-----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, PwM0IsMGYl9UoX2V7vKpanE0eiMX3iM0mWGimJfBp6ZLzUADQGGA8G92A09g8EzY L9HziKAa2vpJEpolQjnBqg== 0000950144-99-013668.txt : 19991130 0000950144-99-013668.hdr.sgml : 19991130 ACCESSION NUMBER: 0000950144-99-013668 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990831 FILED AS OF DATE: 19991129 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-K SEC ACT: SEC FILE NUMBER: 000-19364 FILM NUMBER: 99765112 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-K 1 AMERICAN HEALTHCORP,INC. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended August 31, 1999 Commission File No. 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) Securities registered pursuant to Section 12(b) of the Act: None ---- Securities registered pursuant to Section 12(g) of the Act: Common Stock - $.001 par value ------------------------------ (Title of Class) 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 12 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. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of November 12, 1999, 8,293,415 shares of Common Stock were outstanding. The aggregate market value of the shares held by non-affiliates of the Registrant was approximately $35,000,000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held January 25, 2000 are incorporated by reference into Part III of this Form 10-K. 2 PART I ITEM 1. BUSINESS The operations of American Healthcorp, Inc. (the "Company"), a corporation formed in 1981, primarily consist of Diabetes Treatment Centers of America, Inc. ("DTCA"), a wholly-owned subsidiary that is a national provider of diabetes disease management services to hospitals and health plans designed to enhance the quality and lower the cost of treatment of individuals with diabetes. The Company also recently introduced a cardiac disease management program for enrollees of health plans with cardiac disease and intends to develop or acquire a respiratory disease management program. On November 12, 1999, the Company's Board of Directors approved an amendment to the Company's Restated Certificate of Incorporation, subject to stockholder approval, to change the Company's name from American Healthcorp, Inc. to American Healthways, Inc. The amendment will be considered by the Company's stockholders at the Annual Meeting of Stockholders on January 25, 2000. During December 1999, the Company will begin to utilize the name American Healthways as a "doing business as" name for American Healthcorp pending approval of the proposed amendment. The Company's discontinued operations in fiscal 1998 and 1997 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 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. This Form 10-K 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 in the "Industry Risk Considerations" section of this Form 10-K, 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 and/or maintain contracts with its customers under existing terms or restructure these contracts on terms that would not have a material negative impact on the Company's results of operations; the Company's ability to execute contracts for health plan diabetes and cardiac disease management services and for hospital-based diabetes services; the Company's ability to effect estimated cost savings and clinical outcome improvements under health plan 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 with health plans; unusual and unforeseen patterns of healthcare utilization by individuals with diabetes in the health plans with which the Company has executed a diabetes disease management contract; the ability of the health plans to maintain the number of covered lives enrolled in the plans during the terms of the agreements between the health plans 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 develop and implement its cardiac disease management program; the Company's ability to develop a respiratory disease management program or find 2 3 a suitable acquisition candidate and close an acquisition on terms satisfactory to the Company; the Company's ability to attract and/or retain and effectively manage the employees required to implement its agreements with hospitals and health plan 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. SOURCES OF REVENUES - DIABETES SERVICES 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 years ended August 31, 1999, 1998 and 1997:
------------------------------------------------------------- Year ended August 31, 1999 1998 1997 ------------------------------------------------------------- Hospital Contracts 45% 60% 91% Health Plan Contracts 54 39 7 Other 1 1 2 -------------------------------- 100% 100% 100% --------------------------------
For information on the Company's business segments, see Note 10 - Business Segments of the Notes to the Consolidated Financial Statements. The Company's hospital-based diabetes treatment center business had 58 contracts in effect in 24 states at August 31, 1999. The following table presents the number of contracts in effect during the past five fiscal years:
- --------------------------------------------------------------------------------------------------------- Year ended August 31, 1999 1998 1997 1996 1995 - --------------------------------------------------------------------------------------------------------- Contracts in effect at beginning of period 57 58 61 69 69 Contracts signed 9 9 6 5 9 Contracts discontinued (8) (10) (9) (13) (9) --------------------------------------------------- Contracts in effect at end of period 58 57 58 61 69 =================================================== Hospital sites where services are delivered 72 72 74 72 74 ---------------------------------------------------
The Company's 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. 3 4 Under the terms of its contracts with hospitals, the Company provides the resources that enable the hospital to develop and operate an integrated system of care for patients with diabetes that includes: (1) programs to work with physicians to identify objectives for the patient and monitor accomplishment of the objectives during the patient's stay; (2) clinical interventions for patients with diabetes; (3) an information network service that connects the hospital to the Company's dedicated nationwide resources; (4) programs for specific activities related to quality improvement, cost reduction and market share increases for patients with diabetes; and (5) programs to monitor the hospital's performance against quality indicators and processes related to diabetes patients. Also available for hospital customers are numerous other services such as (1) outpatient diabetes patient education and follow-up; (2) programs for diabetes during pregnancy and programs for insulin pump therapy; and (3) policies and procedures to help ensure formal recognition of the diabetes program at the hospital by the American Diabetes Association. The Company's hospital-based centers staff consist of health professionals who have special expertise and training in diabetes. Depending upon the needs of the individual client hospital, the professional staff may include a diabetes clinical nurse specialist, a registered dietitian, an exercise specialist and a counselor. In addition, the Company generally provides a program director who is responsible for on-site program management, community relations and hospital and physician relations and a program assistant who is responsible for record-keeping, general administrative functions and providing assistance to the program director and the professional staff. Generally, all of the program staff are directed by the Company. Other personnel (nursing, ancillary and support staff) are employed and directed by the client hospital. 4 5 The following table sets forth, as of August 31, 1999, the number and location by state of the hospitals in which the Company's diabetes treatment centers are located and the aggregate number of licensed beds in these hospitals: - ---------------------------------------------------------------------- Number of Client Hospitals' State Client Hospitals Licensed Beds (1) - ---------------------------------------------------------------------- Florida 8 2,445 California 5 1,169 Georgia 5 1,599 North Carolina 5 1,156 Tennessee 5 2,064 Pennsylvania 4 1,092 Wisconsin 4 757 Alabama 3 842 Massachusetts 3 784 Missouri 3 666 New York 3 590 Ohio 3 938 Texas 3 1,361 Virginia 3 547 Indiana 2 822 Louisiana 2 283 New Jersey 2 691 Oklahoma 2 537 South Carolina 2 649 Colorado 1 250 Kentucky 1 446 Michigan 1 495 Nevada 1 225 Utah 1 128 -------------------------------------------- TOTAL 72 20,536 -------------------------------------------- (1) Numbers based upon the American Hospital Association's 1998/99 Guide to the Healthcare Field. While the Company's revenues historically have been generated primarily by its operating contracts with hospitals, a majority of fiscal 1999 revenues were generated from programs that are designed to assist health plans in reducing healthcare costs and improving the quality of care for individuals with diabetes enrolled in their plans. The Company believes that a substantial portion of its future revenue growth will result from diabetes disease management contracts and other types of disease management contracts with health plans. Implementation of the Company's first diabetes disease management contracts with health plans occurred in fiscal 1996. The diabetes disease management products enable the Company to assist 5 6 enrollees and the providers of healthcare in the health plan with specific diabetes care and treatment as well as provide assistance for the overall needs of populations of individuals with diabetes. The Company believes that its patient and physician support regimens, delivered and/or supervised by a multi-disciplinary team, will assist in assuring that the most effective care for the treatment of the disease is provided to enrollees with diabetes and that this focus will reduce both the short-term and long-term healthcare costs of these enrollees by ultimately reducing or preventing the devastating and costly complications of diabetes. At August 31, 1999, the Company also had contracts with eight health plans to provide diabetes disease management services to 36 HMO markets. The number of covered lives under management pursuant to these contracts for its Diabetes NetCare(SM) and its Diabetes NetLink(SM) products as of August 31, 1999, 1998, 1997 and 1996 is presented on the following table.
------------------------------------------------------------------------------------------------- At August 31, 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------- Covered lives under management: Diabetes NetCare(SM) 50,875 52,390 11,404 100 Diabetes NetLink(SM) 60,322 4,902 - - -------------------------------------------------- Total covered lives under management 111,197 57,292 11,404 100 --------------------------------------------------
Covered lives at August 31, 1999 exclude 21,000 Diabetes NetLink(SM) contract lives under existing contracts that are scheduled for implementation subsequent to August 31, 1999 and include approximately 3,000 NetCare(SM) lives under a contract that will be discontinued December 31, 1999. In addition, subsequent to August 31, 1999, contracts and letters of intent for an additional 41,000 lives in 13 markets with three new customers and two existing customers have been signed and include the first Cardiac Healthways(SM) agreement covering approximately 2,500 enrollees with cardiac disease. Most of the remainder of the lives under agreements subsequent to August 31, 1999 will be enrolled in the Company's Diabetes NetLink(SM) program. Pursuant to the Company's diabetes disease management contracts, the Company provides clinical and support staff who are responsible for coordinating and supporting the treatment of individuals with diabetes in accordance with treatment standards and protocols that have been developed by the Company and have been approved by the medical leadership at each health plan. The actual treatment of the individuals is provided by physicians and hospitals who are part of the health plan's network of providers. The Company provides its services under two distinct delivery models reflecting the needs and population concentration of each health plan customer. Under both delivery models, the Company's services are designed to coordinate and integrate the healthcare needs of the member population, to improve and promote compliance with generally recognized and evidence-based diabetes standards of care, to improve the overall health status of the population, and, as a result, reduce their overall cost of care. In its Diabetes NetCare(SM) delivery model, the Company's professional staff are located in the health plan's market area and work directly with the network health care providers, as well as by mail and phone, in the delivery of the diabetes disease management program. The Company's Diabetes NetLink(SM) delivery model utilizes a central staff located at its Nashville, Tennessee call center to provide member and provider services. The central activities provided by the Company's call center staff are augmented by services provided locally to providers by health plan personnel. In addition to the Nashville call center, the Company has completed the construction of an additional call center in Phoenix, Arizona which will commence operations at the end of the first quarter of fiscal 2000. The two call centers have a combined service capacity of approximately 200,000 lives. 6 7 Diabetes disease management contracts require a sophisticated management information system to enable the Company to manage the care of large populations of diabetes patients and to assist in reporting outcomes and costs. The Company has developed a clinical management system which it believes meets its information management needs for its diabetes population management services and has installed and is utilizing the system for the enrollees of each of its health plan contract customers. This system is currently being upgraded to enable the system to handle additional diseases other than diabetes from a common platform, and to increase the Company's call center capabilities and efficiency with the installation of state-of-the-art dialing, call routing, and information access technologies. The Company has also recently developed an internet-based enrollee and provider communication capability for one of its health plan customers. The Company anticipates expansion of this capability to other customers as well as enhancement of the capabilities of its internet communication technology. It is anticipated that these upgrades to this system will begin to be installed during January 2000 and will continue through the remainder of fiscal 2000. The capital expenditures required during fiscal 2000 to upgrade the Company's information technology capability, to complete the Phoenix call center and to add the number of lives currently under contract totals approximately $4.5 million. The Company also operates through Arthritis and Osteoporosis Care Center, Inc. ("AOCC"), a wholly-owned subsidiary of the Company, two arthritis and osteoporosis treatment centers in Nashville, Tennessee and Toledo, Ohio. These centers are designed as comprehensive treatment centers providing the resources to meet all of the needs of individuals with arthritis and osteoporosis in one location. In addition, the Company has contracted with five of its diabetes treatment center hospitals to provide osteoporosis treatment expertise as a supplement to its diabetes treatment services. Revenues and profits from osteoporosis services were not material to the Company's operations during fiscal 1999. BUSINESS STRATEGY The Company's strategy is to develop additional relationships with health plans and to further develop and expand its hospital-based diabetes treatment center business. During fiscal 1999, the Company introduced its comprehensive cardiac disease management program, Cardiac Healthways(SM), for health plans and plans to develop or acquire a respiratory disease management program. It is the Company's strategy to provide health plans with programs that address the needs of enrollees with each of these chronic diseases and to support the management of these diseases from a common clinical, information technology and business platform. The Company anticipates that it will utilize its state-of-the-art call center and medical information technologies to gain a competitive advantage in delivering its health plan decease management services. The Company has been marketing its Cardiac Healthways(SM) program since the third quarter of fiscal 1999 and subsequent to August 31, 1999 has entered into a letter of intent with a health plan to provide disease management services that include cardiac services to approximately 2,500 enrollees with cardiac disease beginning during the second quarter of fiscal 2000. While the Company has also made proposals to health plans that include respiratory disease management services, these proposals have been made in conjunction with a privately-owned respiratory disease management company that would provide these services to the health plan. It is anticipated that the Company will continue to make such joint proposals until it has developed or acquired its own respiratory disease management capabilities. It is the Company's intent to have this respiratory capability by the end of calendar 2000. 