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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended August 31, 2000
Commission File No. 000-19364
AMERICAN HEALTHWAYS, INC.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 62-1117144
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3841 Green Hills Village Drive, Nashville, TN 37215
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(Address of Principal Executive Offices) (Zip Code)
615-665-1122
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - $.001 par value
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of November 27, 2000, 8,229,139 shares of Common Stock were outstanding. The
aggregate market value of the shares held by non-affiliates of the Registrant
was approximately $52,000,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held January 22, 2001 are incorporated by reference into Part
III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
American Healthways, Inc. (the "Company"), a corporation formed in
1981, provides specialized, comprehensive care and disease management services
to health plans and hospitals. The Company's programs are 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
provides its services through its DIABETES HEALTHWAYS(SM), CARDIAC
HEALTHWAYS(SM) and RESPIRATORY HEALTHWAYS(SM) product lines. In addition,
subsequent to August 31, 2000, the Company introduced its MYHEALTHWAYS(SM)
product which is designed to provide health plan members and their physicians
personalized health assessments and customized action plans that can be utilized
by all health plan members, not just those with chronic diseases. As of August
31, 2000, the Company had contracts to provide its services to health plans in
58 markets and also had contracts to provide its services at 66 hospitals.
At the Annual Meeting of Stockholders on January 25, 2000, the
stockholders approved an amendment to the Company's Restated Certificate of
Incorporation to change the Company's name from American Healthcorp, Inc. to
American Healthways, Inc.
The Company's discontinued operations in fiscal 1998 represented AmSurg
Corp. ("AmSurg"), formerly a majority-owned subsidiary that develops, acquires
and operates physician practice-based ambulatory surgery centers and specialty
physician networks in partnerships with surgical and other group practices. In
March 1997, the Company's Board of Directors approved a plan to distribute, on a
substantially (approximately 98.5%) tax-free basis, all of the shares of AmSurg
common stock owned by the Company to the holders of Company common stock (the
"Distribution"). The Distribution was completed on December 3, 1997. The Company
has received a letter ruling from the Internal Revenue Service confirming the
substantially tax-free nature of the Distribution.
This Form 10-K contains forward-looking statements, which are based
upon current expectations and involve a number of risks and uncertainties. In
order for the Company to utilize the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, investors are hereby cautioned that
these statements may be affected by the important factors, among others, set
forth below, and 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, MYHEALTHWAYS(SM)
services and to execute new contracts 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; the
Company's ability to resolve favorably contract billing and interpretation
issues with its health plan customers; the ability of the Company to obtain
adequate financing to support the Company's performance under new health plan
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contracts; 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 and its MYHEALTHWAYS(SM) 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
litigation involving the Company; 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.
SOURCES OF REVENUES
The following table sets forth the sources of the Company's revenues by
customer type as a percentage of total revenues from continuing operations for
the three years ended August 31, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
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Year ended August 31, 2000 1999 1998
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<S> <C> <C> <C>
Health Plan Contracts 61% 54% 39%
Hospital Contracts 38 45 60
Other 1 1 1
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100% 100% 100%
==========================
</TABLE>
For information on the Company's business segments, see Note 12 of the Notes to
the Consolidated Financial Statements.
While the Company's revenues historically have been generated primarily
by its operating contracts with hospitals, a majority of its fiscal 1999 and
2000 revenues were generated from programs that are designed to assist health
plans in reducing healthcare costs and improving the quality of care for
individuals with chronic diseases such as diabetes, cardiac disease and
respiratory disease enrolled in their plans. The Company believes that a
substantial portion of its future revenue growth will result from providing
disease and care management services to health plans. Implementation of the
Company's first disease management contracts with health plans occurred in
fiscal 1996 for enrollees of these health plans with diabetes. While continuing
to contract with additional health plans to provide diabetes services in the
years since fiscal 1996, the Company introduced its cardiac disease management
program in fiscal 1999 and its respiratory disease management program in fiscal
2000. During fiscal 2000 the Company signed its first contracts with health
plans to deliver its cardiac and its respiratory disease programs. The Company's
disease management products assist enrollees and the providers of healthcare in
the contracting health plans with specific disease-related care and treatment as
well as provide assistance for the overall needs of populations of individuals
with a specific chronic disease. The Company believes that its patient and
physician support regimens, delivered and/or supervised by a multi-disciplinary
team, will assist in assuring that the most effective care for the treatment of
the disease is provided to enrollees and that this focus will improve the health
status of the enrollee populations with the disease and will reduce both the
short-term and long-term healthcare costs of these enrollees.
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The Company's disease management services for health plans are designed
to meet the needs of individual health plan customers. The Company provides
clinical and support staff who are responsible for coordinating and supporting
the treatment of individuals with chronic diseases such as diabetes, cardiac
disease and respiratory disease in accordance with treatment standards and
protocols that have been developed by the Company and have been approved by the
medical leadership at each health plan. In most contracts, individuals with a
targeted disease in these plans are automatically enrolled in the Company's
program but are permitted to decline to participate. Historically, less than 3%
have declined to participate. The actual treatment of the individuals is
provided by physicians, hospitals and other ancillary service providers who are
part of the health plan's network of providers. The Company's services range
from telephone and mail contacts directed primarily to enrollees with targeted
diseases that can be provided from one of the Company's four centralized
operating unit call centers to services that also include providing local market
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 and are structured primarily as a monthly fee for each member of the
health plan identified with the particular chronic disease under contract. These
contracts are generally for terms of three to five 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
financial cost savings and clinical criteria. The Company records revenue from
its performance-based health plan contracts based on its estimates of expected
performance levels under these contracts and adjusts these estimates as
additional data necessary to determine performance levels becomes available.
MYHEALTHWAYS(SM) will address a broader population base in a health
plan than only those members with chronic diseases. The program will provide
personalized assessments and customized action plans to health plan members and
their physicians which enable proactive intervention with patients who are
identified to be at increased risk for a variety of treatable health problems.
MYHEALTHWAYS(SM) is intended to help mitigate the effects of or prevent certain
health problems. While no contracts have been executed to date for the
MYHEALTHWAYS(SM) product, it is anticipated that the structure for these
contracts will be similar to the Company's contracts for its disease management
products and could involve some portion of the Company's fees at risk subject to
meeting performance criteria.
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 disease
management services and has installed and is utilizing the system for the
enrollees of each of its health plan contract customers. During the fiscal year
ended August 31, 2000, this system was upgraded to enable it to handle
additional diseases other than diabetes from a common platform and to increase
the Company's central operating unit 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 its Internet communication technology. The capital expenditures
required during fiscal 2000 to upgrade the Company's information technology
capability and to add service capacity through the completion of centralized
operating unit call centers in Phoenix, Arizona, Pittsburgh, Pennsylvania and
Honolulu, Hawaii totaled approximately $7.0 million. As a result of these
expenditures, the Company had the infrastructure to provide disease management
services to approximately 400,000 equivalent lives as of August 31, 2000
compared with a capacity of approximately 125,000 equivalent lives at the
beginning of fiscal 2000.
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At August 31, 2000, the Company had contracts with 15 health plans to
provide disease management services in 58 health plan markets. The Company
reports the number of disease lives under its health plan contracts utilizing a
calculation of "equivalent" covered lives. Because the Company's original
disease management efforts focused on enrollees with diabetes and the majority
of its lives as of the end of fiscal 2000 were diabetes lives, contracted
enrollee lives for its cardiac and its respiratory programs are converted into
the revenue and service cost equivalent of a diabetes enrollee for reporting and
internal management purposes. While the average service intensity and the
Company's fee per cardiac enrollee is greater than the service intensity and fee
per diabetes enrollee, the Company believes that the contribution margin
percentage is similar for its diabetes lives and its cardiac disease lives. The
average service and fee intensity of the Company's respiratory disease program
varies in comparison with a diabetes enrollee depending on whether it involves a
lower intensity asthma population or a higher intensity chronic obstructive
pulmonary disease population. However, as with its cardiac disease program, the
Company believes that the contribution margin percentage is similar for its
diabetes lives and its respiratory disease lives. The number of equivalent lives
under management and generating revenues for the Company as well as the number
of equivalent lives under contract and scheduled for implementation but not
currently generating revenue are shown below at August 31, 2000, 1999 and 1998.
<TABLE>
<CAPTION>
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At August 31, 2000 1999 1998
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<S> <C> <C> <C>
Equivalent lives under management 198,916 111,197 57,292
Equivalent lives in backlog 13,000 21,000 35,000
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Total equivalent lives 211,916 132,197 92,292
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</TABLE>
Subsequent to August 31, 2000, the Company executed a contract to
provide cardiac disease management services to approximately 100,000 equivalent
lives in CIGNA Healthcare health plans. Services for these enrollees and fee
revenue for the Company under this contract are currently scheduled to be phased
in during a six-month period beginning April 1, 2001, and are subject to the
Company providing a letter of credit of up to $6.6 million to support the
Company's performance under the contract.
The Company's hospital-based diabetes treatment center business had 50
contracts in effect in 24 states at August 31, 2000. The Company also had a
contract to operate a hospital-based arthritis and osteoporosis treatment
center. The following table presents the number of total hospital contracts in
effect during the past three fiscal years:
<TABLE>
<CAPTION>
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Year ended August 31, 2000 1999 1998
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<S> <C> <C> <C>
Contracts in effect at beginning of period 58 57 58
Contracts signed 8 9 9
Contracts discontinued (15) (8) (10)
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Contracts in effect at end of period 51 58 57
=======================
Hospital sites where services are delivered 66 72 72
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</TABLE>
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 while enhancing the quality of care to this population. Fee structures
under the hospital contracts consist of either fixed management fees, variable
fees based on the Company's performance or a combination thereof. Variable fees
based upon performance
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generally provide for fee payments to the Company based on changes in the client
hospital's market share of diabetes inpatients, the costs of providing care to
these patients, and quality of care measurements. The Company has renewed or
entered into new contracts in recent years that included primarily fixed
management fee arrangements. The terms of hospital contracts generally range
from two to five years and are subject to periodic renegotiation and renewal
that may include reduction in fee structures which have a negative impact on the
Company's revenues and profitability. The form of these contracts includes
various structures ranging from arrangements where all costs of the Company's
program for center professional personnel, medical director fees and community
relations are the responsibility of the Company to structures where all Company
program costs are the responsibility of the client hospital. The Company is paid
directly by the hospital. Patients receiving services from the diabetes
treatment centers are charged by the hospital for typical hospital services.
Under the terms of its contracts with hospitals, the Company provides
the resources that enable the hospital to develop and operate an integrated
system of care for patients with diabetes that includes: (1) programs to work
with physicians to identify objectives for the patient and monitor
accomplishment of the objectives during the patient's stay; (2) clinical
interventions for patients with diabetes; (3) an information network service
that connects the hospital to the Company's dedicated nationwide resources; (4)
programs for specific activities related to quality improvement, cost reduction
and market share increases for patients with diabetes; and (5) programs to
monitor the hospital's performance against quality indicators and processes
related to diabetes patients. Also available for hospital customers are numerous
other services such as (1) outpatient diabetes patient education and follow-up;
(2) programs for diabetes during pregnancy and programs for insulin pump
therapy; and (3) policies and procedures to help ensure formal recognition of
the diabetes program at the hospital by the American Diabetes Association.
