<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended May 31, 2000
Commission File Number 000-19364
---------
AMERICAN HEALTHWAYS, INC.
-------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 62-1117144
------------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3841 Green Hills Village Drive, Nashville, TN 37215
-------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
615-665-1122
-------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of July 13, 2000 there were outstanding 8,234,780 shares of the Registrant's
Common Stock, par value $.001 per share.
<PAGE> 2
PART I.
ITEM 1. FINANCIAL STATEMENTS
AMERICAN HEALTHWAYS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
--------------------------------
May 31, August 31,
2000 1999
--------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,391,853 $13,501,016
Accounts receivable, net 6,314,539 5,333,695
Other current assets 1,642,338 1,240,071
Deferred tax asset 1,179,000 1,179,000
-----------------------------
Total current assets 12,527,730 21,253,782
-----------------------------
Property and equipment:
Leasehold improvements 2,424,446 408,458
Equipment 14,836,900 8,598,750
----------------------------
17,261,346 9,007,208
Less accumulated depreciation (4,717,655) (2,996,655)
-----------------------------
12,543,691 6,010,553
-----------------------------
Long-term deferred tax asset 2,123,000 2,123,000
-----------------------------
Other assets, net 756,230 543,408
-----------------------------
Excess of cost over net assets
of purchased companies, net 10,796,256 11,082,920
-----------------------------
$ 38,746,907 $ 41,013,663
=============================
</TABLE>
2
<PAGE> 3
AMERICAN HEALTHWAYS, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
-----------------------------
May 31, August 31,
2000 1999
-----------------------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 1,565,981 $ 1,095,232
Accrued salaries and benefits 2,580,863 2,951,041
Accrued liabilities 1,467,680 1,775,071
Income taxes payable 302,135 1,116,799
Current portion of other long-term liabilities 597,362 301,940
----------------------------
Total current liabilities 6,514,021 7,240,083
----------------------------
Other long-term liabilities 2,744,782 2,819,776
----------------------------
Stockholders' equity:
Common stock
$.001 par value, 15,000,000 shares
authorized, 8,218,569 and 8,461,772
shares outstanding 8,219 8,462
Additional paid-in capital 23,538,590 24,750,587
Retained earnings 5,941,295 6,194,755
----------------------------
Total stockholders' equity 29,488,104 30,953,804
----------------------------
$38,746,907 $41,013,663
============================
</TABLE>
3
<PAGE> 4
AMERICAN HEALTHWAYS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
------------------------------- ------------------------------
Three Months Ended May 31, Nine Months Ended May 31,
2000 1999 2000 1999
------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Revenues $ 11,617,059 $12,496,866 $ 37,895,361 $36,570,710
------------------------------ ------------------------------
Expenses:
Salaries and benefits 8,537,548 8,103,157 25,700,629 23,468,316
Other operating expenses 3,654,204 2,582,984 9,766,201 8,162,552
Depreciation and amortization 979,657 453,147 2,487,748 1,292,700
Interest 9,005 -- 14,243 256
------------------------------ ------------------------------
Total expenses 13,180,414 11,139,288 37,968,821 32,923,824
------------------------------ ------------------------------
Income (loss) before income taxes (1,563,355) 1,357,578 (73,460) 3,646,886
Income tax expense (benefit) (550,000) 567,000 180,000 1,534,000
------------------------------ ------------------------------
Net income (loss) $ (1,013,355) $ 790,578 $ (253,460) $ 2,112,886
============================== ==============================
Basic income (loss) per share $ (0.12) $ 0.09 $ (0.03) $ 0.26
============================== ==============================
Fully diluted income (loss) per share $ (0.12) $ 0.09 $ (0.03) $ 0.24
============================== ==============================
Weighted average common
shares and equivalents
Basic 8,228,388 8,393,828 8,280,806 8,277,892
Fully diluted 8,228,388 8,988,060 8,280,806 8,906,025
</TABLE>
4
<PAGE> 5
AMERICAN HEALTHWAYS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED MAY 31, 2000
<TABLE>
<CAPTION>
----------------------------------------------------------------
Additional
Common Paid-in Retained
Stock Capital Earnings Total
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, August 31, 1999 $ 8,462 $ 24,750,587 $ 6,194,755 $ 30,953,804
Repurchase of stock (263) (1,273,218) -- (1,273,481)
Exercise of stock options 20 61,221 61,241
Net income (loss) -- -- (253,460) (253,460)
----------------------------------------------------------------
