-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QyIALesmQ2cNa+rouSEeHCV3JKsY7f76sgWY0yJZ58V9HHrpGERdIQItee/f5R0P jWJ5lzjf5Dh+aD3KjYTq4A== 0000950144-96-008734.txt : 19961202 0000950144-96-008734.hdr.sgml : 19961202 ACCESSION NUMBER: 0000950144-96-008734 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960831 FILED AS OF DATE: 19961127 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN HEALTHCORP INC /DE CENTRAL INDEX KEY: 0000704415 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOSPITALS [8060] IRS NUMBER: 621117144 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-19364 FILM NUMBER: 96673424 BUSINESS ADDRESS: STREET 1: ONE BURTON HILLS BLVD CITY: NASHVILLE STATE: TN ZIP: 37215 BUSINESS PHONE: 6156651122 MAIL ADDRESS: STREET 1: ONE BURTON HILLS BLVD CITY: NASHVILLE STATE: TN ZIP: 37215 10-K405 1 AMERICAN HEALTHCORP, INC. FORM 10-K405 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For The Fiscal Year Ended August 31, 1996 Commission File No. 000-19364 AMERICAN HEALTHCORP, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 62-1117144 - --------------------------------------- ---------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) One Burton Hills Boulevard, Nashville Tennessee 37215 - ----------------------------------------------------- ---------------------- (Address of principal executive offices) Zip Code Registrant's telephone number, including area code: (615) 665-1122 ---------------------- Securities registered pursuant to Section 12(b) of the Act: None ---- Securities registered pursuant to Section 12(g) of the Act: Common Stock - $.001 par value ------------------------------ (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X --- As of November 13, 1996, 8,008,140 shares of Common Stock were outstanding. The aggregate market value of the shares held by non-affiliates of the Registrant was approximately $60,000,000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held January 21, 1997 are incorporated by reference into Part III of this Form 10-K. 2 PART I ITEM 1. BUSINESS American Healthcorp, Inc. and its subsidiaries (the "Company") currently operate two business segments, Diabetes Treatment Centers of America, Inc. ("DTCA") and AmSurg Corp. ("AmSurg"). DTCA, a wholly-owned subsidiary, is the nation's leading provider of diabetes services to physicians, hospitals and healthcare payors. AmSurg, a majority-owned (61% at August 31, 1996) subsidiary, develops, acquires and manages physician practice-based ambulatory surgery centers and specialty physician networks in partnership with surgical and other group practices. 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 new "safe harbor" provisions of the Private Litigation Reform Act of 1995, investors are hereby cautioned that these statements may be affected by the important factors, among others, set forth below, and consequently, actual operations and results may differ materially from those expressed in these forward-looking statements. The important factors for DTCA include: DTCA's ability to renew contracts for hospital-based treatment centers on terms that are acceptable to DTCA; DTCA's ability to execute contracts for new hospital-based treatment centers; DTCA's ability to effect estimated cost savings under certain managed care agreements or to effect such savings within the time frames contemplated by DTCA; unusual and unforeseen patterns of healthcare utilization by individuals with diabetes in the HMOs with which DTCA has executed an agreement; the ability of the HMOs to maintain the number of covered lives enrolled in the plans during the terms of the agreements between the HMOs and DTCA; and DTCA's ability to attract and/or retain and effectively manage the employees required to implement the agreements. The important factors for AmSurg include: AmSurg's ability to enter into partnership agreements for new practice-based ambulatory surgery centers and new specialty physician networks; AmSurg's ability to contract with managed care payors for its existing centers and its centers that are currently under development; AmSurg's ability to obtain and retain appropriate licensing approvals for its existing centers and centers currently under development; and AmSurg's ability to maintain favorable relations with its physician partners. SOURCES OF REVENUES The following table sets forth the sources of the Company's revenues as a percentage of total revenues for the three years ended August 31, 1996:
1996 1995 1994 ---- ---- ---- DTCA/Other 52% 65% 79% AmSurg 48% 35% 21% --- --- --- 100% 100% 100% ---- ---- ----
2 3 DTCA - DIABETES SERVICES The principal sources of revenues for DTCA have been its operating contracts for hospital-based diabetes treatment centers. These 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. DTCA's hospital-based centers have a professional staff for patient management and education services in conjunction with the hospital's nursing and other ancillary staff. The basic professional staffing level consists 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, DTCA generally provides a program manager 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 manager and the professional staff. Generally, all of the program staff is recruited and directed by DTCA. Other personnel (nursing, ancillary and support staff) are employed and directed by the client hospital. Specific clinical diabetes services provided by DTCA in a hospital setting include, but are not limited to: (1) detailed assessment of patient status in the areas of diet and caloric intake, exercise, psychosocial adjustment, knowledge of the disease and self-treatment skill level; (2) formulation of recommendations on patient treatment and education; (3) coordination of hospital and center patient care to ensure that physician goals for patients are achieved; (4) provision, in conjunction with the hospital nursing staff, for monitoring of patient blood sugar levels; (5) training of hospital nurses and other professional staff in diabetes management; (6) training of patients in blood glucose monitoring and insulin administration and assistance for physicians in initiating insulin pump therapy; (7) assistance in establishing standardized treatment protocols for hospital staff use; (8) assistance to hospitals to better manage inpatient diabetes patient care costs; and (9) coordination of patient discharge planning. DTCA has also developed additional products which are designed to assist healthcare payors in reducing the total costs and improving the quality of care for individuals with diabetes enrolled in their plans. These products, designed principally for healthcare payors, enable DTCA to manage the total healthcare needs of a population of individuals with diabetes. DTCA believes that its intensive diabetes education, patient support and treatment regimens, delivered by a multi-disciplinary team, will assist in assuring that the most effective care is delivered at the lowest cost and that ultimately such intensive diabetes education, support and treatment efforts will reduce or prevent the devastating and costly complications of diabetes. During January 1996, DTCA executed a contract to provide comprehensive healthcare management services for employees with diabetes of Bristol-Myers Squibb ("Bristol-Myers") located in central and western New Jersey and eastern Pennsylvania. During June 1996, DTCA 3 4 executed contracts to provide these services for enrollees of Principal Health Care, Inc. ("Principal") at six of their HMO locations and enrollees of Health Options, Inc. ("Health Options"), a subsidiary of Blue Cross and Blue Shield of Florida, at one of its HMO locations. These contracts, which the Company believes are the first comprehensive diabetes disease management contracts signed in the industry, include almost 450,000 covered lives, of which approximately 13,000 to 14,000 have diabetes. The Bristol-Myers contract became operational in March 1996 and it is anticipated that the Principal and Health Options contracts will be operational at all seven site locations by January 1997. See "DTCA's Contractual Relationship with Clients." At each of the Bristol-Myers, Principal and Health Options locations, DTCA will provide an office with a staff of six to eight individuals consisting of case managers, nurse educators, dieticians, counselors, administrative support and program management as needed for the number of enrollees and their geographic location in the market. The primary services provided by DTCA under these contracts include (1) identification and clinical stratification of enrollees with diabetes; (2) education of the primary care physician network on the services available to them and their patients under the program; (3) development of individual treatment plan recommendations; (4) provision of patient diabetes disease education and support; (5) provision of case management recommendation for hospitalized diabetes patients; (6) monitoring and support of the treatment plan with the primary care physician and with the patient; and (7) monitoring and reporting of clinical progress and outcomes and provision of assistance to the network providers in improving outcomes. Diabetes population management contracts require a sophisticated management information system to enable DTCA to manage the care of large diabetes patient populations and to assist in reporting outcomes and costs. The Company has developed a clinical management system which it believes will meet DTCA's initial information management needs for its diabetes population management services and has installed and is utilizing the system at the Bristol-Myers location. For fiscal 1996, 1995 and 1994, the Company has incurred approximately $3.4 million, $4.3 million and $1.5 million, respectively, in new product development and marketing expenditures primarily related to its disease management efforts. The Company anticipates that it will continue marketing and development expenditures associated with these products during fiscal 1997 and to incur significant additional corporate operational support costs associated with the implementation and operation of the Principal and Health Options contracts. While the Company believes that the new products will, over time, be accepted as addressing the evolving needs of managed care payors to meet the challenges of reducing cost and improving outcomes for individuals with diabetes, no assurances can be given that its diabetes disease management efforts will be successful and will generate revenues equal to or greater than the costs incurred in their development, marketing and operation. DTCA 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 4 5 centers providing the resources to meet all of the needs of individuals with arthritis and osteoporosis in one location. In August 1995, the Company sold its mail order diabetes supply business. The net revenues of this business were $1,898,000 and $2,373,000 for fiscal years 1995 and 1994, respectively. This business produced no material profit or loss to the Company from its operation or from its sale. The following table sets forth the number and location by state of the hospitals in which the DTCA's diabetes treatment centers in effect as of August 31, 1996 are located and the aggregate number of licensed beds in these hospitals:
======================================================== Number of Client Hospitals' State Client Hospitals Licensed Beds (1) ======================================================== Florida 8 2,260 Georgia 7 1,812 Utah 7 743 California 6 1,472 New Jersey 4 1,575 North Carolina 4 751 Oregon 4 795 Alabama 3 946 South Carolina 3 870 Tennessee 3 1,365 Texas 3 964 Virginia 3 905 New York 2 587 Wisconsin 2 451 Colorado 1 285 Kentucky 1 157 Indiana 1 330 Iowa 1 603 Louisiana 1 166 Massachusetts 1 344 Minnesota 1 366 Missouri 1 238 Nebraska 1 316 Nevada 1 225 Oklahoma 1 247 Ohio 1 605 Pennsylvania 1 274 -- ------ Total 72 19,652 == ======
(1) Numbers based upon the American Hospital Association's 1995/96 Guide to the Healthcare Field. 5 6 DTCA'S BUSINESS STRATEGY DTCA's hospital-based diabetes treatment center business has grown from two diabetes treatment contracts in effect in 1984 to 61 contracts in effect in 27 states at August 31, 1996. The following table presents the number of contracts in effect during the past five fiscal years:
---------------------------------------------------------------- Fiscal Year Ended August 31, 1996 1995 1994 1993 1992 ---------------------------------------------------------------- Contracts in effect at beginning of period 69 69 70 65 57 Contracts signed 5 9 11 9 9 Contracts discontinued (13) (9) (12) (4) (1) --------------------------- Contracts in effect at end of period 61 69 69 70 65 =========================== Hospital sites where services are delivered 72 74 71 70 65 ===========================
During fiscal 1996, DTCA also signed contracts with three healthcare payors for its new diabetes disease management products. These contracts cover implementation of the Company's program in eight markets covering approximately 13,000 to 14,000 individuals with diabetes in these locations. The Company's growth strategy is primarily to further develop and expand its hospital-based diabetes treatment center business, to develop new relationships directly with payors and others who are ultimately responsible for the healthcare costs of individuals with diabetes and if the Company determines that it will enhance and/or accelerate the development of its diabetes disease management product for the managed care marketplace, the Company may develop strategic alliances or joint ventures with other entities that have interests in diabetes care. The Company believes that the healthcare payor market is recognizing the potential cost-savings and improved outcome benefits of chronic disease programs, including diabetes population management services. The Company also believes that its position as the leading provider of diabetes treatment services to hospitals and physicians will be an advantage in comparison with other potential competitors or with the payors themselves who have no such actual diabetes treatment experience. DTCA's ability to generate revenues and profits from its diabetes disease management contracts with payors is dependent primarily on its ability to reduce overall healthcare costs for individuals with diabetes while improving clinical outcomes for these individuals. While DTCA has considerable supporting evidence and there exists considerable independent research regarding the ability to reduce the healthcare costs and to improve the clinical outcomes for 6 7 individuals with diabetes through effective management of the disease, DTCA's ability to operate these contracts in a manner that will produce profitability for the Company has not yet been established because the Company's initial disease management contracts are believed to be the first of this type in the industry and have only recently been implemented or are in the process of being implemented. DTCA'S OPERATIONAL RELATIONSHIP WITH CLIENTS In DTCA's typical hospital relationship, the Company is retained to be the service-line manager for the client hospital's diabetes treatment services. Although DTCA interacts with and provides services to patients located throughout the entire hospital, a dedicated area or a medical/surgical unit of the hospital is often reserved for the diabetes treatment center. Each diabetes treatment center typically consists of dedicated patient beds, an exercise facility, a classroom and staff offices. In its effort to increase the client hospital's market share of diabetes patients, DTCA has developed expertise in community relations to make patients, physicians and payors aware of the services offered by the diabetes treatment centers. Generally, DTCA provides materials and programs associated with community relations activities for each diabetes treatment center. These efforts increase the visibility of the client hospital within its community and additional diabetes patients that otherwise would have utilized other hospitals and providers in the area are attracted to the client hospital and its medical staff. The hospital provides all equipment and furnishings needed for the diabetes treatment center 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 DTCA staff is responsible for coordinating and supporting the management of the treatment of both inpatients and outpatients with diabetes in accordance with the treatment objectives of the patient's physicians. DTCA provides corporate support to each client hospital and to the on-site DTCA 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. DTCA 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 DTCA's disease management contracts with payors, DTCA provides a core group of diabetes treatment and support staff that will be responsible for coordinating and supporting the management of the treatment of individuals with diabetes in accordance with 7 8 treatment standards and protocols that have been developed by DTCA and have been approved by the medical leadership at each managed care plan. The actual treatment of the individuals is provided by physicians and hospitals who are part of the payor's network of providers. DTCA'S CONTRACTUAL RELATIONSHIP WITH CLIENTS DTCA has a variety of contractual relationships with its client hospitals. Fee structures under the hospital contracts consist of either incentive-based fees, fixed management