BUSINESS STRATEGY
The Company's strategy is to develop additional relationships with
health plans to provide care and disease management services and to further
develop and expand its hospital-based diabetes treatment center business. 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. In addition, the Company plans to
add services, such as MYHEALTHWAYS(SM), to its product mix for health plans that
will extend the Company's programs beyond its current chronic disease focus and
will be designed to enhance the ability of health plans to create a positive
health care relationship with all of their members, not just those who are
chronically ill. It is anticipated that some of these new services will be added
through strategic alliances with other entities and that the Company may choose
to make minority interest investments in one or more of these entities.
The Company anticipates that additional disease management contracts
that the Company may sign with health plans may take one of several forms,
including some form of shared savings of overall enrollee healthcare costs, per
member per month payments to the Company to cover its services to enrollees, or
some combination of these arrangements. The Company anticipates that under most
contracts, some portion of the Company's fees will be at risk subject to its
performance against financial cost savings and clinical criteria.
INDUSTRY AND OTHER RISK CONSIDERATIONS
In the process of the Company's execution of its business strategy, its
operations and financial condition are subject to certain risks. The primary
industry risks are described below and readers of this Annual Report on Form
10-K should take such risks into account in evaluating any investment decision
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involving the Company. This section does not describe all risks applicable to
the Company and is intended only as a summary of certain material factors that
impact its operations in the industry in which it operates. More detailed
information concerning these and other risks is contained in other sections of
this Annual Report on Form 10-K.
The healthcare industry in which the Company operates is currently
subject to significant cost reduction pressures as a result of constrained
revenues from governmental and private revenue sources as well as from
increasing underlying medical care costs. The Company believes that these
pressures will continue and possibly intensify. While the Company believes that
its products are geared specifically to assist health plans and hospitals in
controlling the high costs associated with the treatment of chronic diseases,
the pressures to reduce costs immediately may have a negative effect in certain
circumstances on the ability of or the length of time required by the Company to
sign new health plan and hospital contracts. In addition, this focus on cost
reduction may result in increased focus from health plan and hospital customers
on contract restructurings that reduce the fees paid to the Company for the
Company's services.
Hospitals and health plans are subject to considerable state and
federal government regulation. Many of these regulations are vaguely written and
subject to differing interpretations that may, in certain cases, result in
unintended consequences that may impact the Company's ability to effectively
deliver its services. The current focus on regulatory and legislative efforts to
protect the confidentiality of patient identifiable medical information, as
evidenced by the Health Insurance Portability and Accountability Act, is one
such example. While the Company believes that its ability to obtain patient
identifiable medical information for disease management purposes from a health
plan with which it has contracted is protected in recently released proposed
federal regulations governing medical record confidentiality as well as in most
state legislation and regulations addressing this issue, new federal or state
legislation or regulation in this area which restricts the availability of this
information to the Company or which leaves uncertain whether disease management
is an allowable use of patient identifiable medical information would have a
negative impact on its health plan disease management operations.
Broadly written Medicare fraud and abuse laws and regulations which are
subject to varying interpretations also may expose the Company to potential
civil and criminal litigation regarding the structure of current and past
contracts entered into with hospital and health plan customers such as the civil
lawsuit filed against the Company in 1994 as discussed later in this Annual
Report on Form 10-K. While the Company believes that its operations do not
violate the provisions of the fraud and abuse statutes and regulations, no
assurances can be given that private individuals acting on behalf of the United
States government in return for a portion of potential penalties or recoveries
obtained from the Company or government enforcement agencies themselves will not
pursue a claim against the Company under a new or differing interpretation of
these statutes and regulations.
The disease management industry, which is growing rapidly, is a
relatively new segment of the overall health care industry and has many entrants
marketing various services and products labeled as disease management. The
generic label of disease management has been utilized to characterize a wide
range of activities from the sale of medical supplies and drugs to services
aimed at demand management. Because the industry is relatively new, health plan
purchasers of these services have not had significant experience purchasing,
evaluating or monitoring such services. While the Company believes that its many
years of experience in treating chronic diseases, the clinical depth of the
Company's programs and the documented positive population-based financial and
clinical outcomes experienced by the Company's health plan customers provide
clear product differentiation, the existence of numerous competing disease
management products and contracting structures in an industry with a relatively
short history has created and may continue to create confusion in the
contracting process for these services. In addition, because the industry is
still
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relatively new and health plans have recently entered into disease management
contracts, the Company has a significant concentration of its revenues
represented by contracts with two health plans, Highmark, Inc. (Blue Cross and
Blue Shield of Western Pennsylvania) and CIGNA Healthcare, which collectively
accounted for 44% of the Company's revenues in fiscal 2000. Until additional
significant health plan contracts are signed by the Company, the Company would
be negatively and materially impacted by the loss or restructuring of a contract
with a single large health plan customer. During the fiscal year ended August
31, 2000, the Company restructured a contract with one of these health plans,
which resulted in a material reduction in revenues and profits under this
contract beginning January 1, 2000.
The disease management industry is dependent on the effective use of
information technology. While the Company believes that its state of the art
electronic medical record and call center technology provides it with a
competitive advantage in the industry, the Company expects to continually invest
in updating this technology and, in some cases, such as those discussed in this
Annual Report on Form 10-K, will be required to make systems investments in
advance of the generation of revenue by these investments. In addition, these
system requirements expose the Company to technology obsolescence risks.
Accordingly, the Company amortizes its computer software and hardware over
periods ranging from three to five years.
The determination of which health plan members are eligible to receive
the Company's services and the measurement of the Company's performance under
its health plan contracts are highly dependent upon the timely receipt of
accurate data from its health plan customers and the accuracy of the analysis of
such data. Data acquisition, data quality control and data analysis are intense
and complex processes subject to error. Untimely, incomplete or inaccurate data
from the Company's health plan customers or flawed analysis of such data could
materially impact the Company's revenues derived from a contract.
During fiscal 2000, the Company recorded negative revenue adjustments
of approximately $1.2 million to provide for the settlement of billing
misunderstandings with two health plan customers due to the lack of clarity in
contracts with those customers relating to the conditions under which enrollees
in the plans were eligible to participate in the Company's disease management
program. These settlements related primarily to the initial enrollment periods
of plan members under two of the Company's older contracts. The Company believes
that such eligibility issues have been more clearly defined in its newer disease
management contracts.
Stock prices of healthcare companies and the Company's stock price in
particular may be volatile. The stock's volatility may be influenced by the
market's perceptions of the healthcare sector in general, or other companies
believed to be similar to the Company or by the market's perception of the
Company's operations and future prospects. Many of these perceptions are beyond
the ability of the Company to control. In addition, the Company's stock is not
heavily traded and therefore the ability to achieve relatively quick liquidity
without a negative impact on the stock price may be limited.
OPERATING CONTRACT RENEWALS
The Company's health plan contract revenues are dependent upon the
contractual relationships it establishes and maintains with client health plans
to provide disease management services to their members. The terms of these
health plan contracts generally range from three to five years with some
contracts providing for early termination by the health plan under certain
conditions. Because the disease management industry is relatively new and the
Company's contracts were some of the first large scale contracts to be executed
with health plans for disease management services, the renewal experience in
this industry is limited. No assurances can be given that the results from
restructurings and possible terminations at renewal would not have a material
negative impact on the Company's results of operations. During the three years
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ended August 31, 2000, four health plan contracts were terminated. Two of these
contracts involved pilot programs which ended by mutual consent at the end of
their terms. The other two contracts were terminated early as the result of the
acquisition of the Company's health plan customers by other health plans who did
not wish to continue providing the services.
During the fiscal year ending August 31, 2001, four health plan
customer contracts representing 23% of the Company's revenues for fiscal 2000
are eligible to be terminated under the terms of the contracts. No assurance can
be given that the results of these renewals or possible contract terminations
would not have a material negative impact on the Company's net income during
fiscal 2001.
The Company's hospital contract revenues are also dependent upon the
contractual relationships it establishes and maintains with client hospitals to
develop and operate diabetes treatment centers. The terms of these hospital
contracts generally range from two to five years and are subject to periodic
renegotiation and renewal that may include reduction in fee structures that have
a negative impact on the Company's revenues and profitability. Contracts have
been discontinued or not renewed by the Company and by client hospitals for a
number of reasons including financial problems of the hospital, the
consolidation of hospitals in a market, and a hospital's need to reduce the
hospital's operating costs including the short-term reduction of costs
associated with elimination of the Company's program or the contract's
performance.
During fiscal 2000, 10 hospital contracts were renewed. Several of
these renewals included contract rate reductions, which the Company has
undertaken to maintain favorable long-term contractual relationships. Also
during fiscal 2000, 15 hospital contracts were discontinued. Several of these
contracts were lower revenue and lower margin contracts with limited impact on
the Company's profitability. There were no material continuing obligations or
costs for the Company associated with the termination of any client hospital
contracts. The Company anticipates that continued hospital industry pressures to
reduce costs because of constrained revenues will result in a continuation of
contract rate reductions and the potential for additional contract terminations.
During fiscal 2001, 28 contracts are eligible to be terminated under the terms
of the contracts with the hospitals.
COMPETITION
The healthcare industry is highly competitive and subject to continual
change in the manner in which services are provided. Other companies, including
major pharmaceutical companies, healthcare providers and organizations that
provide services to health plan organizations, which may have greater financial,
research, staff, and marketing resources than the Company, are marketing
diabetes, cardiac and respiratory disease management services to health plans or
have announced an intention to offer such services. While the Company believes
it has advantages over its competitors because of its state-of-the-art central
operating unit call center technology linked to its proprietary medical
information technology, the comprehensive clinical nature of its product
offerings, its established reputation in the provision of care to enrollees with
chronic diseases and the financial and clinical outcomes from its health plan
programs, there can be no assurance that the Company can compete effectively
with these companies.
The Company's principal competition for its hospital treatment center
business is from hospitals that have basic programs for treating patients with
diabetes. Generally, hospitals have not committed the time, personnel or
financial resources necessary to establish and maintain comprehensive diabetes
treatment services comparable to the services offered by the Company's diabetes
treatment centers.
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GOVERNMENTAL REGULATION
While the Company itself is not directly subject to many of the
governmental and regulatory requirements affecting healthcare delivery, its
client hospitals and health plans must comply with a variety of regulations
including the licensing and reimbursement requirements of federal, state and
local agencies and the requirements of municipal building codes, health codes
and local fire departments. Certain professional healthcare employees of the
Company, such as nurses, are subject to individual licensing requirements.
The Company is indirectly affected by changes in the laws governing
hospital and health plan reimbursement under governmental programs such as
Medicare and Medicaid. There may be continuing legislative and regulatory
initiatives to reduce the funding of the Medicare and Medicaid programs in an
effort to curtail or reduce overall federal healthcare spending. Federal
legislation such as the Balanced Budget Act of 1997 have or will significantly
reduce Medicare and Medicaid reimbursements to most hospitals. These
reimbursement changes are negatively impacting hospital revenues and operations.
There can be no assurance that these changes, future legislative initiatives or
government regulation would not adversely affect the Company's operations or
reduce the demand for its services.