Balance, May 31, 2000 $ 8,219 $ 23,538,590 $ 5,941,295 $ 29,488,104
================================================================
</TABLE>
5
<PAGE> 6
AMERICAN HEALTHWAYS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
--------------------------------
Nine Months Ended May 31,
2000 1999
--------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (253,460) $ 2,112,886
Income tax expense 180,000 1,534,000
--------------------------------
Income (loss) before income taxes (73,460) 3,646,886
Noncash expenses, revenues, losses and gains
included in income:
Depreciation and amortization 2,487,748 1,292,700
Increase in working capital items (1,589,931) (3,019,682)
Other noncash transactions 637,086 620,380
--------------------------------
1,461,443 2,540,284
Income taxes (net paid) (997,270) (1,021,700)
Increase in other assets (359,731) (320,831)
Payments on other long-term liabilities (252,227) (354,032)
--------------------------------
Net cash flows used in operating activities (147,785) 843,721
--------------------------------
Cash flows from investing activities:
Acquisition of property and equipment (8,707,896) (2,331,758)
--------------------------------
Net cash flows used in investing activities (8,707,896) (2,331,758)
--------------------------------
Cash flows from financing activities:
Exercise of stock options 19,999 960,797
Repurchase of stock (1,273,481) (453,750)
--------------------------------
Net cash flows from (used in)
financing activities (1,253,482) 507,047
--------------------------------
Net decrease in cash and cash equivalents (10,109,163) (980,990)
Cash and cash equivalents, beginning of period 13,501,016 13,243,571
--------------------------------
Cash and cash equivalents, end of period $ 3,391,853 $ 12,262,581
================================
</TABLE>
6
<PAGE> 7
AMERICAN HEALTHWAYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) INTERIM FINANCIAL REPORTING
The accompanying consolidated financial statements of American
Healthways, Inc. and its subsidiaries (the "Company") for the three and nine
month periods ended May 31, 2000 and 1999 are unaudited. However, in the opinion
of the Company, all adjustments consisting of normal, recurring accruals
necessary for a fair presentation, have been reflected therein.
On November 12, 1999, the Company's Board of Directors approved an
amendment to the Company's Restated Certificate of Incorporation, subject to
stockholder approval, to change the Company's name from American Healthcorp,
Inc. to American Healthways, Inc. The amendment was approved by the Company's
stockholders at the Annual Meeting of Stockholders on January 25, 2000.
Certain financial information which is normally included in financial
statements prepared in accordance with generally accepted accounting principles,
but which is not required for interim reporting purposes, has been omitted. The
accompanying consolidated financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended August 31, 1999.
(2) STOCK REPURCHASE
In March 2000, the Company's Board of Directors authorized the
repurchase and cancellation of up to 500,000 shares of the Company's common
stock. The authorization enables the Company to make repurchases from time to
time in open market and private transactions prior to March 1, 2002. As of May
31, 2000, the Company had repurchased 37,900 shares at a cost of $153,557
pursuant to this authorization.
In January 1998, the Company's Board of Directors authorized the
repurchase and cancellation of up to 400,000 shares of the Company's common
stock. The authorization enabled the Company to make repurchases from time to
time in open market and private transactions prior to January 1, 2000. As of the
expiration of this authorization on January 1, 2000, the Company had repurchased
361,987 shares at a cost of $2,283,118.
(3) BUSINESS SEGMENTS
American Healthways, Inc. provides specialized, comprehensive disease
management services designed to improve the quality and lower the cost of
healthcare for people with one or more chronic diseases such as diabetes,
cardiac disease and respiratory disease. The Company is a national provider of
diabetes disease management services to hospitals and health plans and has also
recently developed and entered into its initial contract to provide cardiac
disease and respiratory disease management programs for enrollees of health
plans. The Company's reportable segments are the types of customers, hospital or
health plan, who contract for the Company's services. The segments are managed
separately and the Company evaluates performance of the respective segments
based on operating profits. Because the Company's services are similar for both
types of customers, the Company supports both segments with common human
resources, clinical, marketing and information technology resources.