7 8 INDUSTRY RISK CONSIDERATIONS In the process of the Company's execution of its business strategy, its operations and financial condition are subject to certain risks. The primary industry risks are described below and readers of this Annual Report on Form 10-K should take such risks into account in evaluating any investment decision involving the Company. This section does not describe all risks applicable to the Company and is intended only as a summary of certain material factors that impact its operations in the industry in which it operates. More detailed information concerning these and other risks is contained in other sections of this Annual Report on Form 10-K. The healthcare industry in which the Company operates is currently subject to significant cost reduction pressures as a result of constrained revenues from governmental and private revenue sources as well as from increasing underlying medical care costs. The Company believes that these pressures will continue and possibly intensify. While the Company believes that its products are geared specifically to assist health plans and hospitals in controlling the high costs associated with the treatment of chronic diseases, the pressures to reduce costs immediately may have a negative effect in certain circumstances on the ability of or the length of time required by the Company to sign new health plan and hospital contracts. In addition, this focus on cost reduction may result in increased focus from health plan and hospital customers on contract restructurings that reduce the fees paid to the Company for the Company's services. The healthcare industry and the HMO industry in particular are the subjects of considerable legislative and legal initiatives relative to various "patient rights" issues and legal liability issues. While the Company believes that its products for health plans provide patient and physician focused chronic disease management services that assure that appropriate treatment for chronic disease enrollees is provided and, therefore, should be seen as enhancing access to better care, the time required to deal with overall "patient rights" and legal liability issues may detract from the time necessary for health plans to evaluate and implement new programs such as those provided by the Company. The hospital and managed care industries are subject to considerable state and federal government regulation. Many of these regulations are vaguely written and subject to differing interpretations that may, in certain cases, result in unintended consequences that may impact the Company's ability to effectively deliver its services. The current focus on legislative efforts to protect the confidentiality of patient identifiable medical information is one such example. While the Company believes that its ability to obtain this information for disease management purposes from a health plan with which it has contracted is protected in recently released proposed medical record confidentiality federal regulations addressing this issue, new federal or state legislation or regulation in this area which restricts the availability of this information to the Company or which leaves uncertainty as to whether disease management is an allowable use of patient identifiable medical information would have a negative impact on its health plan disease management operations. Broadly written Medicare fraud and abuse laws and regulations which are subject to varying interpretations also may expose the Company to potential civil and criminal litigation regarding the structure of current and past contracts entered into with hospital and health plan customers such as the civil lawsuit filed against the Company in 1994 as discussed later in this Annual Report on Form 10-K. While the Company believes that its operations do not violate the provisions of the fraud and abuse statutes and regulations, no assurances can be given that private individuals acting on behalf of the United States 8 9 government in return for a portion of potential penalties or recoveries obtained from the Company or government enforcement agencies themselves will not pursue a claim against the Company under a new or differing interpretation of these statutes and regulations. The disease management industry, which is growing rapidly, is a relatively new segment of the overall health care industry and which has many entrants marketing various services and products labeled as disease management. The generic label of disease management has been utilized to characterize a wide range of activities from the sale of medical supplies and drugs to services aimed at demand management. Because the industry is new, health plan purchasers of these services have not had experience purchasing, evaluating or monitoring such services. While the Company believes that its many years of experience in treating chronic diseases, the clinical depth of the Company's programs and the documented positive population-based financial and clinical outcomes experienced by the Company's health plan customers provide it with a clear product differentiation, the existence of numerous competing disease management products and contracting structures in an industry with a relatively short history has created and may continue to create confusion in the contracting process for these services. In addition, because the industry is still relatively new and health plans are just beginning to enter into disease management contracts, the Company has a significant concentration of its revenues represented by contracts with two health plans, Highmark, Inc. (Blue Cross and Blue Shield of Western Pennsylvania) and CIGNA Healthcare, which in total for fiscal 1999 accounted for 43% of the Company's revenues. Until additional significant health plan contracts are signed by the Company, the Company can be negatively impacted by the loss or restructuring of a contract with a single large health plan customer. The disease management industry is dependent on the effective use of information technology. While the Company believes that its state of the art electronic medical record and call center technology provides it with a competitive advantage in the industry, the Company expects to continually invest in updating this technology and, in some cases, such as those discussed in this Annual Report on Form 10-K, is required to make systems investments in advance of the generation of revenue by these investments. In addition, these system requirements expose the Company to technology obsolescence risks. Accordingly, the Company amortizes its computer software and hardware over periods ranging from three to five years. While the Company believes that it has been successful in identifying, addressing and correcting its internal Year 2000 information system risks, it will be dependent on the success of its health plan and hospital customers, and also many health care payors such as the federal government who provide funding for its hospital customers and for certain aspects of health plan customer operations, in dealing with Year 2000 compliance. Failure of the systems of these customers or those who provide funding for the operations of these customers could have a material adverse impact on the Company. Healthcare industry stock prices and the Company's stock price in particular may be volatile. The stock's volatility may be influenced by the market's perceptions of the healthcare sector in general, or other companies believed to be similar to the Company or by the market's perception of the Company's operations and future prospects. Many of these perceptions are beyond the ability of the Company to control. In addition, the Company's stock is not heavily traded and therefore the ability to achieve relatively quick liquidity without a negative impact on the stock price may be limited. 9 10 OPERATIONAL RELATIONSHIP WITH CLIENTS In the Company's typical hospital relationship, the Company is retained to be the service-line manager for the client hospital's diabetes treatment services. The hospital provides all equipment and furnishings needed for the diabetes program and is responsible for routine patient services including admissions, nursing care, housekeeping, laboratory and other ancillary services, and billing and collections for all patients. The Company staff is responsible for coordinating and supporting the hospital's overall care for patients with diabetes. The Company provides corporate support to each client hospital and to the on-site Company staff in the areas of community relations, staff training and education, financial analysis, clinical programming and management, quality assurance, utilization review and ongoing program development and refinement. The Company typically sends one monthly bill to each client hospital, and is paid directly by the hospital. Patients receiving services from the diabetes treatment centers are charged by the hospital for typical hospital services. Health insurance, including Medicare and Medicaid, cover charges incurred on an inpatient basis on the same basis as non-diabetes related inpatient episodes. Many insurance plans, including Medicare, also provide coverage for outpatient education services for people with diabetes. Pursuant to the Company's diabetes disease management contracts, the Company provides clinical and support staff who are responsible for coordinating and supporting the treatment of individuals with diabetes in accordance with treatment standards and protocols that have been developed by the Company and have been approved by the medical leadership at each health plan. The actual treatment of the individuals is provided by physicians and hospitals who are part of the health plan's network of providers. The Company provides its services under two distinct delivery models reflecting the needs and population concentration of each health plan customer. Under both delivery models, the Company's services are designed to coordinate and integrate the healthcare needs of the member population, to improve and promote compliance with generally recognized and evidence-based diabetes standards of care, to improve the overall health status of the population, and, as a result, reduce their overall cost of care. In its Diabetes NetCare(SM) delivery model, the Company's professional staff are located in the health plan's market area and work directly with the network health care providers, as well as by mail and phone, in the delivery of the diabetes disease management program. The Company's Diabetes NetLink(SM) delivery model utilizes a central staff located at its Nashville, Tennessee call center to provide member and provider services. The central activities provided by the Company's call center staff are augmented by services provided locally to providers by health plan personnel. In addition to the Nashville call center, the Company has completed the construction of an additional call center in Phoenix, Arizona which will commence operations at the end of the first quarter of fiscal 2000. The two call centers have a combined service capacity of approximately 200,000 lives. 10 11 CONTRACTUAL RELATIONSHIP WITH CLIENTS The Company has a variety of contractual relationships with its client hospitals. 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 the Company based on changes in the client hospital's market share of diabetes patients 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 Company program for center professional personnel, medical director fees and community relations are the responsibility of the Company to structures where all Company program costs are the responsibility of the client hospital. Recent trends in contracting with hospitals are resulting in new and renewed contracts that consist primarily of fixed management fee arrangements. The terms of hospital contracts generally range from two to five years and are subject to periodic renegotiation and renewal that may include reduction in fee structures which have a negative impact on the Company's revenues and profitability. The Company's initial health plan contracts for diabetes disease management services that were entered into during fiscal 1996 and fiscal 1997 were "shared savings" Diabetes NetCare(SM) contracts with initial terms of five years. Healthcare cost savings resulting from the Company's programs at these health plan sites were shared with the health plan according to ratios set forth in the respective contracts. Under these arrangements, the Company was at risk for the costs of operating its program and the health plans were at risk for 100% of their members' healthcare costs. Because of ramp-up periods prior to the generation of healthcare cost savings and the normal time lag associated with claims information necessary to evaluate cost savings, the Company's profitability was negatively affected during the first 12 months of operation at each site. During fiscal 1998 and 1999 all new Diabetes NetCare(SM) and Diabetes NetLink(SM) contracts signed with health plans were based on per member per month payments to the Company for the health plan's enrollees who have diabetes and participate in the Company's programs. In most of these contracts, individuals with diabetes in these plans are automatically enrolled in the Company's program but are permitted to decline to participate. Historically, less than 2% decline to participate. These contracts were generally for terms of three years with provisions for subsequent renewal and typically provided that between 15% and 30% of the per member per month fee is at risk subject to the Company's performance against clinical and financial cost savings criteria. The structures of the health plan contracts signed during fiscal 1998 and 1999 significantly reduced or eliminated the start-up losses that have been experienced under the health plan contracts signed during fiscal 1996 and 1997. In addition, during fiscal 1998 all health plan contracts signed during fiscal 1996 and 1997 were converted to per member per month structures or were terminated as part of a mutual agreement reached with Coventry Healthcare to discontinue six Diabetes NetCare(SM) site operations at Principal Healthcare HMOs acquired by Coventry Healthcare during fiscal 1998. The Company recorded an additional $1.8 million in pretax profit in connection with the termination of these contracts. Consequently, as of August 31, 1999, the Company did not have any "shared savings" contracts with health plans for its diabetes disease management products. During fiscal 1999 and during the initial months of fiscal 2000, the Company's disease management services were extended to additional health plan sites or health plan products by several of its health plan customers by additions to the initial contracts. Additionally, subsequent to August 31, 1999, the stated term of an agreement with CIGNA Healthcare to provide Diabetes NetLink(SM) services was extended from