1998. Salaries and benefits for the quarter and nine months ended May 31, 1998 increased 16% and 11%, respectively, as a result of increased staffing levels associated primarily with managed care payor operations and normal salary increases partially offset by reduced salaries and benefits associated with fewer hospital contracts in operation. Salaries and benefits as a percentage of revenues for the quarter and nine months ended May 31, 1998 were 66% and 70%, respectively, compared with 75% and 72% for the 13 14 quarter and nine months ended May 31, 1997, respectively. Salaries and benefits as a percentage of revenues for the periods ended May 31, 1998 decreased compared to the same periods in 1997 principally because of increased revenues related to managed care payor operations. Other operating expenses for the quarter and nine months ended May 31, 1998 increased 35% and 16%, respectively, principally as a result of additional managed care payor contracts in operation. Other operating expenses as a percentage of revenue increased to 30% for the quarter ended May 31, 1998 from 29% for the same quarter in 1997, and remained at 28% for the nine months ended May 31, 1998 and 1997. Operating expenses as a percentage of revenues increased during the quarter ended May 31, 1998 primarily as a result of additional expenses from new managed care payor contracts. The income tax expense for the quarter ended May 31, 1998 was $48,000 compared to a benefit of $203,000 for the same quarter in 1997. This change resulted from improved operating results. The income tax benefit for the nine months ended May 31, 1998 of $2,230,000 was principally the result of recording the tax benefit associated with compensation expense related to the adjustment of stock options in the quarter ended November 30, 1997, as discussed in the following paragraph. The differences between the statutory federal income tax rate of 34% and the Company's effective tax income rates during the 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. As a result of the Distribution and pursuant to the terms of the Company's stock option plans, the exercise price per share of outstanding options to purchase shares of the Company's common stock was reduced and the number of shares underlying such options was, in certain cases, increased to maintain the value of these stock options following the Distribution at pre-Distribution levels. Holders of these stock options on the Distribution record date were not entitled to receive shares of AmSurg common stock with respect to such options. The amount by which the options were adjusted resulted from a comparison of the market price per share of American Healthcorp common stock before and after the Distribution. In addition, the vesting of options was accelerated for options that have not yet vested. This adjustment had the effect of reducing the average exercise price of outstanding options to $3.27 per share from $8.62 per share. 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. Although it would have been possible to adjust the options without changing this ratio, it could only have been accomplished by issuing a large number of new options which would have resulted in substantial dilution to the Company's stockholders. While the adjustment did result in an additional 254,000 shares being subject to options, the number of additional shares being subject to options is significantly less than the number which would have been required to avoid recognition of compensation expense. The option adjustment, on a one-time basis, resulted in the recognition of compensation expense of $5.8 million and also resulted in an income tax benefit associated with the compensation expense of $2.2 million during the quarter ended November 30, 1997. 14 15 In addition, the option adjustment described above will also have the effect, during periods when the Company is reporting net income, of decreasing future earnings per share primarily because of the impact of the additional number of shares being subject to options that were issued as part of this adjustment on the calculation of common stock equivalents used in the calculation of earnings per share. The Distribution also resulted in certain nonrecurring expenses being recognized by the Company as part of its discontinued operations. For the Company, the non-recurring expenses of the Distribution were approximately $960,000 of which $615,000 was incurred and expensed during the year ended August 31, 1997 and $345,000 was incurred and expensed during the three month period ended November 30, 1997. LIQUIDITY AND CAPITAL RESOURCES Operating activities from continuing operations for the nine months ended May 31, 1998 utilized $198,836 in cash flow. Investing activities during the nine months ended May 31, 1998 used $1.9 million in cash flow which consisted primarily of property and equipment purchases for DTCA of $1.4 million associated principally with DTCA's new managed care contracts and payment of costs associated with the spinoff of AmSurg of $496,411. Financing activities associated with continuing operations for the nine months ended May 31, 1998 provided $12,274 in cash flow in proceeds from the exercise of options to purchase the Company's common stock of $168,781 offset by the Company's repurchase of its stock of $156,507. The Company believes that cash flow from DTCA operating activities and the Company's available cash balances of $10.2 million at May 31, 1998 will continue to enable the Company to fund DTCA's current working capital needs and capital expenditure needs, including its diabetes disease management efforts. The Company has evaluated its computer software and databases to ensure that any modifications required to be year 2000 compliant are made in a timely manner. Management does not expect the financial impact of such modifications to be material to the Company's financial position or results of operations in any given year. 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. Various preliminary motions have been filed regarding jurisdictional and pleading 15 16 matters, resulting in the filing of a number of amended complaints and the dismissal of the Company as a defendant. DTCA continues to be a defendant. All of these preliminary motions have now been resolved and the lawsuit has entered the discovery stage. The Company 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 will 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 will 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. The Company must be notified of any proposal intended to be presented for action at the 1999 Annual Meeting of Stockholders by any stockholder of the Company not later that October 18, 1998. The Company may exercise discretionary voting authority with respect to any such proposal if it does not have notice of such matter by that date. 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. 16 17 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 14, 1998 By /s/ Henry D. Herr --------------------------- --------------------------------- HENRY D. HERR Executive Vice President Finance and Administration, (Principal Financial Officer) Date July 14, 1998 By /s/ David A. Sidlowe ---------------------------- --------------------------------- DAVID A. SIDLOWE Vice President and Controller (Principal Accounting Officer) 17 EX-27 2 FINANCIAL DATA SCHEDULE
5 9-MOS AUG-31-1998 SEP-01-1997 MAY-31-1998 10,183,178 0 4,166,054 0 0 16,526,482 4,985,284 (2,282,522) 33,884,298 6,244,702 0 0 0 8,096 25,274,639 33,884,298 0 25,670,256 0 25,127,104 6,690,846 0 113 (6,147,807) (2,230,000) (3,917,807) 56,483 0 0 (3,861,324) (.48) (.48)
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