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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, 2001
Commission File Number 000-19364

AMERICAN HEALTHWAYS, INC.

3841 Green Hills Village Drive, Nashville, TN 37215

615-665-1122

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock — $.001 par value

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        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 26, 2001, 14,171,400 shares of Common Stock were outstanding. The aggregate market value of the shares held by non-affiliates of the Registrant was approximately $337,000,000.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held January 22, 2002 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, 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. In addition, the Company’s My Healthways^SM product 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. As of August 31, 2001, the Company had contracts to provide its services to 17 health plans in 69 markets and also had 55 contracts to provide its services at 78 hospitals.

     In June 2001, the Company announced the launch of its comprehensive care enhancement programs for health plans which include screening all members of a health plan’s population and providing care enhancement programs specifically designed to address the needs of people identified with various additional high cost health conditions. This care enhancement strategy includes the development of expanded tools and technologies that will be fully integrated into the Company’s central operating unit call centers and its proprietary Population Works^SM information platform. This information platform houses patient and care data, monitors program activities and facilitates exchange of information between care coordinators, physicians and health plans. 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.

     In two separate transactions during fiscal 2001, the Company acquired 100% of CareSteps.com, Inc. (“CareSteps”) and 100% of Empower Health, Inc. (“Empower Health”). The Company is integrating CareSteps’ evidence-based, Internet health application and advanced neural network predictive modeling capabilities with the Company’s current care and disease management services. The acquisition of Empower Health provided market research regarding outcomes improvement services, prospective sales opportunities and experienced management to strengthen the Company’s sales and marketing efforts in addition to key strategic relationships.

     This Annual Report on 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 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 outcomes 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 Company’s ability to accurately forecast performance under the terms of its health plan contracts ahead of data collection and reconciliation; 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

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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 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 to support or guarantee 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 attract and/or retain and effectively manage the employees required to implement its agreements with hospitals and health plan organizations; any impact of the transitional impairment test of goodwill as required by SFAS No. 142; the impact of 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; and general economic conditions. 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, 2001, 2000 and 1999:

     For information on the Company’s business segments, see Note 12 of the Notes to the Consolidated Financial Statements.

Health Plan Contracts

     While the Company’s revenues historically have been generated primarily by its operating contracts with hospitals, a majority of its fiscal 1999 through 2001 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 management and care enhancement 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. During fiscal 2001, the Company announced the launch of its total population care enhancement strategy designed to identify enrollees and provide care enhancement services for enrollees in health plans that have been identified as having or are at risk for having one or

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more high cost diseases or impact conditions. The Company’s disease management and care enhancement programs assist enrollees and their health plan’s affiliated health care service providers with specific disease or condition-related care enhancement services. The Company believes that its patient and physician support regimens, delivered and/or supervised by a multi-disciplinary team, will assist in assuring that effective care for the treatment of the disease or condition is provided to enrollees and that this focus will improve the health status of the enrollee populations with the disease or condition and will reduce both the short-term and long-term healthcare costs of these enrollees.

     The Company’s health plan disease management and care enhancement 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. Approximately one third of the Company’s health plan revenues recorded during the fiscal year ended August 31, 2001 are subject to confirmation of the Company’s performance against financial cost savings and clinical criteria. Estimates for performance under the terms of these contracts and other factors affecting 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. These estimates are continually reviewed and adjusted as information related to performance levels and associated fees become available.

     Disease management and care enhancement health plan contracts require sophisticated management information systems to enable the Company to manage the care of large populations of patients with certain chronic diseases such as diabetes, cardiac disease and respiratory disease as well as certain other medical conditions and to assist in reporting outcomes and costs before and after the Company’s involvement with a health plan’s enrollees. The Company has developed and is continually expanding and improving its clinical management systems which it believes meet its information management needs for its disease management and care enhancement services and has installed and is utilizing the systems for the enrollees of each of its health plan contract customers. The anticipated expansion and improvements in its information management systems will continue to require significant investments by the Company in information technology software, hardware and its information technology staff.

     At August 31, 2001, the Company had contracts with 17 health plans to provide disease management services in 69 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 2001 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

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revenues for the Company as well as the backlog of equivalent lives under contract and scheduled for implementation but not currently generating revenues are shown below at August 31, 2001, 2000 and 1999.