fees or a combination thereof. Incentive arrangements generally provide for fee payments to DTCA based on changes in the client hospital's market share of diabetes inpatients and the costs of providing care to these patients. The form of these contracts includes various structures ranging from arrangements where all costs of the DTCA program for center professional personnel, medical director fees and community relations are the responsibility of DTCA to structures where all DTCA program costs are the responsibility of the client hospital. The Company in previous years had designated DTCA contracts as either "A" contracts or "B" contracts depending primarily on whether the assumption of risk for the center program costs was assumed by DTCA or the client hospital. Because the terms of numerous new contracts and renewed contracts in recent periods have tended to create numerous hybrid arrangements regarding risk that do not provide for clear designation of a contract into these two categories, the Company has decided to discontinue the designation of contracts as either "A" or "B" status. DTCA currently has 18 operating contracts covering services at 24 hospitals that are owned by Columbia/HCA Healthcare Corporation ("Columbia/HCA"). The revenues from the Columbia/HCA contracts were approximately 15%, 15% and 22% of the Company's total revenues for fiscal years ended August 31, 1996, 1995 and 1994, respectively. Eight of those contracts covering services at eight hospitals will expire during fiscal 1997 unless renewed. A loss of the revenue derived from these contracts could materially adversely affect the Company. During the fourth quarter of fiscal 1996, DTCA executed an agreement with U.S. Healthcare ("USHC") to provide outpatient services to USHC enrollees with diabetes, including patient assessment and patient stratification based on the scope and intensity of needed services, as well as educational, behavioral and motivational support and outcomes tracking and reporting. Services will be provided on a packaged fee-for-service basis through DTCA centers currently operating in USHC markets. As of August 31, 1996, implementation has begun at DTCA hospital contract sites in markets which contain the greatest concentration of USHC enrollees. The Company's agreement with Bristol-Myers for disease management services has a two year term, provides that Bristol-Myers will continue to be at risk for all healthcare costs for their employees and dependents with diabetes and will pay DTCA a fee of $1,000,000 plus reimbursement of DTCA's costs associated with implementing its comprehensive diabetes disease management program for these individuals. In addition, the agreement also provides Bristol-Myers an exclusive, one-year right, which expires on December 31, 1996, to negotiate a further agreement with the Company regarding future joint business opportunities in diabetes disease management. 8 9 The Company's agreements with Principal and Health Options are "shared savings" contracts with initial terms of five years. Principal and Health Options will continue to be at risk for 100% of their members' healthcare costs. DTCA will be at risk for the costs of operating its comprehensive healthcare program system at each of the seven locations included in these contracts. Cost savings produced by the system will be shared according to ratios set forth in the respective contracts. DTCA anticipates that revenues and profits from these contracts will be more heavily weighted toward the later years of the contracts' initial terms and that, during the first year of operations at each site, revenues will be slightly less than operating costs. Because of anticipated ramp-up periods at each of the contract sites and significant start-up costs and the timing delay in calculating DTCA's share of cost savings, if any, produced by the program, DTCA's profitability is expected to be negatively affected by these contracts through fiscal 1997. The Company anticipates that additional disease management contracts that the Company may sign could take a variety of forms including shared savings contracts such as the Principal and the Health Options contracts, contracts which provide fees to DTCA based on the number of diabetes lives under management or a combination of shared savings and fixed management fee arrangements. DTCA'S OPERATING CONTRACT RENEWALS As a service provider, DTCA's revenues have been dependent upon the contractual relationships it establishes and maintains with client hospitals to develop and operate diabetes treatment centers. The terms of these contracts generally range from two to five years and are subject to periodic renegotiation and renewal of the financial terms as well as the length of the contract. 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 DTCA's program or the contract's performance. During fiscal 1996, 14 contracts were renewed. Some of these renewals included contract rate reductions which DTCA has traditionally undertaken to maintain favorable long-term contractual relationships. The Company anticipates that downward pressures on hospital costs will result in a continuation of contract rate reductions. During fiscal 1997, 25 contracts will reach the end of their terms unless renewed. Also during fiscal 1996, 13 contracts were discontinued or not renewed. The Company believes that the general uncertainties associated with the changes taking place in the healthcare industry and the reactions of the Company's client hospitals to date to this changing healthcare environment have adversely affected the Company's revenues and the contract retention during fiscal 1996, 1995 and 1994 and may continue to have an adverse effect in future periods. While the Company believes that its programs reduce the costs of care for hospitalized diabetes 9 10 patients, certain hospitals faced with pressures to make immediate cost reductions have decided that the short-term benefit of eliminating the costs associated with programs such as the Company's diabetes program is justified. However, the Company also believes that the growth in healthcare payor demand for effective chronic disease management programs from healthcare providers such as hospitals will eventually stabilize DTCA's hospital contract business and will provide an opportunity for future growth in this business. During fiscal 1996 there were no material continuing obligations or costs for the Company associated with the termination of any client hospital contracts. DTCA'S PHYSICIAN RELATIONSHIPS DTCA generally 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 treatment center. These physicians, who are independent contractors with DTCA 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 and patient education. These contracts generally have terms of one to two years with renewal options and generally cannot be extended beyond the terms of the related hospital contract. DTCA also targets local physicians in its awareness efforts. Each member of the center staff is assigned to work with physicians who have diabetes patients in the hospital and to serve as case manager for those patients, thus helping to assure that the physicians' treatment objectives are met. DTCA'S COMPETITION The healthcare industry is highly competitive and subject to continual change in the manner in which services are provided. DTCA's principal competition for its treatment center 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 DTCA's diabetes treatment centers. The Company is also aware that other companies such as major pharmaceutical companies and managed care organizations, which may have greater financial, research, staff, and marketing resources than the Company, are interested in diabetes disease management and may develop the necessary expertise alone or in partnership with other providers to compete with DTCA in its diabetes disease management efforts. There is no assurance that the Company could compete effectively with these companies. 10 11 DTCA'S GOVERNMENTAL REGULATION While DTCA itself is not directly subject to many of the governmental and regulatory requirements affecting healthcare delivery, its client hospitals must comply with a variety of regulations including the licensing requirements of federal, state and local health agencies, state mandated rate control initiatives and the requirements of municipal buildings codes, health codes and local fire departments. DTCA is indirectly affected by changes in the laws governing hospital reimbursement under governmental programs such as Medicare. 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 the overall federal budget deficit. Recently introduced federal legislation, if enacted, would significantly limit the rate of increase in Medicare spending over the next several years and establish block grants to the states for Medicaid spending. These funding limitations, if enacted, could negatively impact hospital revenues and operations. There can also be no assurance that current or future legislative initiatives or government regulation will not adversely affect DTCA'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 Medicare or Medicaid patients. While the Company believes that its business arrangements with its client hospitals 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. 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. Certain of these motions are still pending. 11 12 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. During the fiscal year ended August 31, 1996, the legal expense costs associated with these matters totaled approximately $250,000. AMSURG - PRACTICE-BASED AMBULATORY SURGERY CENTERS Practice-based ambulatory surgery centers are licensed outpatient surgery centers equipped and staffed for a single medical specialty and are generally located in or adjacent to a physician group practice. AmSurg has targeted ownership in centers that perform gastrointestinal endoscopy, eye surgery, urology, orthopaedics or otolaryngology procedures. These specialties perform many high-volume, lower risk procedures that are appropriate for the practice-based setting. The focus at each center on only the procedures in a single specialty results in these centers generally having significantly lower capital and operating costs than the costs of hospital and freestanding ambulatory surgery center alternatives that are designed to provide more intensive services in a broader array of surgical specialties. In addition, the practice-based surgery center, which is located in or adjacent to the group practice, also provides a much more convenient setting for the patient and for the physician performing the procedure. Improvements in technology are also enabling additional types of procedures to be performed in the practice-based setting. AmSurg believes that a primary competitive advantage is the translation of lower surgery center costs into lower prices for high quality service in a very convenient location. AmSurg believes that the fees charged by its surgery centers are generally less than the fees charged by hospitals or by freestanding surgery centers. The AmSurg development staff selects potential acquisition and new center startup candidates based on identification of specific group practices in the medical specialties which AmSurg has targeted for development. These candidates are then screened against AmSurg's project criteria which include several factors such as number of procedures currently being performed by the practice, competition from and the fees being charged by other surgical providers, relative strength of the physician practice under consideration, certificate of need requirements for development of a new center and other factors. The Company believes that continuing pressures to reduce healthcare costs provides AmSurg with a significant opportunity to develop new centers in partnership with physician practices. AmSurg intends to expand primarily through the development and acquisition of additional surgery centers in targeted surgical specialties. In addition, AmSurg's surgery 12 13 centers, combined with its relationships with specialty physician surgical practices in their markets, will provide other opportunities for AmSurg growth from surgical specialty network acquisition and development that may include the acquisition of specialty physician practices. By using AmSurg surgery centers as a base to develop specialty physician networks that are designed to serve large numbers of covered lives, the Company believes that AmSurg will strengthen its market position in contracting with managed care organizations. In furtherance of this strategy, on February 1, 1996, AmSurg acquired an undivided 70% interest in the assets of a gastroenterology and primary care physician practice located in Miami, Florida and associated with a surgery center in which AmSurg already held an ownership interest. AMSURG CENTER STRUCTURE AmSurg, through its corporate subsidiaries, owns between a 51% and a 70% interest as a general partner in each partnership or as a member in each limited liability company ("LLC") that owns the individual practice-based surgery centers. The remaining partnership or LLC interest in each center is generally held by the physician practice group that has made partnership or LLC capital contributions proportionate to its interest in the center. AmSurg manages the business operations at each center. At the majority of centers, AmSurg receives a management fee paid by the partnership or LLC. In addition, for start-up centers that are being developed, a fee is generally paid by the partnership or LLC to AmSurg for management of the planning, construction and opening of the center. At August 31, 1996, AmSurg had 22 centers and one specialty physician practice in operation, 16 centers under development or subject to certificate of need review and 11 centers under letters of intent. While AmSurg generally owns 51% to 70% of the entities operating each of these center/practice entities, the Company's consolidated statements of operations include 100% of the results of operations of these entities reduced by the minority partners' share of the net income of the entities. In addition, because the Company owns only approximately 61% of the common stock of AmSurg, the calculation of consolidated net income of the Company includes a minority interest adjustment to reflect the AmSurg minority stockholders' share of the net income or loss of AmSurg. AMSURG FINANCING The Company anticipates that AmSurg operating activities will continue to provide positive cash flow and that this cash flow will be utilized in combination with borrowings under AmSurg's existing bank revolving credit agreement and other financing agreements that may be entered into by AmSurg to finance additional AmSurg acquisition and development projects. AmSurg may also fund acquisition and development projects with the private sale of AmSurg debt or equity securities to parties other than the Company and as part of the consideration paid in connection with the acquisition of center and specialty physician practice interests. 13 14 On November 20, 1996, AmSurg issued to unaffiliated institutional investors a combination of redeemable and convertible preferred stock for consideration totaling $5,500,000, the convertible portion of which is convertible into 6% (ratably increasing to 8% by November 2000) of the outstanding common stock of AmSurg if certain events of liquidity do not take place. The Company and AmSurg also are considering certain strategic alternatives in order to provide AmSurg with better access to the public and private capital necessary to fund its continuing growth. Among the alternatives available to the Company and AmSurg is the alternative of creating a public market for AmSurg common stock either through a public offering of authorized but unissued shares of AmSurg common stock or the spinoff of AmSurg common stock owned by the Company. No assurance can be made that the Company and AmSurg will effect any such strategic alternative. In September 1993, AmSurg entered into a revolving credit agreement with a lending institution. This agreement was amended and restated in June 1996. The agreement provided for repayment of a term loan totaling $5.6 million by installment payments through June 2000 and also provided an additional $12 million of borrowing capacity to finance additional development and acquisition projects. Borrowings under the $12 million portion of this agreement must be completed by June 10, 1998 and are repayable through June 10, 2002. As of August 31, 1996, AmSurg had borrowed $3,744,000 under this $12 million facility. AMSURG THIRD PARTY PAYMENT Practice-based ambulatory surgery centers such as those owned by AmSurg depend upon third-party programs, including governmental and private insurance programs, to pay for facility services rendered to patients in the centers. Physicians who perform procedures in these centers bill and are paid separately by these third party programs for their professional fees. Physicians' professional fees are not included in the revenues of AmSurg. AmSurg also is a partner in a physician group practice which also derives a significant amount of its revenue from third party payors. AmSurg's surgery centers derive a significant portion of their net revenues from healthcare programs including Medicare and Medicaid. The Medicare program presently pays ambulatory surgery centers in accordance with a fee schedule which is prospectively determined. As part of the Omnibus Budget Reconciliation Act of 1993 ("OBRA 93"), Congress froze the Medicare fee schedule for ambulatory surgery centers for the fiscal years ended September 30, 1994 and 1995. Effective October 1, 1995 the Medicare ambulatory surgery center fee schedules were increased by 3.2% and on October 1, 1996 Medicare increased the fee schedules by 2.6%. There may be continuing legislative and regulatory initiatives to limit the rate of increase in expenditures of the Medicare and Medicaid programs in an effort to curtail or reduce the federal budget deficit. These limitations, if enacted, could negatively impact AmSurg center revenues and operations. 