Health plan and hospital customers are subject to considerable state
and federal government regulation. Many of these regulations are vaguely written
and subject to differing interpretations that may, in certain cases, result in
unintended consequences that may impact the Company's ability to effectively
deliver its services. The current focus on legislative efforts to protect the
confidentiality of patient identifiable medical information, as evidenced by the
Health Insurance Portability and Accountability Act, is one such example. While
the Company believes that its ability to obtain this information for disease
management purposes from a health plan with which it has contracted is protected
in recently released proposed federal regulations governing medical record
confidentiality, new federal or state legislation or regulation in this area
which restricts the availability of this information to the Company or which
leaves uncertain whether disease management is an allowable use of patient
identifiable medical information would have a negative impact on its health plan
disease management operations.
Various federal and state laws regulate the relationship among
providers of healthcare services, other healthcare businesses and physicians.
The "fraud and abuse" provisions of the Social Security Act provide civil and
criminal penalties and potential exclusion from the Medicare and Medicaid
programs for persons or businesses who offer, pay, solicit or receive
remuneration in order to induce referrals of patients covered by federal health
care programs (which includes Medicare, Medicaid, TriCare and other federally
funded health programs). While the Company believes that its business
arrangements with its client hospitals, health plans and medical directors are
in compliance with these statutes, these fraud and abuse provisions are broadly
written and the full extent of their application is not yet known. The Company
is therefore unable to predict the effect, if any, of broad enforcement
interpretation of these fraud and abuse provisions.
INSURANCE
The Company maintains professional malpractice liability and general
liability insurance for all of its locations and operations. While the Company
believes its insurance policies to be adequate in amount and coverage for its
current operations, there can be no assurance that coverage is sufficient to
cover all future claims or will continue to be available in adequate amounts or
at a reasonable cost. The Company's liability insurance coverage provides for
certain deductible levels to be paid by the Company. Estimated reserves to cover
potential payments under these deductibles have been provided in the Company's
financial statements.
10
<PAGE> 11
EMPLOYEES
As of August 31, 2000, the Company had 323 full-time employees and 313
part-time employees in the following general classifications: 370 healthcare
professionals, including nurses, counselors, dietitians and exercise therapists;
128 center and health plan site management and administrative personnel; and 138
operations support and Company management personnel. The Company's employees are
not subject to any collective bargaining agreement. Management considers the
relationship between the Company and its employees to be good.
ITEM 2. PROPERTIES
The Company's corporate and primary service support office is located
in Nashville, Tennessee and contains approximately 44,000 square feet of office
space, which the Company leases pursuant to an agreement which expires in
September 2007. The Company also has seven office space leases associated with
its current health plan contract services including its four call center
locations in Phoenix, AZ, Nashville, TN, Pittsburgh, PA, and Honolulu, HI for an
aggregate of approximately 59,000 square feet of space for terms of three to ten
years. All of the Company's diabetes and arthritis and osteoporosis treatment
centers are located in hospital-based units for which the Company pays no rent.
ITEM 3. LEGAL PROCEEDINGS
In November 1994, the Company received an administrative subpoena for
documents from a regional office of the Office of the Inspector General (AOIG")
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. Various preliminary motions
have been filed regarding jurisdictional and pleading matters, resulting in the
filing of a number of amended complaints and the dismissal of the Company as a
defendant. AHSI continues to be 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
11
<PAGE> 12
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding executive
officers of the Company as of August 31, 2000. Executive officers of the Company
serve at the pleasure of the Board of Directors.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
Officer Age Position
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
Thomas G. Cigarran 58 Chairman of the Board and Chief Executive Officer since 1988,
President and Director since 1981. Chairman of the Board of
AmSurg since 1992. President and Chief Executive Officer of
AmSurg from 1992 to 1998.
Henry D. Herr 54 Executive Vice President-Finance and Administration since
1986, Chief Financial Officer since 1981, Secretary and
Director since 1988. Director of AmSurg since 1992. Vice
President and Secretary of AmSurg from 1992 to 1998.
Robert E. Stone 54 Executive Vice President since 1999, Senior Vice President
since 1981.
David A. Sidlowe 50 Senior Vice President since 1999, Vice President since 1984,
Controller since 1982.
</TABLE>
12
<PAGE> 13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market Information
The Company's common stock is traded over the counter on The Nasdaq
Stock Market under the symbol AMHC.
The following table sets forth the high and low sales prices per share
of common stock as reported by Nasdaq for the relevant periods.
<TABLE>
<CAPTION>
------------------------
High Low
------------------------
<S> <C> <C>
Year ended August 31, 2000
First Quarter $ 7.00 $ 3.94
Second Quarter 5.50 3.75
Third Quarter 4.59 3.63
Fourth Quarter 7.25 3.88
Year ended August 31, 1999
First Quarter $12.13 $ 7.00
Second Quarter 11.88 9.38
Third Quarter 11.38 7.00
Fourth Quarter 9.13 6.38
</TABLE>
(b) Holders
At November 22, 2000 there were approximately 2,000 holders of the
Company's Common Stock, including 137 stockholders of record.
(c) Dividends
The Company has never declared or paid a cash dividend on its Common
Stock. The Company intends to retain its earnings to finance the growth and
development of its business and does not expect to declare or pay any cash
dividends in the foreseeable future. The declaration of dividends is within the
discretion of the Company's Board of Directors, which will review this dividend
policy from time to time.
13
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
Year ended and at August 31, 2000 1999 1998 1997 1996
----------------------------------------------------------------------------------------------------------
(In thousands except per share data)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues $53,030 $ 50,052 $ 41,167 $ 30,537 $31,403
--------------------------------------------------------
Expenses:
Salaries and benefits 34,975 31,362 26,473 21,437 19,866
Other operating expenses 13,786 11,203 11,084 8,702 7,254
Depreciation and amortization 3,621 1,805 1,308 1,342 1,273
Interest 22 -- 1 6 5
Spin-off stock option adjustment -- -- 5,770 -- --
--------------------------------------------------------
Total expenses 52,404 44,370 44,636 31,487 28,398
--------------------------------------------------------
Income (loss) before income taxes
and discontinued operations 626 5,682 (3,469) (950) 3,005
Income tax expense (benefit) 478 2,365 (1,148) (207) 544
--------------------------------------------------------
Income (loss) from continuing operations 148 3,317 (2,321) (743) 2,461
Discontinued operations -- -- 57 (940) 799
--------------------------------------------------------
Net income (loss) $ 148 $ 3,317 $ (2,264) $ (1,683) $ 3,260
========================================================
Basic income (loss) per share:
From continuing operations $ 0.02 $ 0.40 $ (0.29) $ (0.09) $ 0.31
From discontinued operations -- -- 0.01 (0.12) 0.10
--------------------------------------------------------
$ 0.02 $ 0.40 $ (0.28) $ (0.21) $ 0.41
========================================================
Diluted income (loss) per share:
From continuing operations $ 0.02 $ 0.37 $ (0.29) $ (0.09) $ 0.30
From discontinued operations -- -- 0.01 (0.12) 0.10
--------------------------------------------------------
$ 0.02 $ 0.37 $ (0.28) $ (0.21) $ 0.40
========================================================
Weighted average common shares and equivalents:
Basic 8,269 8,319 8,081 8,022 7,980
Diluted 8,635 8,924 8,081 8,022 8,161
BALANCE SHEET DATA:
Cash and cash equivalents $ 7,025 $ 13,501 $ 13,244 $ 12,227 $12,562
Working capital 5,861 14,014 10,859 11,564 13,324
Net assets of discontinued operations -- -- -- 16,407 16,361
Total assets 41,355 41,014 36,857 49,373 48,943
Other long-term liabilities 3,009 2,820 2,446 2,186 2,657
Stockholders' equity 29,956 30,954 26,606 40,441 41,611
</TABLE>
14
<PAGE> 15
ITEM 7. 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 care and disease management services
to health plans and hospitals. The Company's programs are 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
provides its services through its DIABETES HEALTHWAYS(SM), CARDIAC
HEALTHWAYS(SM) and RESPIRATORY HEALTHWAYS(SM) product lines. In addition,
subsequent to August 31, 2000, the Company introduced its MYHEALTHWAYS(SM)
product which is designed to provide health plan members and their physicians
personalized health assessments and customized action plans that can be utilized
by all health plan members, not just those with chronic diseases.
At the Annual Meeting of Stockholders on January 25, 2000, the
stockholders approved an amendment to the Company's Restated Certificate of
Incorporation to change the Company's name from American Healthcorp, Inc. to
American Healthways, Inc.
The Company's discontinued operations in fiscal 1998 represented AmSurg
Corp. ("AmSurg"), formerly a majority-owned subsidiary that develops, acquires
and operates physician practice-based ambulatory surgery centers and specialty
physician networks in partnerships with surgical and other group practices. In
March 1997, the Company's Board of Directors approved a plan to distribute, on a
substantially (approximately 98.5%) tax-free basis, all of the shares of AmSurg
common stock owned by the Company to the holders of Company common stock (the
"Distribution"). The Distribution was completed on December 3, 1997. The Company
has received a letter ruling from the Internal Revenue Service confirming the
substantially tax-free nature of the Distribution.
Management's Discussion and Analysis of Financial Condition and Results
of Operations contains forward-looking statements, which are based upon current
expectations and involve a number of risks and uncertainties. In order for the
Company to utilize the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, investors are hereby cautioned that these
statements may be affected by the important factors, among others, set forth
below, and consequently, actual operations and results may differ materially
from those expressed in these forward-looking statements. The important factors
include: the Company's ability to renew and/or maintain contracts with its
customers under existing terms or restructure these contracts on terms that
would not have a material negative impact on the Company's results of
operations; the Company's ability to execute new contracts for health plan
diabetes, cardiac and respiratory disease management services, MYHEALTHWAYS(SM)
services and to execute new contracts 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; the
Company's ability to resolve favorably contract billing and interpretation
issues with its health plan customers; the ability of the Company to obtain
adequate financing to support the Company's performance under new health plan
contracts; 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
15
<PAGE> 16
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
and its MYHEALTHWAYS(SM) 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 litigation
involving the Company; 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 from continuing operations for
the three years ended August 31, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
-------------------------------------------------
Year ended August 31, 2000 1999 1998
-------------------------------------------------
<S> <C> <C> <C>
Health Plan Contracts 61% 54% 39%
Hospital Contracts 38 45 60
Other 1 1 1
----------------------
100% 100% 100%
======================
</TABLE>
While the Company's revenues historically have been generated primarily
by its operating contracts with hospitals, a majority of its fiscal 1999 and
2000 revenues were generated from programs that are designed to assist health
plans in reducing healthcare costs and improving the quality of care for
individuals with chronic diseases such as diabetes, cardiac disease and
respiratory disease enrolled in their plans. The Company believes that a
substantial portion of its future revenue growth will result from providing
disease and care management services to health plans. Implementation of the
Company's first disease management contracts with health plans occurred in
fiscal 1996 for enrollees of these health plans with diabetes. While continuing
to contract with additional health plans to provide diabetes services in the
years since fiscal 1996, the Company introduced its cardiac disease management
program in fiscal 1999 and its respiratory disease management program in fiscal
2000. During fiscal 2000 the Company signed its first contracts with health
plans to deliver its cardiac and its respiratory disease programs. The Company's
disease management products assist enrollees and the providers of healthcare in
the contracting health plans with specific disease-related care and treatment as
well as provide assistance for the overall needs of populations of individuals
with a specific chronic disease. The Company believes that its patient and
physician support regimens, delivered and/or supervised by a multi-disciplinary
team, will assist in assuring that the most effective care for the treatment of
the disease is provided to enrollees and that this focus will improve the health
status of the enrollee populations with the disease and will reduce both the
short-term and long-term healthcare costs of these enrollees.
