<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 February 29, 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)
American Healthcorp, Inc.
-------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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 April 10, 2000 there were outstanding 8,222,257 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>
-------------------------------------
February 29, August 31,
2000 1999
-------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,765,291 $ 13,501,016
Accounts receivable, net 5,874,940 5,333,695
Other current assets 1,981,878 1,240,071
Deferred tax asset 1,179,000 1,179,000
-------------------------------------
Total current assets 15,801,109 21,253,782
-------------------------------------
Property and equipment:
Leasehold improvements 2,039,848 408,458
Equipment 11,990,322 8,598,750
-------------------------------------
14,030,170 9,007,208
Less accumulated depreciation (3,893,116) (2,996,655)
-------------------------------------
10,137,054 6,010,553
-------------------------------------
Long-term deferred tax asset 2,123,000 2,123,000
-------------------------------------
Other assets, net 715,328 543,408
-------------------------------------
Excess of cost over net assets
of purchased companies, net 10,891,810 11,082,920
-------------------------------------
$ 39,668,301 $ 41,013,663
====================================
</TABLE>
2
<PAGE> 3
AMERICAN HEALTHWAYS, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
-------------------------------------
February 29, August 31,
2000 1999
-------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 1,251,026 $ 1,095,232
Accrued salaries and benefits 1,972,390 2,951,041
Accrued liabilities 1,453,604 1,775,071
Income taxes payable 1,156,375 1,116,799
Current portion of other long-term liabilities 597,362 301,940
------------------------------------
Total current liabilities 6,430,757 7,240,083
------------------------------------
Other long-term liabilities 2,595,927 2,819,776
------------------------------------
Stockholders' equity:
Common stock
$.001 par value, 15,000,000 shares
authorized, 8,248,947 and 8,461,772
shares outstanding 8,249 8,462
Additional paid-in capital 23,678,718 24,750,587
Retained earnings 6,954,650 6,194,755
------------------------------------
Total stockholders' equity 30,641,617 30,953,804
------------------------------------
$ 39,668,301 $ 41,013,663
====================================
</TABLE>
3
<PAGE> 4
AMERICAN HEALTHWAYS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
------------------------- -------------------------
Three Months Ended Six Months Ended
February 29/28, February 29/28,
------------------------- -------------------------
2000 1999 2000 1999
------------------------- -------------------------
<S> <C> <C> <C> <C>
Revenues $13,213,223 $12,238,955 $26,278,302 $24,073,844
------------------------- -------------------------
Expenses:
Salaries and benefits 8,637,424 7,877,997 17,163,081 15,365,159
Other operating expenses 3,243,153 2,690,777 6,111,997 5,579,568
Depreciation and amortization 841,446 434,567 1,508,091 839,553
Interest 5,238 -- 5,238 256
------------------------- -------------------------
Total expenses 12,727,261 11,003,341 24,788,407 21,784,536
------------------------- -------------------------
Income before income taxes 485,962 1,235,614 1,489,895 2,289,308
Income tax expense 311,000 519,000 730,000 967,000
------------------------- -------------------------
Net income $ 174,962 $ 716,614 $ 759,895 $ 1,322,308
========================= =========================
Basic income per share $ 0.02 $ 0.09 $ 0.09 $ 0.16
========================================================
Fully diluted income per share $ 0.02 $ 0.08 $ 0.09 $ 0.15
========================================================
Weighted average common
shares and equivalents
Basic 8,243,191 8,291,652 8,307,016 8,219,924
Fully diluted 8,566,304 9,045,549 8,674,397 8,865,008
</TABLE>
4
<PAGE> 5
AMERICAN HEALTHWAYS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED FEBRUARY 29, 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 (225) (1,119,699) -- (1,119,924)
Exercise of stock options 12 47,830 47,842
Net income -- -- 759,895 759,895
-----------------------------------------------------
Balance, February 29, 2000 $ 8,249 $ 23,678,718 $6,954,650 $ 30,641,617
=====================================================
</TABLE>
5
<PAGE> 6
AMERICAN HEALTHWAYS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
--------------------------------
Six Months Ended February 29/28,
2000 1999
--------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 759,895 $ 1,322,308
Income tax expense 730,000 967,000
--------------------------------
Income before income taxes 1,489,895 2,289,308
Noncash expenses, revenues, losses and gains
included in income:
Depreciation and amortization 1,508,091 839,553
Increase in working capital items (2,427,376) (3,610,369)
Other noncash transactions 421,199 498,979
--------------------------------
991,809 17,471
Income taxes (net paid) (693,030) (579,521)
Increase in other assets (270,991) (70,614)
Payments on other long-term liabilities (242,074) (353,300)
--------------------------------
Net cash flows used in operating activities (214,286) (985,964)
--------------------------------