14 15 In addition to payment from governmental programs, ambulatory surgery centers derive a significant portion of their net revenues from private healthcare reimbursement plans. These plans include both standard indemnity insurance programs as well as managed care structures such as preferred provider organizations, health maintenance organizations and other similar structures. The strengthening of managed care systems nationally has resulted in substantial competition among providers of services, including providers of surgery center services with greater financial resources and market penetration than AmSurg, to contract with these systems. The Company believes that all payors, both governmental and private, will continue their efforts over the next several years to reduce healthcare costs and that their efforts will generally result in a less stable market for healthcare services. While no assurances can be given concerning the ultimate success of AmSurg's efforts to contract with healthcare payors, the Company believes that AmSurg's position as a low-cost alternative for certain surgical procedures should enable AmSurg centers to compete effectively in the evolving healthcare marketplace. AMSURG'S GOVERNMENTAL REGULATION AmSurg's surgery centers and its physician partners are subject to numerous regulatory, accreditation and certification requirements, including requirements related to licensure, certificate of need, reimbursement from insurance companies and other private third-party payors, Medicare and Medicaid participation and reimbursement, and utilization and quality review organizations. The grant and renewal of these licenses, certifications and accreditations are based upon governmental and private regulatory agency inspections, surveys, audits, investigations or other reviews, including self-reporting requirements. An adverse review or determination by any regulatory authority could result in denial of a center's plan of development or proposed expansion of facilities or services, the loss or restriction of licensure by a center or one or more of the physician partners, or loss of center certification or accreditation. A regulatory authority could also reduce, delay or terminate reimbursement to a center or require repayment of reimbursement received. The loss, denial or restriction of any such licensure, accreditation, certification (including certificates of need or exemption therefrom) or reimbursement through changes in the regulatory requirements, an enforcement action, or otherwise, could have a material adverse effect on AmSurg. As generators of infectious waste, the AmSurg surgery centers are required to satisfy all federal, state and local waste disposal requirements. If any regulatory agency finds a center to be in violation of waste laws, penalties and fines may be imposed for each day of violation, and the center in question could be forced to cease operations. The Company believes that the AmSurg centers dispose of such waste properly. PHYSICIAN SELF-REFERRAL AND ILLEGAL REMUNERATION PROVISIONS Recent federal legislation, including OBRA 93, prohibit referrals of Medicare and Medicaid patients for "designated health services" in which a physician has an ownership or investment interest. In addition, other federal and state legislation makes certain investment and 15 16 financial arrangements between healthcare service providers and referring physicians illegal if such arrangements are determined to encourage referrals by the physician (the "anti-kickback provisions"). Violation of the federal anti-kickback provisions is a felony, punishable by a five year jail sentence and/or exclusion from participation in the Medicare and Medicaid programs. The Department of Health and Human Services has from time to time published regulations identifying certain "safe harbors", including investment interests, which offer exemption from the anti-kickback provisions. The Company believes that the structure and the activities of the AmSurg centers are not outlawed by OBRA 93 because, among other reasons, ambulatory surgery services are not a "designated health service" subject to the prohibition. In addition, various state legislation aimed at banning physician ownership of certain health services has generally exempted ownership of ambulatory surgery centers by the physicians who perform procedures in these centers from such prohibitions. Further, the Company believes that the structure and activities of the AmSurg centers are not in violation of the anti-kickback provisions although to date they have not been afforded safe harbor protection. There can, however, be no assurance that physician ownership of surgery center interests could not be prohibited in the future. In the event of such prohibition, AmSurg would be required to purchase the limited partnership or LLC interests currently owned by physicians under the terms of its limited partnership or operating agreements generally at a preset multiple of actual pretax earnings for the center. These purchase arrangements provide for payment of the consideration generally in the form of cash, notes and common stock of AmSurg. The Company believes that, should physicians no longer have an ownership interest, the physicians would continue to utilize the center because of its location inside of or adjacent to their practice. Utilizing alternative surgery sites for these procedures would be much less convenient and less efficient for the physicians and for their patients. However, there can be no assurance that the physicians would continue to utilize the center's services. INSURANCE The Company maintains professional malpractice liability and general liability insurance for all of its locations and operations. The cost of liability insurance coverage and the availability of such coverage has varied widely in recent years. 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. 16 17 EMPLOYEES As of August 31, 1996, the Company had 298 full-time employees and 126 part-time employees distributed by position as follows: 111 center management and administrative personnel; 101 clinical nurse specialists; 99 other healthcare professionals, including counselors, dietitians and exercise therapists; and 113 center support and Company management personnel. Employees of AmSurg centers are generally employees of the physicians' practice who are leased by the partnership or LLC that owns and operates the center. The physicians who are the medical directors of the diabetes, arthritis and osteoporosis treatment and AmSurg centers are independent contractors, and not employees of the Company. 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. ITEM 2. PROPERTIES The Company's corporate headquarters is located in Nashville, Tennessee and contains an aggregate of approximately 39,400 square feet of office space, which the Company leases pursuant to an agreement that 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 December 1999. 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. At each of DTCA's disease management contract sites, DTCA will rent office space ranging from 1,000 to 3,000 square feet for terms of two to three years. AmSurg partnerships and LLCs generally lease space for their surgery centers. Nineteen of the centers and the physician practice in operation at August 31, 1996 lease space ranging from 1,200 to 7,800 square feet with remaining lease terms ranging from two to eighteen years. Three centers in operation at August 31, 1996 are located in buildings owned by AmSurg or the related partnership. ITEM 3. LEGAL PROCEEDINGS The Internal Revenue Service has completed examinations of the Company's federal income tax returns through the fiscal year ended August 31, 1992. In connection with these examinations, the Company received assessments totaling approximately $2.6 million primarily related to the disallowance of deductions taken for certain costs associated with the leveraged buy-out of the Company in August 1988 and for certain costs associated with the sale of the Company's alcohol and drug treatment business in August 1989. The Company filed a petition with the Tax Court to contest the assessments. In September 1996 a settlement was reached with the Internal Revenue Service which substantially confirmed the Company's position on these issues and accordingly, the Company reversed $760,000 of income tax liabilities it had previously provided for these matters. 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. 17 18 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. Certain of these motions are still pending. 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. During the fiscal year ended August 31, 1996, the legal expense costs associated with these matters totaled approximately $250,000. 18 19 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information regarding executive officers of the Company as of August 31, 1996. Executive officers of the Company serve at the pleasure of the Board of Directors.
Employee Age Position - ------------------ --- ----------------------------------------------------- Thomas G. Cigarran 54 Chairman of the Board and Chief Executive Officer since 1988, President and Director since 1981. Chairman, President and Chief Executive Officer of AmSurg since 1992. James A. Deal 46 Executive Vice President since 1991, Vice President from 1982-1990, President of DTCA since 1985. Director of AmSurg since 1992. Henry D. Herr 50 Executive Vice President-Finance and Administration since 1986, Chief Financial Officer since 1981, Secretary and Director since 1988. Vice President, Secretary and Director of AmSurg since 1992. Robert E. Stone 50 Vice President since 1981, Executive Vice President of DTCA since 1989. David A. Sidlowe 46 Vice President since 1984, Controller since 1982.
19 20 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, 1996 First Quarter $10.13 $ 5.75 Second Quarter 10.75 8.75 Third Quarter 12.38 8.25 Fourth Quarter 14.38 10.00 Year Ended August 31, 1995 First Quarter 9.00 5.13 Second Quarter 8.25 4.88 Third Quarter 8.38 6.38 Fourth Quarter 7.63 5.38
(b) Holders At November 13, 1996 there were approximately 2,550 holders of the Company's Common Stock, including 150 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. However, the declaration of dividends is currently limited in amount under the Company's senior revolving credit facility. 20 21 ITEM 6. SELECTED FINANCIAL DATA For the Twelve Months Ended and At August 31, (In thousands except per share data)
----------------------------------------------- 1996 1995 1994 1993 1992 ------ ------ ------ ------ ------ OPERATING DATA: Revenues: DTCA and other $31,403 $36,583 $41,144 $39,682 $37,112 AmSurg 29,206 20,026 10,900 4,331 - ------- ------- ------- ------- ------- Total revenues 60,609 56,609 52,044 44,013 37,112 Expenses: Salaries and benefits 29,088 24,411 22,075 18,533 16,488 Other operating expenses 16,879 17,708 16,685 13,646 11,860 Depreciation and amortization 3,927 3,459 2,301 1,787 1,336 Interest 828 600 89 22 12 ------- ------- ------- ------- ------- Total expenses 50,722 46,178 41,150 33,988 29,696 ------- ------- ------- ------- ------- Income before income taxes and minority interests 9,887 10,431 10,894 10,025 7,416 Income tax expense # 1,358 2,659 3,586 3,884 3,040 ------- ------- ------- ------- ------- Income before minority interests 8,529 7,772 7,308 6,141 4,376 AmSurg minority partners' interest 4,783 3,446 1,975 731 - AmSurg minority stockholders' interest 486 410 6 (127) - ------- ------- ------- ------- ------- Net income $ 3,260 $ 3,916 $ 5,327 $ 5,537 $ 4,376 ======= ======= ======= ======= ======= Net income per share $ 0.40 $ 0.48 $ 0.63 $ 0.66 $ 0.52 ======= ======= ======= ======= ======= Weighted average common shares and equivalents 8,161 8,211 8,461 8,404 8,370 Components of net income: DTCA and other $ 2,461 $ 3,242 $ 5,289 $ 5,707 $ 4,376 AmSurg 799 674 38 (170) - ------- ------- ------- ------- ------- Total net income $ 3,260 $ 3,916 $ 5,327 $ 5,537 $ 4,376 ======= ======= ======= ======= ======= BALANCE SHEET DATA: Cash and cash equivalents $13,990 $13,722 $11,820 $ 9,445 $10,323 Working capital 15,067 13,353 14,295 13,454 11,961 Total assets 78,205 65,532 53,853 40,784 32,203 Long-term debt and other long-term liabilities 13,345 7,384 4,377 2,067 1,665 Minority interest 13,797 10,582 7,002 3,416 - Stockholders' equity 41,611 38,299 36,460 30,850 25,158
# Includes nonrecurring income tax benefit in the fourth quarter of fiscal 1996 of $760,000, or $.09 per share. 21 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW American Healthcorp, Inc. and its subsidiaries (the "Company") currently operate two business segments, Diabetes Treatment Centers of America, Inc. ("DTCA") and AmSurg Corp. ("AmSurg"). DTCA, a wholly-owned subsidiary, is the nations's leading provider of diabetes services to physicians, hospitals and healthcare payors designed to enhance the quality and lower the cost of treatment of patients with diabetes. AmSurg, a majority-owned (61% at August 31, 1996) subsidiary, develops, acquires and manages physician practice-based ambulatory surgery centers and specialty physician networks in partnership with surgical and other group practices. 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 new "safe harbor" provisions of the Private Litigation Reform Act of 1995, investors are hereby cautioned that these statements may be affected by the important factors, among others, set forth below, and consequently, actual operations and results may differ materially from those expressed in these forward-looking statements. The important factors for DTCA include: DTCA's ability to renew contracts for hospital-based treatment centers on terms that are acceptable to DTCA; DTCA's ability to execute contracts for new hospital-based treatment centers; DTCA's ability to effect estimated cost savings under certain managed care agreements or to effect such savings within the time frames contemplated by DTCA; unusual and unforeseen patterns of healthcare utilization by individuals with diabetes in the HMOs with which DTCA has executed an agreement; the ability of the HMOs to maintain the number of covered lives enrolled in the plans during the terms of the agreements between the HMOs and DTCA; and DTCA's ability to attract and/or retain and effectively manage the employees required to implement the agreements. The important factors for AmSurg include: AmSurg's ability to enter into partnership agreements for new practice-based ambulatory surgery centers and new specialty physician networks; AmSurg's ability to contract with managed care payors for its existing centers and its centers that are currently under development; AmSurg's ability to obtain and retain appropriate licensing approvals for its existing centers and centers currently under development; and AmSurg's ability to maintain favorable relations with its physician partners. DTCA The principal sources of revenues for DTCA were its operating contracts for hospital-based diabetes treatment centers. Fee structures under the hospital contracts consist of either incentive-based fees, fixed management fees or a combination thereof. Incentive arrangements generally provide for fee payments to DTCA based on changes in the client hospital's market share of diabetes inpatients and the costs of providing care to these patients. The form of these contracts includes various structures ranging from arrangements where all costs of the DTCA program for center professional personnel, medical director fees and community relations are 22 23 the responsibility of DTCA to structures where all DTCA program costs are the responsibility of the client hospital. The following table presents the number of DTCA contracts in effect and the number of hospital sites where DTCA provided services or was in the process of initiating operations as of the end of fiscal years 1996, 1995 and 1994. The number of contracts and hospital sites for these periods includes two Arthritis and Osteoporosis Care Center ("AOCC") contracts with hospitals to provide comprehensive arthritis and osteoporosis services that are operated by DTCA.
As of August 31, ============================================================== 1996 1995 1994 ============================================================== Hospital Hospital Hospital Contracts Sites Contracts Sites Contracts Sites ------------------- ------------------- -------------------- Hospital contracts/sites 59 61 68 70 69 71 Network contracts/sites 2 11 1 4 - - --------- -------- --------- -------- --------- -------- Total contracts/sites 61 72 69 74 69 71 --------- -------- --------- -------- --------- --------
The components of changes to the total number of DTCA hospital contracts for fiscal years 1996, 1995 and 1994 are presented below.