The Company's disease management services for health plans are designed
to meet the needs of individual health plan customers. The Company provides
clinical and support staff who are responsible for coordinating and supporting
the treatment of individuals with chronic diseases such as diabetes, cardiac
disease and respiratory disease in accordance with treatment standards and
protocols that have been developed by the Company and have been approved by the
medical leadership at each health plan. In most contracts, individuals with a
targeted disease in these plans are automatically enrolled in the Company's
program but are permitted to decline to participate. Historically, less than 3%
have declined to participate. The actual treatment of the individuals is
provided by physicians, hospitals and other ancillary service providers who are
16
<PAGE> 17
part of the health plan's network of providers. The Company's services range
from telephone and mail contacts directed primarily to enrollees with targeted
diseases that can be provided from one of the Company's four centralized
operating unit call centers to services that also include providing local market
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 and are structured primarily as a monthly fee for each member of the
health plan identified with the particular chronic disease under contract. These
contracts are generally for terms of three to five 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
financial cost savings and clinical criteria. The Company records revenue from
its performance-based health plan contracts based on its estimates of expected
performance levels under these contracts and adjusts these estimates as
additional data necessary to determine performance levels becomes available.
The Company anticipates that additional disease management contracts
that the Company may sign with health plans may take one of several forms,
including some form of shared savings of overall enrollee healthcare costs, per
member per month payments to the Company to cover its services to enrollees, or
some combination of these arrangements. The Company anticipates that under most
contracts, some portion of the Company's fees will be at risk subject to its
performance against financial cost savings and clinical criteria.
MYHEALTHWAYS(SM) will address a broader population base in a health
plan than only those members with chronic diseases. The program will provide
personalized assessments and customized action plans to health plan members and
their physicians which enable proactive intervention with patients who are
identified to be at increased risk for a variety of treatable health problems.
MYHEALTHWAYS(SM) is intended to help mitigate the effects of or prevent certain
health problems. While no contracts have been executed to date for the
MYHEALTHWAYS(SM) product, it is anticipated that the structure for these
contracts will be similar to the Company's contracts for its disease management
products and could involve some portion of the Company's fees at risk subject to
meeting performance criteria.
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 disease
and care management services and has installed and is utilizing the system for
the enrollees of each of its health plan contract customers. During the fiscal
year ended August 31, 2000, this system was upgraded to enable it to handle
additional diseases other than diabetes from a common platform and to increase
the Company's central operating unit 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 its Internet communication technology. The capital expenditures
required during fiscal 2000 to upgrade the Company's information technology
capability and to add service capacity through the completion of centralized
operating unit call centers in Phoenix, Arizona, Pittsburgh, Pennsylvania and
Honolulu, Hawaii totaled approximately $7.0 million. As a result of these
expenditures, the Company had the infrastructure to provide disease and care
management services to approximately 400,000 equivalent lives as of August 31,
2000 compared with a capacity of approximately 125,000 equivalent lives at the
beginning of fiscal year 2000.
At August 31, 2000, the Company had contracts with 15 health plans to
provide disease management services in 58 health plan markets. The Company
reports the number of disease lives under its health plan contracts utilizing a
calculation of "equivalent" covered lives. Because the Company's original
disease
17
<PAGE> 18
management efforts focused on enrollees with diabetes and the majority of its
lives as of the end of fiscal 2000 were diabetes lives, contracted enrollee
lives for its cardiac and its respiratory programs are converted into the
revenue and service cost equivalent of a diabetes enrollee for reporting and
internal management purposes. While the average service intensity and the
Company's fee per cardiac enrollee is greater than the service intensity and fee
per diabetes enrollee, the Company believes that the contribution margin
percentage is similar for its diabetes lives and its cardiac disease lives. The
average service and fee intensity of the Company's respiratory disease program
varies in comparison with a diabetes enrollee depending on whether it involves a
lower intensity asthma population or a higher intensity chronic obstructive
pulmonary disease population. However, as with its cardiac disease program, the
Company believes that the contribution margin percentage is similar for its
diabetes lives and its respiratory disease lives. The number of equivalent lives
under management and generating revenues for the Company as well as the number
of equivalent lives under contract and scheduled for implementation but not
currently generating revenue are shown below at August 31, 2000, 1999 and 1998.
<TABLE>
<CAPTION>
--------------------------------------------------------------------
At August 31, 2000 1999 1998
--------------------------------------------------------------------
<S> <C> <C> <C>
Equivalent lives under management 198,916 111,197 57,292
Equivalent lives in backlog 13,000 21,000 35,000
--------------------------------
Total equivalent lives 211,916 132,197 92,292
================================
</TABLE>
Subsequent to August 31, 2000, the Company executed a contract to
provide cardiac disease management services to approximately 100,000 equivalent
lives in CIGNA Healthcare health plans. Services for these enrollees and fee
revenue for the Company under this contract is currently scheduled to be phased
in during the six month period beginning April 1, 2001, and are subject to the
Company providing a letter of credit of up to $6.6 million to support the
Company's performance under the contract.
During the fiscal years ended August 31, 2000 and 1999, approximately
44% and 43%, respectively, of the Company's revenues were derived from contracts
with two health plans. The loss of either of these contracts or a reduction in
the profitability of these contracts would have a material negative impact on
the Company's financial operations. During the fiscal year ended August 31,
2000, the Company restructured a contract with one of these health plans, which
resulted in a material reduction in revenues and profits under this contract
beginning January 1, 2000.
The Company's health plan contract revenues are dependent upon the
contractual relationships it establishes and maintains with client health plans
to provide disease management services to their members. The terms of these
health plan contracts generally range from three to five years with some
contracts providing for early termination by the health plan under certain
conditions. Because the disease management industry is relatively new and the
Company's contracts were some of the first large scale contracts to be executed
with health plans for disease management services, the renewal experience in
this industry is limited. No assurances can be given that the results from
restructurings and possible terminations at renewal would not have a material
negative impact on the Company's results of operations. During the three years
ended August 31, 2000, four health plan contracts have been terminated. Two of
these contracts involved pilot programs which ended by mutual consent at the end
of their terms. The other two contracts were terminated early as the result of
the acquisition of the Company's health plan customers by other health plans who
did not wish to continue providing the services.
During the fiscal year ending August 31, 2001, four health plan
customer contracts representing approximately 23% of the Company's revenues for
fiscal 2000 are eligible to be terminated under the terms
18
<PAGE> 19
of the contracts. No assurance can be given that the results of these renewals
or possible contract terminations would not have a material negative impact on
the Company's net income during fiscal 2001.
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 while enhancing the quality of care to this population. Fee structures
under the hospital contracts consist of either fixed management fees, variable
fees based on the Company's performance or a combination thereof. Variable fees
based upon performance generally provide for fee payments to the Company based
on changes in the client hospital's market share of diabetes inpatients, the
costs of providing care to these patients, and quality of care measurements. The
Company has renewed or entered into new contracts in recent years that included
primarily fixed management fee arrangements. The terms of hospital contracts
generally range from two to five years and are subject to periodic renegotiation
and renewal that may include reduction in fee structures which have a negative
impact on the Company's revenues and profitability. The form of these contracts
includes various structures ranging from arrangements where all costs of the
Company's program for center professional personnel, medical director fees and
community relations are the responsibility of the Company to structures where
all Company program costs are the responsibility of the client hospital. The
Company is paid directly by the hospital. Patients receiving services from the
diabetes treatment centers are charged by the hospital for typical hospital
services.
The Company's hospital-based diabetes treatment center business had 50
contracts in effect in 24 states at August 31, 2000. The Company also had a
contract to operate a hospital-based arthritis and osteoporosis treatment
center. The following table presents the number of total contracts in effect
during the past three fiscal years:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Year ended August 31, 2000 1999 1998
---------------------------------------------------------------------
<S> <C> <C> <C>
Contracts in effect at beginning of period 58 57 58
Contracts signed 8 9 9
Contracts discontinued (15) (8) (10)
----------------------
Contracts in effect at end of period 51 58 57
======================
Hospital sites where services are delivered 66 72 72
======================
</TABLE>
During fiscal 2000, 10 hospital contracts were renewed. Several of
these renewals included contract rate reductions, which the Company has
undertaken to maintain favorable long-term contractual relationships. Also
during fiscal 2000, 15 hospital contracts were discontinued. Several of these
contracts were lower revenue and lower margin contracts with limited impact on
the Company's profitability. There were no material continuing obligations or
costs for the Company associated with the termination of any client hospital
contracts. The Company anticipates that continued hospital industry pressures to
reduce costs because of constrained revenues will result in a continuation of
contract rate reductions and the potential for additional contract terminations.
During fiscal 2001, 28 contracts are eligible to be terminated under the terms
of the contracts with the hospitals.
The Company's strategy is to develop additional relationships with
health plans to provide care and disease management services and to further
develop and expand its hospital-based diabetes treatment center business. The
Company anticipates that it will utilize its state-of-the-art call center and
medical information
19
<PAGE> 20
technologies to gain a competitive advantage in delivering its health plan
disease management services. In addition, the Company plans to add services,
such as MYHEALTHWAYS(SM), to its product mix for health plans that will extend
the Company's programs beyond its current chronic disease focus and will be
designed to enhance the ability of health plans to create a positive health care
relationship with all of their members, not just those who are chronically ill.
It is anticipated that some of these new services will be added through
strategic alliances with other entities and that the Company may choose to make
minority interest investments in one or more of these entities.
The Company anticipates that additional disease management contracts
that the Company may sign with health plans may take one of several forms,
including some form of shared savings of overall enrollee healthcare costs, per
member per month payments to the Company to cover its services to enrollees, or
some combination of these arrangements. The Company anticipates that under most
contracts, some portion of the Company's fees will be at risk subject to its
performance against financial cost savings and clinical criteria.
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
received preferred stock purchase rights as a dividend at the rate of one right
per share. Each right initially entitles its holder to purchase one
one-hundredth of a new Series A preferred share at $32, subject to adjustment.
Upon becoming exercisable, each right will allow the holder (other than the
person or group whose actions have triggered the exercisability of the rights),
under alternative circumstances, to buy either securities of the Company 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 outstanding common stock. 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.
RESULTS OF OPERATIONS
FISCAL 2000 COMPARED TO FISCAL 1999
The increase in revenues of $2.9 million from 1999 to 2000 resulted
primarily from an increase in the average number of equivalent lives enrolled in
the Company's health plan disease management contracts to approximately 143,000
for 2000 from approximately 89,000 for 1999. This increase in the average number
of equivalent lives under management was primarily the result of new health plan
contracts signed during fiscal 1999 and 2000. The average revenue per member per
month for enrollees under the Company's health plan contracts for 2000 was 27%
less than for 1999. This decrease in average per member per month revenue
occurred primarily as a result of a greater mix of equivalent lives from new
contracts with lower revenue intensity levels during 2000 compared with 1999;
the negative impact during 2000 of reduced revenue from a contract with one of
the Company's health plan customers which was restructured effective January 1,
2000; and as a result of non-recurring negative revenue adjustments of
approximately $1.2 million recorded during 2000 related to the resolution of
billing eligibility issues with two health plan customers. The increase in
health plan contract revenues was offset partially by decreased revenues from
hospital treatment center contracts. Revenues from the Company's hospital
contract operations for 2000 were 9% less than for 1999 on 5% fewer average
number of contracts in operation during 2000 as compared with 1999. Average
revenue per hospital contract was approximately 4% lower in 2000 than in 1999
due primarily to contract fee reductions and to a greater mix of relatively
newer contracts with somewhat lower fees in 2000 compared with 1999. The Company
anticipates that revenues for fiscal 2001 will increase over fiscal 2000
revenues primarily as a result of additional lives enrolled under its existing
and anticipated new health plan contracts offset somewhat by lower revenues from
hospital contract operations resulting from contract fee reductions and contract
terminations.