Cash flows from investing activities:
Acquisition of property and equipment (5,408,115) (1,435,754)
--------------------------------
Net cash flows used in investing activities (5,408,115) (1,435,754)
--------------------------------
Cash flows from financing activities:
Exercise of stock options 6,600 648,295
Repurchase of stock (1,119,924) --
--------------------------------
Net cash flows used in financing
activities (1,113,324) 648,295
--------------------------------
Net decrease in cash and cash equivalents (6,735,725) (1,773,423)
Cash and cash equivalents, beginning of period 13,501,016 13,243,571
--------------------------------
Cash and cash equivalents, end of period $ 6,765,291 $ 11,470,148
================================
</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 six
month periods ended February 29, 2000 and February 28, 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. During
December 1999, the Company utilized the name American Healthways as a "doing
business as" name for American Healthcorp pending approval of the proposed
amendment.
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.
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
7
<PAGE> 8
Company's services are similar for both types of customers, the Company supports
both segments with common human resources, clinical, marketing and information
technology resources.
The accounting policies of the segments are the same as 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 Six months ended
February 29/28, February 29/28,
2000 1999 2000 1999
--------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Revenues:
Health plan contracts $ 7,997,227 $ 6,499,100 $ 15,973,226 $ 12,270,029
Hospital contracts 5,081,995 5,614,375 10,020,772 11,529,516
Other revenue 134,001 125,480 284,304 274,299
--------------------------------- --------------------------------
$ 13,213,223 $ 12,238,955 $ 26,278,302 $ 24,073,844
--------------------------------- --------------------------------
Income before income taxes:
Health plan contracts $ 1,233,922 $ 1,492,401 $ 2,858,799 $ 2,905,871
Hospital contracts 1,416,388 1,567,279 2,765,539 3,241,586
Shared support services (1,581,954) (1,253,102) (3,098,757) (2,714,558)
--------------------------------- --------------------------------
Total segments 1,068,356 1,806,578 2,525,581 3,432,899
General corporate expenses (582,394) (570,964) (1,035,686) (1,143,591)
--------------------------------- --------------------------------
$ 485,962 $ 1,235,614 $ 1,489,895 $ 2,289,308
================================= ================================
</TABLE>
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.
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. During
December 1999, the Company utilized the name American Healthways as a "doing
business as" name for American Healthcorp pending approval of the proposed
amendment.
8
<PAGE> 9
Management's Discussion and Analysis of Financial Condition and Results
of Operations contains forward-looking statements which are based upon current
expectations and involve a number of risks and uncertainties. In order for the
Company to utilize the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, investors are hereby cautioned that these
statements may be affected by the important factors, among others, set forth
below, and consequently, actual operations and results may differ materially
from those expressed in these forward-looking statements. The important factors
include: the Company's ability to renew and/or maintain contracts with its
customers under existing terms or restructure these contracts on terms that
would not have a material negative impact on the Company's results of
operations; the Company's ability to execute contracts for health plan diabetes,
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 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.
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 six months
ended February 29, 2000 and February 28, 1999.
<TABLE>
<CAPTION>
------------------- ----------------
Three months ended Six months ended
February 29/28, February 29/28,
2000 1999 2000 1999
------------------- ----------------
<S> <C> <C> <C> <C>
Health plan contracts 61% 53% 61% 51%
Hospital contracts 38 46 38 48
Other 1 1 1 1
------------------- ----------------
100% 100% 100% 100%
=================== ================
</TABLE>
The Company's revenue growth for the three and six month periods ended
February 29, 2000 compared to the three and six month periods ended February 28,
1999 resulted primarily from the growth in the Company's health plan diabetes
disease management 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
9
<PAGE> 10
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 50% of the per member per
month fee is at risk subject to the Company's performance against clinical and
financial cost savings criteria. Because the Company's cardiac disease and
respiratory disease management products are new to the industry and to our
health plan customers, the Company anticipates that it may have to assume more
performance risk and risk regarding the manner in which cost savings are
determined in some of its initial cardiac and respiratory disease contracts than
the Company has assumed in its current diabetes disease management contracts.