Fiscal year ended August 31, ================================================================= 1996 1995 1994 ================================================================= Hospital Hospital Hospital Contracts Sites Contracts Sites Contracts Sites ------------------- ------------------- ----------------------- Total contracts/sites at beginning of period 69 74 69 71 70 71 New contracts/sites signed 6 11 9 9 11 12 Contracts/sites discontinued (13) (13) (9) (9) (12) (12) Conversion of stand alone hospital contract to hospital network contract (1) - - 3 - - -------- ------- -------- ------- -------- ------- Total contracts/sites 61 72 69 74 69 71 -------- ------- -------- ------- -------- -------
23 24 During fiscal 1996 and 1995, 14 and 25 contracts, respectively, were renewed for DTCA hospital-based diabetes treatment centers. During fiscal 1997, there will be 25 contracts which will reach the end of their terms unless renewed. The Company periodically renegotiates existing DTCA hospital contracts and, in that connection, has historically agreed to reduce its fee structure in certain of these contracts in order to maintain favorable long-term client relationships with these hospitals. The Company anticipates that it will continue to make such fee reductions or center contract restructurings which will have a negative impact on the Company's revenues and profitability. The Company believes that general uncertainties associated with the changes taking place in the healthcare industry and hospital pressures to reduce operating costs as a result of increasing managed care payor influences have adversely affected the Company's revenues and contract retention during fiscal 1996 and 1995 and may continue to have an adverse effect on hospital contract profitability in future periods. While the Company believes that its programs reduce the costs of care for hospitalized diabetes patients, certain hospitals faced with pressures to make immediate cost reductions have decided that the short-term benefit of eliminating the costs associated with programs such as the Company's diabetes program is justified. However, the Company also believes that the growth in healthcare payor demand for effective chronic disease management programs from healthcare providers such as hospitals will eventually stabilize DTCA's hospital contract business and will provide an opportunity for future growth in this business. 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. Certain of these motions are still pending. 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 24 25 associated with its defense of this matter and the civil suit. During the fiscal year ended August 31, 1996, the legal expense costs associated with these matters totaled approximately $250,000. While DTCA's revenues have historically been generated primarily by its operating contracts with hospitals, the Company believes that the substantial portion of its future revenue growth will result from comprehensive healthcare management contracts with managed care payors for their enrollees with diabetes. During fiscal 1996 and 1995 the Company incurred approximately $3.4 million and $4.3 million, respectively, in expenditures for the development and marketing of new products associated primarily with these comprehensive diabetes disease management efforts. These expenditures have been incurred primarily to identify and develop diabetes population management products to address varying managed care payor needs and delivery system requirements, to develop the staff and materials and implement a managed care payor marketing program for these products and to develop the Company's information technology capabilities. Information technology efforts have focused primarily on supporting claims/cost analyses for individuals with diabetes for potential payor customers as part of the marketing process, developing clinical patient management and data collection capabilities and developing information technology support systems required to manage and measure performance under operating contracts with managed care payors. The Company anticipates that it will need to continue these disease management product development and marketing efforts during fiscal 1997 at expenditure levels it expects to approximate fiscal 1996 expenditure levels and additional expenditures during fiscal 1997 will be required to support the comprehensive healthcare management contracts for individuals with diabetes which will be implemented during fiscal 1997. The Company's growth strategy is primarily to develop new relationships directly with payors and others who are ultimately responsible for the healthcare costs of individuals with diabetes and to further develop its hospital-based diabetes treatment center business. If the Company determines that it will enhance and/or accelerate the development of its comprehensive diabetes disease management product for the managed care marketplace, the Company may develop strategic alliances or joint ventures with other entities that have interests in diabetes care. Pursuant to the strategy with payors, DTCA is expected to provide management services designed to improve the quality of care for individuals with diabetes while lowering the overall cost of care. DTCA fees under these agreements with payors may take the form of shared savings of overall diabetes enrollee healthcare costs, capitated payments to DTCA that cover DTCA's services to enrollees but do not include responsibility for enrollee healthcare claims or some combination of these arrangements. The Company believes that its current position as the leading provider of diabetes treatment services to hospitals and physicians will be an advantage in comparison with other potential competitors or with the payors considering initiating such services themselves, most of whom have no such actual diabetes treatment or comprehensive diabetes population management experience. In this regard, during January 1996, DTCA entered into an agreement with Bristol-Myers Squibb Co., U.S. Pharmaceuticals ("Bristol Myers") whereby DTCA will provide its comprehensive diabetes disease management services to Bristol-Myers' employees, dependents and retirees located in central and western New Jersey and eastern Pennsylvania. During the 25 26 initial two-year term of this agreement, Bristol-Myers will continue to be at risk for all healthcare costs for this population, will reimburse DTCA for DTCA's costs associated with implementing its comprehensive diabetes disease management program for this group of individuals and will pay DTCA $1,000,000. Implementation of this agreement began during the Company's third quarter of fiscal 1996. In addition, the agreement provides an exclusive, one-year right to negotiate a further agreement with the Company regarding future joint business opportunities. Also as a result of its managed care payor efforts, in June 1996 DTCA reached agreement with two HMOs, Principal Healthcare, Inc. ("Principal") and Health Options, Inc. ("Health Options"), an HMO subsidiary of Blue Cross and Blue Shield of Florida, to provide comprehensive healthcare management services for their enrollees with diabetes. The Principal agreement covers six of the largest HMO subsidiaries of Principal totaling approximately 370,000 members, including an estimated 11,000 members who have diabetes. The Health Options agreement covers enrollees in their central Florida region in Orlando and seven surrounding counties encompassing approximately 65,000 members, including an estimated 1,800 to 2,000 members with diabetes. Both the Principal and the Health Options contracts have an initial term of five years. DTCA will be at risk for the costs of operating its comprehensive healthcare management system and Principal and Health Options will continue to be at risk for all of their members' healthcare costs. Cost savings produced by the system will be shared according to formulae set forth in the agreements. DTCA anticipates that revenues and profits from the Principal and Health Options agreements will be more heavily weighted toward the later years of the agreements' initial terms and that, during the first full year of operations at each site, revenues will be slightly less than operating costs. Implementation of these contracts began on a market-by-market basis during July 1996, with all markets having begun implementation by the end of October 1996. Because of expected ramp-up periods at each of the agreement sites, the significant start-up costs for the implementation program and the timing delay in calculating DTCA's share of savings, if any, which may be produced by the program, it is anticipated that DTCA's profitability will be negatively affected by these agreements during fiscal 1997. In June 1996, DTCA also reached agreement with U.S. Healthcare ("USHC") to provide outpatient services to USHC enrollees with diabetes, including patient assessment and patient stratification based on the scope and intensity of needed services, as well as educational, behavioral and motivational support and outcomes tracking and reporting. Services will be provided on a packaged fee-for-services basis and will be delivered through DTCA centers currently operating in USHC markets. Implementation has begun at DTCA hospital contract sites in markets which contain the greatest concentration of USHC enrollees. While the Company believes that the Principal, Health Options and the USHC agreements will provide substantial revenue and profit opportunities for DTCA over the term of these agreements, it cannot accurately predict the amount or timing of these revenues and profits. The Company also believes the agreements with Principal, Health Options and USHC, as well as the agreement announced in January 1996 with Bristol-Myers, will provide momentum in its 26 27 discussions with other potential customers for its diabetes healthcare management products; however, no assurances can be given that DTCA will be successful in developing these additional relationships. AMSURG Through investments made since fiscal 1993, the Company owns approximately 61% of the outstanding common stock of AmSurg, a company that develops, acquires and manages physician practice-based ambulatory surgery centers and specialty physician networks through partnership or limited liability company ("LLC") interests in these centers and networks. The following table presents the components of changes in the number of AmSurg surgery centers in operation at the end of fiscal 1996, 1995 and 1994.
Fiscal year ended August 31, ============================ 1996 1995 1994 ============================ Centers in operation at beginning of period 18 10 4 New center acquisitions placed in operation 2 3 4 New development centers placed in operation 2 5 2 ---------------------------- Centers in operation at end of period 22 18 10 ----------------------------
Beginning in fiscal 1995, AmSurg focused its center development efforts primarily on start-up centers as opposed to center acquisitions. Because of the additional time required in the development and construction of these start-up centers, the number of centers placed in operation during fiscal 1996 was lower than in previous fiscal years. However, because most of these start-up centers will begin operation during fiscal 1997 and because AmSurg has recently resumed its acquisition efforts, it is anticipated that the number of AmSurg centers placed in operation during fiscal 1997 will be significantly higher than that experienced during fiscal 1996. Eighteen of the AmSurg surgery centers in operation as of August 31, 1996 perform gastrointestinal endoscopy procedures, three centers perform eye surgery procedures and one center performs ear, nose and throat procedures. As of August 31, 1996, AmSurg also owned a majority interest in sixteen partnerships or LLCs, including four projects requiring certificate of need approval, each of which will develop, own and operate a surgery center. As of August 31, 1995, AmSurg owned a majority interest in five partnerships that were developing centers. In addition, on February 1, 1996, AmSurg acquired an undivided 70% interest in the assets of a gastroenterology and primary care physician practice located in Miami, Florida and associated with a surgery center in which AmSurg already held an ownership interest. While AmSurg generally owns 51% to 70% of these center/practice entities, the Company's consolidated statements of operations include 100% of the results of operations of the entities, reduced by the minority partners' share of the net income or loss of the surgery center/practice entities. Also, 27 28 because the Company owns approximately 61% of the common stock of AmSurg, the calculation of consolidated net income of the Company includes a minority interest provision to reflect the AmSurg minority stockholders' share of the net income or loss of AmSurg. AmSurg intends to expand primarily through the development and acquisition of additional surgery centers in targeted surgical specialties. In addition, AmSurg's surgery centers, combined with its relationships with specialty physician surgical practices in their markets, will provide other opportunities for AmSurg growth from surgical specialty network acquisition and development that may include the acquisition of specialty physician practices. By using AmSurg surgery centers as a base to develop specialty physician networks that are designed to serve large numbers of covered lives, the Company believes that AmSurg will strengthen its market position in contracting with managed care organizations. In order to fund its future growth, AmSurg expects to obtain additional equity or debt financing from sources other than the Company. In that respect, on November 20, 1996, AmSurg issued to an unaffiliated institutional investor a combination of redeemable and convertible preferred stock totaling $5,500,000, the convertible portion of which is convertible into 6% (ratably increasing to 8% by November 2000) of the outstanding common stock of AmSurg if certain events of liquidity do not take place. The Company and AmSurg also are considering certain strategic alternatives in order to provide AmSurg with better access to the public and private capital necessary to fund its continuing growth. Among the alternatives available to the Company and AmSurg is the alternative of creating a public market for AmSurg common stock either through a public offering of authorized but unissued shares of AmSurg common stock or the spinoff of AmSurg common stock owned by the Company. No assurance can be made that the Company and AmSurg will effect any such strategic alternative. RESULTS OF OPERATIONS The Company operates two business segments, DTCA and AmSurg. Included in DTCA results of operations are the operations of two Arthritis and Osteoporosis Care centers and corporate costs attributable to DTCA. Included in AmSurg expenses are charges for general management, administrative and accounting services provided by the Company. Charges to AmSurg for such services approximate the Company's cost. 28 29 DTCA The following table presents the operations of DTCA for fiscal 1996, 1995 and 1994 and associated percentage changes for fiscal 1996 from 1995 and the percentage changes for fiscal 1995 from 1994.
Fiscal Year Ended August 31, 1996 % Change 1995 % Change 1994 =========================================================================================== Revenues $31,403,644 (14.2)% $36,583,573 (11.1)% $41,144,098 ----------- ------ ----------- ------ ----------- Expenses: Salaries and benefits 19,866,459 5.2 % 18,877,972 1.0 % 18,699,330 Other operating expenses 7,254,703 (33.2)% 10,865,505 (11.5)% 12,270,569 Depreciation and amortization 1,272,756 (5.0)% 1,339,357 3.6 % 1,292,638 Interest 5,248 (25.9)% 7,081 8.9 % 6,501 ----------- ------ ----------- ------ ----------- Total expenses 28,399,166 (8.7)% 31,089,915 (3.7)% 32,269,038 ----------- ------ ----------- ------ ----------- Income before income taxes 3,004,478 (45.3)% 5,493,658 (38.1)% 8,875,060 Income taxes 544,000 (75.8)% 2,252,000 (37.2)% 3,586,000 =========== ====== =========== ====== =========== Net income $ 2,460,478 (24.1)% $ 3,241,658 (38.7)% $ 5,289,060 =========== ====== =========== ====== ===========
