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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended May 31, 2001
Commission File Number 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)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of July 12, 2001 there were outstanding 9,434,583 shares of the Registrant's
Common Stock, par value $.001 per share.
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PART I.
ITEM 1. FINANCIAL STATEMENTS
AMERICAN HEALTHWAYS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
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May 31, August 31,
2001 2000
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Current assets:
Cash and cash equivalents $ 9,063,617 $ 7,025,277
Accounts receivable, net 5,161,484 5,036,051
Other current assets 2,016,363 1,465,804
Deferred tax asset 724,000 724,000
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Total current assets 16,965,464 14,251,132
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Property and equipment:
Leasehold improvements 2,478,803 2,448,285
Equipment 20,031,434 16,557,524
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22,510,237 19,005,809
Less accumulated depreciation (8,927,920) (5,570,307)
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13,582,317 13,435,502
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Long-term deferred tax asset 2,132,000 2,132,000
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Other assets, net 1,499,890 835,245
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Excess of cost over net assets
of purchased companies, net 10,414,036 10,700,701
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$ 44,593,707 $ 41,354,580
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AMERICAN HEALTHWAYS, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
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May 31, August 31,
2001 2000
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Current liabilities:
Accounts payable $ 1,805,867 $ 1,924,077
Accrued salaries and benefits 4,000,723 3,260,418
Accrued liabilities 1,319,403 2,373,444
Income taxes payable 1,557 126,840
Current portion of other long-term liabilities 379,720 704,992
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Total current liabilities 7,507,270 8,389,771
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Other long-term liabilities 3,253,000 3,008,901
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Stockholders' equity:
Common stock
$.001 par value, 15,000,000 shares
authorized, 8,564,485 and 8,246,504
shares outstanding 8,564 8,247
Additional paid-in capital 25,339,788 23,604,823
Retained earnings 8,485,085 6,342,838
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Total stockholders' equity 33,833,437 29,955,908
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$ 44,593,707 $ 41,354,580
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AMERICAN HEALTHWAYS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
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Three Months Ended May 31, Nine Months Ended May 31,
2001 2000 2001 2000
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Revenues $18,459,037 $ 11,617,059 $52,694,304 $ 37,895,361
------------------------------- ----------------------------
Expenses:
Salaries and benefits 10,824,909 8,537,548 31,420,123 25,700,629
Other operating expenses 4,715,278 3,654,204 13,532,429 9,766,201
Depreciation and amortization 1,393,358 979,657 3,888,224 2,487,748
Interest 38,405 9,005 62,281 14,243
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Total expenses 16,971,950 13,180,414 48,903,057 37,968,821
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Income (loss) before income taxes 1,487,087 (1,563,355) 3,791,247 (73,460)
Income tax expense (benefit) 647,000 (550,000) 1,649,000 180,000
------------------------------- ----------------------------
Net income (loss) $ 840,087 $ (1,013,355) $ 2,142,247 $ (253,460)
=============================== ============================
Basic income (loss) per share $ 0.10 $ (0.12) $ 0.26 $ (0.03)
=============================== ============================
Fully diluted income (loss)
per share $ 0.09 $ (0.12) $ 0.24 $ (0.03)
=============================== ============================
Weighted average common
shares and equivalents
Basic 8,484,927 8,228,388 8,368,005 8,280,806
Fully diluted 9,308,041 8,228,388 9,065,029 8,280,806
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AMERICAN HEALTHWAYS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED MAY 31, 2001
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Additional
Common Paid-in Retained
Stock Capital Earnings Total
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Balance, August 31, 2000 $8,247 $23,604,823 $6,342,838 $29,955,908
Exercise of stock options 317 897,178 -- 897,495
Tax benefit of option exercises -- 837,787 -- 837,787
Net income -- -- 2,142,247 2,142,247
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Balance, May 31, 2001 $8,564 $25,339,788 $8,485,085 $33,833,437
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AMERICAN HEALTHWAYS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Nine Months Ended May 31,
2001 2000
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Cash flows from operating activities:
Net income (loss) $ 2,142,247 $ (253,460)
Income tax expense 1,649,000 180,000
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Income (loss) before income taxes 3,791,247 (73,460)
Noncash expenses, revenues, losses and gains
included in income:
Depreciation and amortization 3,888,224 2,487,748
Increase in working capital items (1,107,938) (1,589,931)
Other noncash transactions 860,681 637,086
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7,432,214 1,461,443
Income taxes (net paid) (936,496) (997,270)
Increase in other assets (96,487) (159,731)
Payments on other long-term liabilities (546,699) (252,227)
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Net cash flows provided by operating activities 5,852,532 52,215
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Cash flows from investing activities:
Acquisition of property and equipment (3,666,366) (8,707,896)
Investments in unconsolidated businesses (1,000,000) (200,000)
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Net cash flows used in investing activities (4,666,366) (8,907,896)
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Cash flows from financing activities:
Exercise of stock options 852,174 19,999
Repurchase of stock -- (1,273,481)
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Net cash flows provided by (used in)
financing activities 852,174 (1,253,482)
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Net increase (decrease) in cash and cash equivalents 2,038,340 (10,109,163)
Cash and cash equivalents, beginning of period 7,025,277 13,501,016
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Cash and cash equivalents, end of period $ 9,063,617 $ 3,391,853
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AMERICAN HEALTHWAYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) INTERIM FINANCIAL REPORTING
The accompanying consolidated financial statements of American
Healthways, Inc. and its subsidiaries (the "Company") for the three and nine
month periods ended May 31, 2001 and 2000 are unaudited. However, in the opinion
of the Company, all adjustments consisting of normal, recurring accruals
necessary for a fair presentation, have been reflected therein.