As of February 29, 2000, the Company had contracts with 13 health plans
to provide disease management services in 51 health plan markets compared with
contracts with seven health plans in 35 markets as of February 28, 1999. The
number of covered lives under management pursuant to these contracts which were
implemented as of February 29, 2000 and February 28, 1999 is 127,786 and 84,677,
respectively, all of which were covered lives for diabetes services. Covered
lives at February 29, 2000 do not include approximately 29,000 contract lives
under existing contracts that are scheduled for implementation subsequent to
February 29, 2000. Of these lives, approximately 26,000 are diabetes, 2,000 are
cardiac lives and 1,000 are respiratory lives. In addition, the Company is
currently in the final stages of negotiating contracts with three new health
plan customers covering approximately 26,000 additional lives. Of these lives,
approximately 24,000 are diabetes and 2,000 are cardiac lives.
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. This system is
currently being upgraded to enable the system to handle additional diseases
other than diabetes from a common platform and to increase the Company's call
center capabilities and efficiency with the installation of state-of-the-art
dialing, call routing, and information access technologies. The Company has also
recently developed an Internet-based enrollee and provider communication
capability for one of its health plan customers. The Company anticipates
expansion of this capability to other customers as well as enhancement of the
capabilities of its Internet communication technology. Installation of these
upgrades to this system began during January 2000 and will continue through the
remainder of fiscal 2000. The capital expenditures estimated to be required
during fiscal 2000 to upgrade the Company's information technology capability,
to complete call centers in Phoenix, Arizona and in Pittsburgh, Pennsylvania and
to add the number of lives currently under contract totals approximately $5.2
million. Approximately $3.0 million of these expenditures were made during the
six months ended February 29, 2000.
Effective as of December 31, 1999, the Company and a health plan
customer mutually decided to terminate a pilot program contract begun during
fiscal 1998 covering approximately 3,000 lives. The Company also provides
diabetes disease management services to this customer at other locations, which
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<PAGE> 11
have not been affected by this pilot project termination. The loss of this
contract is not expected to have a negative impact upon the Company's net income
in fiscal 2000.
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. This
restructuring had a material negative impact on the Company's revenues and net
income during the quarter ended February 29, 2000, however, the full ongoing
negative impact of this restructuring will not begin until the quarter ended May
31, 2000.
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 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 February 29, 2000, the Company had 54 hospital contracts to
provide services at 68 hospital sites compared with 57 contracts at 74 hospital
sites as of February 28, 1999. The number of hospital contracts and hospital
sites for the February 29, 2000 period includes an Arthritis and Osteoporosis
Care Center ("AOCC") contract with a hospital to provide comprehensive arthritis
and osteoporosis services that are operated by the Company. The February 28,
1999 period includes two Arthritis and Osteoporosis Care Center 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 six months ended February
29, 2000 and February 28, 1999 are presented below.
<TABLE>
<CAPTION>
-----------------------------------------------
Three months ended February 29/28,
2000 1999
-----------------------------------------------
Contracts Sites Contracts Sites
--------------------- ---------------------
<S> <C> <C> <C> <C>
Total contracts/sites at
beginning of period 57 71 57 74
New contracts/sites signed 4 4 3 9
Contracts/sites discontinued (7) (7) (3) (9)
--------------------- ---------------------
Total contracts/sites at end
of period 54 68 57 74
===============================================
</TABLE>
11
<PAGE> 12
<TABLE>
<CAPTION>
-----------------------------------------------
Three months ended February 29/28,
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 6 6 4 12
Converted to health
plan contract (1) (1) -- --
Contracts/sites discontinued (9) (9) (4) (10)
--------------------- ---------------------
Total contracts/sites at end
of period 54 68 57 74
===============================================
</TABLE>
During the three month period ended February 29, 2000, no contracts
were renewed for the Company's hospital-based diabetes treatment centers. During
the remainder of fiscal 2000, 16 contracts are eligible to be terminated under
the terms of the contracts with the hospitals.
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 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.