October 31, 2001 to September 30, 2004 and also included the addition of approximately 16,000 covered 11 12 lives at nine additional health plan sites to be managed for CIGNA Healthcare bringing the total lives under this contract to over 75,000. While no assurances can be provided that this trend of additional lives from existing health plan customers will continue in fiscal 2000, the Company anticipates further extension of services to additional health plan sites and products of its existing health plan customers during fiscal 2000. The Company anticipates that additional disease management contracts that the Company may sign with health plans may take one of several forms, including some form of shared savings of overall enrollee healthcare costs, per member per month payments to the Company to cover its services to enrollees, or some combination of these arrangements. Because of a lack of operating history for its recently introduced Cardiac Healthways(SM) program and for its to-be-developed or acquired respiratory disease program, the Company may have to assume more performance risk in contracts for these new programs than it currently has assumed in its existing diabetes health plan contracts. During fiscal year ended August 31, 1999, approximately 43% of the Company's revenues were derived from contracts with two health plans. The loss of either of these contracts or a reduction in the profitability of these contracts would have a material negative impact on the Company's financial operations. During fiscal year ended August 31, 1998, approximately 32% of the Company's revenues were derived from contracts with two health plans and 11% were derived from one group of hospitals owned by Columbia/HCA Healthcare Corporation. Revenues under the Company's contracts with hospitals and health plans are recorded as services are provided. Adjustments for performance under the terms of the contracts and for other factors impacting revenue recognition are accrued on an estimated basis in the period the services are provided and adjusted in future periods when final settlement is determined. Management believes it has adequately provided in its financial statements for any potential adjustments that may be applied to revenues from its contracts. OPERATING CONTRACT RENEWALS The Company's hospital contract revenues are dependent upon the contractual relationships it establishes and maintains with client hospitals to develop and operate diabetes treatment centers. The terms of these hospital contracts generally range from two to five years and are subject to periodic renegotiation and renewal that may include reduction in fee structures that have a negative impact on the Company's revenues and profitability. Contracts have been discontinued or not renewed by the Company and by client hospitals for a number of reasons including financial problems of the hospital, the consolidation of hospitals in a market, a hospital's need to reduce the hospital's operating costs including the short-term reduction of costs associated with elimination of the Company's program or the contract's performance. During fiscal 1999, 15 hospital contracts were renewed. Several of these renewals included contract rate reductions which the Company has traditionally undertaken to maintain favorable long-term contractual relationships. Also during fiscal 1999, eight hospital contracts were discontinued. There were no material continuing obligations or costs for the Company associated with the termination of any client hospital contracts. The Company anticipates that continued hospital industry pressures to reduce hospital costs because of constrained hospital revenues will result in a continuation of contract rate reductions and the potential for additional contract terminations. During fiscal 2000, 29 contracts are eligible to be terminated under the terms of the contracts with the hospitals. 12 13 The Company's health plan contract revenues are also dependent upon the contractual relationships it establishes and maintains with client health plans to provide disease management services to their members. The terms of these health plan contracts generally range from three to five years and are subject to periodic renegotiations and renewal that may include changes in fee structure. Because the disease management industry is relatively new and the Company's contracts were some of the first large scale contracts to be executed with health plans for disease management services, the Company anticipates that, as additional experience is gained by our customers and by the Company in delivering services to chronic disease populations, one or more of these contracts may be restructured prior to the end of the term of the original contract. No assurances can be given that the results of any future restructurings would not have a material negative impact on the Company's results of operations. During fiscal 1999, a contract with a health plan formerly owned by Principal Healthcare was terminated by mutual agreement with the new owner of that health plan. During fiscal 2000, one health plan contract covering less than 1,000 lives will terminate unless renewed. However, several health plan contracts provide for early termination by the health plan if the Company does not meet certain performance standards. Subsequent to August 31,1999, the Company and a health plan customer mutually decided to terminate a pilot program contract begun during fiscal 1998 covering approximately 3,000 lives under a Diabetes NetCare(SM) arrangement. The Company also provides Diabetes NetCare(SM) services to this customer at other locations, which have not been affected by this pilot project termination. The loss of this contract is not expected to have a material negative impact upon the Company's profitability in fiscal 2000. PHYSICIAN RELATIONSHIPS In several of its hospital contracts, the Company contracts with leading physicians in that community who specialize in the treatment of diabetes to serve as medical directors or associate medical directors of the diabetes hospital-based treatment center. These physicians, who are independent contractors with the Company or, in certain circumstances, with the client hospital, remain in private practice and are responsible for billing and collecting for their personal professional services. In addition, these physicians receive a fixed annual stipend under their contracts for providing specific services to the diabetes treatment center in the areas of medical supervision, liaison with the hospital's medical staff, quality control and staff education. These contracts generally have terms of one year with renewal options and generally cannot be extended beyond the terms of the related hospital contract. The Company's health plan operations have no contractual relationships with physicians for the delivery of patient care services. The Company's diabetes disease management programs serve as a resource to the health plan's network physicians in the delivery of care to enrollees with diabetes. At the Company's Diabetes NetCare(SM) locations, the Company typically contracts at an hourly rate with one or more physicians in the health plan's local provider network to provide the Company with medical supervision in the delivery of its program and also to assist the Company in its relationship with other physicians and provider members of the health plan's provider network. COMPETITION The healthcare industry is highly competitive and subject to continual change in the manner in which services are provided. The Company's principal competition for its hospital treatment center 13 14 business is from hospitals that have basic programs for treating patients with diabetes. Generally, hospitals have not committed the time, personnel or financial resources necessary to establish and maintain comprehensive diabetes treatment services comparable to the services offered by the Company's diabetes treatment centers. Other companies, including major pharmaceutical companies, healthcare providers and organizations that provide services to health plan organizations, which may have greater financial, research, staff, and marketing resources than the Company, are marketing diabetes, cardiac and respiratory disease management services to health plans or have announced an intention to offer such services. While the Company believes it has advantages over its competitors because of its state-of-the-art call center technology linked to its proprietary medical information technology, the comprehensive clinical nature of its product offerings, its established reputation in the provision of diabetes care and the financial and clinical outcomes from its health plan programs, there can be no assurance that the Company can compete effectively with these companies. GOVERNMENTAL REGULATION While the Company itself is not directly subject to many of the governmental and regulatory requirements affecting healthcare delivery, its client hospitals and health plans must comply with a variety of regulations including the licensing and reimbursement requirements of federal, state and local agencies and the requirements of municipal buildings codes, health codes and local fire departments. Certain professional healthcare employees of the Company, such as nurses, are subject to individual licensing requirements. The Company is indirectly affected by changes in the laws governing hospital and health plan reimbursement under governmental programs such as Medicare and Medicaid. There may be continuing legislative and regulatory initiatives to reduce the funding of the Medicare and Medicaid programs in an effort to curtail or reduce overall federal healthcare spending. Recent federal legislation such as the Balanced Budget Act of 1997 have or will significantly reduce Medicare and Medicaid reimbursements to most hospitals. These reimbursement changes are negatively impacting hospital revenues and operations. There can be no assurance that these changes or future legislative initiatives or government regulation would not adversely affect the Company's operations or reduce the demand for its services. Various federal and state laws regulate the relationship among providers of healthcare services, other healthcare businesses and physicians. The "fraud and abuse" provisions of the Social Security Act provide civil and criminal penalties and potential exclusion from the Medicare and Medicaid programs for persons or businesses who offer, pay, solicit or receive remuneration in order to induce referrals of patients covered by federal health care programs (which includes Medicare, Medicaid, TriCare and other federally funded health programs). While the Company believes that its business arrangements with its client hospitals, health plans and medical directors are in compliance with these statutes, these fraud and abuse provisions are broadly written and the full extent of their application is not yet known. The Company is therefore unable to predict the effect, if any, of broad enforcement interpretation of these fraud and abuse provisions. The hospital and managed care industries are subject to considerable state and federal government regulation. Many of these regulations are vaguely written and subject to differing interpretations that may, in certain cases, result in unintended consequences that may impact the Company's ability to effectively deliver its services. The current focus on legislative efforts to protect the confidentiality of patient identifiable medical information is one such example. While the Company believes that its ability to obtain this information for disease management purposes from a health plan with which it has contracted is 14 15 protected in recently released proposed medical record confidentiality federal regulations addressing this issue, new federal or state legislation or regulation in this area which restricts the availability of this information to the Company or which leaves uncertainty as to whether disease management is an allowable use of patient identifiable medical information would have a negative impact on its health plan disease management operations. 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 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. 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. INSURANCE The Company maintains professional malpractice liability and general liability insurance for all of its locations and operations. While the Company believes its insurance policies to be adequate in amount and coverage for its current operations, there can be no assurance that coverage is sufficient to cover all future claims or will continue to be available in adequate amounts or at a reasonable cost. The Company's liability insurance coverage provides for certain deductible levels to be paid by the Company. Estimated reserves to cover potential payments under these deductibles have been provided in the Company's financial statements. EMPLOYEES As of August 31, 1999, the Company had 471 full-time employees and 139 part-time employees in the following general classifications: 297 nurses; 57 other healthcare professionals, including counselors, dietitians and exercise therapists; 129 center and health plan site management and administrative personnel; and 127 operations support and Company management personnel. The Company's employees are not subject to any collective bargaining agreement. Management considers the relationship between the Company and its employees to be good. 15 16 ITEM 2. PROPERTIES The Company's corporate and primary service support office is located in Nashville, Tennessee and contains approximately 39,000 square feet of office space, which the Company leases pursuant to an agreement which expires in December 1999. The Company subleases to AmSurg approximately 15,000 square feet of its corporate headquarters pursuant to a sublease which also expires in December 1999. Upon the expiration of the current lease, the Company is relocating its corporate and primary service support office to a new location in Nashville which contains approximately 44,000 square feet pursuant to a lease agreement which expires in September 2007. This new lease will require the Company to expend approximately $1.6 million on leasehold improvements. The Company also has seven office space leases associated with its current health plan contract services including its two call center locations for an aggregate of approximately 49,000 square feet of space for terms of three to ten years. All of the Company's diabetes and arthritis and osteoporosis treatment centers are located in hospital-based units for which the Company pays no rent. ITEM 3. LEGAL PROCEEDINGS In November 1994, the Company received an administrative subpoena for documents from a regional office of the 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 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. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 16 17 EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information regarding executive officers of the Company as of August 31, 1999. Executive officers of the Company serve at the pleasure of the Board of Directors.
Employee Age Position - ----------------------------- --------- ------------------------------------------------------------ Thomas G. Cigarran 57 Chairman of the Board and Chief Executive Officer since 1988, President and Director since 1981. Chairman of the Board of AmSurg since 1992. President and Chief Executive Officer of AmSurg from 1992 to 1998. Henry D. Herr 53 Executive Vice President-Finance and Administration since 1986, Chief Financial Officer since 1981, Secretary and Director since 1988. Director of AmSurg since 1992. Vice President and Secretary of AmSurg from 1992 to 1998. Robert E. Stone 53 Senior Vice President since 1981. David A. Sidlowe 49 Vice President since 1984, Controller since 1982.
17 18 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Market Information The Company's common stock is traded over the counter on The Nasdaq Stock Market under the symbol AMHC. The following table sets forth the high and low sales prices per share of common stock as reported by Nasdaq for the relevant periods.