7
<PAGE> 8
The accounting policies of the segments are the same as the policies
used for the Company's consolidated financial statements. There are no
intersegment sales. Income before income taxes by operating segment excludes
interest income, interest expense and general corporate expenses.
Summarized financial information by business segment is as follows:
<TABLE>
<CAPTION>
------------------------------- -------------------------------
Three months ended May 31, Nine months ended May 31,
2000 1999 2000 1999
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Revenues:
Health plan contracts $ 6,410,783 $ 7,050,147 $ 22,384,009 $ 19,320,177
Hospital contracts 5,120,843 5,302,570 15,141,615 16,832,085
Other revenue 85,433 144,149 369,737 418,448
------------------------------- -------------------------------
$ 11,617,059 $ 12,496,866 $ 37,895,361 $ 36,570,710
=============================== ===============================
Income (loss) before income taxes:
Health plan contracts $ (440,296) $ 1,614,436 $ 2,418,503 $ 4,520,307
Hospital contracts 1,408,633 1,559,512 4,174,172 4,801,098
Shared support services (1,938,442) (1,336,704) (5,037,199) (4,051,262)
------------------------------- -------------------------------
Total segments (970,105) 1,837,244 1,555,476 5,270,143
General corporate expenses (593,250) (479,666) (1,628,936) (1,623,257)
------------------------------- -------------------------------
$ (1,563,355) $ 1,357,578 $ (73,460) $ 3,646,886
=============================== ===============================
</TABLE>
(4) STOCKHOLDER RIGHTS PLAN
On June 19, 2000, the Company's Board of Directors adopted a
stockholder rights plan under which holders of common stock as of June 30, 2000
will receive preferred stock purchase rights as a dividend at the rate of one
right per share. Each right will initially entitle its holder to purchase one
one-hundredth of a new Series A preferred share at $32 each, subject to
adjustment. Upon becoming exercisable, each Right will allow the holder (other
than the person or group whose actions has triggered the exercisability of the
Rights), under alternative circumstances, to buy either securities of American
Healthways or securities of the acquiring Company (depending on the form of the
transaction) having a value of twice the then current exercise price of the
Rights. With certain exceptions, each right will become exercisable only when a
person or group acquires, or commences a tender or exchange offer for, 15% or
more of the company's common shares outstanding. Rights will also become
exercisable in the event of certain mergers or asset sales involving more than
50% of the Company's assets or earning power. The rights will expire on June 19,
2010.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
American Healthways, Inc. (the "Company"), a corporation formed in
1981, provides specialized, comprehensive disease management services designed
to improve the quality and lower the cost of healthcare for people with one or
more chronic diseases such as diabetes, cardiac disease and respiratory disease.
The Company is a national provider of diabetes disease management services to
hospitals and health plans and has also recently developed and entered into its
initial contract to provide cardiac disease and respiratory disease management
programs for enrollees of health plans.
Management's Discussion and Analysis of Financial Condition and Results
of Operations contains forward-looking statements which are based upon current
expectations and involve a number of risks and uncertainties. In order for the
Company to utilize the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, investors are hereby cautioned that these
statements may be affected by the important factors, among others, set forth
below, and consequently, actual operations and results may differ materially
from those expressed in these forward-looking statements. The important factors
include: the Company's ability to renew and/or maintain contracts with its
customers under existing terms or restructure these contracts on terms that
would not have a material negative impact on the Company's results of
operations; the Company's ability to execute new contracts for health plan
diabetes, cardiac and respiratory disease management services and for
hospital-based diabetes services; the risks associated with a significant
concentration of the Company's revenues with a small number of health plan
customers; the Company's ability to effect estimated cost savings and clinical
outcome improvements under health plan contracts and reach mutual agreement with
customers with respect to cost savings, or to effect such savings and
improvements within the time frames contemplated by the Company; the ability of
the Company's health plan customers to provide timely and accurate data that is
essential to the operation and measurement of its performance under the terms of
its health plan contracts; the Company's ability to implement on a cost
effective and timely basis its expansion of its information technology
capabilities in connection with the growth in its business and its Internet
communication strategy; the ability of the Company to negotiate favorable fee
structures with health plans; unusual and unforeseen patterns of healthcare
utilization by individuals with diabetes, cardiac and respiratory disease in the
health plans with which the Company has executed a disease management contract;
the ability of the health plans to maintain the number of covered lives enrolled
in the plans during the terms of the agreements between the health plans and the
Company; the Company's ability to implement its backlog of contracted lives
within anticipated time frames contemplated by the Company; the Company's
ability to successfully implement its cardiac and respiratory disease management
programs; the Company's ability to attract and/or retain and effectively manage
the employees required to implement its agreements with hospitals and health
plan organizations; the impact of existing and any future litigation or judicial
or administrative proceedings; and the impact of future state and federal
healthcare legislation and regulations on the ability of the Company to deliver
its services or on the financial health of the Company's customers and their
willingness to purchase the Company's services. The Company undertakes no
obligation to update or revise any such forward-looking statements.