Certain financial information which is normally included in financial
statements prepared in accordance with generally accepted accounting principles,
but which is not required for interim reporting purposes, has been omitted. The
accompanying consolidated financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended August 31, 2000.
(2) 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 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.
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Summarized financial information by business segment is as follows:
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Three Months Ended May 31, Nine Months Ended May 31,
2001 2000 2001 2000
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Revenues:
Health plan contracts $ 13,307,246 $ 6,410,783 $ 37,685,571 $ 22,384,009
Hospital contracts 5,033,679 5,120,843 14,672,290 15,141,615
Other revenue 118,112 85,433 336,443 369,737
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$ 18,459,037 $ 11,617,059 $ 52,694,304 $ 37,895,361
=============================== ==============================
Income (loss) before income taxes:
Health plan contracts $ 3,072,003 $ (440,296) $ 8,686,067 $ 2,418,503
Hospital contracts 1,404,018 1,408,633 3,824,797 4,174,172
Shared support services (2,120,266) (1,938,442) (6,223,879) (5,037,199)
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Total segments 2,355,755 (970,105) 6,286,985 1,555,476
General corporate expenses (868,668) (593,250) (2,495,738) (1,628,936)
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$ 1,487,087 $ (1,563,355) $ 3,791,247 $ (73,460)
=============================== ==============================
(3) RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board has approved for issuance
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and No. 142 "Goodwill and Other Intangible Assets". Both
statements are scheduled to be published in July 2001. SFAS No. 141 will require
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 and that the use of the pooling-of-interest method
is no longer allowed. SFAS No. 142 requires that upon adoption, amortization of
goodwill will cease and instead, the carrying value of goodwill will be
evaluated for impairment on an annual basis. Identifiable intangible assets will
continue to be amortized over their useful lives and reviewed for impairment in
accordance with SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of". SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001; however, the Company may elect
early adoption of this statement on September 1, 2001, the beginning of its 2002
fiscal year. The Company is evaluating the impact of the adoption of these
standards and has not yet determined the effect of adoption on its financial
position and results of operations.
(4) SUBSEQUENT EVENTS
In two separate transactions in June 2001, the Company acquired the
remaining 93% interest in CareSteps.com, Inc. ("CareSteps") that the Company did
not already own and 100% of Empower Health, Inc. ("Empower Health"). CareSteps
is a health care technology company that provides both evidence-based,
consumer-facing web-based health application and advanced neural network
predictive modeling capabilities that the Company will integrate with its
current health care and disease management services. Empower Health contributes
unique and extensive market research regarding outcome improvement services,
prospective sales opportunities and seasoned executives to strengthen the
Company's sales and marketing efforts as well as strategic alliances with
entities including Johns Hopkins Medical Center and Cap Gemini Ernst & Young.
The purchase price paid for the interests acquired consisted primarily of
742,101 unregistered shares of the Company's common stock and contingent
consideration of up
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to 355,000 shares of unregistered common stock to be issued between October 2001
and September 2006, depending on the price of the Company's common stock for
certain periods during that time frame.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
American Healthways, Inc. (the "Company") provides specialized,
comprehensive disease management and care management services to health plans,
physicians 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 and recently
introduced its MYHEALTHWAYS(sm) product which is designed to provide health plan
members and their physicians with personalized health assessments and customized
action plans that can be utilized by all health plan members, not just those
with chronic diseases.