20
<PAGE> 21
The increase in salaries and benefits of $3.6 million for 2000 over
1999 resulted primarily from higher staffing levels associated with increases in
the number of equivalent lives enrolled in the Company's health plan contracts
as well as increased staffing levels during 2000 associated with improvements in
the Company's health plan information technology capabilities and increases in
central operating unit call center service capacity for future growth. Salaries
and benefits as a percentage of revenues increased to 66% for 2000 from 63% for
1999 primarily as a result of higher staffing levels associated with its health
plan operations including the costs associated with information technology
improvements and service capacity expansion. The Company anticipates salaries
and benefits expense to increase during fiscal 2001 compared with fiscal 2000
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.
The increase in other operating expenses of $2.6 million for 2000
compared with 1999 resulted primarily from higher costs associated with
increases in the average number of equivalent lives enrolled in the Company's
health plan contracts as well as from costs during 2000 associated with
improvements in the Company's health plan information technology capabilities
and increases in central operating unit call center service capacity for future
growth. Other operating expenses as a percentage of revenues increased to 26%
for 2000 from 22% for 1999 primarily as a result of higher costs associated with
increases in the average number of lives enrolled in the Company's health plan
contracts as well as from costs associated with health plan related information
technology improvements and service capacity expansion. The Company anticipates
other operating expenses will increase during 2001 compared with fiscal 2000
primarily as a result of increased costs associated with anticipated increases
in the number of lives enrolled under the Company's health plan contracts.
The increase in depreciation and amortization expense of $1.8 million
for 2000 from 1999 resulted principally from increased depreciation expense
associated with information technology related capital expenditures for its
health plan operations, including the addition of two new central operating unit
call centers and the conversion of another health plan site to a central
operating unit call center during fiscal 2000. In addition, depreciation and
amortization expense increased during 2000 as a result of the Company's
leasehold improvements and other costs related to the Company's relocated and
expanded corporate and primary support office location in Nashville, Tennessee.
The Company anticipates depreciation and amortization expense to increase during
2001 compared with fiscal 2000 primarily as a result of additional information
technology and other capital expenditures associated with expected increases in
the number of equivalent lives enrolled under the Company's health plan
contracts and the full year impact during 2001 of capital expenditures made
during 2000.
The Company's income tax expense of $478,000 for 2000 compared to $2.4
million for 1999 resulted from decreased profitability in 2000 compared to 1999.
The differences between the statutory federal income tax rate of 34% and the
Company's effective tax rates during 2000 and 1999 are due primarily to the
impact of state income taxes and certain non-deductible expenses for income tax
purposes, primarily the amortization of excess costs over net assets of
purchased companies.
FISCAL 1999 COMPARED TO FISCAL 1998
Revenues for 1998 included $3.6 million resulting from the settlement
with a health plan, which terminated its disease management contract with the
Company effective July 31, 1998 in connection with its acquisition by another
health plan. The increase in revenues of $8.9 million from 1998 to 1999 resulted
primarily from an increase in the average number of equivalent lives enrolled in
the Company's health plan
21
<PAGE> 22
disease management contracts to approximately 88,700 for 1999 from approximately
26,200 for 1998 offset by the $3.6 million settlement with a health plan
customer included in revenues for 1998. The increase in the average number of
equivalent lives under management was primarily the result of new health plan
contracts signed during 1998 and 1999. The average revenue per member per month
for enrollees under the Company's health plan contracts for 1999 was 36% less
than for 1998. This decrease in average per member per month revenue occurred
primarily as a result of a greater mix of the lower-revenue intensity lives in
1999 as compared to 1998 and also as a result of higher revenues for health plan
lives during 1998 attributable to contracts with shared healthcare cost savings
fee structures which have been replaced with per member per month fee structures
in 1999. These increases in health plan contract revenues were offset partially
by decreased revenues from hospital treatment center contracts. Revenues from
the Company's hospital contract operations for 1999 were 9% less than for 1998
on a slightly higher average number of contracts in operation during 1999 as
compared with 1998. This reduction in hospital contract revenue is due primarily
to contract fee reductions and to a greater mix of relatively newer contracts
with somewhat lower fees in 1999 compared with 1998.
The increase in salaries and benefits of $4.9 million for 1999 over
1998 resulted primarily from higher staffing levels associated with increases in
the number of equivalent lives enrolled in the Company's health plan contracts
partially offset by decreased employee incentive compensation awards associated
with operating performance during 1999 and approximately $936,000 in severance
and other employee related costs incurred in 1998 associated with the
acquisition-related contract termination. Salaries and benefits as a percentage
of revenues decreased to 63% for 1999 from 64% for 1998 primarily as a result of
improved revenue performance at the Company's health plan contract operations.
The increase in other operating expenses of $118,000 for 1999 compared
with 1998 resulted primarily from higher costs associated with increases in the
average number of equivalent lives enrolled in the Company's health plan
contracts offset by other operating expenses of approximately $880,000
associated with the acquisition-related contract termination incurred in 1998.
Other operating expenses as a percentage of revenues decreased to 22% for 1999
from 27% for 1998 primarily as a result of improved revenue performance of the
Company's health plan contracts and the impact of the acquisition-related
contract termination costs incurred during 1998.
The increase in depreciation and amortization expense of $497,000 for
1999 from 1998 resulted principally from increased depreciation expense
associated with furniture, equipment and computer-related capital expenditures
associated with its disease management operations for health plans.
The Company's income tax expense of $2.4 million for 1999 compared to
an income tax benefit of $1.1 million for 1998 resulted from improved
profitability in 1999 compared to 1998 and as a result of the income tax benefit
generated in 1998 from the non-recurring stock option expense adjustment
associated with the AmSurg Distribution (see Note 8 to the Notes to Consolidated
Financial Statements). The differences between the statutory federal income tax
rate of 34% and the Company's effective tax and benefit rates during 1999 and
1998 are due primarily to the impact of state income taxes and the amortization
of excess costs over net assets of purchased companies, which are not deductible
for income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities for fiscal 2000 generated $5.6 million in cash
flow. Investing activities during this period used $10.6 million in cash which
consisted of the acquisition of property and equipment primarily associated with
improvements in the Company's health plan information technology capabilities
and with increases in its central operating unit call center service capacity
and also associated with leasehold
22
<PAGE> 23
improvements and other costs related to the Company's relocated and expanded
corporate and primary support office location in Nashville, Tennessee. Financing
activities for fiscal 2000 used $1.4 million in cash flow primarily resulting
from the Company's repurchase of its common stock.
In January 2000, the Company executed a financing agreement with a
financial institution which provides the Company with up to $6 million in
borrowing capacity, including the ability to issue up to $4.0 million of letters
of credit, 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 repurchases of the Company's common stock. As of August
31, 2000, there were no borrowings outstanding under this agreement, however,
subsequent to August 31, 2000, a letter of credit for approximately $600,000 was
issued to a health plan customer under the terms of this financing agreement to
support the Company's performance under the terms of a new health plan contract
signed during 2000. Also subsequent to August 31, 2000, the Company entered into
a new health plan management contract for cardiac services covering
approximately 100,000 equivalent lives which requires that the Company provide a
letter of credit for up to $6.6 million during 2001 to support the Company's
performance under the terms of that contract. The Company anticipates that it
will be able to expand its ability to issue letters of credit under its existing
or under new financing agreements but no assurances can be given that it will be
successful in securing this financing capability on terms that would be
acceptable to the Company.
The Company believes that cash flow from operating activities, its
available cash balances of $7.0 million at August 31, 2000 and available credit
under its financing agreement will continue to enable the Company to fund its
working capital needs and other expenditures associated with the growth and
expansion of its health plan operations including expenditures and minority
interest investments required to implement its strategy to extend the Company's
health plan programs beyond its current chronic disease focus. However, to the
extent that the expansion of the Company's health plan operations requires
significant financing resources through the issuance of letters of credit to
support the Company's performance, the Company's ability to arrange such
financing capability will be limited and the Company's ability to expand its
health plan operations may be restricted.
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 August 31, 2000,
the Company had repurchased 37,900 shares at a cost of $153,557 pursuant to this
authorization.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
23
<PAGE> 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AMERICAN HEALTHWAYS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
At August 31, 2000 1999
-------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note 1b) $ 7,025,277 $13,501,016
Accounts receivable, net 5,036,051 5,333,695
Other current assets (Note 1c) 1,465,804 1,240,071
Deferred tax assets (Notes 1g and 3) 724,000 1,179,000
--------------------------
Total current assets 14,251,132 21,253,782
--------------------------
Property and equipment (Note 1d):
Leasehold improvements 2,448,285 408,458
Equipment 16,557,524 8,598,750
--------------------------
19,005,809 9,007,208
Less accumulated depreciation (5,570,307) (2,996,655)
--------------------------
Net property and equipment 13,435,502 6,010,553
--------------------------
Long-term deferred tax assets (Notes 1g and 3) 2,132,000 2,123,000
--------------------------
Other assets, net (Note 1e) 835,245 543,408
--------------------------
Excess of cost over net assets of purchased
companies, net (Note 1f) 10,700,701 11,082,920
--------------------------
$41,354,580 $41,013,663
==========================
</TABLE>
See accompanying notes to the consolidated financial statements.
24
<PAGE> 25
AMERICAN HEALTHWAYS, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
At August 31, 2000 1999
-------------------------------------------------------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 1,924,077 $ 1,095,232
Accrued salaries and benefits 3,260,418 2,951,041
Accrued liabilities 2,373,444 1,775,071
Income taxes payable (Notes 1g and 3) 126,840 1,116,799
Current portion of other long-term liabilities (Note 5) 704,992 301,940
--------------------------
Total current liabilities 8,389,771 7,240,083
--------------------------
Other long-term liabilities (Note 5) 3,008,901 2,819,776
--------------------------
Commitments and contingencies (Notes 4, 6 and 11)
Stockholders' equity (Notes 7, 8 and 9)
Preferred stock
$.001 par value, 5,000,000 shares authorized,
none outstanding -- --
Common stock
$.001 par value, 15,000,000 shares authorized,
8,246,504 and 8,461,772 shares outstanding 8,247 8,462
Additional paid-in capital 23,604,823 24,750,587
Retained earnings 6,342,838 6,194,755
--------------------------
Total stockholders' equity 29,955,908 30,953,804
--------------------------
$41,354,580 $41,013,663
==========================
</TABLE>
See accompanying notes to the consolidated financial statements.