FISCAL 1996 COMPARED TO FISCAL 1995 The DTCA revenue decrease for 1996 from 1995 resulted primarily from the impact of contract terminations, from a 9% decrease in same contract revenues for centers in operation as of September 1, 1994 and from the absence of revenues from the Company's mail order diabetes supply business which was sold at the end of 1995. The decrease in same contract revenues resulted primarily from the impact of contract fee renegotiations and restructurings. The Company believes that hospital pressures to immediately reduce their operating costs may continue to negatively impact same-contract revenue comparisons and contract renewals during fiscal 1997. While the comprehensive healthcare management contract with Bristol-Myers for enrollees with diabetes at select locations did generate a small amount of revenue for DTCA during 1996, the new managed care agreements signed by DTCA with Principal, Health Options and USHC are anticipated to begin generating revenues during fiscal 1997, though costs associated with such contracts are expected to initially exceed anticipated revenues. The increase in overall DTCA salaries and benefits for 1996 over 1995 resulted primarily from normal salary and benefit increases, higher staffing costs associated with DTCA's managed care contract with Bristol-Myers which was signed during the second quarter of fiscal 1996 and its contracts with Principal and Health Options signed during the fourth quarter of fiscal 1996 offset somewhat by the impact of fewer hospital contracts in operation during 1996 than during 1995 and decreased incentive compensation during 1996 compared with 1995. Salaries and benefits as a percentage of revenues for 1996 was 63.3% as compared with 51.6% for 1995. 29 30 This increase resulted primarily from the impact of reduced same-contract revenues during 1996, the absence of diabetes supply revenues during 1996 and the impact of additional salary costs associated with the Company's managed care efforts which produced minimal revenues during 1996. DTCA anticipates that salaries and benefits will increase during fiscal 1997 as a result of the implementation and operation of the managed care contracts with Principal and Health Options. The decrease in DTCA's other operating expenses for 1996 from 1995 resulted primarily from the sale of the Company's mail order diabetes supply business, reduced outside consulting fees associated with DTCA's new product development efforts, lower medical director costs at DTCA hospital centers and lower legal costs associated with a civil suit filed by a former employee and the resulting OIG investigation. Therefore, other operating expenses as a percentage of revenues for 1996 were 23.1% compared with 29.7% for 1995. DTCA anticipates that other operating costs will increase during fiscal 1997 as a result of the implementation and operation of the managed care contracts with Principal and Health Options. The decrease in DTCA's depreciation and amortization expense for 1996 from 1995 resulted from reduced amortization expense at DTCA centers where the costs of center contract development have been fully amortized, partially offset by additional amortization expense associated with the costs of center development at centers recently placed in operation. The decrease in income tax expense attributable to DTCA's operations for 1996 from 1995 resulted from decreased operating results for 1996 and from the reversal of $760,000 of income tax liability reserves during 1996 as a result of the favorable resolution of prior year income tax issues with the Internal Revenue Service. DTCA's effective income tax rate for 1996, excluding the nonrecurring favorable income tax expense adjustment of $760,000, increased from 41.0% for 1995 to 43.4% and resulted primarily from the impact of the fixed amount of DTCA's non-deductible amortization of excess costs over net assets of purchased companies relative to decreased levels of income. The differences between the federal statutory income tax rate and the Company's effective income tax rate during 1996 and 1995, excluding the impact of the non-recurring favorable $760,000 adjustment to income tax expense during 1996 are due primarily to the impact of state income taxes and the amortization of certain excess costs over net assets of purchased companies which are not deductible for income tax purposes. FISCAL 1995 COMPARED TO FISCAL 1994 The DTCA revenue decrease for 1995 from 1994 resulted primarily from an 8% decrease in same-contract revenues for centers in operation as of September 1, 1993, and from an increase in the percentage mix of lower revenue, less mature contracts during 1995 compared with 1994. The decrease in same center revenues resulted primarily from the impact of contract fee restructurings. The change in the mix of contracts resulted from the impact of the discontinuance of several mature contracts during 1994 and 1995 the revenues of which were considerably higher than new contracts that were being signed and placed in operation during this period. The Company believes that the negative impact of selected contract rate 30 31 renegotiations and restructurings, the transition of client hospitals to their evolving healthcare markets, the impact of changing revenue patterns resulting from new DTCA products and the timing of implementation of these new products have negatively impacted same center revenue changes, contract terminations and new center revenues. The increase in overall DTCA salaries and benefits for 1995 over 1994 resulted primarily from increased corporate staff overhead costs associated with DTCA's new product efforts during 1995 and from increased performance-based compensation during 1995 offset by lower corporate overhead costs associated with DTCA's traditional hospital inpatient treatment center business during 1995 and by lower staffing levels during 1995 required at new centers placed in operation during 1995 and 1994 compared with contracts terminated during this period. Salaries and benefits expense as a percentage of revenues for 1995 was 51.6% compared with 45.4% for 1994. This increase was primarily a result of the revenue decrease for 1995 from 1994 and from an increase in the corporate staff overhead costs associated with DTCA's new product efforts which did not produce significant revenue during 1995. The decrease in DTCA's other operating expenses for 1995 from 1994 resulted primarily from reduced center expenses such as media, community relations and contracted medical director costs offset somewhat by increased expenditures related to the Company's new product efforts and legal costs associated with the civil suit filed by a former employee and the OIG investigation. Therefore, other operating expenses as a percentage of revenues for 1995 were 29.7% compared with 29.8% for 1994. The increase in DTCA depreciation and amortization expense for 1995 over 1994 resulted primarily from additional amortization expense associated with the costs of center development at centers recently placed in operation partially offset by reduced amortization expense at DTCA centers where the costs of center contract development have been fully amortized. The decrease in income tax expense attributable to DTCA's operations for 1995 resulted primarily from decreased operating results compared with 1994. DTCA's effective income tax rate for 1995 increased to 41.0% from 40.4% for 1994. The increase in the effective rate resulted primarily from the impact of the fixed amount of DTCA's non-deductible amortization of excess costs over net assets of purchased companies relative to decreased levels of income. The differences between the federal statutory income tax rate and the Company's effective tax rates during 1995 and 1994 are due primarily to the impact of state income taxes and the amortization of certain excess costs over net assets of purchased companies which are not deductible for income tax purposes. 31 32 AMSURG The following table presents the operations of AmSurg for fiscal 1996, 1995 and 1994 and associated percentage changes for fiscal 1996 from 1994 and the percentage changes for fiscal 1995 from 1994. % Fiscal Year Ended August 31, 1996 % Change 1995 Change 1994 =================================================================================================== Revenues $29,205,697 45.8% $20,025,821 83.7% $10,899,771 ----------- ------- ----------- ------ ----------- Expenses: Salaries and benefits 9,222,023 66.7% 5,532,991 63.9% 3,376,093 Other operating expenses 9,624,549 40.7% 6,842,648 55.0% 4,414,489 Depreciation and amortization 2,654,102 25.2% 2,119,290 110.2% 1,008,159 Interest 822,573 38.6% 593,363 623.3% 82,034 ----------- ------- ----------- ------ ----------- Total expenses 22,323,247 48.0% 15,088,292 69.9% 8,880,775 ----------- ------- ----------- ------ ----------- Income before income taxes and minority interests 6,882,450 39.4% 4,937,529 144.6% 2,018,996 Income taxes 814,000 100.0% 407,000 - - ----------- ------- ----------- ------ ----------- Income before minority interests 6,068,450 33.9% 4,530,529 124.4% 2,018,996 AmSurg minority partners' interest 4,783,195 38.8% 3,445,651 74.5% 1,974,926 AmSurg minority stockholders' interest 486,112 18.5% 410,213 6752.9% 5,986 ----------- ------- ----------- ------ ----------- Net income $ 799,143 18.5% $ 674,665 1671.5% $ 38,084 =========== ======= =========== ====== ===========
FISCAL 1996 COMPARED TO FISCAL 1995 The increase in AmSurg revenues for 1996 over 1995 resulted primarily from more surgery centers in operation, the acquisition of the Florida physician practice as of February 1, 1996 and from an increase of 15.0% in same-center revenues at the ten centers in operation since September 1, 1994. The Company anticipates further revenue growth in 1997 resulting from additional start-up and acquisition centers placed in operation in 1996 and 1997 and from same-center revenue growth. The increase in salaries and benefits expense and in other operating expenses for 1996 from 1995 resulted primarily from the acquisition of the Florida physician practice and from an increase in AmSurg corporate staff primarily to support anticipated growth in centers in operation that will occur primarily during fiscal 1997. 32 33 AmSurg's depreciation and amortization expense increases for 1996 over 1995 resulted primarily from AmSurg's acquisition of majority interests in additional surgery centers, the acquisition of the Florida physician practice and from new start-up surgery centers placed in operation. The increase in interest expense for 1996 over 1995 is primarily attributable to debt assumed or incurred by AmSurg in connection with additional acquisitions of interests in surgery centers and the Florida physician practice plus the interest expense associated with newly opened start-up surgery centers financed partially with bank debt. The effective income tax rate for 1996 for AmSurg, after reduction of taxable income for AmSurg center minority partner's interest, was 38.8% compared with 27.3% for 1995. The increase in the effective income tax rate resulted from the utilization of prior period net operating loss carryforwards during 1995. The difference between the federal statutory income tax rate and AmSurg's effective income tax rates is due primarily to the utilization of prior-period net operating loss carryforwards for 1995 and the impact of state income taxes for both 1996 and 1995. The AmSurg minority partners' interest in earnings for 1996 increased to $4.8 million from $3.4 million for 1995, primarily as a result of minority partners' interest in earnings at AmSurg surgery centers recently added to operations and from increased profitability at same-centers. AmSurg minority stockholders' interest in earnings increased to $486,112 for 1996 from $410,213 for 1995 primarily as a result of improved AmSurg 1996 profitability. FISCAL 1995 COMPARED TO FISCAL 1994 The increase in AmSurg revenues for 1995 over 1994 resulted primarily from more centers in operation which were added through acquisition and through start-up development and from increases in revenues at existing centers. The increases in salaries and benefits expense and in other operating expenses for 1995 over 1994 resulted primarily from an increased number of centers in operation and from an increase in AmSurg corporate staff to support centers in operation and the anticipated growth in the number of centers. AmSurg depreciation and amortization expense increases for 1995 over 1994 are associated primarily with AmSurg's acquisition of majority interests in additional practice-based ambulatory surgery centers and from new start-up centers placed in operation. Increases in interest expense are primarily attributable to debt assumed or incurred by AmSurg in connection with additional acquisitions of interests in centers plus the interest expense associated with newly opened start-up centers financed with bank debt. The effective income tax rate for 1995 for AmSurg, after reduction of taxable income for AmSurg center minority partners' interest, was 27.3% compared with no provision for income tax made during 1994 because of the utilization of prior period net operating loss carryforwards during that year. The difference between the federal statutory tax rate and AmSurg's effective income tax rates for both periods is due primarily to the utilization of prior 33 34 period net operating loss carryforwards during 1995 and 1994 and the impact of state income taxes. The AmSurg minority partners' interest in earnings for 1995 increased to $3.4 million from $2.0 million in 1994 primarily as a result of additional practice-based surgery centers placed in operation and from increased profitability at existing centers. AmSurg minority stockholders' interest in earnings increased to $410,000 for 1995 from $6,000 for 1994 as a result of improved AmSurg 1995 profitability. LIQUIDITY AND CAPITAL RESOURCES Operating activities for fiscal 1996 generated $11.2 million in cash flow. Investing activities during this period used $11.8 million which consisted primarily of $8.5 million used by AmSurg to acquire partnership interests in additional practice-based ambulatory surgery centers and to acquire the partnership interest in the Florida physician practice and $3.4 million used for the acquisition of property and equipment for new AmSurg start-up surgery centers and for other equipment and leasehold improvement purchases for AmSurg and DTCA. Financing activities for fiscal 1996 provided $809,017 in cash flow primarily as a result of net additions to AmSurg long-term debt of $4.5 million, $866,347 in AmSurg minority partner capital contributions to AmSurg partnerships and LLCs and cash proceeds from the private sale of AmSurg common stock to parties other than the Company and $160,429 in proceeds from the exercise of options to purchase the Company's common stock; these financing proceeds were partially offset by $4.6 million in net distributions to AmSurg surgery center minority partners and $127,503 utilized to repurchase Company common stock. At August 31, 1996, the Company had no outstanding borrowings under its $10 million bank revolving credit agreement, which expires January 29, 1998, and AmSurg had $5.6 million outstanding under its amended and restated bank credit agreement which is repayable through June 2000. At August 31, 1996, AmSurg also had outstanding borrowings of $3.7 million under a credit facility which provides up to $12 million through June 1998 for acquisition and development projects with repayment of these borrowings being made through June 2002. AmSurg borrowings under this bank credit agreement bear interest at a rate equal to the prime rate or 1.75% above LIBOR or a combination thereof at AmSurg's option. The Company believes that cash flow from DTCA operating activities and the Company's available cash balances will continue to enable the Company to fund DTCA's current working capital needs, including the implementation and operation of the new agreements with Principal and Health Options. The Company anticipates that AmSurg operating activities will continue to provide positive cash flow and that this cash flow will be utilized in combination with borrowings under AmSurg's amended and restated bank revolving credit agreement and through additional financing sources that AmSurg is expected to require to fund acquisition and development projects. On November 20, 1996, AmSurg issued to an unaffiliated institutional investor a combination of redeemable and convertible preferred stock totaling $5,500,000, the convertible portion of which is convertible into 6% (ratably increasing to 8% by November 2000) of the outstanding common stock of AmSurg if certain events of liquidity do not take 34 35 place. The Company and AmSurg also are considering certain strategic alternatives in order to provide AmSurg with better access to the public and private capital necessary to fund its continuing growth. Among the alternatives available to the Company and AmSurg is the alternative of creating a public market for AmSurg common stock either through a public offering of authorized but unissued shares of AmSurg common stock or the spinoff of AmSurg common stock owned by the Company. No assurance can be made that the Company and AmSurg will effect any such strategic alternative. 35 36 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA AMERICAN HEALTHCORP, INC. CONSOLIDATED BALANCE SHEETS ASSETS
August 31, --------------------------- 1996 1995 ------------- ----------- Current assets: Cash and cash equivalents (Note 1) $13,989,848 $13,721,650 Accounts receivable, net of allowance for uncollectible accounts of $845,859 and $405,992 7,922,084 6,162,026 Other current assets (Note 1) 1,471,797 1,586,051 Deferred tax asset (Notes 1 and 3) 679,000 934,000 ----------- ----------- Total current assets 24,062,729 22,403,727 ----------- ----------- Long-term receivables and deposits 1,008,604 120,534 ----------- ----------- Property and equipment (Note 1): Land and improvements 97,280 - Buildings and improvements 6,247,661 4,586,031 Equipment 10,043,288 7,278,162 Construction in progress 591,266 42,624 ----------- ----------- 16,979,495 11,906,817 Less accumulated depreciation (4,711,066) (2,916,377) ----------- ----------- Net property and equipment 12,268,429 8,990,440 ----------- ----------- Long-term deferred tax asset (Notes 1 and 3) 740,000 453,000 ----------- ----------- Other assets, net (Note 1) 929,545 1,277,121 ----------- ----------- Excess of cost over net assets of purchased companies, net (Notes 1 and 2) 39,195,303 32,286,755 ----------- ----------- $78,204,610 $65,531,577 =========== ===========
See accompanying notes to the consolidated financial statements. 36 37 AMERICAN HEALTHCORP, INC. CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY
August 31, ------------------------------ 1996 1995 -------------- ------------- Current liabilities: Accounts payable $ 936,775 $ 886,628 Accrued salaries and benefits 2,348,406 2,385,784 Accrued liabilities 2,617,082 1,982,882 Income taxes payable (Notes 1 and 3) 255,111 1,320,609 Current portion of other long-term debt/liabilities (Notes 4 and 5) 2,838,381 2,475,101 ---------- ---------- Total current liabilities 8,995,755 9,051,004 ---------- ---------- Deferred income taxes (Notes 1 and 3) 456,000 215,000 ---------- ---------- Long-term debt (Note 4) 10,736,825 5,237,286 ---------- ---------- Other long-term liabilities (Note 5) 2,608,041 2,146,322 ---------- ---------- Minority interest (Note 1) 13,796,900 10,582,469 ---------- ---------- Commitments and contingencies (Notes 6 and 11) Stockholders' equity (Notes 7 and 8) Preferred stock $.001 par value, 5,000,000 shares authorized, none outstanding - - Common stock $.001 par value, 15,000,000 shares authorized, 7,985,884 and 7,979,005 shares outstanding 7,986 7,979 Additional paid-in capital 17,629,678 17,577,713 Retained earnings 23,973,425 20,713,804 ---------- ---------- Total stockholders' equity 41,611,089 38,299,496 ---------- ---------- $78,204,610 $65,531,577 ========== ==========