In June 2001, the Company announced the launch of its comprehensive
Care Enhancement programming which brings together new services for screening
all members of an insurer's population and programs specifically designed to
address the needs of people with respect to 27 different health conditions. Care
Enhancement will bring expanded tools and technologies that will be fully
integrated into the Company's call centers and its proprietary Population Works
information platform which houses all patient and care data, monitors program
activities and facilitates exchange of information between care coordinators
and a health plan. The additional health conditions for which the Company is
adding services include those that the Company believes have a solid base of
scientific evidence which supports providing specific clinical interventions to
improve outcomes and reduce the cost of care.
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
disease management services and Care Enhancement 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 limited number of
health plan customers; the Company's ability to effect estimated cost savings
and clinical outcome improvements under health plan disease management and Care
Enhancement 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 the Company's performance under the terms of its health plan
contracts; the Company's ability to resolve favorably contract billing and
interpretation issues with its health plan customers; the ability of the Company
to effectively integrate new technologies such as those encompassed in its Care
Enhancement initiatives into the Company's care management information
technology platform; the ability of the Company to improve its health plan sales
and marketing effectiveness as a result of the integration of Empower Health
personnel into its existing management organization; the ability of the Company
to implement its Care Enhancement strategy within the expected
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cost estimates; the ability of the Company to obtain adequate financing to
provide the capital that may be needed to support the growth of the Company's
health plan operations and financing or reinsurance 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 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 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 and on the financial health of
the Company's customers and their willingness to purchase the Company's
services. The Company undertakes no obligation to update or revise any such
forward-looking statements.
The following table sets forth the sources of the Company's revenues by
customer type as a percentage of total revenues for the three and nine months
ended May 31, 2001 and 2000.
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Three Months Ended Nine Months Ended
May 31, May 31,
2001 2000 2001 2000
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Health plan contracts 72% 55% 71% 59%
Hospital contracts 27 44 28 40
Other 1 1 1 1
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100% 100% 100% 100%
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The Company believes that a substantial portion of its future revenue
growth will result from health plan customer contracts.
HEALTH PLAN CONTRACTS
The Company's disease management and Care Enhancement services for
health plans are designed to meet the needs of individual health plan customers.
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.
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As of May 31, 2001, the Company had contracts with 17 health plans to
provide disease management services in 69 health plan markets compared with
contracts with 15 health plans in 53 markets as of May 31, 2000. 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 currently under contract are 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 May 31, 2001 and 2000.
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At May 31, 2001 2000
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Equivalent lives under management 238,137 146,615
Equivalent lives in backlog 156,000 49,000
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Total equivalent lives 394,137 195,615
=======================
During the quarter ended May 31, 2001, the Company executed two
contracts to provide disease management services. The first contract, with Aetna
Health Management, Inc., will provide cardiac disease management services to
approximately 60,000 equivalent lives. The second contract, with Blue Cross and
Blue Shield of Missouri, will provide diabetes disease management services to
approximately 9,000 equivalent lives. Services for these enrollees and fee
revenue for the Company under these contracts is currently scheduled to begin
during the fourth quarter of fiscal 2001.
During the three and nine months ended May 31, 2001, approximately 43%
and 40%, 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 could have a material negative impact on
the Company's results of operations.
During the quarter ended May 31, 2001, one of the Company's health plan
customer contracts comprising 13% of the Company's revenues for the nine months
ended May 31, 2001 terminated by its terms. No other material health plan
contracts are subject to termination during the remainder of fiscal 2001.
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 contract
restructurings and possible terminations at renewal would not have a material
negative impact on the Company's results of operations.
As part of the Company's strategy to expand its health plan operations
beyond its disease management focus to comprehensive Care Enhancement services,
effective June 1, 2001, the Company acquired the remaining 93% interest in
CareSteps.com, Inc. ("CareSteps") it did not already own. CareSteps is a health
care technology company that provides both evidence-based, consumer-facing
web-based health application and advanced neural network predictive modeling
capabilities that the Company
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will integrate with its current health care and disease management programs to
broaden its Care Enhancement services. In addition, CareSteps' software provides
the basic structure for the Company's MYHEALTHWAYS(sm) system.
To further accelerate the implementation of the Company's Care
Enhancement strategy, on June 5, 2001, the Company acquired Empower Health Inc.