Common Stock Prices ------------------------ High Low ------------------------ Year ended August 31, 1999 First Quarter $12.13 $ 7.00 Second Quarter 11.88 9.38 Third Quarter 11.38 7.00 Fourth Quarter 9.13 6.38 Year ended August 31, 1998 First Quarter 14.13 10.63 Second Quarter 8.63 6.25 Third Quarter 11.13 8.13 Fourth Quarter 11.38 8.00
(b) Holders At November 12, 1999 there were approximately 2,000 holders of the Company's Common Stock, including 128 stockholders of record. (c) Dividends The Company has never declared or paid a cash dividend on its Common Stock. The Company intends to retain its earnings to finance the growth and development of its business and does not expect to declare or pay any cash dividends in the foreseeable future. The declaration of dividends is within the discretion of the Company's Board of Directors, which will review this dividend policy from time to time. 18 19 Item 6. Selected Financial Data
- ------------------------------------------------------------------------------------------------------------------------ Year ended and at August 31, 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------ (In thousands except per share data) Operating Data: Revenues $ 50,052 $ 41,167 $ 30,537 $31,403 $36,583 ----------------------------------------------------------------- Expenses: Salaries and benefits 31,362 26,473 21,437 19,866 18,878 Other operating expenses 11,203 11,084 8,702 7,254 10,865 Depreciation and amortization 1,805 1,308 1,342 1,273 1,339 Interest -- 1 6 5 7 Spin-off stock option adjustment -- 5,770 -- -- -- ----------------------------------------------------------------- Total expenses 44,370 44,636 31,487 28,398 31,089 ----------------------------------------------------------------- Income (loss) before income taxes and discontinued operations 5,682 (3,469) (950) 3,005 5,494 Income tax expense (benefit) 2,365 (1,148) (207) 544 2,252 ----------------------------------------------------------------- Income (loss) from continuing operations 3,317 (2,321) (743) 2,461 3,242 Discontinued operations -- 57 (940) 799 674 ----------------------------------------------------------------- Net income (loss) $ 3,317 $ (2,264) $ (1,683) $ 3,260 $ 3,916 ----------------------------------------------------------------- Basic income (loss) per share: From continuing operations $ 0.40 $ (0.29) $ (0.09) $ 0.31 $ 0.40 From discontinued operations -- 0.01 (0.12) 0.10 0.08 ----------------------------------------------------------------- $ 0.40 $ (0.28) $ (0.21) $ 0.41 $ 0.48 ----------------------------------------------------------------- Diluted income (loss) per share: From continuing operations $ 0.37 $ (0.29) $ (0.09) $ 0.30 $ 0.40 From discontinued operations -- 0.01 (0.12) 0.10 0.08 ----------------------------------------------------------------- $ 0.37 $ (0.28) $ (0.21) $ 0.40 $ 0.48 ----------------------------------------------------------------- Weighted average common shares and equivalents: Basic 8,319 8,081 8,022 7,980 8,121 Diluted 8,924 8,081 8,022 8,161 8,211 Balance Sheet Data: Cash and cash equivalents $ 13,501 $ 13,244 $ 12,227 $12,562 $11,076 Working capital 14,014 10,859 11,564 13,324 11,089 Net assets of discontinued operations -- -- 16,407 16,361 14,695 Total assets 41,014 36,857 49,373 48,943 45,873 Other long-term liabilities 2,820 2,446 2,186 2,657 2,156 Stockholders' equity 30,954 26,606 40,441 41,611 38,299
19 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The operations of American Healthcorp, Inc. (the "Company"), a corporation formed in 1981, primarily consist of Diabetes Treatment Centers of America, Inc. ("DTCA"), a wholly-owned subsidiary that is a national provider of diabetes disease management services to hospitals and health plans designed to enhance the quality and lower the cost of treatment of individuals with diabetes. The Company also recently introduced a cardiac disease management program for enrollees of health plans with cardiac disease and intends to develop or acquire a respiratory disease management program. On November 12, 1999, the Company's Board of Directors approved an amendment to the Company's Restated Certificate of Incorporation, subject to stockholder approval, to change the Company's name from American Healthcorp, Inc. to American Healthways, Inc. The amendment will be considered by the Company's stockholders at the Annual Meeting of Stockholders on January 25, 2000. During December 1999, the Company will begin to utilize the name American Healthways as a "doing business as" name for American Healthcorp pending approval of the proposed amendment. The Company's discontinued operations in fiscal 1998 and 1997 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 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: the Company's ability to renew and/or maintain contracts with its customers under existing terms or restructure these contracts on terms that would not have a material negative impact on the Company's results of operations; the Company's ability to execute contracts for health plan diabetes and cardiac disease management services and for hospital-based diabetes services; the Company's ability to effect estimated cost savings and clinical outcome improvements under health plan 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 with health plans; unusual and unforeseen patterns of healthcare utilization by individuals with diabetes in the health plans with which the Company has executed a diabetes disease management contract; the ability of the health plans to maintain the number of covered lives enrolled in the plans during the terms of the agreements between the health plans 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 develop and implement its cardiac disease management program; the Company's ability to develop a respiratory disease management program or find 20 21 a suitable acquisition candidate and close an acquisition on terms satisfactory to the Company; the Company's ability to attract and/or retain and effectively manage the employees required to implement its agreements with hospitals and health plan 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 years ended August 31, 1999, 1998 and 1997:
- ------------------------------------------------------------ Year ended August 31, 1999 1998 1997 - ------------------------------------------------------------ Hospital Contracts 45% 60% 91% Health Plan Contracts 54 39 7 Other 1 1 2 ------------------------------- 100% 100% 100% -------------------------------
The Company's 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. The Company has a variety of contractual relationships with its client hospitals. 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 the Company based on changes in the client hospital's market share of diabetes patients 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 Company's program for center professional personnel, medical director fees and community relations are the responsibility of the Company to structures where all Company program costs are the responsibility of the client hospital. Recent trends in contracting with hospitals are resulting in new and renewed contracts that consist primarily of fixed management fee arrangements. The terms of hospital contracts generally range from two to five years and are subject to periodic renegotiation and renewal that may include reduction in fee structures which have a negative impact on the Company's revenues and profitability. 21 22 The following table presents the number of hospital contracts in effect and the number of hospital sites where the Company's services were provided under the terms of these contracts or was in the process of initiating operations as of the end of fiscal years 1999, 1998 and 1997. 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 the Company.
- --------------------------------------------------------------------------- As of August 31, 1999 1998 1997 - --------------------------------------------------------------------------- Hospital Contracts 58 57 58 Hospital sites where services are provided 72 72 74
The components of changes to the total number of hospital contracts and hospital sites under these contracts for fiscal years 1999, 1998 and 1997 are presented below.
- ----------------------------------------------------------------------------------------------------------------- Year ended August 31, 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------- Contracts Sites Contracts Sites Contracts Sites -------------------------- -------------------------- -------------------------- Total contracts/sites at beginning of period 57 72 58 74 61 72 New contracts/sites signed 9 19 9 12 6 11 Contracts/sites discontinued (8) (19) (10) (14) (9) (9) -------------------------- -------------------------- -------------------------- Total contracts/sites at end of period 58 72 57 72 58 74 ----------------------------------------------------------------------------------
During fiscal 1999, 15 hospital contracts were renewed. Several of these renewals included contract rate reductions which the Company has traditionally undertaken to maintain favorable long-term contractual relationships. Also during fiscal 1999, eight hospital contracts were discontinued. There were no material continuing obligations or costs for the Company associated with the termination of any client hospital contracts. The Company anticipates that continued hospital industry pressures to reduce costs because of constrained revenues will result in a continuation of contract rate reductions and the potential for additional contract terminations. During fiscal 2000, 29 contracts are eligible to be terminated under the terms of the contracts with the hospitals. While the Company's revenues historically have been generated primarily by its operating contracts with hospitals, a majority of fiscal 1999 revenues were generated from programs that are designed to assist health plans in reducing the healthcare costs and improving the quality of care for individuals with diabetes enrolled in their plans. The Company believes that a substantial portion of its future revenue growth will result from diabetes disease management contracts and other types of disease management contracts with health plans. Implementation of the Company's first diabetes disease management contracts with health plans occurred in fiscal 1996. The diabetes disease management products enable the Company to assist enrollees and the providers of healthcare in the health plan with specific diabetes care and treatment as well as provide assistance for the overall needs of populations of individuals with diabetes. The Company believes that its patient and physician support regimens, delivered and/or supervised by a multi-disciplinary 22 23 team, will assist in assuring that the most effective care for the treatment of the disease is provided to enrollees with diabetes and that this focus will reduce both the short-term and long-term healthcare costs of these enrollees by ultimately reducing or preventing the devastating and costly complications of diabetes. Pursuant to the Company's diabetes disease management contracts, the Company provides clinical and support staff who are responsible for coordinating and supporting the treatment of individuals with diabetes in accordance with treatment standards and protocols that have been developed by the Company and have been approved by the medical leadership at each health plan. The actual treatment of the individuals is provided by physicians and hospitals who are part of the health plan's network of providers. The Company provides its services under two distinct delivery models reflecting the needs and population concentration of each health plan customer. Under both delivery models, the Company's services are designed to coordinate and integrate the healthcare needs of the member population, to improve and promote compliance with generally recognized and evidence-based diabetes standards of care, to improve the overall health status of the population, and, as a result, reduce their overall cost of care. In its Diabetes NetCare(SM) delivery model, the Company's professional staff are located in the health plan's market area and work directly with the network health care providers, as well as by mail and phone, in the delivery of the diabetes disease management program. The Company's Diabetes NetLink(SM) delivery model utilizes a central staff located at its Nashville, Tennessee call center to provide member and provider services. The central activities provided by the Company's call center staff are augmented by services provided locally to providers by health plan personnel. In addition to the Nashville call center, the Company has completed the construction of an additional call center in Phoenix, Arizona which will commence operations at the end of the first quarter of fiscal 2000. The two call centers have a combined service capacity of approximately 200,000 lives. Diabetes disease management contracts require a sophisticated management information system to enable the Company to manage the care of large populations of diabetes patients and to assist in reporting outcomes and costs. The Company has developed a clinical management system which it believes meets its information management needs for its diabetes population management services and has installed and is utilizing the system for the enrollees of each of its health plan contract customers. This system is currently being upgraded to enable the system to handle additional diseases other than diabetes from a common platform and to increase the Company's call center capabilities and efficiency with the installation of state-of-the-art dialing, call routing, and information access technologies. The Company has also recently developed an internet-based enrollee and provider communication capability for one of its health plan customers. The Company anticipates expansion of this capability to other customers as well as enhancement of the capabilities of its internet communication technology. It is anticipated that these upgrades to this system will begin to be installed during January 2000 and will continue through the remainder of fiscal 2000. The capital expenditures required during fiscal 2000 to upgrade the Company's information technology capability, to complete the Phoenix call center and to add the number of lives currently under contract totals approximately $4.5 million. 23 24 As of August 31, 1999, the Company had contracts with eight health plans to provide diabetes disease management services to 36 health plan markets. The number of covered lives under management pursuant to these contracts for its Diabetes NetCare(SM) and its Diabetes NetLink(SM) products as of August 31, 1999, 1998 and 1997 is presented on the following table.
- ----------------------------------------------------------------------------------- At August 31, 1999 1998 1997 - ----------------------------------------------------------------------------------- Covered lives under management: Diabetes NetCare(SM) 50,875 52,390 11,404 Diabetes NetLink(SM) 60,322 4,902 - ------------------------------------ Total covered lives under management 111,197 57,292 11,404 ------------------------------------
