AMERICAN HEALTHWAYS INC - 10-Q Quarterly Report

Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934

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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

As of January 9, 2004 there were outstanding 32,003,485 shares of the Registrant’s Common Stock, par value $.001 per share.


				(Unaudited)
				November 30,			August 31,
				2003			2003⁽¹⁾

Current assets:
	Cash and cash equivalents			$	35,007		$	35,956
	Accounts receivable, net
			Billed		21,043			18,526
			Unbilled		4,701			7,971
	Other current assets				3,997			4,267
	Deferred tax asset				1,105			758

		Total current assets			65,853			67,478
Property and equipment:
	Leasehold improvements				5,381			5,045
	Computer equipment and related software				41,908			38,214
	Furniture and office equipment				10,367			9,558

					57,656			52,817
	Less accumulated depreciation				(28,528	)		(25,166	)

					29,128			27,651
Long-term deferred tax asset					67			—
Other assets					2,131			182
Intangible assets, net					22,945			264
Goodwill, net					83,627			44,438

				$	203,751		$	140,013

⁽¹⁾ Certain items have been reclassified to conform to current classifications.


			(Unaudited)
			November 30,		August 31,
			2003		2003⁽¹⁾

Current liabilities:
	Accounts payable		$	3,130	$	4,067
	Accrued salaries and benefits			3,183		9,162
	Accrued liabilities			4,532		2,790
	Contract billings in excess of earned revenue			5,463		3,272
	Income taxes payable			1,523		391
	Current portion of long-term debt			12,516		389
	Current portion of long-term liabilities			484		360

		Total current liabilities		30,831		20,431
Long-term debt				45,613		109
Long-term deferred tax liability				2,380		2,380
Other long-term liabilities				5,247		4,662
Stockholders’ equity:
	Preferred stock $.001 par value, 5,000,000 shares authorized, none outstanding			—		—
	Common stock $.001 par value, 40,000,000 shares authorized, 31,925,679 and 31,593,464 shares outstanding⁽²⁾			32		32
	Additional paid-in capital⁽²⁾			77,363		74,070
	Retained earnings			42,285		38,329

		Total stockholders’ equity		119,680		112,431

			$	203,751	$	140,013

⁽¹⁾

Certain items have been reclassified to conform to current classifications.

⁽²⁾

Restated to reflect the effect of the December 2003 two-for-one stock split.


		Three Months Ended
		November 30,

		2003		2002

Revenues		$	51,078	$	37,538
Cost of services			34,144		24,626

Gross margin			16,934		12,912
Selling, general and administrative expenses			5,142		3,918
Depreciation and amortization			4,142		2,539
Interest expense			944		185

Income before income taxes			6,706		6,270
Income tax expense			2,750		2,571

Net income		$	3,956	$	3,699

Earnings per share:⁽¹⁾
	Basic	$	0.12	$	0.12
	Diluted	$	0.12	$	0.11
Weighted average common shares and equivalents:⁽¹⁾
	Basic		31,790		30,793
	Diluted		34,218		32,690

⁽¹⁾

Restated to reflect the effect of the December 2003 two-for-one stock split.


						Additional
		Preferred		Common		Paid-in		Retained
		Stock		Stock		Capital		Earnings		Total

Balance, August 31, 2003⁽¹⁾		$	—	$	32	$	74,070	$	38,329	$	112,431
	Exercise of stock options and other		—		—		1,265		—		1,265
	Tax benefit of option exercises		—		—		2,028		—		2,028
	Net income		—		—		—		3,956		3,956

Balance, November 30, 2003		$	—	$	32	$	77,363	$	42,285	$	119,680

⁽¹⁾

Restated to reflect the effect of the December 2003 two-for-one stock split.


			Three Months Ended
			November 30,

			2003			2002⁽¹⁾

Cash flows from operating activities:
	Net income		$	3,956		$	3,699
	Adjustments to reconcile net income to net cash provided by operating activities, net of business acquisitions:
		Depreciation and amortization		4,142			2,539
		Amortization of deferred loan costs		192			69
		Tax benefit of stock option exercises		2,028			352
		Decrease (increase) in accounts receivable, net		1,182			(3,026	)
		Decrease (increase) in other current assets		497			(726	)
		Decrease in accounts payable		(1,480	)		(2,251	)
		Decrease in accrued salaries and benefits		(6,599	)		(7,528	)
		Increase in other current liabilities		1,706			6,305
		Other		488			391
		Decrease in other assets		49			251
		Payments on other long-term liabilities		(61	)		—

	Net cash flows provided by operating activities			6,100			75

Cash flows from investing activities:
		Acquisition of property and equipment		(3,061	)		(4,862	)
		Business acquisitions, net of cash acquired		(59,812	)		—

	Net cash flows used in investing activities			(62,873	)		(4,862	)

Cash flows from financing activities:
		Increase in restricted cash and cash equivalents		—			(3,000	)
		Proceeds from issuance of long-term debt, net of deferred loan costs		57,685			—
		Exercise of stock options		1,262			206
		Payments of long term-debt		(3,123	)		(94	)

	Net cash flows provided by (used in) financing activities			55,824			(2,888	)

Net decrease in cash and cash equivalents				(949	)		(7,675	)
Cash and cash equivalents, beginning of period				35,956			23,924
Cash and cash equivalents, end of period			$	35,007		$	16,249

Supplemental disclosure of cash flow information:
	Cash paid during the period for interest		$	649		$	13

	Cash paid during the period for income taxes		$	837		$	15

⁽¹⁾

Certain items have been reclassified to conform to current classifications.