("Empower Health"), which contributes unique and extensive market research
regarding outcome improvement services, prospective sales opportunities and
seasoned executives to strengthen the Company's sales and marketing efforts as
well as strategic alliances with entities including Johns Hopkins Medical Center
and Cap Gemini Ernst & Young.
HOSPITAL CONTRACTS
The Company's hospital-based diabetes treatment centers are located in
and operated under contracts with general acute care hospitals. As of May 31,
2001, the Company had 56 hospital contracts to provide services at 79 hospital
sites compared with the 54 contracts at 69 hospital sites as of May 31, 2000.
The number of hospital contracts and hospital sites for the period ended May 31,
2000 included an Arthritis and Osteoporosis Care Center contract with a hospital
to provide comprehensive arthritis and osteoporosis services. This contract
terminated on April 30, 2001.
The components of changes to the total number of hospital contracts and
hospital sites under these contracts for the three and nine months ended May 31,
2001 and 2000 are presented below.
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Three Months Ended Nine Months Ended
May 31, May 31,
2001 2000 2001 2000
---------------------- ------------------
Contracts in effect at beginning of period 55 54 51 58
Contracts signed 3 2 9 8
Contracts discontinued (2) (2) (4) (12)
---------------------- ------------------
Contracts in effect at end of period 56 54 56 54
====================== ==================
Hospital sites where services are
delivered 79 69 79 69
====================== ==================
During the three month period ended May 31, 2001, two contracts were
renewed for the Company's hospital-based diabetes treatment centers. During the
remainder of fiscal 2001, 13 contracts are either subject to expiration if not
renewed or have early cancellation provisions that could result in contract
termination.
The hospital industry continues to experience pressures on its
profitability as a result of constrained revenues from governmental and private
revenue sources as well as from increasing underlying medical care costs. The
Company believes that these pressures will continue. While the Company believes
that its products are geared specifically to assist hospitals in controlling the
high costs associated with the treatment of chronic diseases, the pressures to
reduce costs immediately may have a negative effect, in certain circumstances,
on the ability of or the length of time required by the Company to sign new
hospital contracts as well as on the Company's ability to retain hospital
contracts. This focus on cost reduction may also result in a continuation of
downward pressure on the fee structures of existing contracts. While the Company
believes that the overall environment for hospitals may become somewhat more
positive as a result of Medicare reimbursement relief that has been granted for
hospitals as a result of recently passed federal legislation, there can be no
assurance that
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these financial pressures will not continue to have a negative impact on the
Company's hospital contract operations.
RESULTS OF OPERATIONS
Revenues for the three and nine month periods ended May 31, 2001
increased 59% and 39%, respectively, over the same periods in 2000. This
increase in revenues resulted primarily from an increase in the average number
of equivalent lives enrolled in the Company's health plan contracts to
approximately 218,000 lives and 215,000 lives, respectively, for the three and
nine month periods ended May 31, 2001 from approximately 139,000 lives and
129,000 lives, respectively, for the comparable three and nine month periods
during the prior year. The increase in the average number equivalent lives under
management was primarily the result of new health plan contracts signed during
fiscal 2000 and 2001. The average revenue per member per month for equivalent
lives enrolled under the Company's health plan contracts were 32% and 5% greater
during the three and nine month periods ended May 31, 2001, respectively, than
during the prior year periods. This increase in average per member per month
revenue occurred primarily as a result of a greater mix of equivalent lives
under contracts with higher revenue intensity and levels in the fiscal 2001
period when compared with the fiscal 2000 period, improved performance under the
terms of incentive fee provisions of health plan contracts, a non-recurring
negative revenue adjustment of approximately $1.0 million recorded in the third
quarter of fiscal 2000, and revenues recognized during the fiscal 2001 periods
associated with final settlement and transition services on two health plan
contracts that terminated during fiscal 2001. Revenues from the Company's
hospital contract operations for the three and nine month periods ended May 31,
2001 were 2% and 3% less, respectively, than hospital contract revenues for the
comparable periods last year principally due to selected rate reductions for
contract renewals which occurred subsequent to May 31, 2000. The Company
anticipates that total revenues for the remainder of fiscal 2001 will increase
over comparative fiscal 2000 periods primarily as a result of additional lives
enrolled under new and existing care and disease management contracts with
health plans offset somewhat by the impact of lower revenues from its hospital
contract operations.