25
<PAGE> 26
AMERICAN HEALTHWAYS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Year ended August 31, 2000 1999 1998
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues (Note 1h) $53,029,860 $ 50,052,072 $ 41,167,436
-------------------------------------------
Expenses:
Salaries and benefits 34,975,208 31,362,186 26,472,583
Other operating expenses 13,785,983 11,202,507 11,084,345
Depreciation and amortization (Note 1) 3,620,305 1,805,410 1,308,320
Interest 22,281 289 1,308
Spin-off stock option adjustment (Note 8) -- -- 5,770,000
-------------------------------------------
Total expenses 52,403,777 44,370,392 44,636,556
Income (loss) before income taxes and
discontinued operations 626,083 5,681,680 (3,469,120)
Income tax expense (benefit) (Notes 1g and 3) 478,000 2,365,000 (1,148,000)
-------------------------------------------
Income (loss) from continuing operations 148,083 3,316,680 (2,321,120)
Income (loss) from discontinued operations, net of
income taxes (Note 2) -- -- 56,483
-------------------------------------------
Net income (loss) $ 148,083 $ 3,316,680 $ (2,264,637)
===========================================
Basic income (loss) per share (Note 1i):
From continuing operations $ 0.02 $ 0.40 $ (0.29)
From discontinued operations -- -- 0.01
-------------------------------------------
$ 0.02 $ 0.40 $ (0.28)
===========================================
Fully diluted income (loss) per share (Note 1i):
From continuing operations $ 0.02 $ 0.37 $ (0.29)
From discontinued operations -- -- 0.01
-------------------------------------------
$ 0.02 $ 0.37 $ (0.28)
===========================================
Weighted average common shares and equivalents
(Note 1i)
Basic 8,268,952 8,318,975 8,080,942
Fully diluted 8,635,400 8,923,523 8,080,942
</TABLE>
See accompanying notes to the consolidated financial statements.
26
<PAGE> 27
AMERICAN HEALTHWAYS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
--------------------------------------------------------------------
Additional
Preferred Common Paid-in Retained
Stock Stock Capital Earnings Total
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, August 31, 1997 -- $ 8,052 $ 18,142,278 $ 22,290,392 $ 40,440,722
Exercise of stock options (Note 8) -- 152 493,483 -- 493,635
Stock repurchase (Note 7) -- (79) (685,928) -- (686,007)
Spin-off stock option
adjustment (Note 8) -- -- 5,770,000 -- 5,770,000
Distribution of AmSurg
stock (Note 2) -- -- -- (17,147,680) (17,147,680)
Net loss -- -- -- (2,264,637) (2,264,637)
--------------------------------------------------------------------
Balance, August 31, 1998 -- 8,125 23,719,833 2,878,075 26,606,033
Exercise of stock options (Note 8) 395 1,507,883 -- 1,508,278
Stock repurchase (Note 7) -- (58) (477,129) -- (477,187)
Net income -- -- -- 3,316,680 3,316,680
--------------------------------------------------------------------
Balance, August 31, 1999 -- 8,462 24,750,587 6,194,755 30,953,804
Exercise of stock options (Note 8) 47 127,455 -- 127,502
Stock repurchase (Note 7) -- (262) (1,273,219) -- (1,273,481)
Net income -- -- -- 148,083 148,083
--------------------------------------------------------------------
Balance, August 31, 2000 -- $ 8,247 $ 23,604,823 $ 6,342,838 $ 29,955,908
====================================================================
</TABLE>
See accompanying notes to the consolidated financial statements.
27
<PAGE> 28
AMERICAN HEALTHWAYS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
Year ended August 31, 2000 1999 1998
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 148,083 $ 3,316,680 $ (2,264,637)
Income (loss) from discontinued operations (Note 2) -- -- 56,483
Net income (loss) from continuing operations 148,083 3,316,680 (2,321,120)
Income tax expense (benefit) (Notes 1g and 3) 478,000 2,365,000 (1,148,000)
---------------------------------------------
Income (loss) before income taxes 626,083 5,681,680 (3,469,120)
Noncash expenses, revenues, losses and gains
included in income:
Depreciation and amortization (Note 1) 3,620,305 1,805,410 1,308,320
Spin-off stock option adjustment (Note 8) -- -- 5,770,000
Decrease in working capital items 1,808,506 (2,495,717) 785,557
Other noncash transactions 1,041,300 776,102 1,249,788
---------------------------------------------
7,096,194 5,767,475 5,644,545
Income taxes (net paid) (1,021,959) (1,468,748) (507,549)
Increase in other assets (233,139) (454,670) (165,234)
Payments on other long-term liabilities (Note 5) (281,121) (490,507) (129,487)
---------------------------------------------
Net cash flows provided by operating activities 5,559,975 3,353,550 4,842,275
---------------------------------------------
Cash flows from investing activities:
Acquisition of property and equipment (10,595,887) (3,699,640) (2,991,724)
Investment in discontinued operations
including spin-off costs (Note 2) -- -- (496,411)
---------------------------------------------
Net cash flows used in investing activities (10,595,887) (3,699,640) (3,488,135)
---------------------------------------------
Cash flows from financing activities:
Exercise of stock options (Note 8) 83,654 1,080,722 348,617
Investment in unconsolidated subsidiaries (250,000) -- --
Stock repurchase (Note 7) (1,273,481) (477,187) (686,007)
---------------------------------------------
Net cash flows provided by (used in) financing activities (1,439,827) 603,535 (337,390)
---------------------------------------------
Net increase (decrease) in cash and cash equivalents (6,475,739) 257,445 1,016,750
Cash and cash equivalents, beginning of period 13,501,016 13,243,571 12,226,821
---------------------------------------------
Cash and cash equivalents, end of period $ 7,025,277 $ 13,501,016 $ 13,243,571
=============================================
</TABLE>
See accompanying notes to the consolidated financial statements.
28
<PAGE> 29
AMERICAN HEALTHWAYS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
Year ended August 31, 2000 1999 1998
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Decrease (increase) in other working capital items excluding income taxes:
Accounts receivable, net $ 297,644 $(1,710,234) $ (153,622)
Other current assets (225,733) (441,357) 508,358
Accounts payable 828,845 79,314 230,244
Accrued expenses 907,750 (423,440) 2,451,753
Unearned contract fees -- -- (2,251,176)
--------------------------------------------
$ 1,808,506 $(2,495,717) $ 785,557
============================================
SUPPLEMENTAL NOTES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
1. Other noncash transactions consist of the following:
Deferred compensation agreements $ 531,785 $ 572,554 $ 848,900
Write-off of assets for terminated contracts 112,430 125,457 401,250
Deferred rent payments 341,513 -- --
Liability insurance reserves -- 8,775 --
Miscellaneous other 55,572 69,316 (362)
--------------------------------------------
$ 1,041,300 $ 776,102 $ 1,249,788
============================================
</TABLE>
See accompanying notes to the consolidated financial statements.
29
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED AUGUST 31, 2000, 1999 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The operations of American Healthways, Inc. (the "Company") consist
primarily of American Healthways Services, Inc. ("AHSI"), a wholly-owned
subsidiary that is a national provider of disease management services to
hospitals and health plans. The Company formerly conducted business as American
Healthcorp, Inc. and changed its name in December 1999.
a. Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its subsidiaries, all of which are
wholly-owned or majority-owned. All material intercompany profits, transactions
and balances have been eliminated. Investments in unconsolidated subsidiaries
are carried at cost.
b. Cash and Cash Equivalents - Cash and cash equivalents are comprised
principally of tax-exempt debt instruments, repurchase agreements, commercial
paper and other short-term investments with maturities of less than three months
and accrued interest thereon.
c. Other Current Assets - Other current assets at August 31, 2000 and
1999 are comprised of prepaid expenses, inventories and other receivables.
d. Property and Equipment - Property and equipment costs include
expenditures, which increase value or extend useful lives. Depreciation is
recognized under the straight line method over useful lives ranging principally
from 5 to 10 years for leasehold improvements, 3 to 5 years for computer
software and hardware and 5 to 10 years for furniture and other office
equipment.
e. Other Assets - Other assets principally consist of net costs
incurred in obtaining hospital contracts, long-term notes receivable and
investments in unconsolidated subsidiaries.
f. Excess of Cost Over Net Assets of Purchased Companies - The excess
costs at August 31, 2000 and 1999 arose from a management buy-out of the Company
in August 1988. This excess cost is being amortized over 40 years and has no
income tax basis. Accumulated amortization at August 31, 2000 and 1999 was
$4,586,630 and $4,204,411, respectively. The Company assesses the impairment of
the value of excess of cost over net assets of purchased companies and other
long-lived assets in accordance with criteria consistent with the provisions of
Financial Accounting Standard No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", primarily using
estimated cash flows projected over the useful life of the related assets.
g. Income Taxes - The Company files a consolidated federal income tax
return which includes all of its wholly-owned subsidiaries and computes its
income tax provision under Financial Accounting Standard No. 109, "Accounting
for Income Taxes".
h. Revenue Recognition - Revenues under the Company's contracts with
hospitals and health plans are calculated based on various performance-based and
fixed-fee methodologies and are recorded as services are provided. Adjustments
for performance under the terms of the contracts and other factors impacting
revenue recognition are accrued on an estimated basis in the period the services
are provided and adjusted in future periods when final settlement is determined.
Management believes it has adequately provided for any potential adjustments
that may be applied to revenues from its contracts.
30
<PAGE> 31
During fiscal years ended August 31, 2000 and 1999, approximately 44%
and 43%, respectively, of the Company's revenues were derived from contracts
with two health plans. During fiscal year ended August 31, 1998, approximately
32% of the Company's revenues were derived from contracts with two health plans
and 11% were derived from one group of hospitals with common ownership.
i. Net Income (Loss) Per Share - Net income (loss) per share is
reported under Financial Accounting Standard No. 128 "Earnings per Share". The
presentation of basic earnings per share is based upon average common shares
outstanding during the period. Diluted earnings per share is based on average
common shares outstanding during the period plus the dilutive effect of stock
options outstanding. The calculation of diluted earnings per share for the year
ended August 31, 1998 does not include 583,573 in common stock equivalents
relative to outstanding stock options as their effect would be antidilutive.
j. Management Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
k. Recently Issued Accounting Standards - In June 1998, the Financial
Accounting Standards Board issued Financial Accounting Standard No. 133 ("FAS
133") "Accounting for Derivative Instruments and Hedging Activities". FAS 133 is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. The Company does not believe that the adoption of FAS 133 will have a
material effect on its financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements". SAB 101 provides guidance for applying generally accepted
accounting principles to selected revenue recognition issues. The implementation
of SAB 101 is required no later than the fourth fiscal quarter of fiscal years
beginning after December 15, 1999. The Company does not expect the application
of SAB 101 to have a material impact on the Company's consolidated financial
statements.
2. AMSURG - DISCONTINUED OPERATIONS
On March 7, 1997, the Company's Board of Directors approved a plan to
distribute on a substantially tax-free basis all of the shares of AmSurg common
stock owned by the Company to the holders of Company common stock (the
"Distribution"). The Distribution to stockholders of record at November 25, 1997
based on an amended plan of distribution was completed on December 3, 1997. The
effect of the Distribution was a reduction in retained earnings of $17,147,680,
which represented the Company's net investment in AmSurg.
The results of operations from discontinued operations for 1998 include
the Company's share of AmSurg's net income or loss based on the Company's
percentage ownership of AmSurg as well as the Company's expenses associated with
the Distribution which totaled $344,500 during 1998.