Covered lives at August 31, 1999 exclude 21,000 Diabetes NetLink(SM) contract lives under existing contracts that are scheduled for implementation subsequent to August 31, 1999 and include approximately 3,000 Diabetes NetCare(SM) lives under a contract that will be discontinued December 31, 1999. In addition, subsequent to August 31, 1999, contracts and letters of intent for an additional 41,000 lives in 13 markets with three new customers and two existing customers have been signed and include the first Cardiac Healthways(SM) agreement covering approximately 2,500 enrollees with cardiac disease. Most of the remainder of the lives under agreements subsequent to August 31, 1999 will be enrolled in the Company's Diabetes NetLink(SM) program. The Company's health plan contract revenues are dependent upon the contractual relationships it establishes and maintains with client health plans to provide disease management services to their members. The terms of these health plan contracts generally range from three to five years and are subject to periodic renegotiations and renewal that may include changes in fee structure. Because the disease management industry is relatively new and the Company's contracts were some of the first large scale contracts to be executed with health plans for disease management services, the Company anticipates that, as additional experience is gained by our customers and by the Company in delivering services to chronic disease populations, one or more of these contracts may be restructured prior to the end of the term of the original contract. No assurances can be given that the results of any future restructurings would not have a material negative impact on the Company's results of operations. The Company's initial health plan contracts for diabetes disease management services that were entered into during fiscal 1996 and fiscal 1997 were "shared savings" Diabetes NetCare(SM) contracts with initial terms of five years. Healthcare cost savings resulting from the Company's programs at these health plan sites were shared with the health plan according to ratios set forth in the respective contracts. Under these arrangements, the Company was at risk for the costs of operating its program and the health plans were at risk for 100% of their members' healthcare costs. Because of ramp-up periods prior to the generation of healthcare cost savings and the normal time lag associated with claims information necessary to evaluate cost savings, the Company's profitability was negatively affected during the first 12 months of operation at each site. During fiscal 1998 and 1999 all new Diabetes NetCare(SM) and Diabetes NetLink(SM) contracts signed with health plans were based on per member per month payments to the Company for the health plan's enrollees who have diabetes and participate in the Company's programs. In most of these contracts, individuals with diabetes in these plans are automatically enrolled in the Company's program but are permitted to decline to participate. Historically, less than 2% decline to participate. 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 the Company's performance against clinical and financial cost savings criteria. The structures of the health plan contracts signed during fiscal 1998 and 1999 significantly reduced or eliminated the start-up losses that have been experienced under the health plan contracts signed during fiscal 1996 and 1997. In addition, during fiscal 1998 all health plan contracts signed during fiscal 1996 and 1997 were converted to per member per month structures or were terminated as part of a mutual agreement reached with Coventry Healthcare to discontinue six Diabetes NetCare(SM) site operations at Principal Healthcare HMOs acquired by Coventry Healthcare during fiscal 1998. Consequently, as of August 31, 1999, the Company did not have any "shared savings" contracts with health plans for its diabetes disease management products. 24 25 As a result of the mutual agreement to terminate the Coventry Healthcare contracts in July 1998, the Company recorded additional revenue of approximately $3.6 million associated with this settlement and also recorded additional costs of $1.8 million associated with the termination of services at these locations. The resulting pretax profit of approximately $1.8 million from this settlement was recognized during the Company's fourth fiscal quarter of 1998. During fiscal 1999, a contract with a health plan formerly owned by Principal Healthcare was terminated by mutual agreement with the new owner of that health plan. During fiscal 2000, one health plan contract covering less than 1,000 lives will terminate unless renewed. However, several health plan contracts provide for early termination by the health plan if the Company does not meet certain performance standards. Subsequent to August 31,1999, the Company and a health plan customer mutually decided to terminate a pilot program contract begun during fiscal 1998 covering approximately 3,000 lives under a Diabetes NetCare(SM) arrangement. The Company also provides Diabetes NetCare(SM) services to this customer at other locations, which have not been affected by this pilot project termination. The loss of this contract is not expected to have a material negative impact upon the Company's profitability in fiscal 2000. During fiscal 1999 and during the initial months of fiscal 2000, the Company's disease management services were extended to additional health plan sites or health plan products by several of its health plan customers by additions to the initial contracts. Additionally, subsequent to August 31, 1999, the stated term of an agreement with CIGNA Healthcare to provide Diabetes NetLink(SM) services was extended from October 31, 2001 to September 30, 2004 and also included the addition of approximately 16,000 covered lives at nine additional health plan sites to be managed for CIGNA Healthcare bringing the total lives under this contract to over 75,000. While no assurances can be provided that this trend of additional lives from existing health plan customers will continue in fiscal 2000, the Company anticipates further extension of services to additional health plan sites and products of its existing health plan customers during fiscal 2000. The Company's strategy is to develop additional relationships with health plans and to further develop and expand its hospital-based diabetes treatment center business. During fiscal 1999, the Company introduced its comprehensive cardiac disease management program, Cardiac Healthways(SM), for health plans and plans to develop or acquire a respiratory disease management program. It is the Company's strategy to provide health plans with programs that address the needs of enrollees with each of these chronic diseases and to support the management of these diseases from a common clinical, information technology and business platform. The Company anticipates that it will utilize its state-of-the-art call center and 25 26 medical information technologies to gain a competitive advantage in delivering its health plan decease management services. The Company has been marketing its Cardiac Healthways(SM) program since the third quarter of fiscal 1999 and subsequent to August 31, 1999 has entered into a letter of intent with a health plan to provide disease management services that include cardiac services to approximately 2,500 enrollees with cardiac disease beginning during the second quarter of fiscal 2000. While the Company has also made proposals to health plans that include respiratory disease management services, these proposals have been made in conjunction with a privately-owned respiratory disease management company that would provide these services to the health plan. It is anticipated that the Company will continue to make such joint proposals until it has developed or acquired its own respiratory disease management capabilities. It is the Company's intent to have this respiratory capability by the end of calendar 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. 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. 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 health plan disease management operations are structured around its electronic medical record capability and various data interchange capabilities with its health plan customers. 26 27 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 an extensive effort in progress addressing 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 health plan operations, on the ability of its customers to provide the Company 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 November 15, 1999, the Company has completed all five phases of its Year 2000 Project for its critical components of operations. As part of its Year 2000 Project, the Company identified the electronic medical record utilized in its health plan operations as its primary mission-critical component and has completed 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 designed to position the Company to realize significant operating enhancements for the system in addition to Year 2000 compliance. As of November 15, 1999, this upgrade project is substantially complete and all components of the upgraded electronic medical record have been remediated, tested and implemented. The Company's survey of its customers and critical vendors to determine their readiness for Year 2000 compliance is substantially complete. No potential compliance problems have been identified with customers or critical vendors. The Company believes that all of its critical systems and processes are now Year 2000 compliant and the Company's survey of its customers and vendors has identified no potential compliance problems. Some non-critical systems may not be addressed until after January 2000; however, the Company believes that the potential failure of some or all of these non-critical systems will not have a material adverse effect on its operations. The Company incurred approximately $268,000 in operating expenditures during fiscal 1999, which represents approximately 16% of the Company's information technology operating expenses for the fiscal year ended August 31, 1999, to support the Year 2000 Project and estimates that it will spend an additional $50,000 in operating expenses primarily during the first half of fiscal 2000 to complete the Year 2000 Project. No expenditures were incurred for the Year 2000 Project during fiscal 1998. In addition, the Company currently anticipates that accelerated capital expenditures because of Year 2000 issues will total less than $200,000. Although the Company anticipates that a significant focus of its health plan information technology system development resources throughout the first four months of fiscal 2000 will be directed toward Year 2000 compliance efforts, the Company believes that it has the resources and capabilities to support other information technology projects, including a major upgrade of its electronic medical record capability to 27 28 provide a multiple disease management platform. The Company believes that its ability to add new health plan business and hospital center business will not be materially impacted by its Year 2000 efforts. While the Company believes that it has successfully completed the substantial portion of its Year 2000 Project, there can be no assurance that it will not incur unexpected difficulties in Year 2000 compliance or that one or more of its customers or critical vendors will not experience unexpected difficulties that impact their ability to be Year 2000 compliant. The failure of the Company's critical systems or the failure of one or more of its large health plan customers, the failure of a significant number of its hospital customers or the failure of one or more of its critical vendors to be Year 2000 compliant and the inability to correct any such non-compliance within a relatively short period of time would materially impact the ability of the Company to provide services and earn revenues and/or receive cash payments from its customers. The Company has developed contingency plans that address potential Year 2000 compliance-related failure of its critical systems as well as Year 2000 compliance-related failures of major customers of the Company or its most critical vendors. While these contingency plans include, among other considerations, manual procedures for certain critical automated systems and the availability of additional financial resources to deal with scenarios that interrupt the Company's payments from customers, all of the Company's contingency plans address short-term Company, customer or vendor compliance issues. The costs to implement the contingency plans that address these short-term compliance failures are not expected to be material to the Company's operations. However, should any compliance problem interrupt the Company's services or should major customers or critical vendors experience significant compliance problems for extended periods of time (such as complete shut-down beyond a two week period of time), the Company's contingency plans will likely not be sufficient to prevent such a failure or failures from having a material negative impact on the operations of the Company. RESULTS OF OPERATIONS The operations of the Company represent 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 prior to the Distribution for general management, administrative and accounting services provided by the Company. Charges to AmSurg for such services approximated the Company's cost. FISCAL 1999 COMPARED TO FISCAL 1998 Revenues for 1998 included $3.6 million resulting from the settlement with Coventry Healthcare terminating diabetes disease management contracts at six HMO sites effective July 31, 1998. The increase in revenues of $8.9 million from 1998 to 1999 resulted primarily from an increase in the average number of lives enrolled in the Company's health plan diabetes disease management contracts to approximately 88,700 for 1999 from approximately 26,200 for 1998. This increase in the average number of lives under management was primarily the result of new health plan contracts signed during fiscal 1998 and 1999. The average revenue per member per month for enrollees under the Company's health plan contracts for 1999 was 36% less than for 1998. 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 1999 as compared to 1998 and also as a result of higher revenues for the Diabetes NetCare(SM) lives during 1998 attributable to contracts with shared healthcare cost savings fee structures which have been replaced with per member per month fee structures in 1999. These increases in health plan contract revenues were offset partially by 28 29 decreased revenues from hospital treatment center contracts. Revenues from the Company's hospital contract operations for 1999 were 9% less than for 1998 on a slightly higher average number of contracts in operation during 1999 as compared with 1998. 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 1999 compared with 1998. The Company anticipates that revenues for fiscal 2000 will increase over fiscal 1999 revenues primarily as a result of additional lives enrolled under its existing and new health plan disease management contracts offset somewhat by lower revenues from hospital contract operations resulting from contract fee reductions and contract terminations. The increase in salaries and benefits of $4.9 million for 1999 over 1998 resulted primarily from higher staffing levels associated with increases in the number of lives enrolled in the Company's health plan contracts partially offset by decreased employee incentive compensation awards associated with operating performance during 1999 and approximately $936,000 in severance and other employee related costs incurred in 1998 associated with the termination of the Coventry Healthcare contracts. Salaries and benefits as a percentage of revenues decreased to 63% for 1999 from 64% for 1998 primarily as a result of improved revenue performance at the Company's health plan contract operations. The Company anticipates salaries and benefits expense to increase during fiscal 2000 compared with fiscal 1999 primarily as a result of increased staff, including the staff for the new Phoenix, Arizona call center, required for expected increases in the number of lives enrolled under the Company's health plan contracts. The increase in other operating expenses of $118,000 for 1999 compared with 1998 resulted primarily from higher costs associated with increases in the average number of lives enrolled in the Company's health plan contracts offset by other operating expenses of approximately $880,000 associated with the termination of the Coventry Healthcare contracts incurred in 1998. Other operating expenses as a percentage of revenues decreased to 22% for 1999 from 27% for 1998 primarily as a result of improved revenue performance of the Company's health plan contracts and the impact of the termination costs for the Coventry Healthcare sites during 1998. The Company anticipates other operating expenses will increase during 2000 compared with fiscal 1999 primarily as a result of increased costs associated with anticipated increases in the number of lives enrolled under the Company's health plan contracts. The increase in depreciation and amortization expense of $497,000 for 1999 from 1998 resulted principally from increased depreciation expense associated with furniture, equipment and computer-related capital expenditures associated with its diabetes disease management operations for health plans. The Company anticipates depreciation and amortization expense to increase during 2000 compared with fiscal 1999 primarily as a result of increased information technology and other capital expenditures associated with expected increases in the number of covered lives enrolled under the Company's health plan contracts, including the capital costs associated with the opening of the new Phoenix, Arizona call center, as well as from upgrades and additions to the Company's information technology capabilities. The Company's income tax expense of $2.4 million for 1999 compared to an income tax benefit of $1.1 million for 1998 resulted from improved operating performance in 1999 compared to 1998 and as a result of the income tax benefit generated in 1998 from the non-recurring stock option expense adjustment associated with the AmSurg Distribution. The differences between the statutory federal income tax rate of 34% and the Company's effective tax and benefit rates during 1999 and 1998 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. 