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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.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 62-1117144
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
One Burton Hills Boulevard, Nashville, TN 37215
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(Address of Principal Executive Offices) (Zip Code)
615-665-1122
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock - $.001 par value
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(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.
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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
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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:
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Year ended August 31, 1999 1998 1997
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Hospital Contracts 45% 60% 91%
Health Plan Contracts 54 39 7
Other 1 1 2
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100% 100% 100%
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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:
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Year ended August 31, 1999 1998 1997 1996 1995
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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)
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Contracts in effect at end of period 58 57 58 61 69
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Hospital sites where services are delivered 72 72 74 72 74
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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.
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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.
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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:
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Number of Client Hospitals'
State Client Hospitals Licensed Beds (1)
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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
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TOTAL 72 20,536
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(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
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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.
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At August 31, 1999 1998 1997 1996
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Covered lives under management:
Diabetes NetCare(SM) 50,875 52,390 11,404 100
Diabetes NetLink(SM) 60,322 4,902 - -
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Total covered lives under management 111,197 57,292 11,404 100
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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.
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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.
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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
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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.
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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.
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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
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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
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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
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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.
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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.
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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.
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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.
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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
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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
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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.
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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.
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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
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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.
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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.
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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.
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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.
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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.
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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.
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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))
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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))
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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.
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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.
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