31
<PAGE> 32
Summary operating results of AmSurg are as follows:
<TABLE>
<CAPTION>
---------------------------------------------------
Year ended August 31, 1998
---------------------------------------------------
<S> <C>
Revenues $15,916,989
Net income $ 768,439
</TABLE>
A reconciliation of AmSurg net income to the Company's income from
discontinued operations is as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------
Year ended August 31, 1998
------------------------------------------------------------------
<S> <C>
Net income $ 768,439
AmSurg minority stockholders' interest (367,456)
Distribution costs incurred by American Healthways (344,500)
-----------
Net income from discontinued operations $ 56,483
===========
</TABLE>
3. Income Taxes
Income tax expense (benefit) is comprised of the following:
<TABLE>
<CAPTION>
------------------------------------------------------------------
Year ended August 31, 2000 1999 1998
------------------------------------------------------------------
<S> <C> <C> <C>
Current taxes
Federal $ 10,000 $1,665,000 $ 549,000
State 22,000 251,000 57,000
Deferred taxes 446,000 449,000 (1,754,000)
-----------------------------------------
Total $478,000 $2,365,000 $(1,148,000)
=========================================
</TABLE>
32
<PAGE> 33
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's net deferred tax asset for the fiscal years ended
August 31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
At August 31, 2000 1999
---------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Financial accruals without economic performance $ 722,000 $ 615,000
Spin-off stock option adjustment 1,338,000 1,764,000
Deferred compensation 1,196,000 1,259,000
-------------------------
3,256,000 3,638,000
-------------------------
Deferred tax liability:
Tax over book depreciation 310,000 236,000
Tax over book amortization 90,000 100,000
-------------------------
400,000 336,000
-------------------------
Net deferred tax assets $2,856,000 $3,302,000
=========================
Net current deferred tax assets $ 724,000 $1,179,000
Net long-term deferred tax assets 2,132,000 2,123,000
-------------------------
$2,856,000 $3,302,000
=========================
</TABLE>
The Company has not provided a valuation allowance on its deferred tax
assets because management believes their ultimate realization is more likely
than not.
The difference between income tax expense (benefit) computed using the
effective tax rate and the statutory federal income tax rate follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
Year ended August 31, 2000 1999 1998
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax from continuing operations $213,000 $1,932,000 $(1,180,000)
State income taxes, less Federal income tax benefit 34,000 224,000 (129,000)
Amortization of excess cost over net assets of
purchased companies 130,000 130,000 130,000
Other 101,000 79,000 31,000
-------------------------------------
Income tax expense (benefit) $478,000 $2,365,000 $(1,148,000)
=====================================
</TABLE>
4. LONG TERM DEBT
In January 2000, the Company executed a financing agreement with a
financial institution which provides the Company with up to $6 million in
borrowing capacity, including the ability to issue up to $4.0 million of letters
of credit, 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 repurchases of the Company's common stock. As of August
31, 2000, there were no borrowings outstanding under this agreement, however,
subsequent to August 31, 2000, a letter of credit for approximately $600,000 was
issued to a health plan customer under the terms of this
33
<PAGE> 34
financing agreement to support the Company's performance under the terms of a
new health plan contract signed during 2000. Also subsequent to August 31, 2000,
the Company entered into a new health plan management contract for cardiac
services covering approximately 100,000 equivalent lives which requires that the
Company provide a letter of credit for up to $6.6 million during 2001 to support
the Company's performance under the terms of that contract. The Company
anticipates that it will be able to expand its ability to issue letters of
credit under its existing or under new financing agreements to meet this
requirement.
5. OTHER LONG-TERM LIABILITIES
The Company has a non-qualified deferred compensation plan under which
officers of the Company and certain subsidiaries may defer a portion of their
salaries and receive a Company matching contribution plus a contribution based
on the performance of the Company. Company contributions vest at 25% per year.
The plan is unfunded and remains an unsecured obligation of the Company.
Participants in these plans elect payout dates for their account balances, which
can be no earlier than four years from the period of the deferral. Included in
other long-term liabilities are vested amounts under these plans of $2,372,345
and $2,455,594 as of August 31, 2000 and 1999, respectively, net of the current
portion of $656,778 and $301,940, respectively. Plan payments required in the
five years subsequent to August 31, 2000 for the Company are $656,778, $205,977,
$393,490, $277,685, and $110,262.
6. LEASES
The Company has operating lease agreements principally for its
corporate office space and for certain health plan contract site offices. The
present corporate office lease for approximately 44,000 square feet expires
September 2007. The health plan contract site office rentals are approximately
2,000 to 15,000 square feet each and have terms of three to ten years. Rent
expense under lease agreements for the years ended August 31, 2000, 1999 and
1999 was approximately $1,293,000, $1,053,000 and $951,000, respectively.
The future minimum lease commitments, net of sublease income, for each
of the next five years following August 31, 2000 for the Company for all
non-cancelable operating leases are as follows:
<TABLE>
<CAPTION>
-----------------------------
Year ending August 31,
-----------------------------
<S> <C>
2001 $1,898,142
2002 1,922,176
2003 1,846,265
2004 1,620,218
2005 1,589,822
-----------
Total $8,876,623
===========
</TABLE>
7. STOCKHOLDERS' EQUITY
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 August 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
34
<PAGE> 35
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.
8. STOCK OPTIONS
The Company has several stock option plans under which non-qualified
options to purchase the Company's common stock have been granted. Options under
these plans are normally granted at market value at the time of the grant and
normally vest over four years at the rate of 25% per year. Options have a term
of 10 years from the date of grant. At August 31, 2000, 38,525 shares were
reserved for future option grants.
As a result of the Company's distribution of its AmSurg common stock in
December 1997 (see Note 2) and pursuant to the terms of the Company's stock
option plans, the number of shares issuable pursuant to the Company's
outstanding stock options and the exercise price per share were adjusted to
maintain the value of the options subsequent to the Distribution at the
pre-Distribution level. This adjustment had the effect of reducing the average
exercise price of outstanding options to $3.27 per share from $8.62 per share
and resulted in an additional 254,000 shares being subject to options.
Additionally, all outstanding options as of the date of the Distribution became
fully vested. As a result of this adjustment of the stock options in December
1997, the Company recorded non-cash compensation expense and an equal increase
in stockholders' equity (additional paid-in capital) in an amount equal to the
difference between the aggregate exercise price of outstanding options to
purchase shares of the Company's common stock having an exercise price below the
market price of the Company's common stock and the aggregate market price for
such shares immediately prior to the Distribution. Although this adjustment
resulted in no change in the aggregate value of the options, the compensation
expense and associated increase in additional paid-in capital were recognized
because the adjustment resulted in a change in the ratio of the exercise price
to the market price per share.
Stock option activity for the three years ended August 31, 2000 is
summarized below:
<TABLE>
<CAPTION>
Number of Option Price
Shares Per Share
----------- --------------
<S> <C> <C>
Outstanding at August 31, 1997 1,170,851 $.001 - $21.43
Options granted 233,800 $6.84 - $11.31
Options cancelled at spin-off (1,344,055) $.001 - $21.43
Replacement options issued at spin-off 1,598,264 $1.71 - $15.41
Options exercised (146,732) $1.71 - $ 7.56
Options terminated (15,931) $4.37 - $10.75
-----------
Outstanding at August 31, 1998 1,496,197 $1.71 - $15.41
Options granted 290,275 $7.42 - $10.93
Options exercised (390,597) $1.71 - $10.90
Options terminated (29,103) $1.71 - $11.31
-----------
Outstanding at August 31, 1999 1,366,772 $1.71 - $15.41
Options granted 497,590 $3.85 - $ 6.83
Options exercised (38,405) $1.71 - $ 6.67
Options terminated (52,071) $1.71 - $11.31
-----------
Outstanding at August 31, 2000 1,773,886 $1.71 - $15.41
===========
</TABLE>
35
<PAGE> 36
The following table summarizes information concerning outstanding and
exercisable options at August 31, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Life (Yrs.) Price Exercisable Price
--------------- ----------- ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
Less than $2.00 476,775 3.0 $1.74 476,775 $ 1.74
$2.01 - $5.00 498,225 7.7 4.45 308,150 4.64
$5.01 - $8.00 721,286 7.0 6.61 267,561 6.54
More than $8.00 77,600 7.8 9.39 31,315 10.18
----------- ----------
1,773,886 6.2 4.81 1,083,801 3.99
=========== ==========
</TABLE>
The Company has also reserved 50,000 shares of common stock to be
granted as restricted stock as part of the Company's Board of Directors
compensation program of which 27,112 shares have been granted.
The Company accounts for its stock options issued to employees and
outside directors pursuant to Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees". Accordingly, no compensation expense
has been recognized in connection with the issuance of stock options. The
estimated weighted average fair values of the options at the date of grant using
the Black-Scholes option pricing model as promulgated by Financial Accounting
Standard No. 123, "Accounting for Stock Based Compensation" in the years ended
August 31, 2000, 1999 and 1998 are $2.88, $4.30 and $4.41 per share,
respectively. In applying the Black-Scholes model, the Company assumed no
dividends, an expected life for the options of six and one-half years, a
forfeiture rate of 3% for the years ended August 31, 2000, 1999, and 1998,
respectively, and an average risk free interest rate of 6.2%, 5.2% and 5.5% for
the years ended August 31, 2000, 1999 and 1998, respectively. The Company also
utilized a volatility rate of 52% for the year ended August 31, 2000 and 53% for
the years ended August 31, 1999 and 1998. Had the Company used the Black-Scholes
estimates to determine compensation expense for options granted during the years
ended August 31, 2000, 1999 and 1998, net income (loss) and net income (loss)
per share would have been reduced to the following pro forma amounts.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
Year ended August 31, 2000 1999 1998
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss)
As reported $ 148,083 $ 3,316,680 $(2,264,367)
Pro forma $(526,917) $ 2,909,680 $(3,105,392)
Net income (loss) per fully diluted share
As reported $ 0.02 $ 0.37 $ (0.28)
Pro forma $ (0.06) $ 0.33 $ (0.38)
</TABLE>
9. 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
received preferred stock purchase rights as a dividend at the rate of one right
per share. Each right initially entitles its holder to purchase one
one-hundredth of a new Series A preferred share at $32, subject to adjustment.
Upon becoming exercisable, each right will allow the
36
<PAGE> 37
holder (other than the person or group whose actions have triggered the
exercisability of the rights), under alternative circumstances, to buy either
securities of the Company 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 outstanding common stock. 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.
10. EMPLOYEE BENEFITS
The Company has a Section 401(k) Retirement Savings Plan ("Plan")
available to substantially all employees of the Company and its wholly owned
subsidiaries. Employee contributions are limited to a percentage of their basic
compensation as defined in the Plan and are supplemented by Company
contributions, which are subject to vesting requirements. Company contributions
under the Plan totaled $414,318, $334,860 and $340,301 for the years ended
August 31, 2000, 1999 and 1998, respectively.
11. CONTINGENCIES
In November 1994, the Company received an administrative subpoena for
documents from a regional office of the Office of the Inspector General ("OIG")
of the Department of Health and Human Services in connection with an
investigation of 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. Various preliminary motions
have been filed regarding jurisdictional and pleading matters, resulting in the
filing of a number of amended complaints and the dismissal of the Company as a
defendant. AHSI continues to be 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 will not have a material
adverse effect on the Company, the Company believes that the resolution of
issues, if any, which may be raised by the government and the resolution of the
civil litigation will not have a material adverse effect on the Company's
financial position or results of operations except to the extent that the
Company incurs material legal expenses associated with its defense of this
matter and the civil suit.