9
<PAGE> 10
The following table sets forth the sources of the Company's revenues by
customer type as a percentage of total revenues for the three and nine months
ended May 31, 2000 and 1999.
<TABLE>
<CAPTION>
--------------------- --------------------
Three months ended Nine months ended
May 31, May 31,
2000 1999 2000 1999
------------------- -------------------
<S> <C> <C> <C> <C>
Health plan contracts 55% 56% 59% 53%
Hospital contracts 44 43 40 46
Other 1 1 1 1
------------------ ------------------
100% 100% 100% 100%
================== ==================
</TABLE>
Revenue growth from the Company's health plan disease management
business as well as reductions in revenue from its hospital contract business
have resulted in the increasing proportion of the Company's revenue that is
derived from its health plan operations.
The Company's disease management services are designed to assist health
plans in reducing the total costs and improving the quality of care for
individuals enrolled in their plans with chronic conditions such as diabetes,
cardiac disease and respiratory disease. The Company believes that a substantial
portion of its future revenue growth will result from disease management
contracts with health plans.
The Company's disease management services for health plans are designed
to meet the needs of individual health plan customers. Services range from
telephone and mail contacts directed primarily to enrollees with targeted
diseases that can be provided from a centralized operations call center to
services that also include providing local personnel resources to address acute
episode interventions as well as coordination of care with local healthcare
providers. The fees charged by the Company vary according to the level of
service being provided under each of its health plan customer contracts. These
contracts are generally for terms of three years with provisions for subsequent
renewal and typically provide that between 15% and 100% of the Company's fees
are at risk subject to the Company's performance against clinical and financial
cost savings criteria. The Company records revenue from its performance-based
health plan contracts based on its estimates of expected performance under these
contracts and adjusts these estimates as additional data necessary to determine
performance becomes available.
Beginning with the third quarter of fiscal 2000, the Company will
present the number of lives in its health plan disease management programs using
"equivalent" lives. Because the Company's new cardiac healthways(SM) and
respiratory healthways(SM) programs have per member per month fee revenues that
are generally higher than the fees for lives under its diabetes healthways(SM)
program, health plan equivalent lives, for comparative purposes, represents the
conversion of cardiac and respiratory lives to an approximate revenue equivalent
of diabetes lives. The Company anticipates that the average contribution
percentage margin under all programs will be approximately the same.
As of May 31, 2000, the Company had contracts with 15 health plans to
provide disease management services in 53 health plan markets compared with
contracts with seven health plans in 35 markets as of May 31, 1999. The number
of covered equivalent lives under management pursuant to these contracts which
were in operation as of May 31, 2000 and May 31, 1999 was 146,615 and 97,984,
10
<PAGE> 11
respectively. Covered equivalent lives at May 31, 2000 do not include
approximately 49,000 equivalent contract lives under executed health plan
contracts that are scheduled for implementation subsequent to May 31, 2000,
primarily during the quarter ending August 31, 2000.
Disease management contracts require a sophisticated management
information system to enable the Company to manage the care of large populations
of patients with diabetes, cardiac disease and respiratory disease and to assist
in reporting outcomes and costs. The Company has developed a clinical management
system which it believes meets its information management needs for its diabetes
population management services and has installed and is utilizing the system for
the enrollees of each of its health plan contract customers. During the current
fiscal year this system has been upgraded to enable the system to handle
additional diseases other than diabetes from a common platform and to increase
the Company's call center capabilities and efficiency with the installation of
state-of-the-art dialing, call routing, and information access technologies. The
Company has also developed an Internet-based enrollee and provider communication
capability for one of its health plan customers. The Company anticipates
expansion of this capability to other customers as well as enhancement of the
capabilities of its Internet communication technology. Installation of these
upgrades to this system began during January 2000 and will continue through the
remainder of fiscal 2000. The capital expenditures required during fiscal 2000
to upgrade the Company's information technology capability and to add future
covered life service capacity through the completion of centralized call centers
in Phoenix, Arizona, Pittsburgh, Pennsylvania and Honolulu, Hawaii are estimated
to total approximately $7.0 million. Approximately $5.5 million of these
expenditures were made during the nine months ended May 31, 2000. In addition,
during the three months and nine months ended May 31, 2000, the Company recorded
expenses of approximately $100,000 and $300,000, respectively, for the
write-down of equipment and other costs related to the closing of certain health
plan service locations all associated with the implementation of the Company's
new information technology platform.