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<PAGE> 13
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.
RESULTS OF OPERATIONS
Revenues for the three and six month periods ended February 29, 2000
increased 8% and 9%, respectively, over the same periods in 1999. This increase
in revenues resulted primarily from an increase in the average number of lives
enrolled in the Company's health plan diabetes disease management contracts to
approximately 128,000 lives and 124,000 lives, respectively, for the three and
six month periods ended February 29, 2000 from approximately 82,000 lives and
79,000 lives, respectively, for the comparable three and six month periods
during the prior year. This increase in 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 21% and 17% less during the three and six month
periods ended February 29, 2000, respectively, than during the prior year
periods. This decrease in average per member per month revenue occurred
primarily as a result of a greater mix of lives under contracts providing lower
service intensity in the fiscal 2000 period when compared with the fiscal 1999
period and, for the quarter ended February 29, 2000, also included the impact of
reduced revenues from a contract with one of the Company's largest health plan
customers which was restructured during the quarter. Revenues from the Company's
hospital contract operations for the three and six month periods ended February
29, 2000 were 10% and 13% less, respectively, than hospital contract revenues
for the comparable periods last year on fewer average number of contracts in
operation for the periods. This reduction in hospital contract revenue 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 for fiscal 2000 will increase over fiscal 1999 primarily as a result of
additional lives enrolled under disease management contracts with health plans
offset by the
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<PAGE> 14
impact of lower revenues from the restructuring of one of its health plan
customer contracts and by lower revenues from its hospital contract operations.
Salaries and benefits for the three and six month periods ended
February 29, 2000 increased 10% and 12%, respectively, primarily from higher
staffing levels associated with increases in the number of lives enrolled in the
Company's health plan contracts and the opening of a new telephone call center
in Phoenix, Arizona, offset somewhat by decreased employee incentive
compensation associated with operating performance during the current year and a
contract restructuring during the most recent quarter. Salaries and benefits as
a percentage of revenues increased to 65% for both the three and six month
periods ended February 29, 2000 from 64% for both of 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 lives
enrolled under the Company's health plan contracts.
Other operating expenses for the three and six month periods ended
February 29, 2000 increased 21% and 10%, 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 offset by lower consulting
fees associated with Year 2000 Project compliance issues compared to the same
periods last year. Other operating expenses as a percentage of revenues
increased to 25% for the three month period ended February 29, 2000 from 22% 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 23% for both the
six months ended February 29, 2000 and February 28, 1999. 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 in the number of 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 $841,446 and
$1.5 million, respectively, for the three and six month periods ended February
29, 2000 from $434,567 and $839,553 for the comparable periods last year
principally resulted 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 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 expense for the three and six month periods
ended February 29, 2000 was $311,000 and $730,000, respectively, compared to
$519,000 and $967,000 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.
14
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
Operating activities for the six months ended February 29, 2000 used
$214,286 in cash flow. Investing activities during this period used $5.4 million
in cash which consisted of the acquisition of property and equipment for the
Company primarily associated with its expanding health plan contract operations
and leasehold improvements and other costs associated with its relocated and
expanded corporate and primary support office location in Nashville, Tennessee.
Financing activities for the six months ended February 29, 2000 used $1.1
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 February 29, 2000, there were no borrowings outstanding
under this agreement.
The Company believes that cash flow from operating activities, its
available cash balances of $6.8 million at February 29, 2000 and available
credit under its new financing agreement will continue to enable the Company to
fund its working capital needs, capital expenditures associated with increasing
information technology capability for its growing health plan operations and the
remaining capital expenditures for leasehold improvements and other costs
associated with its relocated and expanded corporate and primary support office
location in Nashville, Tennessee. Remaining commitments for capital expenditures
associated with these projects of approximately $3.0 million are expected to be
paid over the remainder of fiscal 2000. In addition, 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.
15
<PAGE> 16
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.
Not Applicable.
ITEM 3. Defaults Upon Senior Securities.
Not Applicable.
16
<PAGE> 17
ITEM 4. Submission of Matters to a Vote of Security Holders.
(a) The Annual Meeting of Stockholders of American Healthways,
Inc. was held on January 25, 2000.
(c) The following proposals were voted upon at the Annual Meeting
of Stockholders:
(i) Nominations to elect Henry D. Herr and Martin J.