Salaries and benefits for the three and nine month periods ended May
31, 2001 increased 27% and 22%, respectively, primarily from higher staffing
levels associated with increases in the number of equivalent lives enrolled in
the Company's health plan contracts and increased employee incentive
compensation associated with improved operating performance compared with the
prior fiscal year periods. Salaries and benefits as a percentage of revenues
decreased to 59% and 60% for the three and nine month periods ended May 31,
2001, respectively, compared to 74% and 68%, respectively, for the three and
nine month periods last year primarily as a result of improved revenue
performance at the Company's health plan contract operations offset somewhat by
higher staffing levels at its health plan contract operations. The Company
anticipates salaries and benefits expense to increase during the remainder of
fiscal 2001 compared with fiscal 2000 primarily as a result of increased staff
required for expected expansion of the Company's health plan operations and the
addition of management staff associated with the CareSteps and the Empower
Health acquisitions.
Other operating expenses for the three and nine month periods ended May
31, 2001 increased 29% and 39%, respectively, from the comparable periods last
year. The increase for the three and nine month periods was primarily
attributable to higher operating costs resulting from the growth of the
Company's health plan operations compared to the same periods last year and, for
the nine month period, from the write off of a $250,000 minority interest
investment in a small startup cancer care management company in February 2001.
Other operating expenses as a percentage of revenues decreased to 26% for the
three month period ended May 31, 2001 from 32% for the comparable period
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last year primarily as a result of improved revenue performance at the Company's
health plan contract operations. Other operating expenses as a percentage of
revenues for the nine month period was 26% for both periods primarily as a
result of higher operating costs associated with its health plan operations
during fiscal 2001 and the write off of the investment in a small startup cancer
care management company in February 2001 offset by improved revenue performance
at the Company's health plan contract operations. The Company anticipates other
operating expenses will increase during the remainder of fiscal 2001 compared
with fiscal 2000 primarily as a result of increased costs associated with the
expansion of the Company's health plan operations including the development and
marketing of its new Care Enhancement strategy.
The increase in depreciation and amortization expense to $1.4 million
and $3.9 million, respectively, for the three and nine month periods ended May
31, 2001 from $979,657 and $2.5 million for the comparable periods last year
principally resulted from increased depreciation expense associated with
equipment and computer-related capital expenditures for the Company's health
plan operations. The Company anticipates depreciation and amortization expense
to increase during the remainder of fiscal 2001 compared with fiscal 2000
primarily as a result of intangible assets recorded in the CareSteps and Empower
Health acquisitions, additional capital expenditures associated with expected
increases in the number of equivalent lives enrolled under the Company's health
plan contracts as well as from growth and improvement in the Company's
information technology capabilities and the expenses associated with the
development and marketing of its new Care Enhancement strategy.
The Company's income tax expense for the three and nine month periods
ended May 31, 2001 was $647,000 and $1.6 million, respectively, compared to a
tax benefit of $550,000 for the three months ended May 31, 2000 and income tax
expense of $180,000 for the nine months ended May 31, 2000. The increase in the
income tax expense between these periods resulted primarily from an increase in
profitability. The differences between the statutory federal income tax rate of
34% and the Company's effective tax rates during both periods are due primarily
to the impact of state income taxes and certain non-deductible expenses for
income taxes, primarily amortization of excess costs over net assets of
purchased companies.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities for the nine months ended May 31, 2001 generated
$5.9 million in cash flow. Investing activities during this period used $4.7
million in cash which consisted of the acquisition of property and equipment
purchases for the Company primarily associated with its expanding health plan
contract operations and for a $1.0 million minority investment in Caresteps.
Financing activities for the nine months ended May 31, 2001 provided $852,000 in
cash proceeds from the exercise of options to purchase the Company's common
stock.
The Company's credit agreement with a financial institution provides
borrowing capacity of up to $10 million, inclusive of the ability to issue up to
$8 million of letters of credit. This agreement expires on January 4, 2003.
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, limits the amount of repurchases of the Company's common stock, and
requires the Company to maintain cash and cash equivalents of $5 million. As of
May 31, 2001, there were no borrowings outstanding under this agreement,
however, there are letters of credit outstanding under the agreement totaling
approximately $7.2 million to support the Company's performance under two health
plan contracts.