     In June 2001, the Company announced its intent to provide initial funding for the establishment at Johns Hopkins University and Health System of an outcomes verification program to independently evaluate and verify the effectiveness of clinical interventions and their clinical and financial results. Johns Hopkins’ initial work will be to evaluate the Company’s care enhancement interventions and then, separately, validate and publish the Company’s outcomes improvement results. This strategic alliance agreement will be effective December 1, 2001 and will cost approximately $1.4 million a year over five years.

Hospital Contracts

     The Company’s hospital-based diabetes treatment center business had 55 contracts in effect in 24 states at August 31, 2001. The Company also had a contract to operate one hospital-based arthritis and osteoporosis treatment center during fiscal 2000 and 1999; this contract was discontinued during fiscal 2001. The following table presents the number of total hospital contracts in effect during the past three fiscal years:

     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 primarily of fixed management fees, but in some contracts may also include variable fees based on the Company’s performance. 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 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.

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Business Strategy

     The Company’s strategy is to develop additional relationships with health plans to provide disease management and care enhancement 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 central operating unit call center and medical information technologies to gain a competitive advantage in delivering its health plan disease management services. In addition, the Company has announced its plans to add services 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 provide care enhancement services to individuals identified with one or more of a number of additional diseases or conditions or who are at risk for these diseases or conditions. The Company believes that significant cost savings and improvements in care can result from addressing care management and treatment requirements for these additional selected diseases and conditions and will enable the Company to address a much larger percent of a health plan’s total healthcare costs. The Company anticipates that significant costs will be incurred during fiscal 2002 in the development of the clinical programs, the associated information technology support for these expanded care enhancement initiatives and the opening of additional central operating unit call centers and that many of these costs will be incurred prior to the initiation of revenues from contracts for these new programs. It is also anticipated that some of these new capabilities and technologies may be added through strategic alliances with other entities and that the Company may choose to make minority interest investments in or to acquire for stock or cash one or more of these entities.

     The Company anticipates that additional disease management and care enhancement contracts that the Company may sign with health plans may take one of several forms, including per member per month payments to the Company to cover its services to enrollees, some form of shared savings of overall enrollee healthcare costs, 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 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

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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 of 1996 (“HIPAA”), 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 federal regulations governing medical record confidentiality, state legislation or regulation will preempt federal legislation if it is more restrictive. The Company is in the process of determining the extent to which specific state legislation or regulations govern the Company’s health plan operations. 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 material 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 and care enhancement industry, which is growing rapidly, is a relatively new segment of the overall healthcare 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 which generally results in a lengthened sales cycle for new health plan contracts. In addition, because the industry is still relatively new and health plans have only recently entered into disease management contracts, the Company has a significant concentration of its revenues represented by contracts with two health plans, Hawaii Medical Services Association and CIGNA Healthcare, Inc., which collectively accounted for 43% of the Company’s revenues in fiscal 2001. Until additional significant health plan contracts are signed and implemented by the Company, the Company’s results of operations and financial condition would be negatively and materially impacted by the loss or restructuring of a contract with a single large health plan customer.

     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 central operating unit call center technology provides it with a competitive advantage in the industry, the Company expects to continually invest in updating and expanding 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 revenues from contracts with new health plans. 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 Company’s health plan growth strategy focuses on the development of care enhancement programs to address additional diseases or medical conditions, as well as the overall health of all enrollees of a health plan, which is beyond the Company’s current disease management focus. While the Company has considerable experience in care enhancement efforts with a broad range of medical conditions, most of the Company’s existing health plan contracts address the healthcare needs of enrollees with only one or two diseases. Because the Company’s new care enhancement programs will address all the healthcare

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needs of enrollees who are identified as having or at risk for having one or more of 27 diseases or impact conditions, many of these programs will be new to the Company and will involve additional risks of execution and performance.

     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.

     The membership enrollment and disenrollment processes of the Company’s health plan customers can result in a seasonal reduction in lives under management during the Company’s fiscal second and third quarters. Employers typically make decisions on which health insurance carriers they will offer to their employees and also may allow employees to switch between health plans on an annual basis. Historically, the Company has found that most of these decisions are made on December 31st of each year. An employer’s change in health plans or employees’ change in health plan elections will result in the Company’s loss of covered lives under management as of December 31st. Although these decisions may also result in a gain in enrollees, the process of identifying eligible new members to participate in the Company’s programs is dependent on the submission of healthcare claims, which lags enrollment by an indeterminate period. As a result, there historically has been a loss of covered lives of between 5% and 7% on December 31st that is not restored through new member identification until later in the fiscal year thereby negatively affecting Company revenues in its second and third fiscal quarters.