Effective January 1, 2000, the Company and one of its largest health
plan customers restructured its contract, the effect of which was to materially
reduce the revenues and net income the Company derives from this contract from
historical levels. The full ongoing impact of this restructuring had a material
negative impact on the Company's revenues and net income during the quarter
ended May 31, 2000.
During the quarter ended May 31, 2000, the Company recorded a negative
revenue adjustment of approximately $1.0 million to provide for the settlement
of a billing misunderstanding due to lack of clarity in contracts with two of
its health plan customers relating to conditions under which enrollees of these
plans were eligible to participate in the Company's disease management programs.
This estimated settlement relates primarily to the initial enrollment periods in
two of the Company's older disease management contracts. In the Company's newer
disease management contracts, these eligibility issues are more clearly defined
than in the older contracts subject to this revenue adjustment.
The Company's hospital-based diabetes treatment centers are located in
and operated under contracts with general acute care hospitals. The primary goal
of each center is to create a center of excellence for the treatment of diabetes
in the community in which it is located and thereby increase the hospital's
market share of diabetes patients and lower the hospital's cost of providing
services to this population. Fee structures under the hospital contracts consist
of either fixed management fees, incentive-based fees or a combination thereof.
Incentive arrangements generally provide for fee payments to the Company based
on changes in the client hospital's market share of diabetes inpatients and the
costs of providing care to these patients. The form of these contracts includes
various structures
11
<PAGE> 12
ranging from arrangements where all costs of the Company program for center
professional personnel, medical director fees and community relations are the
responsibility of the Company to structures where all Company program costs are
the responsibility of the client hospital.
As of May 31, 2000, the Company had 54 hospital contracts to provide
services at 69 hospital sites compared with 58 contracts at 77 hospital sites as
of May 31, 1999. The number of hospital contracts and hospital sites for the May
31, 2000 period includes one Arthritis and Osteoporosis Care Center ("AOCC")
contract with a hospital to provide comprehensive arthritis and osteoporosis
services that are operated by the Company. The May 31, 1999 period includes two
AOCC contracts with hospitals to provide comprehensive arthritis and
osteoporosis services that were operated by the Company.
The components of changes to the total number of hospital contracts and
hospital sites under these contracts for the three and nine months ended May 31,
2000 and May 31, 1999 are presented below.
<TABLE>
<CAPTION>
----------------------------------------------------
Three months ended May 31,
2000 1999
----------------------------------------------------
Contracts Sites Contracts Sites
---------------------- -------------------------
<S> <C> <C> <C> <C>
Total contracts/sites at
beginning of period 54 68 57 74
New contracts/sites signed 2 3 3 5
Contracts/sites discontinued (2) (2) (2) (2)
-------------------- ----------------------
Total contracts/sites at end
of period 54 69 58 77
==================== =======================
<CAPTION>
----------------------------------------------------
Nine months ended May 31,
2000 1999
----------------------------------------------------
Contracts Sites Contracts Sites
----------------------- ------------------------
<S> <C> <C> <C> <C>
Total contracts/sites at
beginning of period 58 72 57 72
New contracts/sites signed 8 9 7 17
Converted to health
plan contract (1) (1) -- --
Contracts/sites discontinued (11) (11) (6) (12)
-------------------- ----------------------
Total contracts/sites at end
of period 54 69 58 77
==================== ======================
</TABLE>
During the three month period ended May 31, 2000, one contract was
renewed for the Company's hospital-based diabetes treatment centers. During the
remainder of fiscal 2000, eight contracts are eligible to be terminated under
the terms of the contracts with the hospitals.