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The Company believes that cash flow from operating activities, its
available cash and available credit under its credit agreement will continue to
enable the Company to fund the current level of growth in its health plan
operations. However, to the extent that the expansion of the Company's health
plan operations requires significant additional financing resources, such as the
issuance of letters of credit to guarantee the Company's performance under the
terms of new health plan contracts, the Company's ability to arrange such
financing capability may limited and the Company's ability to expand its health
plan operations could be restricted. In addition, should health plan contract
development accelerate or should acquisition opportunities arise that would
enhance the Company's planned expansion of its health plan operations, the
Company may need to issue additional equity to provide the funding for these
increased growth opportunities. No assurance can be given that the Company would
be able to issue additional equity on terms that would be acceptable to the
Company.
During March 2000, the Company's Board of Directors authorized the
repurchase of up to 500,000 shares of the Company's common stock. The
authorization enables the Company to make repurchases from time to time in open
market and private transactions prior to March 1, 2002. As of May 31, 2001, the
Company had repurchased 37,900 shares at a cost of $153,557 pursuant to this
authorization.
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PART II
ITEM 1. Legal Proceedings.
In November 1994, the Company received an administrative
subpoena for documents from a regional office of the Office of
the Inspector General ("OIG") of the Department of Health and
Human Services in connection with an investigation of a
wholly-owned subsidiary of the Company, American Healthways
Services, Inc. ("AHSI"), formerly Diabetes Treatment Centers
of America, Inc., under certain federal Medicare and Medicaid
statutes. On February 10, 1995, the Company learned that the
federal government had declined to take over and pursue a
civil "whistle blower" action brought under seal in June 1994
on behalf of the government by a former employee dismissed by
the Company in February 1994. The Company believes that this
lawsuit triggered the OIG investigation. The civil suit was
filed in June 1994 against the Company, AHSI, and certain
named and unnamed medical directors and client hospitals and
was kept under seal to permit the government to determine
whether to take over the lawsuit. Following its review, the
government made the determination not to take over the
litigation. Accordingly, 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. The case has been transferred to the United States
District Court for the District of Columbia so that the court
can coordinate discovery with other qui tam cases in which
certain client hospitals and their affiliates are named as
defendants. On January 30, 2001, that court ordered the
government to file any notice of intervention in each of the
consolidated cases on or before March 15, 2001. The government
again filed papers indicating that it would not be intervening
in AHSI's case. The case is still in the discovery stage and
has not yet been set for trial.
The Company has cooperated fully with the OIG in its
investigation, and believes that its operations have been
conducted in full compliance with applicable statutory
requirements. Although there can be no assurance that the
existence of, or the results of, the investigation would not
have a material adverse effect on the Company, the Company
believes that the resolution of issues, if any, which may be
raised by the government and the resolution of the civil
litigation would not have a material adverse effect on the
Company's financial position or results of operations except
to the extent that the Company incurs material legal expenses
associated with its defense of this matter and the civil suit.
ITEM 2. Changes in Securities.
On June 1, 2001, the Company issued the 627,106 shares of
common stock to the former shareholders of CareSteps in
connection with the merger of a wholly-owned subsidiary of the
Company with and into CareSteps. Certain former shareholders
of CareSteps also received an additional 11,905 shares of
common stock in connection with entering into covenants not to
compete with the Company. The issuances were made in reliance
on the exemption provided by Rule 506 of the Securities Act of
1933, as amended.
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On June 5, 2001, the Company issued 114,995 shares of common
stock to the former shareholders of Empower Health in
connection with the merger of Empower Health with and into the
Company. The issuances were made in reliance on the exemption
provided by Section 4(2) of the Securities Act of 1933, as
amended, for a transaction not involving a public offering.
ITEM 3. Defaults Upon Senior Securities.
Not Applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
ITEM 5. Other Information.
Not Applicable.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 Employment Agreement dated June 1, 2001
between the Company and Jeffrey J. Rice, M.D.
10.2 Employment and Non-Compete Agreement dated June 5,
2001 between the Company and Richard R. Rakowski
(b) Reports on Form 8-K
A Current Report on Form 8-K dated March 15, 2001 was filed during the
quarter ended May 31, 2001 reporting a live broadcast of the second
quarter conference call to analysts on the Internet.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
American Healthways, Inc.
(Registrant)
Date July 16, 2001 By /s/ Henry D. Herr
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HENRY D. HERR
Executive Vice President
Finance and Administration,
(Principal Financial Officer)
Date July 16, 2001 By /s/ David A. Sidlowe
-------------------------------------
DAVID A. SIDLOWE
Senior Vice President and Controller
(Principal Accounting Officer)
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