29 30 FISCAL 1998 COMPARED TO FISCAL 1997 The increase in revenues of $10.6 million for 1998 from 1997 resulted from improved performance under the Company's shared savings health plan contracts for diabetes disease management services, an increase in the average number of lives enrolled in the Company's diabetes disease management contracts to 26,200 for fiscal 1998 from 8,500 for fiscal 1997 as well as from $3.6 million of revenue in fiscal 1998 resulting from the settlement with Coventry Healthcare terminating diabetes disease management contracts at six HMO sites covering approximately 6,000 enrolled lives effective July 31, 1998. These increases in health plan contract revenues were offset partially by decreased revenues from hospital treatment center contracts which were 12% less than for 1997 due to contract rate renegotiations and restructurings and from a decrease in the average number of hospital contracts in operation between the periods from 60 contracts during 1997 to 55 contracts during 1998. The increase in salaries and benefits of $5.0 million for 1998 over 1997 resulted primarily from higher staffing levels associated with increases in the number of lives enrolled in the Company's health plan contracts, from increased employee incentive compensation awards associated with improved operating performance during 1998 and from severance and other employee related costs of approximately $936,000 associated with the termination of the Coventry Healthcare contracts. Salaries and benefits as a percentage of revenues decreased to 64% for 1998 from 70% for 1997 primarily as a result of improved revenue performance at its health plan contract operations and as a result of the settlement associated with the Coventry Healthcare contract terminations. The increase in other operating expenses of $2.4 million for 1998 over 1997 resulted primarily from higher costs associated with increases in the average number of lives enrolled in the Company's health plan contracts and from other operating expenses of approximately $880,000 associated with the termination of the Coventry Healthcare contracts. Other operating expenses as a percentage of revenues decreased to 27% for 1998 from 29% for 1997 primarily as a result of improved revenue performance at the Company's health plan contracts. The decrease in depreciation and amortization expense of $34,000 for 1998 from 1997 resulted from decreased amortization expense associated with its hospital treatment center operations as a result of expensing contract start-up costs as incurred during 1998 in comparison to amortizing these costs over periods of one to three years during prior years. This decrease was offset somewhat by the increased depreciation expense associated with furniture, equipment and computer-related capital expenditures associated with its diabetes disease management operations for health plans. As a result of the Company's distribution of its AmSurg common stock and 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 30 31 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 impact of this adjustment on the Company's financial statements is summarized below:
Net Income Increase (Decrease) -------------- Compensation expense $ (5,770,000) Estimated deferred income tax benefit 2,190,000 -------------- Net decrease in net income $ (3,580,000) -------------- Stockholders' Equity Increase (Decrease) -------------- Increase in paid-in capital $ 5,770,000 Net decrease in net income (3,580,000) -------------- Net increase in stockholder's equity $ 2,190,000 --------------
The Company's income tax benefit increased to $1.1 million for 1998 compared to $207,000 for 1997 primarily as a result of the income tax benefit generated in 1998 from the non-recurring stock option expense adjustment associated with the AmSurg Distribution offset partially by improved operating performance in the Company's operating results before consideration of this stock option expense adjustment. The differences between the statutory federal income tax rate of 34% and the Company's effective tax benefit rates during both 1998 and 1997 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 1998 and for 1997 include the Company's share of AmSurg's net income or loss 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 1998 and $615,000 during 1997. LIQUIDITY AND CAPITAL RESOURCES Operating activities for fiscal 1999 generated $3.4 million in cash flow. Investing activities during this period used $3.7 million for the acquisition of property and equipment purchases primarily associated with its expanding health plan operations. Financing activities for fiscal 1999 generated $604,000 in cash flow which included $1.1 million in proceeds from the exercise of options to purchase the Company's common stock offset partially by $477,000 used to repurchase the Company's stock. 31 32 The Company believes that cash flow from operating activities and its available cash balances of $13.5 million at August 31, 1999 will continue to enable the Company to fund its working capital needs, capital expenditures totaling approximately $4.5 million associated with its growing health plan operations, including the development of respiratory disease management capability, and the leasehold improvements and other associated costs totaling approximately $2.3 million for its relocated and expanded corporate and primary support office location in Nashville, Tennessee. In addition, the Company may utilize its cash resources to fund repurchases of its common stock; as of August 31, 1999 the Company had repurchased 137,320 shares of common stock pursuant to an authorization by the Board of Directors in January 1998 to purchase up to 400,000 shares in open market and private transactions from time to time prior to January 1, 2000. The Company has received a letter of commitment for a $6 million credit facility from a bank to provide borrowing capacity for capital expenditures and for working capital needs including unforeseen working capital needs associated with Year 2000 compliance problems that may be experienced by its customers. However, there can be no assurance that this financing will be completed on terms acceptable to the Company. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 32 33 Item 8. Financial Statements and Supplementary Data AMERICAN HEALTHCORP, INC. CONSOLIDATED BALANCE SHEETS ASSETS
- ----------------------------------------------------------------------------------- At August 31, 1999 1998 - ----------------------------------------------------------------------------------- Current assets: Cash and cash equivalents (Note 1b) $ 13,501,016 $ 13,243,571 Accounts receivable, net 5,333,695 3,623,461 Other current assets (Note 1c) 1,240,071 798,714 Deferred tax assets (Notes 1g and 3) 1,179,000 998,000 ------------------------------- Total current assets 21,253,782 18,663,746 ------------------------------- Property and equipment (Note 1d): Leasehold improvements 408,458 191,950 Equipment 8,598,750 5,828,698 ------------------------------- 9,007,208 6,020,648 Less accumulated depreciation (2,996,655) (2,336,242) ------------------------------- Net property and equipment 6,010,553 3,684,406 ------------------------------- Long-term deferred tax assets (Notes 1g and 3) 2,123,000 2,753,000 ------------------------------- Other assets, net (Note 1e) 543,408 290,513 ------------------------------- Excess of cost over net assets of purchased companies, net (Note 1f) 11,082,920 11,465,139 ------------------------------- $ 41,013,663 $ 36,856,804 -------------------------------
See accompanying notes to the consolidated financial statements. 33 34 AMERICAN HEALTHCORP, INC. CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------- At August 31, 1999 1998 - ------------------------------------------------------------------------------------------- Current liabilities: Accounts payable $ 1,095,232 $ 1,015,918 Accrued salaries and benefits 2,951,041 2,985,589 Accrued liabilities 1,775,071 2,163,963 Income taxes payable (Notes 1g and 3) 1,116,799 1,054,407 Current portion of other long-term liabilities (Note 4) 301,940 584,805 ---------------------------- Total current liabilities 7,240,083 7,804,682 ---------------------------- Other long-term liabilities (Note 4) 2,819,776 2,446,089 ---------------------------- Commitments and contingencies (Notes 5 and 9) Stockholders' equity (Notes 6 and 7) Preferred stock $.001 par value, 5,000,000 shares authorized, none outstanding -- -- Common stock $.001 par value, 15,000,000 shares authorized, 8,461,772 and 8,125,507 shares outstanding 8,462 8,125 Additional paid-in capital 24,750,587 23,719,833 Retained earnings 6,194,755 2,878,075 ---------------------------- Total stockholders' equity 30,953,804 26,606,033 ---------------------------- $41,013,663 $36,856,804 ----------------------------
See accompanying notes to the consolidated financial statements. 34 35 AMERICAN HEALTHCORP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------ Year ended August 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------ Revenues (Note 1h) $ 50,052,072 $ 41,167,436 $ 30,536,776 -------------------------------------------------- Expenses: Salaries and benefits 31,362,186 26,472,583 21,437,253 Other operating expenses 11,202,507 11,084,345 8,701,748 Depreciation and amortization (Note 1) 1,805,410 1,308,320 1,341,825 Interest 289 1,308 5,512 Spin-off stock option adjustment (Note 7) -- 5,770,000 -- -------------------------------------------------- Total expenses 44,370,392 44,636,556 31,486,338 -------------------------------------------------- Income (loss) before income taxes and discontinued operations 5,681,680 (3,469,120) (949,562) Income tax expense (benefit) (Notes 1g and 3) 2,365,000 (1,148,000) (207,000) -------------------------------------------------- Income (loss) from continuing operations 3,316,680 (2,321,120) (742,562) Income (loss) from discontinued operations, net of income taxes (Note 2) -- 56,483 (940,471) -------------------------------------------------- Net income (loss) $ 3,316,680 $ (2,264,637) $ (1,683,033) -------------------------------------------------- Basic income (loss) per share (Note 1i): From continuing operations $ 0.40 $ (0.29) $ (0.09) From discontinued operations -- 0.01 (0.12) -------------------------------------------------- $ 0.40 $ (0.28) $ (0.21) -------------------------------------------------- Fully diluted income (loss) per share (Note 1i): From continuing operations $ 0.37 $ (0.29) $ (0.09) From discontinued operations -- 0.01 (0.12) -------------------------------------------------- $ 0.37 $ (0.28) $ (0.21) -------------------------------------------------- Weighted average common shares and equivalents (Note 1i) Basic 8,318,975 8,080,942 8,022,257 Fully diluted 8,923,523 8,080,942 8,022,257
See accompanying notes to the consolidated financial statements. 35 36 AMERICAN HEALTHCORP, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
-------------------------------------------------------------------------- Additional Preferred Common Paid-in Retained Stock Stock Capital Earnings Total -------------------------------------------------------------------------- Balance, August 31, 1996 -- $ 7,986 $ 17,629,678 $ 23,973,425 $ 41,611,089 Exercise of stock options (Note 7) -- 66 512,600 -- 512,666 Net loss -- -- -- (1,683,033) (1,683,033) -------------------------------------------------------------------------- Balance, August 31, 1997 -- 8,052 18,142,278 22,290,392 40,440,722 Exercise of stock options (Note 7) -- 152 493,483 -- 493,635 Stock repurchase (Note 6) -- (79) (685,928) -- (686,007) Spin-off stock option adjustment (Note 7) -- -- 5,770,000 -- 5,770,000 Distribution of AmSurg stock (Note 2) -- -- -- (17,147,680) (17,147,680) Net loss -- -- -- (2,264,637) (2,264,637) -------------------------------------------------------------------------- Balance, August 31, 1998 -- 8,125 23,719,833 2,878,075 26,606,033 Exercise of stock options (Note 7) 395 1,507,883 -- 1,508,278 Stock repurchase (Note 6) -- (58) (477,129) -- (477,187) Net income -- -- -- 3,316,680 3,316,680 -------------------------------------------------------------------------- Balance, August 31, 1999 -- $ 8,462 $ 24,750,587 $ 6,194,755 $ 30,953,804 --------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements. 36 37 AMERICAN HEALTHCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------- Year ended August 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income (loss) $ 3,316,680 $ (2,264,637) $ (1,683,033) Income (loss) from discontinued operations (Note 2) -- 56,483 (940,471) -------------------------------------------------- Net income (loss) from continuing operations 3,316,680 (2,321,120) (742,562) Income tax expense (benefit) (Notes 1g and 3) 2,365,000 (1,148,000) (207,000) -------------------------------------------------- Income (loss) before income taxes 5,681,680 (3,469,120) (949,562) Noncash expenses, revenues, losses and gains included in income: Depreciation and amortization (Note 1) 1,805,410 1,308,320 1,341,825 Spin-off stock option adjustment (Note 7) -- 5,770,000 -- Decrease in working capital items (2,495,717) 785,557 1,877,076 Other noncash transactions 776,102 1,249,788 150,982 -------------------------------------------------- 5,767,475 5,644,545 2,420,321 Income taxes (net paid) (1,468,748) (507,549) 3,673 Increase in other assets (454,670) (165,234) (188,101) Payments on other long-term liabilities (Note 4) (490,507) (129,487) (715,139) -------------------------------------------------- Net cash flows provided by operating activities 3,353,550 4,842,275 1,520,754 -------------------------------------------------- Cash flows from investing activities: Acquisition of property and equipment (3,699,640) (2,991,724) (1,304,235) Investment in discontinued operations including spin-off costs (Note 2) -- (496,411) (976,103) -------------------------------------------------- Net cash flows used in investing activities (3,699,640) (3,488,135) (2,280,338) -------------------------------------------------- Cash flows from financing activities: Exercise of stock options (Note 7) 1,080,722 348,617 424,702 Stock repurchase (Note 6) (477,187) (686,007) -- -------------------------------------------------- Net cash flows provided by (used in) financing activities 603,535 (337,390) 424,702 -------------------------------------------------- Net increase (decrease) in cash and cash equivalents 257,445 1,016,750 (334,882) Cash and cash equivalents, beginning of period 13,243,571 12,226,821 12,561,703 -------------------------------------------------- Cash and cash equivalents, end of period $ 13,501,016 $ 13,243,571 $ 12,226,821 --------------------------------------------------
See accompanying notes to the consolidated financial statements. 37 38 AMERICAN HEALTHCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------- Year ended August 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- Decrease (increase) in other working capital items excluding income taxes: Accounts receivable, net $ (1,710,234) $ (153,622) $ 51,540 Other current assets (441,357) 508,358 172,860 Accounts payable 79,314 230,244 52,956 Accrued expenses (423,440) 2,451,753 (234,789) Unearned contract fees -- (2,251,176) 1,834,509 -------------------------------------------------- $ (2,495,717) $ 785,557 $ 1,877,076 --------------------------------------------------