12
<PAGE> 13
The Company periodically renegotiates existing 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 contract restructurings which will
continue to have a negative impact on the Company's revenues and profitability.
The hospital industry is currently experiencing pressures on its
profitability as a result of constrained revenues from governmental and private
revenue sources as well as from increasing underlying medical care costs. The
Company believes that these pressures will continue. While the Company believes
that its products are geared specifically to assist hospitals in controlling the
high costs associated with the treatment of chronic diseases, the pressures to
reduce costs immediately may have a negative effect, in certain circumstances,
on the ability of or the length of time required by the Company to sign new
hospital contracts as well as on the Company's ability to retain hospital
contracts. This focus on cost reduction may also result in a continuation of
contract restructurings that reduce the fees paid to the Company for the
Company's services. While the Company believes that the overall environment for
hospitals may become somewhat more positive as a result of Medicare
reimbursement relief that has been granted for hospitals through recently passed
federal legislation, there can be no assurance that these financial pressures
will not continue to have a negative impact on the Company's hospital contract
operations.
The Company's strategy is to develop additional relationships with
health plans for disease management services and to further develop and expand
its hospital-based diabetes treatment center business. It is the Company's
strategy to provide health plans with programs that address the needs of
enrollees with diabetes, cardiac and/or respiratory disease and to support the
management of these diseases from a common clinical, information technology and
business platform. The Company anticipates that it will utilize its
state-of-the-art call center and medical information technologies to gain a
competitive advantage in delivering its health plan disease management services.
On June 19, 2000, the Company's Board of Directors adopted a
stockholder rights plan under which holders of common stock as of June 30, 2000
will receive preferred stock purchase rights as a dividend at the rate of one
right per share. Each right will initially entitle its holder to purchase one
one-hundredth of a new Series A preferred share at $32 each, subject to
adjustment. With certain exceptions, each right will become exercisable only
when a person or group acquires, or commences a tender or exchange offer for,
15% or more of the Company's common shares outstanding. Rights will also become
exercisable in the event of certain mergers or asset sales involving more than
50% of the Company's assets or earning power. The rights will expire on June 19,
2010.
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 a wholly-owned subsidiary of the Company, American Healthways
Services, Inc. ("AHSI"), formerly Diabetes Treatment Centers of America, Inc.,
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, AHSI, 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,
13
<PAGE> 14
and the complaint was unsealed on February 10, 1995. As a result of the
resolution of preliminary motions in this case, the Company was dismissed as a
defendant. AHSI remains as a defendant. Currently, the case is still in the
discovery stage and has not yet been set for trial.
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.
RESULTS OF OPERATIONS
Revenues for the three and nine month periods ended May 31, 2000
decreased 7% and increased 4%, respectively, over the same periods in 1999.
Revenues were impacted by an increase in the average number of equivalent lives
enrolled in the Company's health plan disease management contracts to
approximately 139,000 and 129,000 equivalent lives, respectively, for the three
and nine month periods ended May 31, 2000 from approximately 90,000 and 83,000
equivalent lives, respectively, for the comparable three and nine month periods
during the prior year. This increase in equivalent lives under management was
primarily the result of additional sites being added at health plan contracts
with existing customers as well as from new contracts signed during fiscal 1999
and fiscal 2000. The average revenue per member per month for enrollees under
the Company's health plan contracts was 41% and 26% less during the three and
nine month periods ended May 31, 2000, respectively, than during the prior year
periods. This decrease in average per member per month revenue occurred
primarily as a result of the non-recurring negative revenue adjustment recorded
during the quarter ended May 31, 2000 related to the anticipated resolution of
billing eligibility issues with two health plan customers and also as a result
of the full impact during the quarter of reduced revenues from a contract with
one of the Company's health plan customers which was restructured during the
quarter ended February 29, 2000. The average revenues per equivalent life for
the three and nine month periods ended May 31, 2000 were also lower than during
the prior period as a result of a greater mix of equivalent lives from new
contracts with lower service intensity levels during the fiscal 2000 periods
compared with the fiscal 1999 periods. Revenues from the Company's hospital
contract operations for the three and nine month periods ended May 31, 2000 were
3% and 10% less, respectively, than hospital contract revenues for the
comparable periods last year primarily as a result of a fewer average number of
contracts in operation during the fiscal 2000 periods and, for the nine months
ended May 31, 2000, from a reduction in average revenue per contract in
operation. This reduction in hospital revenue per contract is due primarily to
contract fee reductions and to a greater mix of relatively newer contracts with
lower fees than contracts that were discontinued since the comparable period in
the prior fiscal year. The Company anticipates that revenues during the fourth
quarter of fiscal 2000 will increase over the comparable prior period quarter
primarily as a result of additional equivalent lives to be added under new
disease management contracts with health plans offset by the impact of lower
revenues from the restructuring of one of its health plan customer contracts and
by lower revenues from its hospital contract operations.