See accompanying notes to the consolidated financial statements. 37 38 AMERICAN HEALTHCORP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended August 31, -------------------------------------------- 1996 1995 1994 ------------- ------------- ------------ Revenues (Note 1) $60,609,341 $56,609,394 $52,043,869 Expenses: Salaries and benefits 29,088,482 24,410,963 22,075,423 Other operating expenses 16,879,252 17,708,153 16,685,058 Depreciation and amortization (Note 1) 3,926,858 3,458,647 2,300,797 Interest 827,821 600,444 88,535 ----------- ---------- ----------- Total expenses 50,722,413 46,178,207 41,149,813 ----------- ---------- ----------- Income before income taxes and minority interests 9,886,928 10,431,187 10,894,056 Income tax expense (Notes 1 and 3) 1,358,000 2,659,000 3,586,000 ----------- ---------- ----------- Income before minority interests 8,528,928 7,772,187 7,308,056 AmSurg minority partners' interest (Note 1) 4,783,195 3,445,651 1,974,926 AmSurg minority stockholders' interest (Note 1) 486,112 410,213 5,986 ----------- ---------- ----------- Net income $ 3,259,621 $ 3,916,323 $ 5,327,144 ========== ========== =========== Net income per share (Note 1) $ 0.40 $ 0.48 $ 0.63 =========== ========== =========== Weighted average common shares and equivalents (Note 1) 8,160,764 8,211,097 8,461,042
See accompanying notes to the consolidated financial statements. 38 39 AMERICAN HEALTHCORP, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Additional Preferred Common Paid-in Retained Stock Stock Capital Earnings Total ----------- ------- ------------ ------------ ------------ Balance, August 31, 1993 $ - $ 8,236 $19,371,492 $11,470,337 $ 30,850,065 Exercise of stock options (Note 8) - 45 282,357 - 282,402 Net income - - - 5,327,144 5,327,144 --------- -------- ----------- ----------- ----------- Balance, August 31, 1994 - 8,281 19,653,849 16,797,481 36,459,611 Exercise of stock options (Note 8) - 35 138,075 - 138,110 Stock repurchase (Note 7) - (337) (2,214,211) - (2,214,548) Net income - - - 3,916,323 3,916,323 --------- -------- ----------- ----------- ----------- Balance, August 31, 1995 - 7,979 17,577,713 20,713,804 38,299,496 Exercise of stock options (Note 8) - 22 179,453 - 179,475 Stock repurchase (Note 7) - (15) (127,488) - (127,503) Net income - - - 3,259,621 3,259,621 --------- -------- ----------- ----------- ----------- Balance, August 31, 1996 $ - $ 7,986 $17,629,678 $23,973,425 $ 41,611,089 ========= ======== =========== =========== ============
See accompanying notes to the consolidated financial statements. 39 40 AMERICAN HEALTHCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended August 31, ----------------------------------------- 1996 1995 1994 ------------ ----------- ------------ Cash flows from operating activities: Net income $ 3,259,621 $ 3,916,323 $ 5,327,144 Income tax expense (Notes 1 and 3) 1,358,000 2,659,000 3,586,000 AmSurg minority partners' interest (Note 1) 4,783,195 3,445,651 1,974,926 AmSurg minority stockholders' interest (Note 1) 486,112 410,213 5,986 ------------ ----------- ------------ Income before income taxes and minority interests 9,886,928 10,431,187 10,894,056 Noncash expenses, revenues, losses and gains included in income: Depreciation and amortization (Note 1) 3,926,858 3,458,647 2,300,797 Decrease (increase) in working capital items (359,151) 1,274,767 1,551,177 Other noncash transactions 91,246 915,957 544,912 ------------ ----------- ------------ 13,545,881 16,080,558 15,290,942 Income taxes (net paid) (2,095,452) (2,485,748) (3,682,770) Additions to other long-term liabilities 583,333 - - Increase in other assets (393,006) (1,140,282) (804,868) Payments on other long-term liabilities (Note 5) (394,610) (228,245) (216,646) ------------ ----------- ------------ Net cash flows provided by operating activities 11,246,146 12,226,283 10,586,658 ------------ ----------- ------------ Cash flows from investing activities: Business acquisitions (Note 2) (8,547,533) (5,260,203) (5,081,218) Acquisition of property and equipment (3,373,823) (3,885,064) (3,668,311) Decrease (increase) in long-term receivables and deposits 134,391 (37,920) (105,818) ------------ ----------- ------------ Net cash flows used in investing activities (11,786,965) (9,183,187) (8,855,347) ------------ ----------- ------------ Cash flows from financing activities: Additions to long-term debt (Note 4) 6,785,333 3,527,365 1,961,181 Payments on long-term debt (Note 4) (2,264,474) (613,315) (507,376) AmSurg distributions to center minority partners (Note 1) (4,611,115) (3,300,098) (1,821,743) AmSurg center minority partners capital contributions 725,080 735,778 381,051 Stock repurchase (Note 7) (127,503) (2,214,548) - Sale of AmSurg stock (net of issuance costs) 141,267 639,422 540,814 Exercise of stock options (Note 8) 160,429 84,166 89,179 ------------ ----------- ------------ Net cash flows provided by (used in) financing activities 809,017 (1,141,230) 643,106 ------------ ----------- ------------ Net increase in cash and cash equivalents 268,198 1,901,866 2,374,417 Cash and cash equivalents, beginning of period 13,721,650 11,819,784 9,445,367 ------------ ----------- ------------ Cash and cash equivalents, end of period $ 13,989,848 $13,721,650 $ 11,819,784 ============ =========== ============
See accompanying notes to the consolidated financial statements. 40 41 AMERICAN HEALTHCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year Ended August 31, ----------------------------------------- 1996 1995 1994 ------------ ---------- ----------- Decrease (increase) in other working capital items excluding income taxes: Accounts receivable, net $(906,259) $ 640,319 $ 726,782 Other current assets 146,505 (351,734) (210,310) Accounts payable 50,147 (244,224) 101,476 Accrued expenses 350,456 1,230,406 933,229 --------- ----------- ----------- $(359,151) $ 1,274,767 $1,551,177 ========= =========== =========== SUPPLEMENTAL NOTES TO CONSOLIDATED STATEMENTS OF CASH FLOWS 1. Interest payments of $711,538, $441,410 and $66,613 were made during the years ended August 31, 1996, 1995 and 1994, respectively. 2. Other noncash transactions consist of the following: Deferred compensation agreements $ 551,775 $ 571,013 $ 500,843 Deferred income (458,333) - - Liability insurance reserves (50,000) (86,192) (179,934) Accrued expenses for center closings - - 97,172 --------- --------- --------- Miscellaneous other 47,804 431,136 126,831 $ 91,246 $ 915,957 $ 544,912 ========= ========= =========
3. Shares of AmSurg stock valued at $1,351,174, $1,001,223 and $1,787,038 were issued in conjunction with the acquisition of a majority interest in various practice-based centers during the years ended August 31, 1996, 1995 and 1994, respectively. (See Note 2.) See accompanying notes to the consolidated financial statements. 41 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED AUGUST 31, 1996, 1995 AND 1994 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES American Healthcorp, Inc. and its subsidiaries (the "Company") currently operate two business segments, Diabetes Treatment Centers of America ("DTCA") and AmSurg Corp. ("AmSurg"). DTCA, a wholly-owned subsidiary, is a national provider of diabetes services to physicians, hospitals and healthcare payors. AmSurg Corp., a majority-owned (61% at August 31, 1996) subsidiary, develops, acquires and manages physician practice-based ambulatory surgery centers and specialty physician networks in partnership with surgical and other group practices. AmSurg's partnership with physician group practices may take the form of limited partnerships, general partnerships or limited liability companies which, in any case, the minority owners thereof are herein referred to as partners. 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. Included in cash at August 31, 1996 and 1995, is the cash of AmSurg totaling $1,427,145 and $2,645,605, respectively. The cash of AmSurg is intended to be used only for the business purposes of AmSurg. c. Other Current Assets - Other current assets at August 31, 1996 and 1995 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 20 years for buildings and improvements and 5 to 10 years for equipment. e. Other Assets - Other assets principally include costs incurred in obtaining management contracts which are being amortized over the lives of the related contracts (generally 2 to 5 years), and the opening activities of DTCA contract centers and AmSurg centers which are being amortized over 12 months. Total accumulated amortization of other assets at August 31, 1996 and 1995 was $1,174,488 and $1,306,979, respectively. f. Excess of Cost Over Net Assets of Purchased Companies - The excess costs at August 31, 1996 and 1995 include net costs of $12,229,578 and $12,611,797 which 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. The excess costs at August 31, 1996 and 1995 also include excess costs which have income tax basis associated with AmSurg business acquisitions made during fiscal 1993 through fiscal 1996 which are being amortized over 25 years. (See Note 2). Accumulated amortization at August 31, 1996 and 1995 was $5,425,600 and $4,121,214, respectively. The Company assesses the impairment of the value of excess of cost over net assets of purchased companies from time to time utilizing valuation methodologies that reflect the current fair market value of the businesses that have been acquired. Effective September 1, 1996, the Company will adopt the provisions of Financial Accounting Standard No. 121 ("FAS 121") 42 43 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The Company does not expect the adoption of FAS 121 to result in an adjustment to the financial statements at the date of adoption. g. Minority Interest - Minority interest at August 31, 1996 and 1995 represents the equity attributable to the minority stockholders of AmSurg plus the equity attributable to the partners of AmSurg centers as of August 31, 1996 and 1995. (See Note 2). As of August 31, 1996, the Company owned 61% of the outstanding common shares of AmSurg and AmSurg generally owns between 51% and 60% of each of its centers. h. Income Taxes - The Company files a consolidated federal income tax return and, effective September 1, 1993, computes its income tax provision under Financial Accounting Standard No. 109, "Accounting for Income Taxes". AmSurg files a separate consolidated federal income tax return with a tax year ending December 31. i. Revenue Recognition - Revenues under the Company's contracts with hospitals are calculated based on various performance-based and fixed-fee methodologies and are recognized when the related service has been provided. Hospital contract revenues include estimates which are subject to adjustment in subsequent periods. During the years ended August 31, 1996, 1995 and 1994, approximately 15%, 15% and 22%, respectively, of the Company's revenues were derived from DTCA contracts with hospitals which had a common parent company. AmSurg revenue is recognized on the date of service, net of estimated contractual allowances from third party medical service payors including Medicare and Medicaid. During the years ended August 31, 1996, 1995 and 1994 approximately 17%, 14% and 9%, respectively, of the Company's revenues were derived from AmSurg's provision of services to patients covered under Medicare and Medicaid. j. Net Income Per Share - Net income per share is computed by dividing net income by the weighted average number of common shares and equivalents outstanding. k. Fair Value of Financial Instruments - Financial Accounting Standard No. 107, "Disclosures About Fair Value of Financial Instruments", requires disclosure of the fair value of certain financial instruments. Cash and cash equivalents, receivables and payables are reflected in the financial statements at cost which approximates fair value. Management believes that the carrying amount of long-term debt approximates market value, because it believes the terms of its borrowings approximate terms which it would incur currently. l. 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. 2. BUSINESS ACQUISITIONS In four separate transactions during the year ended August 31, 1996, AmSurg acquired a majority interest in three physician practice-based surgery centers and a physician practice and related entities. The purchase price paid for the interests acquired was $10,990,183 which consisted of cash of $8,119,028, AmSurg common stock valued at $1,343,374 and assumed debt of $1,527,781. Approximately $8,950,000 of the total purchase price for these acquisitions was allocated to excess of cost over net assets of purchased companies. 43 44 In three separate transactions during the year ended August 31, 1995, AmSurg acquired a majority interest in three physician practice-based surgery centers and another center nearing completion of construction. The purchase price paid for the center interests acquired was $7,899,178 which consisted of cash of $5,163,197, AmSurg common stock valued at $1,001,223, notes payable of $1,012,380 and assumed debt of $722,378. Approximately $6,500,000 of the total purchase price for these acquisitions was allocated to excess of cost over net assets of purchased companies. In four separate transactions during the year ended August 31, 1994, AmSurg acquired a majority interest in four physician practice-based surgery centers. The purchase price paid for the center interests acquired was $7,596,843 which consisted of cash of $4,794,333, AmSurg common stock valued at $1,787,038 and assumed debt of $1,015,472. Approximately $6,610,000 of the total purchase price for these acquisitions was allocated to excess of cost over net assets of purchased companies. Had these transactions occurred September 1, 1993, unaudited pro forma revenues for the years ended August 31, 1996, 1995, and 1994 would have been approximately $65,756,000, $64,776,000 and $62,003,000, respectively. Pro forma net income and earnings per share would not have been materially different from those reported for the period. 3. INCOME TAXES Income tax expense is comprised of the following:
========================================================= Year Ended August 31, 1996 1995 1994 ========================================================= Current taxes Federal $926,000 $2,206,000 $2,969,000 State 189,000 481,000 659,000 Deferred taxes 243,000 (28,000) (42,000) --------------------------------------------------------- Total $1,358,000 $2,659,000 $3,586,000 =========================================================
44 45 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 asset for the fiscal years ended August 31, 1996 and 1995 are as follows:
--------------------- 1996 1995 --------------------- Deferred tax asset: Allowance for doubtful accounts $ 228,000 $ 188,000 Financial accruals without economic performance 532,000 719,000 Deferred compensation 906,000 858,000 Other 15,000 42,000 --------- ---------- 1,681,000 1,807,000 --------- ---------- Deferred tax liability: Tax over book depreciation 97,000 13,000 Tax over book amortization 621,000 622,000 --------- ---------- 718,000 635,000 --------- ---------- Net deferred tax asset $ 963,000 $1,172,000 ========= ========== Net current deferred tax asset $ 679,000 $ 934,000 Net long-term deferred tax asset 284,000 238,000 --------- ---------- $ 963,000 $1,172,000 ========= ==========
The Company has not provided any significant valuation allowance on its deferred tax asset as it believes such allowance is unnecessary because it has been paying current taxes substantially in excess of the net deferred tax asset and anticipates continuing to do so. The difference between income tax expense computed using the effective tax rate and the statutory federal income tax rate follows:
========================================================================================== Year Ended August 31, 1996 1995 1994 ========================================================================================== Statutory federal income tax $3,362,000 $3,547,000 $3,704,0000 AmSurg center minority partners' pretax interest (1,626,000) (1,172,000) (671,000) State income taxes, less Federal income tax benefit 249,000 314,000 420,000 Amortization of excess of cost over net assets of purchased companies 134,000 136,000 130,000 Internal Revenue Service settlement (760,000) - - AmSurg separate return (income) losses - - (15,000) Other (1,000) (166,000) 18,000 - ------------------------------------------------------------------------------------------ Income tax expense $1,358,000 $2,659,000 $3,586,000 ==========================================================================================
45 46 The Company recognized a $760,000 reduction in its income tax expense in its fiscal year ended August 31, 1996 resulting from the resolution of all issues between the Company and the Internal Revenue Service relating principally to the deductibility of costs associated with the leveraged buyout of the Company in 1988 and the sale of the Company's alcohol and drug treatment business in 1989. In fiscal 1994, the Company had filed a petition with the United States Tax Court to contest the proposed disallowance by the IRS of deductions associated with these issues. In September 1996 a settlement was reached with the IRS which substantially confirmed the Company's position on these issues and, accordingly, the Company reversed $760,000 of income tax liabilities it had previously provided for these matters. 4. LONG-TERM DEBT Long-term debt is comprised of the following:
======================================================================================================= Year Ended August 31, 1996 1995 ======================================================================================================= $10,000,000 revolving credit agreement at prime or .75% above LIBOR............................................................... $ - $ - AmSurg term loan at prime or 1.75% above LIBOR (7.3% at August 31, 1996) due through June 10, 2000..................................... 5,629,470 3,607,296 $12,000,000 AmSurg credit agreement at prime or 1.75% above LIBOR (average rate of 7.2% at August 31, 1996) due through June 10, 2002................................................................ 3,744,000 - Various AmSurg debt at an average rate of 9.0% due through September 23, 2003.................................................. 4,064,913 3,738,714 ----------- ---------- 13,438,383 7,346,010 7,346,010 Less current portion.................................................. 2,701,558 2,108,724 ----------- ---------- $10,736,825 $5,237,286 =========== ==========
The Company has a revolving credit agreement with a lending institution which permits the Company to borrow up to $10,000,000. Borrowings under this agreement, at the Company's option, bear interest at the prime rate or at .75% above the LIBOR or a combination thereof. This agreement provides for a fee of .375% on unused commitments and expires January 29, 1998 but may be extended annually at the lender's option. This agreement contains covenants relating to working capital, operating performance, the ratio of liabilities to net worth, maintenance of a minimum net worth and the payment of cash dividends. Under the most restrictive of these covenants, approximately 41% of retained earnings was available for the payment of dividends at August 31, 1996. Unused commitments under the agreement totaled $10,000,000 as of August 31, 1996. 46 47 On September 29, 1993, AmSurg entered into a credit agreement with a lending institution. The credit agreement was amended and restated June 25, 1996. Under the terms of the new agreement, all borrowings outstanding under the previous credit agreement were converted to a term loan that bears interest at the prime rate or 1.75% above LIBOR or a combination thereof and is being repaid on an installment basis through June 10, 2000. The borrowings under the term loan are secured by $9,623,156 of assets financed by these borrowings. Borrowings under the term loan totaled $5,629,470 of which payment of $559,415 was guaranteed by certain partners of AmSurg centers. In addition, the credit agreement permits AmSurg to borrow up to an additional $12,000,000 to finance AmSurg acquisition and development projects. New borrowings under this agreement bear interest at prime or 1.75% above LIBOR or a combination thereof. AmSurg may borrow under this credit agreement through June 10, 1998. The agreement provides for a fee of .35% on unused commitments and all additional borrowings are to be repaid on an installment basis through June 10, 2002. The agreement contains covenants relating to the ratio of debt to net worth, operating performance and minimum net worth and prohibits the payment of dividends. Borrowings under the $12,000,000 credit agreement totaled $3,744,000 at August 31, 1996 of which payment of $208,250 was guaranteed by certain partners of AmSurg centers. The borrowings under the credit agreement are secured by $492,606 of assets financed by a portion of these borrowings. Various of the AmSurg centers included in the Company's consolidated financial statements have loans with local lending institutions or have capitalized lease arrangements. All the loans and capitalized leases are secured by assets of the centers totaling $5,596,874 and both AmSurg and the partners have guaranteed payment of the loans and leases. In addition, AmSurg issued unsecured notes payable in connection with the acquisition of two physician practice-based surgery centers during the year ended August 31, 1995 (see Note 2). Principal payments required on long-term debt in the five years subsequent to August 31, 1996 are $2,701,558, $2,612,172, $3,230,801, $2,719,413 and $1,187,437. 5. 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. Prior to September 1, 1990, other key managers of the Company were also eligible to participate in a similar plan. 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 $2,127,372 and $1,737,672 as of August 31, 1996 and 1995, respectively, net of the current portion of $136,823 and $366,377, respectively. Plan payments required in the five years subsequent to August 31, 1996 for the Company are $136,823, $324,573, $208,615, $169,389 and $127,846. Other long-term liabilities at August 31, 1996 and 1995 also include $355,669 and $408,650, 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 47 48 deductibles on claims and incurred but not reported claims under these policies based on historical loss patterns and management projections. 6. LEASES The Company has operating lease agreements for AmSurg's ambulatory surgery centers, physician practice and the Company's and AmSurg's corporate office space. Rent expense under lease agreements for the years ended August 31, 1996, 1995 and 1994 was approximately $1,843,000, $1,427,000 and $875,500, respectively. The future minimum lease commitments for each of the next five years following August 31, 1996 for the Company for all non-cancelable operating leases are as follows:
======================================== Year Ended August 31, ======================================== 1997........................ $2,310,082 1998........................ 2,286,488 1999........................ 2,181,860 2000........................ 1,573,313 2001........................ 1,124,602 ---------------------------------------- Total $9,476,345 ========================================
7. STOCKHOLDERS' EQUITY In December 1994, 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 the repurchases from time to time in the open market prior to December 26, 1996. At August 31, 1996, the Company had repurchased 351,900 shares at a cost of $2,342,051. 8. STOCK OPTIONS The Company has a number of stock plans under which options to purchase American Healthcorp, Inc. common stock or restricted stock may be granted. All options under these plans have been granted at fair market value as of the date of the grant. The Company has reserved 50,000 shares of common stock to be granted as restricted stock as part of the Company's Board of Director compensation program of which 4,324 shares have been granted. 48 49 Stock option activity, as adjusted for the three-for-two split effective November, 1993, for the three years ended August 31, 1996 is summarized as follows:
======================================== Number of shares Option price per share ======================================== Outstanding at August 31, 1993 912,362 $ .001-$14.730 Options granted 123,011 $5.930-$21.930 Options exercised (45,218) $ .001-$12.687 Options terminated (33,310) $2.780-$12.687 --------- Outstanding at August 31, 1994 956,845 $ .001-$21.930 Options granted 279,665 $ 5.100-$7.880 Options exercised (35,136) $ .001-$2.780 Options terminated (274,098) $2.780-$21.930 --------- Outstanding at August 31, 1995 927,276 $ .001-$21.43 Options granted 319,325 $ 6.44-$12.60 Options exercised (17,555) $ 2.78-$11.42 Options terminated (55,743) $ 5.93-$11.42 --------- Outstanding at August 31, 1996 1,173,303 $ .001-$21.43 =========
As of August 31, 1996, options for 681,359 shares were exercisable at an average price of $7.77 per share and 272,708 shares were reserved for future options. As of August 31, 1995, options for 573,771 shares were exercisable at an average price of $7.29 per share and 221,290 shares were reserved for future options. Pursuant to a stock option plan, AmSurg has granted to certain founding and management employees of AmSurg incentive and non-qualified options to purchase shares of AmSurg common stock which, if exercised, would be equal to approximately 9.8% of its common stock outstanding as of August 31, 1996 at a price equal to the fair value of the AmSurg stock at the date of grant. All of these AmSurg options were outstanding at August 31, 1996. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for Stock-Based Compensation". FAS 123 provides for an alternate method of recording the issuance of stock options and other stock based compensation from that promulgated by Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees". Pursuant to the provisions of FAS 123, the Company has elected to continue to record the issuance of employee stock options in accordance with APB 25, effective September 1, 1996. 49 50 9. 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 $265,528, $195,716 and $210,114 for the years ended August 31, 1996, 1995 and 1994, respectively. 10. INDUSTRY SEGMENTS A summary of segment information for the fiscal years ended August 31, 1996, 1995 and 1994 is as follows:
======================================================================= Year ended August 31, 1996 1995 1994 ======================================================================= Revenues: DTCA/American Healthcorp $31,403,644 $36,583,573 $41,144,098 AmSurg Corp. 29,205,697 20,025,821 10,899,771 ------------------------------------- $60,609,341 $56,609,394 $52,043,869 ===================================== Operating profits: DTCA/American Healthcorp $ 3,009,726 $ 5,500,739 $ 8,881,561 AmSurg Corp. 7,705,023 5,530,892 2,101,030 ------------------------------------- 10,714,749 11,031,631 10,982,591 Interest expense (827,821) (600,444) (88,535) ------------------------------------ $ 9,886,928 $10,431,187 $10,894,056 ===================================== Identifiable assets: DTCA/American Healthcorp $31,968,374 $31,062,102 $31,516,249 AmSurg Corp. 46,236,236 34,469,475 22,336,410 ------------------------------------- $78,204,610 $65,531,577 $53,852,659 ===================================== Capital expenditures: DTCA/American Healthcorp $ 651,676 $ 435,653 $ 332,313 AmSurg Corp. 2,722,147 3,449,411 3,335,998 ------------------------------------- $ 3,373,823 $ 3,885,064 $ 3,668,311 ===================================== Depreciation and amortization: DTCA/American Healthcorp $ 1,272,756 $ 1,339,357 $ 1,292,638 AmSurg Corp. 2,654,102 2,119,290 1,008,159 ------------------------------------- $ 3,926,858 $ 3,458,647 $ 2,300,797 =====================================
50 51 11. 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. Certain of these motions are still pending. 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. During the fiscal years ended August 31, 1996 and 1995, the legal expense costs associated with these matters totaled approximately $250,000 and $750,000, respectively. The Company is not a party to any other pending legal proceedings which it believes will have a material adverse effect on its financial position or results of operations. 12. SUBSEQUENT EVENT On November 20, 1996, AmSurg issued to an unaffiliated institutional investor a combination of redeemable and convertible preferred stock totaling $5,500,000, the convertible portion of which is convertible into 6% (ratably increasing to 8% by November 2000) of the outstanding common stock of AmSurg if certain events of liquidity do not take place. 51 52 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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 1996 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Nashville, Tennessee October 18, 1996 (November 20, 1996 with respect to Note 12) 52 53 QUARTERLY FINANCIAL INFORMATION: (IN THOUSANDS EXCEPT PER SHARE DATA)
Fiscal 1996 First Second Third Fourth - -------------------------------------------------------------------------------------------------- Revenues: DTCA and other $ 8,023 $ 7,691 $ 7,874 $ 7,815 AmSurg 5,881 6,714 8,086 8,525 ------- ------- ------- ------- Total revenues $13,904 $14,405 $15,960 $16,340 Income before income taxes and minority interests $ 2,526 $ 2,631 $ 2,716 $ 2,014 Net income $ 800 $ 705 $ 653 $ 1,102 Net income per share $ 0.10 $ 0.09 $ 0.08 $ 0.13 Components of net income: DTCA and other $ 651 $ 508 $ 366 $ 936 AmSurg 149 197 287 166 ------- ------- ------- ------- Total net income $ 800 $ 705 $ 653 $ 1,102 Fiscal 1995 First Second Third Fourth - -------------------------------------------------------------------------------------------------- Revenues: DTCA and other $ 9,498 $ 9,455 $ 8,970 $ 8,660 AmSurg 3,997 4,681 5,417 5,931 ------- ------- ------- ------- Total revenues $13,495 $14,136 $14,387 $14,591 Income before income taxes and minority interests $ 2,628 $ 2,531 $ 2,484 $ 2,788 Net income $ 1,171 $ 976 $ 875 $ 894 Net income per share $ 0.14 $ 0.12 $ 0.11 $ 0.11 Components of net income: DTCA and other $ 1,034 $ 823 $ 727 $ 658 AmSurg 137 153 148 236 ------- ------- ------- ------- Total net income $ 1,171 $ 976 $ 875 $ 894
53 54 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 4-6 under the caption "Election of Directors" of the Company's Proxy Statement for the Annual Meeting of Stockholders to be held January 21, 1997 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 21, 1997, 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 21, 1997, 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 21, 1997, to be filed with the Securities and Exchange Commission pursuant to Rule 14a-6(c) and is incorporated herein by reference. 54 55 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this report 1. Consolidated financial statement schedule Independent Auditors' Report on Schedule............................S-2 Schedule VIII - Valuation and Qualifying Accounts...................S-3
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)) 4.1 Article IV of the Company's Restated Certificate of Incorporation (included in Exhibit 3.1) 10.1 Registration Agreement dated as of August 31, 1988, as amended, by and among the Company, as successor to AHC Merger, Inc., and certain stockholders identified therein (incorporated by reference to Exhibit 10.2 to Registration Statement on Form S-1 (Registration No. 33-41119)) 10.2 Revolving Credit Agreement as Amended and Restated dated as of July 14, 1992 and May 10, 1995, between the Company and Bank of America, N.A. (incorporated by reference to Exhibit 10.2 to Form 10-K of the registrant for its fiscal year ended August 31, 1992 and Exhibit 10.1 to Form 10-Q of the registrant for its quarter ended May 31, 1995) 10.3 Amended and Restated Loan Agreement dated June 25, 1996, between AmSurg and SunTrust Bank, Nashville, N.A. (incorporated by reference to Exhibit 10.1 to Form 10-Q of the registrant for its quarter ended May 31, 1996) Management Contracts and Compensatory Plans 10.4 Employment Agreement as Amended and Restated dated August 31, 1988 between the Company and Thomas G. Cigarran (incorporated by reference to Exhibit 10.3 to Form 10-K of the registrant for its fiscal year ended August 31, 1992) 10.5 Employment Agreement as Amended and Restated dated August 31, 1988 between the Company and Henry D. Herr (incorporated by reference to Exhibit 10.4 to Form 10-K of the registrant for its fiscal year ended August 31, 1992) 55 56 10.6 Employment Agreement as Amended and Restated dated August 31, 1988 between the Company and James A. Deal (incorporated by reference to Exhibit 10.5 to Form 10-K of the registrant for its fiscal year ended August 31, 1992) 10.7 Employment Agreement as Amended and Restated dated August 31, 1988 between the Company and Robert E. Stone (incorporated by reference to Exhibit 10.6 to Form 10-K of the registrant for its fiscal year ended August 31, 1992) 10.8 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)) 10.9 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 registrant for its fiscal year ended August 31, 1995) 10.10 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)) 10.11 1991 Employee Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.10 to Form 10-K of the registrant for its fiscal year ended August 31, 1992) 10.12 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)) 10.13 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)) 10.14 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)) 10.15 1996 Stock Incentive Plan (incorporated by reference to the Company's proxy statement for the annual meeting of stockholders to be held January 23, 1996) 10.16 Management and Accounting Services Agreement dated November 30, 1992 between the Company and AmSurg (incorporated by reference to Exhibit 10.18 to Form 10-K of the registrant for its fiscal year ended August 31, 1993) 21 Subsidiaries of the registrant 27 Financial Data Schedule (SEC Use Only) 56 57 (b) Reports on Form 8-K There were no reports on Form 8-K filed during the fiscal quarter ended August 31, 1996. 57 58 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 20, 1996 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 20, 1996 - ---------------------- President and Chief Executive Thomas G. Cigarran Officer, Director (Principal Executive Officer) /s/ Henry D. Herr Executive Vice President November 20, 1996 - ----------------- Finance and Administration, Henry D. Herr Chief Financial Officer, Secretary, Director (Principal Financial Officer) /s/ David A. Sidlowe Vice President and Controller November 20, 1996 - -------------------- (Principal Accounting Officer) David A. Sidlowe /s/ Frank A. Ehmann Director November 20, 1996 - ------------------- Frank A. Ehmann /s/ Martin J. Koldyke Director November 20, 1996 - --------------------- Martin J. Koldyke /s/ C. Warren Neel Director November 20, 1996 - ------------------ C. Warren Neel /s/ William C. O'Neil, Jr. Director November 20, 1996 - -------------------------- William C. O'Neil, Jr.