The accompanying consolidated financial statements of American Healthways, Inc. and its subsidiaries (the “Company”) for the three months ended November 30, 2003 and 2002 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 items in prior periods have been reclassified to conform to current classifications.

Certain financial information, which is normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, 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, 2003.

The Company provides care enhancement and disease 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 currently managed separately, and the Company evaluates performance based on operating profits of the respective segments. The Company supports both segments with shared support services, including information technology, marketing, and human resources.

The accounting policies of the segments are the same as those used in the preparation of the Company’s consolidated financial statements. There are no intersegment sales. Income (loss) before income taxes by operating segment excludes general corporate expenses.


			Three Months Ended
			November 30,

(In $000s)			2003			2002

Revenues:
	Health plan contracts		$	47,714		$	33,507
	Hospital contracts			3,312			3,947
	Other revenue			52			84

			$	51,078		$	37,538

Income (loss) before income taxes:
	Health plan contracts		$	16,726		$	11,932
	Hospital contracts			737			753
	Shared support services			(7,019	)		(5,246	)

		Total segments		10,444			7,439
	General corporate expenses			(3,738	)		(1,169	)

			$	6,706		$	6,270

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities”. FIN No. 46 requires consolidation of variable interest entities (“VIE”) if certain conditions are met. The interpretation applies immediately to VIEs created after January 31, 2003, and to variable interests obtained in VIEs after January 31, 2003. FIN No. 46 generally applies to periods ending after March 15, 2004 for variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The adoption of FIN No. 46 did not have and is not expected to have a material impact on the Company’s financial position or results of operations.

In April 2003, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities", which amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities that fall within the scope of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. SFAS No. 149 amends SFAS No. 133 regarding implementation issues raised in relation to the application of the definition of a derivative. The amendments set forth in SFAS No. 149 require that contracts with comparable characteristics be accounted for similarly. This Statement is effective for contracts entered into or modified after June 30, 2003, with certain exceptions, and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on the Company’s financial position or results of operations.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an Amendment of FASB Statement No. 123”. SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for annual and interim periods beginning after December 15, 2002. The adoption of SFAS No. 148 did not have a material impact on the Company’s financial position or results of operations. The Company has elected to continue to measure compensation for stock options issued to its employees and outside directors pursuant to Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and has adopted the disclosure requirements of SFAS No. 123 and SFAS No. 148. Accordingly, no compensation expense has been recognized in connection with the issuance of stock options. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.


		Three Months Ended
		November 30,

(In $000s, except per share data)		2003			2002

Net income, as reported		$	3,956		$	3,699
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(1,103	)		(820	)

Pro forma net income		$	2,853		$	2,879

Earnings per share: (1)
	Basic — as reported	$	0.12		$	0.12
	Basic — pro forma	$	0.09		$	0.09
	Diluted — as reported	$	0.12		$	0.11
	Diluted — pro forma	$	0.08		$	0.09

(1)

Restated to reflect the effect of the December 2003 two-for-one stock split.

On September 5, 2003, the Company completed the acquisition of StatusOne Health Systems, Inc. (“StatusOne”) through the merger of a wholly-owned subsidiary of the Company with and into StatusOne in accordance with the terms of an Agreement and Plan of Merger (the “Merger Agreement”). The addition of StatusOne expands the Company’s product offerings and provides for additional opportunities for initiating and expanding total-population care management programs with health plans.

The aggregate purchase price paid by the Company was approximately $65.4 million, which was funded through a $60 million term loan and cash of $5.4 million, including acquisition costs of approximately $0.4 million. In addition, pursuant to an earn-out agreement (the “Earn-Out Agreement”), the Company is obligated to pay the former stockholders of StatusOne up to $12.5 million in additional purchase price, payable either in cash or common stock at the Company’s discretion, if StatusOne achieves certain revenue targets during the one-year period immediately following the acquisition (the “Earn-Out Period”). At the closing, the Company delivered $5 million of the purchase price into an escrow account under the terms and conditions of a separate escrow agreement to secure certain obligations of the former stockholders under the terms of the Merger Agreement.

The allocation of the StatusOne purchase price, shown below, is preliminary and subject to adjustments, primarily related to any additional purchase price attributable to StatusOne’s results during the Earn-Out Period.

The results of operations of StatusOne were consolidated with those of the Company beginning September 5, 2003. The unaudited pro forma results of operations as if the transaction had occurred on September 1, 2002 are as follows:

Intangible assets subject to amortization at November 30, 2003 consist of the following:


Delaware		62-1117144

(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)


		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF OPERATIONS
		CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
Part II
	Item 1. Legal Proceedings.
	Item 2. Changes in Securities and Use of Proceeds.
	Item 3. Defaults Upon Senior Securities.
	Item 4. Submission of Matters to a Vote of Security Holders.
	Item 5. Other Information.
	Item 6. Exhibits and Reports on Form 8-K.
SIGNATURES
EX-10.1 EMPLOYMENT AGREEMENT - M KELLIHER 09/05/03
EX-11 EARNINGS PER SHARE RECONCILIATION
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO & CFO


(In $000s)

Fair value of net assets acquired			$	2,589
Intangible assets:
	Acquired technology			10,163
	Customer contracts			9,137
	Trade name			4,344
	Goodwill			39,189

		Total purchase price	$	65,422


	Gross Carrying		Accumulated
	Amount		Amortization		Net

(In $000s) Acquired technology	$	10,163	$	508	$	9,655

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		Three Months Ended
(In $000s, except per share data)		November 30, 2002

Revenues		$	42,379
Net income		$	3,500
Earnings per share:⁽¹⁾
	Basic	$	0.11
	Diluted	$	0.11