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Salaries and benefits for the three and nine month periods ended May
31, 2000 increased 5% and 10%, respectively, primarily from higher staffing
levels associated with increases in the number of equivalent lives enrolled in
the Company's health plan contracts, the opening of new health plan call center
service locations and increased staffing associated with the upgrades being made
in the Company's information technology platform. Salaries and benefits as a
percentage of revenues increased to 74% and 68%, respectively, for the three and
nine month periods ended May 31, 2000 from 65% and 64%, respectively, for the
comparable periods last year primarily as a result of higher staffing levels at
its health plan contract operations. The Company anticipates salaries and
benefits expense to increase during the remainder of fiscal 2000 compared with
fiscal 1999 primarily as a result of increased staff required for expected
increases in the number of equivalent lives enrolled under the Company's health
plan contracts.
Other operating expenses for the three and nine month periods ended May
31, 2000 increased 42% and 20%, respectively, from the comparable periods last
year. The increase for the periods was primarily the result of higher operating
costs at its health plan operations, including costs related to implementing the
Company's new information technology platform and adding new call center
operating capacity. Other operating expenses as a percentage of revenues
increased to 32% for the three month period ended May 31, 2000 from 21% for the
comparable period last year primarily as a result of higher operating costs
associated with its health plan contract operations during the fiscal 2000
quarter. Other operating costs as a percentage of revenues was 26% for the nine
months ended May 31, 2000 compared with 22% for the comparable period last year.
The Company anticipates other operating expenses will increase during the
remainder of fiscal 2000 compared with fiscal 1999 primarily as a result of
increased costs associated with anticipated increases during the quarter ending
August 31, 2000 in the number of equivalent lives enrolled under the Company's
health plan contracts as well as from increased expenses associated with
improvements and expansion of the Company's information technology capabilities.
The increase in depreciation and amortization expense to $979,657 and
$2.5 million, respectively, for the three and nine month periods ended May 31,
2000 from $453,147 and $1.3 million for the comparable periods last year
resulted principally from increased depreciation expense associated with
equipment and computer-related capital expenditures for the Company's disease
management operations for health plans. The Company anticipates depreciation and
amortization expense to increase during the remainder of fiscal 2000 compared
with fiscal 1999 primarily as a result of capital expenditures associated with
expected increases in the number of covered equivalent lives enrolled under the
Company's health plan contracts as well as from growth and improvement in the
Company's information technology capabilities.
The Company's income tax benefit for the three month period ended May
31, 2000 was $550,000 and income tax expense for the nine month period ended May
31, 2000 was $180,000, respectively, compared to expense of $567,000 and $1.5
million for the comparable periods last year. The decrease in the income tax
expense between these periods resulted primarily from a decrease in
profitability. The differences between the statutory federal income tax rate of
34% and the Company's effective tax rates during both periods are due to the
impact of certain non-deductible expenses, primarily the amortization of excess
costs over net assets of purchased companies which are not deductible for income
tax purposes, and the impact of state income taxes.
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LIQUIDITY AND CAPITAL RESOURCES
Operating activities for the nine months ended May 31, 2000 used
$147,785 in cash flow. Investing activities during this period used $8.7 million
in cash which consisted of the acquisition of property and equipment primarily
associated with improvements in its health plan information technology
capabilities and with increases in its central call center service capacity and
also associated with leasehold improvements and other costs related to the
Company's relocated and expanded corporate and primary support office location
in Nashville, Tennessee. Financing activities for the nine months ended May 31,
2000 used $1.3 million in cash flow primarily resulting from the Company's
repurchase of its common stock.
In early January 2000, the Company executed a financing agreement with
a financial institution which provides the Company with up to $6 million in
borrowing capacity under a credit facility that expires in January 2002.