     Another potential seasonal impact on covered lives could include a decision by a Medicare Health Maintenance Organization (“HMO”) to withdraw coverage in a geographic area thereby automatically disenrolling previously covered members. Historically, the Company has experienced minimal covered life disenrollment from such a decision, but the potential has increased since a larger proportion of the Company’s lives under contract are enrollees in Medicare HMO programs at customer health plans.

     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 health plans to provide disease management and care enhancement 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 for these contracts 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 and financial condition. During the year ended August 31, 2001, five health plan contracts were scheduled to expire. One of these contracts involved a unique pilot program which ended by mutual consent at the end of its term; one contract was terminated as the result of the acquisition of this health plan by another health plan that did not wish to continue providing the services;

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two contracts were terminated as the result of changes in the strategic direction of these health plans; and one contract was renewed and expanded to include additional lives and an additional disease.

     During the fiscal year ending August 31, 2002, four health plan customer contracts representing 2% of the Company’s revenues for fiscal 2001 are eligible to be terminated under the terms of the contracts. Three additional contracts representing approximately 5% of the Company’s revenues for fiscal 2001 and which also would have expired under the terms of the contracts during fiscal 2002 were renewed during fiscal 2001 on terms substantially the same as the terms in the original contracts. No assurance can be given that unscheduled contract terminations or renegotiations would not have a material negative impact on the Company’s results of operations and financial condition during fiscal 2002.

     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 with some contracts providing for early termination by the hospital under certain conditions. These contracts 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 2001, 13 hospital contracts were renewed. Several of these renewals included contract rate reductions, which the Company has undertaken to maintain long-term contractual relationships. Also during fiscal 2001, seven hospital contracts were discontinued. 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 2002, 22 contracts are either subject to expiration if not renewed or have early cancellation provisions that could result in contract termination.

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 and other care 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. All of the Company’s healthcare professionals who are subject to licensing requirements are licensed in the state in which they are physically present such as the professionals located in a central operating unit call center. Multiple state licensing requirements for healthcare professionals who provide services telephonically over state lines may require the Company to license some of its healthcare professionals in more than one state. The Company is continually monitoring the developments in telemedicine; however, no assurance can be provided that new judicial decisions or federal or state legislation or regulations would not increase the requirement for multistate licensing of all central operating unit call center health professionals, which would increase the administrative costs of the Company.

     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 has reduced or will significantly reduce Medicare and Medicaid reimbursements to most hospitals. These reimbursement changes are negatively impacting hospital revenues and operations. Although the Balanced Budget Refinement Act of 1999 partially alleviated the reimbursement impact on hospitals, 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 HIPAA, is one such example. While the Company believes that its ability to obtain this information for disease management and care enhancement purposes from a health plan with which it has contracted is protected in recently released federal regulations governing medical record confidentiality, additional interpretations of these regulations or 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 and care enhancement services are 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 include 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.

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Insurance

     The Company maintains professional malpractice, errors and omissions 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. The Company also maintains property and workers compensation insurance for each of its locations with commercial carriers on relatively standard commercial terms and conditions.

Employees

     As of August 31, 2001, the Company had 644 full-time employees and 160 part-time employees in the following general classifications: 504 healthcare professionals, including nurses, counselors and dietitians; 132 on site management and administrative personnel; and 168 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. As of August 31, 2001, the Company also had office space leases associated with its four call center locations in Phoenix, AZ, Nashville, TN, Pittsburgh, PA, and Honolulu, HI for an aggregate of approximately 54,000 square feet of space for terms of three to ten years. All of the Company’s diabetes treatment centers are located in hospital space 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 (“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 notice 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.

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     The Company cooperated fully with the OIG in its investigation during 1994 and 1995, 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.

Executive Officers of the Registrant

     The following table sets forth certain information regarding executive officers of the Company as of August 31, 2001. Executive officers of the Company serve at the pleasure of the Board of Directors.

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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 restated to reflect the effect of a three-for-two stock split effective November 2001. (See Note 13 of the Notes to the Consolidated Financial Statements.)

(b) Holders

     At November 26, 2001, there were approximately 8,000 holders of the Company’s Common Stock, including 179 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.

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Table of Contents

Item 6. Selected Financial Data