SUPPLEMENTAL NOTES TO CONSOLIDATED STATEMENTS OF CASH FLOWS 1. Other noncash transactions consist of the following: Deferred compensation agreements $ 572,554 $ 848,900 $ 397,956 Write-off of assets for terminated contracts 125,457 401,250 -- Unearned contract fees -- -- (125,000) Liability insurance reserves 8,775 -- 8,800 Miscellaneous other 69,316 (362) (130,774) -------------------------------------------------- $ 776,102 $ 1,249,788 $ 150,982 --------------------------------------------------
See accompanying notes to the consolidated financial statements. 38 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED AUGUST 31, 1999, 1998 AND 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The 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 disease management services to hospitals and health plans. a. Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned or majority-owned. All material intercompany profits, transactions and balances have been eliminated. b. Cash and Cash Equivalents - Cash and cash equivalents are comprised principally of tax-exempt debt instruments, repurchase agreements, commercial paper and other short-term investments with maturities of less than three months and accrued interest thereon. c. Other Current Assets - Other current assets at August 31, 1999 and 1998 are comprised of prepaid expenses, inventories and other receivables. d. Property and Equipment - Property and equipment costs include expenditures which increase value or extend useful lives. Depreciation is recognized under the straight line method over useful lives ranging principally from 5 to 10 years for leasehold improvements, 3 to 5 years for computer software and hardware and 5 to 10 years for furniture and other office equipment. e. Other Assets - Other assets principally consist of net costs incurred in obtaining hospital contracts and long-term notes receivable. f. Excess of Cost Over Net Assets of Purchased Companies - The excess costs at August 31, 1999 and 1998 arose from a management buy-out of the Company in August 1988. This excess cost is being amortized over 40 years and has no income tax basis. Accumulated amortization at August 31, 1999 and 1998 was $4,204,411 and $3,822,192, respectively. The Company assesses the impairment of the value of excess of cost over net assets of purchased companies and other long-lived assets in accordance with criteria consistent with the provisions of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", primarily using estimated cash flows projected over the useful life of the related assets. g. Income Taxes - The Company files a consolidated federal income tax return which includes all of its wholly-owned subsidiaries and computes its income tax provision under Financial Accounting Standard No. 109, "Accounting for Income Taxes". h. Revenue Recognition - Revenues under the Company's contracts with hospitals and health plans are calculated based on various performance-based and fixed-fee methodologies and are recorded as services are provided. Adjustments for performance under the terms of the contracts and other factors impacting revenue recognition are accrued on an estimated basis in the period the services are provided and adjusted in future periods when final settlement is determined. Management believes it has adequately provided for any potential adjustments that may be applied to revenues from its contracts. 39 40 During fiscal year ended August 31, 1999, approximately 43% of the Company's revenues were derived from contracts with two health plans. During fiscal year ended August 31, 1998, approximately 32% of the Company's revenues were derived from contracts with two health plans and 11% were derived from one group of hospitals with common ownership. i. Net Income (Loss) Per Share - Net income (loss) per share is reported under Financial Accounting Standard No. 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. The calculation of diluted earnings per share for the years ended August 31, 1999, 1998 and 1997 does not include 533,789, 583,573 and 199,723, respectively, in common stock equivalents relative to outstanding stock options as their effect would be antidilutive. j. Management Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. k. Recently Issued Accounting Standards - In June 1998, the Financial Accounting Standards Board issued Financial Accounting Standard No. 133 ("FAS 133") "Accounting for Derivative Instruments and Hedging Activities." FAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The Company does not believe that the adoption of FAS 133 will have any material effect on its financial statements. In June 1997, the Financial Accounting Standards Board issued Financial Accounting Standard No. 130 ("FAS 130") "Reporting Comprehensive Income" and Financial Accounting Standard No. 131 ("FAS 131") "Disclosures about Segments of an Enterprise and Related Information." Both FAS 130 and FAS 131 became effective for fiscal years beginning after December 15, 1997 and early application was permitted. These standards had no effect on the Company's financial statements. 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 stockholders of record at November 25, 1997 based on an amended plan of distribution was completed on December 3, 1997. The effect of the Distribution was a reduction in retained earnings of $17,147,680 which represented the Company's net investment in AmSurg. The results of operations from discontinued operations for 1998 and for 1997 include the Company's share of AmSurg's net income or loss 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 1998 and $615,000 during 1997. 40 41 Summary operating results of AmSurg are as follows:
--------------------------------------------------------- Year ended August 31, 1998 1997 --------------------------------------------------------- Revenues $ 15,916,989 $ 50,319,564 Net income (loss) $ 768,439 $ (366,088)
A reconciliation of AmSurg net income (loss) to the Company's income (loss) from discontinued operations is as follows:
------------------------------------------------------------------------------- Year ended August 31, 1998 1997 ------------------------------------------------------------------------------- Net income (loss) $ 768,439 $ (366,088) AmSurg minority stockholders' interest (367,456) 40,617 Distribution costs incurred by American Healthcorp (344,500) (615,000) ------------------------ Net income (loss) from discontinued operations $ 56,483 $ (940,471) ------------------------
3. INCOME TAXES Income tax expense (benefit) is comprised of the following:
--------------------------------------------------------------------- Year ended August 31, 1999 1998 1997 --------------------------------------------------------------------- Current taxes Federal $ 1,665,000 $ 549,000 $ 492,000 State 251,000 57,000 122,000 Deferred taxes 449,000 (1,754,000) (821,000) ------------------------------------------- Total $ 2,365,000 $ (1,148,000) $ (207,000) -------------------------------------------
41 42 Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's net deferred tax asset for the fiscal years ended August 31, 1999 and 1998 are as follows:
----------------------------------------------------------------------------------- At August 31, 1999 1998 ----------------------------------------------------------------------------------- Deferred tax assets: Financial accruals without economic performance $ 615,000 $ 655,000 Spin-off stock option adjustment 1,764,000 2,190,000 Deferred compensation 1,259,000 1,132,000 ---------------------------- 3,638,000 3,977,000 ---------------------------- Deferred tax liability: Tax over book depreciation 236,000 119,000 Tax over book amortization 100,000 107,000 ---------------------------- 336,000 226,000 ---------------------------- Net deferred tax assets $3,302,000 $ 3,751,000 ---------------------------- Net current deferred tax assets $1,179,000 $ 998,000 Net long-term deferred tax assets 2,123,000 2,753,000 ---------------------------- $3,302,000 $ 3,751,000 ----------------------------
The Company has not provided a valuation allowance on its deferred tax assets because management believes their ultimate realization is more likely than not. The difference between income tax expense (benefit) computed using the effective tax rate and the statutory federal income tax rate follows:
- ------------------------------------------------------------------------------------------------------------- Year ended August 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------- Statutory federal income tax from continuing operations $ 1,932,000 $ (1,180,000) $ (323,000) State income taxes, less Federal income tax benefit 224,000 (129,000) 7,000 Amortization of excess cost over net assets of purchased companies 130,000 130,000 130,000 Other 79,000 31,000 (21,000) ----------------------------------------------- Income tax expense (benefit) $ 2,365,000 $ (1,148,000) $ (207,000) -----------------------------------------------
42 43 4. OTHER LONG-TERM LIABILITIES The Company has a non-qualified deferred compensation plan under which officers of the Company and certain subsidiaries may defer a portion of their salaries and receive a Company matching contribution plus a contribution based on the performance of the Company. Company contributions vest at 25% per year. The plan is unfunded and remains an unsecured obligation of the Company. Participants in these plans elect payout dates for their account balances which can be no earlier than four years from the period of the deferral. Included in other long-term liabilities are vested amounts under these plans of $2,455,594 and $2,090,682 as of August 31, 1999 and 1998, respectively, net of the current portion of $301,940 and $584,805, respectively. Plan payments required in the five years subsequent to August 31, 1999 for the Company are $301,940, $530,383, $165,301, $277,685, and $96,392. Other long-term liabilities at August 31, 1999 and 1998 also include $364,182 and $355,407, respectively, of reserves related to self-insured deductibles under the Company's liability insurance program. The Company's professional and general liability risks above certain levels of per claim and annual aggregate deductibles are insured with major insurance carriers. The Company's policies provide coverage on a claims-made basis. The Company accrues the estimated liability for the retained deductibles on claims and incurred but not reported claims under these policies based on historical loss patterns and management projections. 5. LEASES The Company has operating lease agreements principally for its corporate office space and for certain health plan contract site offices. The present corporate office lease expires in December 1999 and the Company has entered into a new lease in a new location which expires September 2007. The Company subleases to AmSurg approximately 15,000 square feet of its corporate office headquarters pursuant to a sublease which also expires December 1999. The health plan contract site office rentals are approximately 2,000 to 15,000 square feet each and have terms of three to ten years. Rent expense under lease agreements for the years ended August 31, 1999, 1998 and 1997 was approximately $1,053,000, $951,000 and $591,000, respectively. The future minimum lease commitments, net of sublease income, for each of the next five years following August 31, 1999 for the Company for all non-cancelable operating leases are as follows:
--------------------------------- Year ending August 31, --------------------------------- 2000 $ 862,448 2001 1,424,571 2002 1,422,283 2003 1,322,657 2004 1,015,915 ----------- Total $ 6,047,874 -----------
43 44 6. STOCKHOLDERS' EQUITY 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 in open market and private transactions prior to January 1, 2000. As of August 31, 1999, the Company has repurchased 137,320 shares at a cost of $1,163,194. 7. STOCK OPTIONS The Company has several stock option plans under which non-qualified options to purchase the Company's common stock have been granted. Options under these plans are normally granted at market value at the time of the grant and normally vest over four years at the rate of 25% per year. Options have a term of 10 years from the date of grant. At August 31, 1999, 84,044 shares were reserved for future option grants. As a result of the Company's distribution of its AmSurg common stock in December 1997 (see Note 2) and 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 as of the date of the Distribution became fully vested. As a result of this adjustment of the stock options, the Company recorded 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. Although this adjustment resulted in no change in the aggregate value of the options, the compensation expense and associated increase in additional paid-in capital were recognized because the adjustment resulted 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 had taken place. 44 45 The impact of this adjustment on the Company's 1998 financial statements is summarized below:
Net Income Increase (Decrease) ------------ Compensation expense $ (5,770,000) Estimated deferred income tax benefit 2,190,000 ------------ Net decrease in net income $ (3,580,000) ------------ Stockholders' Equity Increase (Decrease) ------------- Increase in paid-in capital $ 5,770,000 Net decrease in net income (3,580,000) ------------ Net increase in stockholder's equity $ 2,190,000 ------------
Stock option activity for the three years ended August 31, 1999 is summarized below:
Number of Option Price Shares Per Share ----------- -------------- Outstanding at August 31, 1996 1,173,303 $.001 - $21.43 Options granted 123,275 $9.38 - $12.83 Options exercised (62,075) $.001 - $11.39 Options terminated (63,652) $5.10 - $12.69 ----------- Outstanding at August 31, 1997 1,170,851 $.001 - $21.43 Options granted 233,800 $6.84 - $11.31 Options cancelled at spin-off (1,344,055) $.001 - $21.43 Replacement options issued at spin-off 1,598,264 $1.71 - $15.41 Options exercised (146,732) $1.71 - $ 7.56 Options terminated (15,931) $4.37 - $10.75 ----------- Outstanding at August 31, 1998 1,496,197 $1.71 - $15.41 Options granted 290,275 $7.42 - $10.93 Options exercised (390,597) $1.71 - $10.90 Options terminated (29,103) $1.71 - $11.31 ----------- Outstanding at August 31, 1999 1,366,772 $1.71 - $15.41 -----------
45 46 The following table summarizes information concerning outstanding and exercisable options at August 31, 1999:
Options Outstanding Options Exercisable ---------------------------------------- ------------------------- Weighted Weighted Weighted Average Average Average Range of Number Remaining Exercise Number Exercise Exercise Prices Outstanding Life (Yrs.) Price Exercisable Price - ----------------- ----------- ----------- --------- ----------- -------- Less than $2.00 521,735 4.0 $1.74 521,735 $ 1.74 $2.01 - $5.00 321,556 7.4 4.64 321,556 4.64 $5.01 - $8.00 440,421 6.6 6.89 208,464 6.29 More than $8.00 83,060 8.8 9.44 13,977 11.86 --------- ----------- 1,366,772 5.9 4.55 1,065,732 3.64 --------- -----------
The Company has also reserved 50,000 shares of common stock to be granted as restricted stock as part of the Company's Board of Directors compensation program of which 18,128 shares have been granted. The Company accounts for its stock options issued to employees and outside directors pursuant to Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation expense has been recognized in connection with the issuance of stock options. The estimated weighted average fair values of the options at the date of grant using the Black-Scholes option pricing model as promulgated by Financial Accounting Standard No. 123, "Accounting for Stock Based Compensation" in the years ended August 31, 1999, 1998 and 1997 are $4.30, $4.41 and $6.19 per share, respectively. In applying the Black-Scholes model, the Company assumed no dividends, an expected life for the options of six and one-half years, a forfeiture rate of 3% for the years ended August 31, 1999, and 1998 and 4.5% for the year ended 1997, respectively, and an average risk free interest rate of 5.2%, 5.5% and 6.4% for the years ended August 31, 1999, 1998 and 1997, respectively. The Company also utilized a volatility rate of 53% for the years ended August 31, 1999, 1998 and 1997. Had the Company used the Black-Scholes estimates to determine compensation expense for options granted during the years ended August 31, 1999, 1998 and 1997, net income (loss) and net income (loss) per share would have been reduced to the following pro forma amounts.