12. BUSINESS SEGMENTS
The Company provides disease and care management services to health
plans and hospitals. The Company's reportable segments are the types of
customers, hospital or health plan, who contract for the Company's services. The
segments are managed separately and the Company evaluates performance based
37
<PAGE> 38
on operating profits of the respective segments. Because the Company's services
are similar for both types of customers, the Company supports both segments with
common human resources, clinical, marketing and information technology
resources.
The accounting policies of the segments are the same as those discussed
in the summary of significant accounting policies. There are no intersegment
sales. Income (loss) before income taxes and discontinued operations by
operating segment excludes interest income, interest expense and general
corporate expenses.
Summarized financial information by business segment is as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
Year ended August 31, 2000 1999 1998
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Health plan contracts $ 32,183,378 $ 27,152,389 $ 16,065,618
Hospital contracts 20,416,807 22,330,858 24,501,589
Other revenue 429,675 568,825 600,229
----------------------------------------------
$ 53,029,860 $ 50,052,072 $ 41,167,436
==============================================
Income (loss) before income taxes
and discontinued operations:
Health plan contracts $ 4,477,579 $ 6,509,044 $ 2,080,459
Hospital contracts 5,569,057 6,502,002 7,146,419
Shared support services (7,099,502) (5,287,320) (4,717,621)
----------------------------------------------
Total segments 2,947,134 7,723,726 4,509,257
General corporate (2,321,051) (2,042,046) (2,208,377)
Spin-off stock option adjustment -- -- (5,770,000)
----------------------------------------------
$ 626,083 $ 5,681,680 $ (3,469,120)
==============================================
Depreciation and amortization:
Health plan contracts $ 1,731,944 $ 825,840 $ 417,516
Hospital contracts 186,073 176,877 209,071
Shared support services 843,572 200,370 159,861
----------------------------------------------
Total segments 2,761,589 1,203,087 786,448
General corporate 858,716 602,323 521,872
----------------------------------------------
$ 3,620,305 $ 1,805,410 $ 1,308,320
==============================================
Expenditures for long-lived assets:
Health plan contracts $ 5,719,951 $ 1,768,722 $ 2,684,508
Hospital contracts 203,879 156,658 195,776
Shared support services 1,581,344 1,530,935 174,909
----------------------------------------------
Total segments 7,505,174 3,456,315 3,055,193
General corporate 3,398,662 431,938 124,265
----------------------------------------------
$ 10,903,836 $ 3,888,253 $ 3,179,458
==============================================
</TABLE>
38
<PAGE> 39
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
At August 31, 2000 1999 1998
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Identifiable assets:
Health plan contracts $ 11,580,554 $ 7,282,246 $ 4,344,215
Hospital contracts 2,412,637 2,591,055 2,960,431
Shared support services 2,651,835 2,174,652 633,661
----------------------------------------------
Total segments 16,645,026 12,047,953 7,938,307
General corporate 11,152,853 14,580,790 13,702,358
Assets not allocated:
Deferred tax assets 2,856,000 3,302,000 3,751,000
Excess of cost over net assets
of purchased companies 10,700,701 11,082,920 11,465,139
----------------------------------------------
$ 41,354,580 $ 41,013,663 $ 36,856,804
==============================================
</TABLE>
All of the Company's operations are in the United States. During the
year ended August 31, 2000, revenues of $11.1 million and $12.2 million,
respectively, were derived from contracts with two health plan customers During
the year ended August 31, 1999, revenues of $16.6 million and $4.8 million,
respectively, were derived from contracts with two health plan customers. During
the year ended August 31, 1998, revenues of $8.1 million and $4.9 million were
derived from two health plan customers and revenues of $4.5 million were derived
from one group of hospitals with common ownership, respectively.
39
<PAGE> 40
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
American Healthways, Inc.
Nashville, Tennessee
We have audited the accompanying consolidated balance sheets of American
Healthways, Inc. (formerly American Healthcorp, Inc.) and subsidiaries as of
August 31, 2000 and 1999, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for each of the three years in
the period ended August 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of American Healthways, Inc. and
subsidiaries as of August 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended August 31,
2000 in conformity with accounting principles generally accepted in the United
States of America.
DELOITTE & TOUCHE LLP
Nashville, Tennessee
October 6, 2000
40
<PAGE> 41
QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
(In thousands except per share data)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
FISCAL 2000 First Second Third Fourth
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $13,065 $13,213 $ 11,617 $15,135
Income (loss) before income taxes $ 1,004 $ 486 $ (1,563) $ 699
Net income $ 585 $ 175 $ (1,013) $ 401
Diluted income (loss) per share * $ 0.07 $ 0.02 $ (0.12) $ 0.05
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
FISCAL 1999 First Second Third Fourth
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $11,835 $12,239 $ 12,497 $13,481
Income before income taxes $ 1,054 $ 1,235 $ 1,358 $ 2,035
Net income $ 606 $ 716 $ 791 $ 1,204
Diluted income per share * $ 0.07 $ 0.08 $ 0.09 $ 0.13
</TABLE>
* Income (loss) per share calculations for each of the quarters were based on
the weighted average number of shares and dilutive options outstanding for
each period. Accordingly, the sum of the quarters may not necessarily be
equal to the full year income (loss) per share.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
41
<PAGE> 42
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the directors of the Company is included in
pages 5-7 under the caption "Election of Directors" of the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held January 22, 2001 and
is incorporated herein by reference.
Pursuant to General Instruction G(3), information concerning executive
officers of the Company is included in Part I, under the caption "Executive
Officers of the Registrant" of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is contained in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held January 22, 2001, to
be filed with the Securities and Exchange Commission pursuant to Rule 14a-6(c)
and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is contained in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held January 22, 2001, to
be filed with the Securities and Exchange Commission pursuant to Rule 14a-6(c)
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is contained in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held January 22, 2001, to
be filed with the Securities and Exchange Commission pursuant to Rule 14a-6(c)
and is incorporated herein by reference.
42
<PAGE> 43
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
3. EXHIBITS
3.1 Restated Certificate of Incorporation for American Healthways,
Inc., as amended (incorporated by reference to Exhibit 10.1 to
Form 10-Q of the Company's fiscal quarter ended February 29,
2000)
3.2 Bylaws [(incorporated by reference to Exhibit 3.2 to
Registration Statement on Form S-1 (Registration No.
33-41119)]
4.1 Article IV of the Company's Restated Certificate of
Incorporation (included in Exhibit 3.1)
10.1 Amended and Restated Distribution Agreement dated November 3,
1997 between American Healthcorp, Inc. and AmSurg Corp.
(incorporated by reference to Exhibit 2.1 to Form 10/A-3 of
AmSurg Corp. filed November 3, 1997)
10.2 Credit Agreement and Revolving Credit Note between American
Healthways, Inc. and SunTrust Bank dated January 4, 2000
(incorporated by reference to Exhibit 10.1 to Form 10-Q of the
Company's fiscal quarter ended November 30, 1999)
10.3 First Amendment to Credit Agreement between American
Healthways, Inc. and SunTrust Bank dated May 12, 2000
(incorporated by reference to Exhibit 10.1 to Form 10-Q of the
Company's fiscal quarter ended May 31, 2000)
10.4 Amendment Agreement between American Healthways Services,
Inc., American Healthways Management, Inc., Arthritis and
Osteoporosis Care Center, Inc. and SunTrust Bank dated May 12,
2000 (incorporated by reference to Exhibit 10.2 to Form 10-Q
of the Company's fiscal quarter ended May 31, 2000)
Management Contracts and Compensatory Plans
10.5 Employment Agreement as Amended and Restated dated August 31,
1992 between the Company and Thomas G. Cigarran (incorporated
by reference to Exhibit 10.3 to Form 10-K of the Company for
its fiscal year ended August 31, 1992)
10.6 Employment Agreement as Amended and Restated dated August 31,
1992 between the Company and Henry D. Herr (incorporated by
reference to Exhibit 10.4 to Form 10-K of the Company for its
fiscal year ended August 31, 1992)
10.7 Employment Agreement as Amended and Restated dated August 31,
1992 between the Company and Robert E. Stone (incorporated by
reference to Exhibit 10.6 to Form 10-K of the Company for its
fiscal year ended August 31, 1992)
10.8 Employment Agreement dated May 15, 1983 between the Company
and David A. Sidlowe [incorporated by reference to Exhibit
10.10 to Registration Statement on Form S-1 (Registration No.
33-41119)]
43
<PAGE> 44
10.9 Capital Accumulation Plan, as amended [incorporated by
reference to Exhibit 10.11 to Registration Statement on Form
S-1 (Registration No. 33-41119) and Exhibit 10.8 to Form 10-K
of the Company for its fiscal year ended August 31, 1995]
10.10 Non-Statutory Stock Option Plan of 1988 [incorporated by
reference to Exhibit 10.12 to Registration Statement on Form
S-1 (Registration No. 33-41119)]
10.11 1991 Employee Stock Incentive Plan, as amended (incorporated
by reference to Exhibit 10.10 to Form 10-K of the Company for
its fiscal year ended August 31, 1992)
10.12 1991 Stock Option Plan for Outside Directors [incorporated by
reference to Exhibit 10.14 to Registration Statement on Form
S-1 (Registration No. 33-41119)]
10.13 1991 Outside Directors Discretionary Stock Option Plan
[incorporated by reference to Exhibit 4(c) to Registration
Statement on Form S-8 (Registration No. 33-42909)]
10.14 Form of Indemnification Agreement by and among the Company and
the Company's directors [incorporated by reference to Exhibit
10.15 to Registration Statement on Form S-1 (Registration No.
33-41119)]
10.15 1996 Stock Incentive Plan, as amended (incorporated by
reference to the Company's proxy statement for the annual
meeting of stockholders held January 23, 1996 and the proxy
statement for the Annual Meeting of Stockholders held January
25, 2000)
21 Subsidiaries of the registrant
23 Independent Auditor's Consent
27 Financial Data Schedule
(b) Reports on Form 8-K
There have been no reports on Form 8-K during the fourth quarter of
fiscal 2000.
44
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMERICAN HEALTHWAYS, INC.
November 29, 2000 By: /s/ Thomas G. Cigarran
----------------------------------------
Thomas G. Cigarran
Chairman of the Board,
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Title Date
-------------------------------------- --------------------------------------- ------------------
/s/ Thomas G. Cigarran Chairman of the Board, November 29, 2000
-------------------------------------- President and Chief Executive Officer,
Thomas G. Cigarran Director (Principal Executive Officer)
/s/ Henry D. Herr Executive Vice President November 29, 2000
-------------------------------------- Finance and Administration, Chief
Henry D. Herr Financial Officer, Secretary, Director
(Principal Financial Officer)
/s/ David A. Sidlowe Senior Vice President and Controller November 29, 2000
-------------------------------------- (Principal Accounting Officer)
David A. Sidlowe
/s/ Frank A. Ehmann Director November 29, 2000
--------------------------------------
Frank A. Ehmann
/s/ Martin J. Koldyke Director November 29, 2000
--------------------------------------
Martin J. Koldyke
/s/ C. Warren Neel Director November 29, 2000
--------------------------------------
C. Warren Neel
/s/ William C. O'Neil, Jr. Director November 29, 2000
--------------------------------------
William C. O'Neil, Jr.
</TABLE>
45