58 59 INDEX TO FINANCIAL STATEMENT SCHEDULES
Schedule No. Schedule Name Page No. - ------------ ---------------------------------------- -------- Independent Auditors' Report on Schedule S-2 VIII Valuation and Qualifying Accounts S-3
All other financial statement schedules are either not required or are not applicable to the Company. S-1 60 INDEPENDENT AUDITORS' REPORT Board of Directors American Healthcorp, Inc. Nashville, Tennessee We have audited the consolidated financial statements for American Healthcorp, Inc. as of August 31, 1996 and 1995 and for each of the three years in the period ended August 31, 1996, and have issued our report thereon dated October 18, 1996 (November 20, 1996 with respect to Note 12); such consolidated financial statements and report are included in this Form 10-K. Our audits also included the consolidated financial statement schedule of American Healthcorp, Inc., listed in Item 14. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Nashville, Tennessee October 18, 1996 (November 20, 1996 with respect to Note 12) S-2 61 SCHEDULE VIII AMERICAN HEALTHCORP, INC. VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED AUGUST 31, 1996
----------------------------------------------------------------- Balance at Charged to Charged to Balance at Beginning Costs and Other End of Period Expenses Accounts Deductions of Period ----------------------------------------------------------------- Year ended August 31, 1994: Allowance for Uncollectible Accounts included under balance sheet caption "Accounts receivable" $464,742 $ 534,737 $ 86,492 (2) $531,248 (1) $554,723 Reserve for self-insured deductibles under balance sheet caption "Other Long-Term Liabilities" 687,490 192,648 (1) 494,842 Year ended August 31, 1995: Allowance for Uncollectible Accounts included under balance sheet caption "Accounts receivable" $554,723 $ 736,294 $ 58,974 (2) $630,873 (1) $405,992 313,126 (3) Reserve for self-insured deductibles under balance sheet caption "Other Long-Term Liabilities" 494,842 86,192 (1) 408,650 Year ended August 31, 1996: Allowance for Uncollectible Accounts included under balance sheet caption "Accounts receivable" $405,992 $,014,335 $241,632 (2) $816,100 (1) $845,859 Reserve for self-insured deductibles under balance sheet caption "Other Long-Term Liabilities" 408,650 52,981 (1) 355,669
(1) Charge-off against reserve. (2) Valuation of allowance for uncollectible accounts at the acquisition of AmSurg physician practice-based ambulatory surgery centers and physician practice. Between 51% and 70% was charged to excess of cost over net assets of purchased companies. See Note 2 of Notes to the Consolidated Financial Statements. (3) Written off on sale of supplies business. S-3 EX-21 2 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARY LIST AS OF NOVEMBER 20, 1996 (PAGE 1 OF 4)
STATE OF OWNERSHIP NAME OF SUBSIDIARY ORGANIZATION OWNED BY PERCENTAGE - --------------------------------------------- ------------ --------------------------- ------------ Diabetes Treatment Centers of America, Inc. DE American Healthcorp, Inc. 100% Arthritis and Osteoporosis Care Center, Inc. DE American Healthcorp, Inc. 100% American Healthcorp of Texas, Inc. DE American Healthcorp, Inc. 100% AmSurg Corp. TN American Healthcorp, Inc. 61% AmSurg KEC, Inc. TN AmSurg Corp. 100% The Endoscopy Center of Knoxville, L.P. TN AmSurg KEC, Inc. 51% AmSurg EC Topeka, Inc. TN AmSurg Corp. 100% The Endoscopy Center of Topeka, L.P. TN AmSurg EC Topeka, Inc. 60% AmSurg EC St. Thomas, Inc. TN AmSurg Corp. 100% The Endoscopy Center of St. Thomas, L.P. TN AmSurg EC St. Thomas, Inc. 60% AmSurg EC Centennial, Inc. TN AmSurg Corp. 100% The Endoscopy Center of Centennial, L.P. TN AmSurg EC Centennial, Inc. 60% AmSurg EC Beaumont, Inc. TN AmSurg Corp. 100% The Endoscopy Center of Southeast Texas, L.P. TN AmSurg EC Beaumont, Inc. 60% AmSurg EC Santa Fe, Inc. TN AmSurg Corp. 100% The Endoscopy Center of Santa Fe, L.P. TN AmSurg EC Santa Fe, Inc. 60% AmSurg EC Washington, Inc. TN AmSurg Corp. 100% The Endoscopy Center of Washington D.C., L.P. TN AmSurg EC Washington, Inc. 60% AmSurg Torrance, Inc. TN AmSurg Corp. 100% The Endoscopy Center of the South Bay, L.P. TN AmSurg Torrance, Inc. 51% AmSurg Encino, Inc. TN AmSurg Corp. 100% The Valley Endoscopy Center, L.P. TN AmSurg Encino, Inc. 51% AmSurg Brevard, Inc. TN AmSurg Corp. 100% The Ophthalmology Center of Brevard, L.P. TN AmSurg Brevard, Inc. 51% AmSurg Sebastopol, Inc. TN AmSurg Corp. 100% The Sebastopol ASC, L.P. TN AmSurg Sebastopol, Inc. 60% AmSurg ENT Brevard, Inc. TN AmSurg Corp. 100% The ENT Center of Brevard, L.P. TN AmSurg ENT Brevard, Inc. 51%
2 SUBSIDIARY LIST AS OF NOVEMBER 20, 1996 (PAGE 2 OF 4)
STATE OF OWNERSHIP NAME OF SUBSIDIARY ORGANIZATION OWNED BY PERCENTAGE - --------------------------------------------- ------------ --------------------------- ------------ AmSurg Abilene, Inc. TN AmSurg Corp. 100% The Abilene ASC, L.P. TN AmSurg Abilene, Inc. 60% AmSurg West Tennessee, Inc. TN AmSurg Corp. 100% The West Tennessee Center, L.P. TN AmSurg West Tennessee, Inc. 40% AmSurg Lakeland, Inc. TN AmSurg Corp. 100% The Lakeland Ophthalmology Center, L.P. TN AmSurg Lakeland, Inc. 51% AmSurg SWFLA, Inc. TN AmSurg Corp. 100% AmSurg Southwest Florida, L.P. TN AmSurg SWFLA, Inc. 60% AmSurg Lorain, Inc. TN AmSurg Corp. 100% The Lorain ASC, L.P. TN AmSurg Lorain, Inc. 51% AmSurg Maryville, Inc. TN AmSurg Corp. 100% The Maryville ASC TN AmSurg Maryville, Inc. 51% AmSurg Holdings, Inc. TN AmSurg Corp. 100% The Knoxville Ophthalmology ASC, LLC TN AmSurg Holdings, Inc. 60% The West Monroe Endoscopy ASC, LLC TN AmSurg Holdings, Inc. 55% Montgomery Eye Surgery Center, LLC TN AmSurg Holdings, Inc. 51% The Evansville ASC, LLC TN AmSurg Holdings, Inc. 40% The Sidney ASC, LLC TN AmSurg Holdings, Inc. 51% The Bloomington ASC, LLC TN AmSurg Holdings, Inc. 51% The Union City ASC, LLC TN AmSurg Holdings, Inc. 51% The Cleveland ASC, LLC TN AmSurg Holdings, Inc. 51% The Milwaukee ASC, LLC TN AmSurg Holdings, Inc. 51% The Eye Care Network, LLC TN AmSurg Holdings, Inc. 51% The Alabama Eye Care Network, LLC TN AmSurg Holdings, Inc. 51% The Columbia ASC, LLC TN AmSurg Holdings, Inc. 51% The Wichita Orthopaedic ASC, LLC TN AmSurg Holdings, Inc. 51% The Minneapolis Endoscopy ASC, LLC TN AmSurg Holdings, Inc. 51% AmSurg Miami, Inc. TN AmSurg Corp. 100% The Miami ASC, L.P. TN AmSurg Miami, Inc. 70%
3 SUBSIDIARY LIST AS OF NOVEMBER 20, 1996 (PAGE 3 OF 4)
STATE OF OWNERSHIP NAME OF SUBSIDIARY ORGANIZATION OWNED BY PERCENTAGE - --------------------------------------------- ------------ ------------------------------ ------------ AmSurg North Platte, Inc. TN AmSurg Corp. 100% The North Platte ASC, L.P. TN AmSurg North Platte, Inc. 51% AmSurg Fort Collins, Inc. TN AmSurg Corp. 100% The Fort Collins ASC, L.P. TN AmSurg Fort Collins, Inc. 51% AmSurg Hanford, Inc. TN AmSurg Corp. 100% The Hanford ASC, L.P. TN AmSurg Hanford, Inc. 63% AmSurg Dallas, Inc. TN AmSurg Corp. 100% AmSurg Port Arthur, Inc. TN AmSurg Corp. 100% The Port Arthur ASC, L.P. TN AmSurg Port Arthur, Inc. 51% AmSurg Melbourne, Inc. TN AmSurg Corp. 100% The Melbourne ASC, L.P. TN AmSurg Melbourne, Inc. 51% AmSurg Chicago, Inc. TN AmSurg Corp. 100% The Chicago Endoscopy ASC, L.P. TN AmSurg Chicago, Inc. 51% AmSurg Hillmont, Inc. TN AmSurg Corp. 100% The Hillmont ASC, L.P. TN AmSurg Hillmont, Inc. 51% AmSurg Northwest Florida, Inc. TN AmSurg Corp. 100% The Northwest Florida ASC, L.P. TN AmSurg Northwest Florida, Inc. 51% AmSurg Palmetto, Inc. TN AmSurg Corp. 100% The Palmetto ASC, L.P. TN AmSurg Palmetto, Inc. 51% AmSurg Hallandale, Inc. TN AmSurg Corp. 100% The Hallandale Surgery ASC, L.P. TN AmSurg Hallandale, Inc. 51% AmSurg Ocala, Inc. TN AmSurg Corp. 100% The Ocala Endoscopy ASC, L.P. TN AmSurg Ocala, Inc. 51% AmSurg South Florida Network, Inc. TN AmSurg Corp. 100% The GI Network of South Florida, L.P. TN AmSurg South Florida Network, Inc. 51% AmSurg Largo, Inc. TN AmSurg Corp. 100% The Largo Urology ASC, L.P. TN AmSurg Largo, Inc. 40% AmSurg Dade County, Inc. TN AmSurg Corp. 100% Gastroenterology Group of South Florida TN AmSurg Dade County, Inc. 70%
4 SUBSIDIARY LIST AS OF NOVEMBER 20, 1996 (PAGE 4 OF 4)
STATE OF OWNERSHIP NAME OF SUBSIDIARY ORGANIZATION OWNED BY PERCENTAGE - ------------------------------------- -------------------- --------------------------- ------------ AmSurg Panama City, Inc. TN AmSurg Corp. 100% The Panama City Eye ASC, L.P. TN AmSurg Panama City, Inc. 51% AmSurg MEA, Inc. TN AmSurg Corp. 100%
EX-27 3 FINANCIAL DATA SCHEDULE
5 YEAR AUG-31-1996 SEP-01-1995 AUG-31-1996 13,989,848 0 7,922,084 0 0 24,062,728 16,979,495 4,711,066 78,204,610 8,995,755 0 0 0 7,986 41,603,103 78,204,610 0 60,609,341 0 45,967,734 3,926,858 0 827,821 9,886,928 1,358,000 3,259,621 0 0 0 3,259,621 .40 .40
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