------------------------------------------------------------------------------------ Year ended August 31, 1999 1998 1997 ------------------------------------------------------------------------------------ Net income (loss) As reported $ 3,316,680 $ (2,264,367) $ (1,683,033) Pro forma $ 2,909,680 $ (3,105,392) $ (2,148,000) Net income (loss) per share As reported $ 0.37 $ (0.28) $ (0.21) Pro forma $ 0.33 $ (0.38) $ (0.27)
46 47 8. EMPLOYEE BENEFITS The Company has a Section 401(k) Retirement Savings Plan ("Plan") available to substantially all employees of the Company and its wholly owned subsidiaries. Employee contributions are limited to a percentage of their basic compensation as defined in the Plan and are supplemented by Company contributions which are subject to vesting requirements. Company contributions under the Plan totaled $334,860, $340,301 and $318,382 for the years ended August 31, 1999, 1998 and 1997, respectively. 9. CONTINGENCIES 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 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. Various procedural motions on this case are pending resolution before the discovery stage of the case can proceed. 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. 10. BUSINESS SEGMENTS The Company provides diabetes disease management services to hospitals and health plans to enhance the quality and lower the cost of treatment of individuals with diabetes. The Company's reportable segments are the types of customers, hospital or health plan, who contract for the Company's services. The segments are managed separately and the Company evaluates performance based on operating profits of the respective segments. Because the Company's services are similar for both types of customers, the Company supports both segments with common human resources, clinical, marketing and information technology resources. The accounting policies of the segments are the same as those discussed in the summary of significant accounting policies. There are no intersegment sales. Income (loss) before income taxes and discontinued operations by operating segment excludes interest income, interest expense and general corporate expenses. 47 48 Summarized financial information by business segment is as follows:
- ------------------------------------------------------------------------------------------------- Year ended August 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------- Revenues: Health plan contracts $ 27,152,389 $ 16,065,618 $ 2,060,704 Hospital contracts 22,330,858 24,501,589 27,745,740 Other revenue 568,825 600,229 730,332 -------------------------------------------------- $ 50,052,072 $ 41,167,436 $ 30,536,776 -------------------------------------------------- Income (loss) before income taxes and discontinued operations: Health plan contracts $ 6,509,044 $ 2,080,459 $ (4,964,982) Hospital contracts 6,502,002 7,146,419 9,523,942 Shared support services (5,287,320) (4,717,621) (3,908,704) -------------------------------------------------- Total segments 7,723,726 4,509,257 650,256 General corporate (2,042,046) (2,208,377) (1,599,818) Spin-off stock option adjustment -- (5,770,000) -- -------------------------------------------------- $ 5,681,680 $ (3,469,120) $ (949,562) -------------------------------------------------- Depreciation and amortization: Health plan contracts $ 825,840 $ 417,516 $ 209,484 Hospital contracts 176,877 209,071 370,532 Shared support services 200,370 159,861 220,036 -------------------------------------------------- Total segments 1,203,087 786,448 800,052 General corporate 602,323 521,872 541,773 -------------------------------------------------- $ 1,805,410 $ 1,308,320 $ 1,341,825 -------------------------------------------------- Expenditures for long-lived assets: Health plan contracts $ 1,768,722 $ 2,684,508 $ 1,032,390 Hospital contracts 156,658 195,776 370,974 Shared support services 1,530,935 174,909 186,344 -------------------------------------------------- Total segments 3,456,315 3,055,193 1,589,708 General corporate 431,938 124,265 83,426 -------------------------------------------------- $ 3,888,253 $ 3,179,458 $ 1,673,134 --------------------------------------------------
48 49
- ---------------------------------------------------------------------------------------------- At August 31, 1999 1998 1997 - ---------------------------------------------------------------------------------------------- Identifiable assets: Health plan contracts $ 7,282,246 $ 4,344,215 $ 1,254,010 Hospital contracts 2,591,055 2,960,431 3,904,114 Shared support services 2,174,652 633,661 599,181 -------------------------------------------------- Total segments 12,047,953 7,938,307 5,757,305 General corporate 14,580,790 13,702,358 13,363,868 Assets not allocated: Deferred tax assets 3,302,000 3,751,000 1,997,000 Excess of cost over net assets of purchased companies 11,082,920 11,465,139 11,847,358 Net assets of discontinued operations (see Note 2) -- -- 16,407,271 -------------------------------------------------- $ 41,013,663 $ 36,856,804 $ 49,372,802 --------------------------------------------------
All of the Company's operations are in the United States. During the year ended August 31, 1999, revenues of $16.6 million and $4.8 million, respectively, were derived from contracts with two health plan customers. During the year ended August 31, 1998, revenues of $8.1 million and $4.9 million were derived from two health plan customers and $4.5 million were derived from one group of hospitals with common ownership, respectively. During the year ended August 31, 1997, revenues of $7.6 million were derived from one group of hospitals with common ownership. 49 50 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders American Healthcorp, Inc. Nashville, Tennessee We have audited the accompanying consolidated balance sheets of American Healthcorp, Inc. and subsidiaries as of August 31, 1999 and 1998, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended August 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of American Healthcorp, Inc. and subsidiaries as of August 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 1999 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Nashville, Tennessee October 8, 1999 50 51 Quarterly Financial Information (unaudited): (In thousands except per share data)
- ------------------------------------------------------------------------------------------------------------------ FISCAL 1999 First Second Third Fourth - ------------------------------------------------------------------------------------------------------------------ Revenues $11,835 $12,239 $12,497 $13,481 Income before income taxes and discontinued operations $ 1,054 $ 1,235 $ 1,358 $ 2,035 Net income $ 606 $ 716 $ 791 $ 1,204 Diluted income per share from continuing operations * $ 0.07 $ 0.08 $ 0.09 $ 0.13 Diluted income per share * $ 0.07 $ 0.08 $ 0.09 $ 0.13 - ------------------------------------------------------------------------------------------------------------------ FISCAL 1998 First Second Third Fourth - ------------------------------------------------------------------------------------------------------------------ Revenues $ 7,746 $ 8,454 $ 9,470 $15,497 Income (loss) before income taxes and discontinued operations $(6,071) $ (128) $ 51 $ 2,679 Net income (loss) $(3,748) $ (116) $ 3 $ 1,597 Diluted income (loss) per share from continuing operations * $ (0.47) $ (0.01) $ -- $ 0.18 Diluted income (loss) per share * $ (0.46) $ (0.01) $ -- $ 0.18
* Income (loss) per share calculations for each of the quarters were based on the weighted average number of shares and dilutive options outstanding for each period. Accordingly, the sum of the quarters may not necessarily be equal to the full year income (loss) per share. 51 52 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning the directors of the Company is included in pages 5-7 under the caption "Election of Directors" of the Company's Proxy Statement for the Annual Meeting of Stockholders to be held January 25, 2000 and is incorporated herein by reference. Pursuant to General Instruction G(3), information concerning executive officers of the Company is included in Part I, under the caption "Executive Officers of the Registrant" of this Form 10-K. ITEM 11. EXECUTIVE COMPENSATION Information required by this item is contained in the Company's Proxy Statement for the Annual Meeting of Stockholders to be held January 25, 2000, to be filed with the Securities and Exchange Commission pursuant to Rule 14a-6(c) and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this item is contained in the Company's Proxy Statement for the Annual Meeting of Stockholders to be held January 25, 2000, to be filed with the Securities and Exchange Commission pursuant to Rule 14a-6(c) and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this item is contained in the Company's Proxy Statement for the Annual Meeting of Stockholders to be held January 25, 2000, to be filed with the Securities and Exchange Commission pursuant to Rule 14a-6(c) and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 3. EXHIBITS 3.1 Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Registration Statement on Form S-1 (Registration No. 33-41119)) 3.2 Bylaws (incorporated by reference to Exhibit 3.2 to Registration Statement on Form S-1 (Registration No. 33-41119))
52 53 4.1 Article IV of the Company's Restated Certificate of Incorporation (included in Exhibit 3.1) 10.1 Second Amended and Restated Loan Agreement dated as of April 15, 1997 among AmSurg, SunTrust Bank, Nashville, N.A., and NationsBank of Tennessee, N.A., as amended on May 6, 1997 and on September 2, 1997 (incorporated by reference to Exhibit 10.4 to Form 10/A-3 of AmSurg Corp. filed November 3, 1997) 10.2 Amended and Restated Distribution Agreement dated November 3, 1997 between American Healthcorp, Inc. and AmSurg Corp. (incorporated by reference to Exhibit 2.1 to Form 10/A-3 of AmSurg Corp. filed November 3, 1997)
Management Contracts and Compensatory Plans 10.3 Employment Agreement as Amended and Restated dated August 31, 1992 between the Company and Thomas G. Cigarran (incorporated by reference to Exhibit 10.3 to Form 10-K of the Company for its fiscal year ended August 31, 1992) 10.4 Employment Agreement as Amended and Restated dated August 31, 1992 between the Company and Henry D. Herr (incorporated by reference to Exhibit 10.4 to Form 10-K of the Company for its fiscal year ended August 31, 1992) 10.5 Employment Agreement as Amended and Restated dated August 31, 1992 between the Company and Robert E. Stone (incorporated by reference to Exhibit 10.6 to Form 10-K of the Company for its fiscal year ended August 31, 1992) 10.6 Employment Agreement dated May 15, 1983 between the Company and David A. Sidlowe (incorporated by reference to Exhibit 10.10 to Registration Statement on Form S-1 (Registration No. 33-41119)) 10.7 Capital Accumulation Plan, as amended (incorporated by reference to Exhibit 10.11 to Registration Statement on Form S-1 (Registration No. 33-41119) and Exhibit 10.8 to Form 10-K of the Company for its fiscal year ended August 31, 1995) 10.8 Non-Statutory Stock Option Plan of 1988 (incorporated by reference to Exhibit 10.12 to Registration Statement on Form S-1 (Registration No. 33-41119)) 10.9 1991 Employee Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.10 to Form 10-K of the Company for its fiscal year ended August 31, 1992) 10.10 1991 Stock Option Plan for Outside Directors (incorporated by reference to Exhibit 10.14 to Registration Statement on Form S-1 (Registration No. 33-41119)) 10.11 1991 Outside Directors Discretionary Stock Option Plan (incorporated by reference to Exhibit 4(c) to Registration Statement on Form S-8 (Registration No. 33-42909)) 10.12 Form of Indemnification Agreement by and among the Company and the Company's directors (incorporated by reference to Exhibit 10.15 to Registration Statement on Form S-1 (Registration No. 33-41119))
53 54 10.13 1996 Stock Incentive Plan (incorporated by reference to the Company's proxy statement for the annual meeting of stockholders held January 23, 1996) 21 Subsidiaries of the registrant 23 Independent Auditors' Consent 27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K There have been no reports on Form 8-K during the quarter for which this report is filed. 54 55 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN HEALTHCORP, INC. November 24, 1999 By: /s/ Thomas G. Cigarran -------------------------------- Thomas G. Cigarran Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Signature Title Date - --------------------------------- --------------------------------- ----------------- /s/ Thomas G. Cigarran Chairman of the Board, November 24, 1999 - --------------------------------- President and Chief Executive Thomas G. Cigarran Officer, Director (Principal Executive Officer) /s/ Henry D. Herr Executive Vice President November 24, 1999 - --------------------------------- Finance and Administration, Chief Henry D. Herr Financial Officer, Secretary, Director (Principal Financial Officer) /s/ David A. Sidlowe Vice President and Controller November 24, 1999 - --------------------------------- (Principal Accounting Officer) David A. Sidlowe /s/ Frank A. Ehmann Director November 24, 1999 - --------------------------------- Frank A. Ehmann /s/ Martin J. Koldyke Director November 24, 1999 - --------------------------------- Martin J. Koldyke /s/ C. Warren Neel Director November 24, 1999 - --------------------------------- C. Warren Neel /s/ William C. O'Neil, Jr. Director November 24, 1999 - --------------------------------- William C. O'Neil, Jr.
55 EX-21 2 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARY LIST AS OF NOVEMBER 19, 1999
STATE OF OWNERSHIP NAME OF SUBSIDIARY ORGANIZATION OWNED BY PERCENTAGE - ---------------------------------------------------------------------------------------------------------- Diabetes Treatment Centers of America, Inc. DE American Healthcorp, Inc. 100% Arthritis and Osteoporosis Care Center, Inc. DE American Healthcorp, Inc. 100% American Healthcorp of Texas, Inc. DE American Healthcorp, Inc. 100%
EX-23 3 INDEPENDENT AUDITORS' CONSENT 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-04615 of American Healthcorp, Inc. on Form S-8 of our report dated October 8, 1999 appearing in this Annual Report on form 10-K of American Healthcorp, Inc. for the year ended August 31, 1999. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Nashville, Tennessee November 29, 1999 EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF AMERICAN HEALTHCORP, INC. FOR THE YEAR ENDED AUGUST 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR AUG-31-1999 SEP-01-1999 AUG-31-1999 13,501,016 0 5,333,695 0 0 21,253,782 9,007,208 (2,996,655) 41,013,663 7,240,083 0 0 0 8,462 30,945,342 41,013,663 0 50,052,072 0 42,564,693 1,805,410 0 289 5,681,680 2,365,000 3,316,680 0 0 0 3,316,680 .40 .37
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