Koldyke as Directors of the Company. The results of
the election of the above mentioned nominees were as
follows:
<TABLE>
<CAPTION>
For Against Withheld
----------------------------------------
<S> <C> <C>
Henry D. Herr 6,121,467 - 286,790
Martin J. Koldyke 6,119,967 - 288,290
</TABLE>
(ii) Approval to amend the Company's 1996 Stock Incentive
Plan to increase the number of shares of the
Company's common stock available for issuance. The
voting results of the above mentioned amendment are
as follows:
<TABLE>
<CAPTION>
For Against Withheld
----------------------------------------------
<S> <C> <C>
4,495,486 1,899,651 13,120
</TABLE>
(iii) Approval to amend the Company's Restated Certificate
of Incorporation to change the Company's name from
American Healthcorp, Inc. to American Healthways,
Inc. The voting results of the above mentioned
amendment are as follows:
<TABLE>
<CAPTION>
For Against Withheld
----------------------------------------------
<S> <C> <C>
6,373,653 26,094 8,510
</TABLE>
ITEM 5. Other Information.
Not Applicable.
17
<PAGE> 18
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 Amended and Restated Certificate of Incorporation for
American Healthways, Inc.
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.
18
<PAGE> 19
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 April 14, 2000 By /s/ Henry D. Herr
---------------------- -------------------------------------
HENRY D. HERR
Executive Vice President
Finance and Administration,
(Principal Financial Officer)
Date April 14, 2000 By /s/ David A. Sidlowe
----------------------- -------------------------------------
DAVID A. SIDLOWE
Vice President and Controller
(Principal Accounting Officer)
19
<PAGE> 1
EXHIBIT 10.1
CERTIFICATE OF AMENDMENT
TO
RESTATED CERTIFICATE OF INCORPORATION
OF
AMERICAN HEALTHCORP, INC.
The undersigned, being the Executive Vice President of Finance and
Administration, Chief Financial Officer and Secretary of American Healthcorp,
Inc., a corporation organized and existing under the General Corporation Law of
the State of Delaware (the "Law"), does hereby certify:
The name of the corporation is "American Healthcorp, Inc." (the
"Corporation").
The Restated Certificate of Incorporation of the Corporation was filed
with the Secretary of State of the State of Delaware on August 20, 1991.
This amendment to the Restated Certificate of Incorporation has been
duly proposed by resolutions adopted and declared advisable by the Board of
Directors of the Corporation, duly adopted by the stockholders of the
Corporation and duly executed by the undersigned as an authorized officer of the
Corporation in accordance with Sections 242, 103 and 228 of the Law of the State
of Delaware.
Article FIRST of the Restated Certificate of Incorporation of the
Corporation is hereby amended to read as follows:
FIRST: The name of the corporation (hereinafter called the
"Corporation") is American Heathways, Inc.
IN WITNESS WHEREOF, the undersigned has executed this Certificate of
Amendment this 25th day of January, 2000.
AMERICAN HEALTHCORP, INC.
By: /s/ Henry D. Herr
----------------------------------------
Henry D. Herr
Executive Vice President of Finance and
Administration,
Chief Financial Officer and Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AMERICAN HEALTHWAYS, INC. FOR THE SIX MONTHS ENDED
FEBRUARY 29, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-2000
<PERIOD-START> SEP-01-1999
<PERIOD-END> FEB-29-2000
<CASH> 6,765,291
<SECURITIES> 0
<RECEIVABLES> 5,874,940
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 15,801,109
<PP&E> 14,030,170
<DEPRECIATION> (3,893,116)
<TOTAL-ASSETS> 39,668,301
<CURRENT-LIABILITIES> 6,432,567
<BONDS> 0
0
0
<COMMON> 8,249
<OTHER-SE> 30,631,558
<TOTAL-LIABILITY-AND-EQUITY> 39,668,301
<SALES> 0
<TOTAL-REVENUES> 26,278,302
<CGS> 0
<TOTAL-COSTS> 23,275,078
<OTHER-EXPENSES> 1,508,091
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,238
<INCOME-PRETAX> 1,489,895
<INCOME-TAX> 730,000
<INCOME-CONTINUING> 759,895
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 759,895
<EPS-BASIC> .09
<EPS-DILUTED> .09
</TABLE>