Borrowings under this agreement bear interest at 2.5% above LIBOR, are secured
by the Company's accounts receivable and contract rights and are guaranteed by
the Company's subsidiaries. The agreement also contains various financial
covenants and limits the amount of any future repurchases of the Company's
common stock. As of May 31, 2000, there were no borrowings outstanding under
this agreement.
The Company believes that cash flow from operating activities, its
available cash balances of $3.4 million at May 31, 2000 and available credit
under its financing agreement will continue to enable the Company to fund its
working capital needs and capital expenditures associated with its remaining
information technology improvements and health plan service capacity expansion.
Remaining commitments for capital expenditures associated with these projects
total approximately $1.5 million and are expected to be completed primarily
during the quarter ending August 31, 2000.
During March 2000, the Company's Board of Directors authorized the
repurchase of up to 500,000 shares of the Company's common stock. The
authorization enables the Company to make repurchases from time to time in open
market and private transactions prior to March 1, 2002. As of May 31, 2000, the
Company had repurchased 37,900 shares at a cost of $153,557 pursuant to this
authorization.
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PART II
ITEM 1. Legal Proceedings.
In November 1994, the Company received an administrative subpoena
for documents from a regional office of the Office of the Inspector
General ("OIG") of the Department of Health and Human Services in
connection with an investigation of a wholly-owned subsidiary of the
Company, American Healthways Services, Inc. ("AHSI"),formerly
Diabetes Treatment Centers of America, Inc., 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, AHSI, and certain named and unnamed
medical directors and client hospitals and was kept under seal to
permit the government to determine whether to take over the lawsuit.
Following its review, the government made the determination not to
take over the litigation, and the complaint was unsealed on February
10, 1995. As a result of the resolution of preliminary motions in
this case, the Company was dismissed as a defendant. AHSI remains as
a defendant. Currently, the case is still in the discovery stage and
has not yet been set for trial.
The Company has cooperated fully with the OIG in its investigation,
and believes that its operations have been conducted in full
compliance with applicable statutory requirements. Although there
can be no assurance that the existence of, or the results of, the
investigation would not have a material adverse effect on the
Company, the Company believes that the resolution of issues, if any,
which may be raised by the government and the resolution of the
civil litigation would not have a material adverse effect on the
Company's financial position or results of operations except to the
extent that the Company incurs material legal expenses associated
with its defense of this matter and the civil suit.
ITEM 2. Changes in Securities and Use of Proceeds.
On June 19, 2000, the Board of Directors of the Company declared a
dividend of one stock purchase right (a "Right") per share of the
Company's common stock, $.001 par value per share (the "Common
Stock"), outstanding on June 30, 2000 (the "Record Date"). A Right
will also accompany each share of Common stock issued following a
Record Date. Each Right, when it first becomes exercisable, entitles
the holder to purchase from the Company one-hundredth of one share
of preferred stock, $.001 par value per share, at an initial
exercise price of $32.00 per one-hundredth of one share, subject to
adjustment. The terms and conditions of the Rights are set forth in
a Rights Agreement dated as of June 19, 2000, between the Company
and SunTrust Bank, as Rights Agent, as more fully described in the
Company's Current Report on Form 8-K, as filed with the Securities
and Exchange Commission on June 21, 2000.
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ITEM 3. Defaults Upon Senior Securities.
Not Applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders.
Not Applicable
ITEM 5. Other Information.
Not Applicable.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 First Amendment to Credit Agreement between American
Healthways, Inc. and SunTrust Bank dated May 12, 2000
10.2 Amendment Agreement between American Healthways
Services, Inc., American Healthways Management, Inc.,
Arthritis and Osteoporosis Care Center, Inc. and
SunTrust Bank dated May 12, 2000
27. Financial Data Schedule
(b) Reports on Form 8-K
There have been no reports on Form 8-K filed during the quarter for
which this report is filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
American Healthways, Inc.
-----------------------------------
(Registrant)
Date July 17, 2000 By /s/ Henry D. Herr
---------------- -----------------------------------
HENRY D. HERR
Executive Vice President
Finance and Administration
(Principal Financial Officer)
Date July 17, 2000 By /s/ David A. Sidlowe
---------------- -----------------------------------
DAVID A. SIDLOWE
Senior Vice President
and Controller
(Principal Accounting Officer)
19
