e10-k

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CPiLFORKE5r1wnWfCgwKYqrt1+Yyhx6heVvcIvDL2FjNxXfM5kjZzrY5L1G6eSzF M7TzyhSqEvcIEY9D6ZLBEw== 0000950144-01-509626.txt : 20020412 0000950144-01-509626.hdr.sgml : 20020412 ACCESSION NUMBER: 0000950144-01-509626 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20010831 FILED AS OF DATE: 20011129 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN HEALTHWAYS INC CENTRAL INDEX KEY: 0000704415 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISC HEALTH & ALLIED SERVICES, NEC [8090] IRS NUMBER: 621117144 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-19364 FILM NUMBER: 1801924 BUSINESS ADDRESS: STREET 1: 3841 GREEN HILLS VILLAGE DRIVE CITY: NASHVILLE STATE: TN ZIP: 37215 BUSINESS PHONE: 6156651122 MAIL ADDRESS: STREET 1: ONE BURTON HILLS BLVD CITY: NASHVILLE STATE: TN ZIP: 37215 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN HEALTHCORP INC /DE DATE OF NAME CHANGE: 19940211 10-K 1 g72997e10-k.htm AMERICAN HEALTHWAYS,INC. e10-k

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.

(Exact Name of Registrant as Specified in its Charter)


Delaware		62-1117144

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

3841 Green Hills Village Drive, Nashville, TN 37215

(Address of Principal Executive Offices) (Zip Code)

615-665-1122

(Registrant’s Telephone Number, Including Area Code)

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

(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 (Box with an X) No (Empty Ballot Box)

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.

TABLE OF CONTENTS


PART I.
	Item 1. Business
	Item 2. Properties
	Item 3. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
PART II
	Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters
	Item 6. Selected Financial Data
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 7A. Quantitative and Qualitative Disclosures About Market Risk
	Item 8. Financial Statements and Supplementary Data
		CONSOLIDATED BALANCE SHEETS
	CONSOLIDATED STATEMENTS OF OPERATIONS
	CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
		#14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
	Item 10. Directors and Executive Officers of the Registrant
PART IV
	Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
SIGNATURES
RESTATED CERTIFICATE OF INCORPORATION
EMPLOYMENT AGREEMENT/MARY D. HUNTER
EMPLOYMENT AGREEMENT/MARY A. CHAPUT
1996 STOCK INCENTIVE PLAN
SUBSIDIARY OF THE REGISTRANT
CONSENT OF DELOITTE & TOUCHE LLP

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.

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

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:


Year ended August 31,	2001			2000			1999

Health plan contracts		73	%		61	%		54	%




Hospital contracts		26	%		38	%		45	%




Other		1	%		1	%		1	%

		100	%		100	%		100	%

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

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

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.


At August 31,		2001		2000		1999

Equivalent lives under management			349,196		198,916		111,197




Equivalent lives in backlog			14,000		13,000		21,000

	Total equivalent lives		363,196		211,916		132,197

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:


Year ended August 31,	2001			2000			1999

Contracts in effect at beginning of period		51			58			57




Contracts signed		11			8			9




Contracts discontinued		(7	)		(15	)		(8	)

Contracts in effect at end of period		55			51			58

Hospital sites where services are delivered		78			66			72

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.

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

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

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;

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.

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.

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.

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.


Officer	Age		Position

Thomas G. Cigarran		59	Chairman and Chief Executive Officer since September 1988, a director since 1981, President September 1981 until June 2001. Chairman and a director of AmSurg Corp.




Richard R. Rakowski		49	President since June 2001, Chief Executive Officer of Empower Health, Inc. from May 2000 until June 2001, Chief Executive Officer of New Paradigm Ventures from June 1992 until May 2000.




Henry D. Herr *		55	Executive Vice President-Finance and Administration 1986 — 2001, Chief Financial Officer since 1981, Secretary and director since 1988. Director of AmSurg Corp. since 1992. Vice President and Secretary of AmSurg Corp. from 1992 to 1998.




Mary A. Chaput *		51	Executive Vice President, Chief Financial Officer and Secretary since October 2001, co-founder and Chief Financial Officer of Paragon Ventures Group, Inc. from November 1998 until October 2001, Vice President and Chief Financial Officer of ClinTrials Research, Inc. from December 1996 until November 1998.




Ben R. Leedle		40	Executive Vice President and Chief Operating Officer — Health Plan Group since 2000. Senior Vice President since 1996, Vice President since 1992, various other positions with the Company since 1985.




Mary D. Hunter		56	Executive Vice President and Chief Operating Officer — Hospital Group since 2001. Senior Vice President since 1994, various other positions with the Company since 1982.




Robert E. Stone		55	Executive Vice President since 1999, Senior Vice President since 1981.




Jeffrey J. Rice, M.D.		37	Executive Vice President since June 2001, Chief Executive Officer of CareSteps.com, Inc. and Axonal and Information Solutions, Inc. from October 1998 until June 20 of WellPath Community Health Plans from November 1995 until November 1997.




David A. Sidlowe		51	Senior Vice President and Controller since 1999, Vice President and Controller since 1984, Controller since 1982.

Mr. Herr retired as Executive Vice President, Chief Financial Officer and Secretary in October 2001 and was replaced by Ms. Chaput. Mr. Herr still serves on the Company’s Board of Directors and as a consultant to the Company.

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.)


		High		Low

Year ended August 31, 2001




	First quarter	$	5.50	$	3.67




	Second quarter		11.50		5.17




	Third quarter		18.00		9.25




	Fourth quarter		28.15		17.35




Year ended August 31, 2000




	First quarter	$	4.67	$	2.63




	Second quarter		3.67		2.50




	Third quarter		3.06		2.42




	Fourth quarter		4.83		2.59

(b) Holders

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

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.

Item 6. Selected Financial Data


Year ended and at August 31,				2001			2000			1999			1998				1997

				(In thousands except per share data)
Operating Data:




	Revenues				$	75,121		$	53,030		$	50,052		$	41,167			$	30,537

	Expenses:




		Salaries and benefits				44,202			34,975			31,362			26,473				21,437




		Other operating expenses				19,481			13,786			11,203			11,084				8,702




		Depreciation and amortization				5,656			3,621			1,805			1,308				1,342




		Interest				115			22			—			1				6




		Spin-off stock option adjustment				—			—			—			5,770				—

			Total expenses			69,454			52,404			44,370			44,636				31,487

	Income (loss) before income taxes and discontinued operations					5,667			626			5,682			(3,469	)			(950	)




			Income tax expense (benefit)			2,510			478			2,365			(1,148	)			(207	)

	Income (loss) from continuing operations					3,157			148			3,317			(2,321	)			(743	)




			Discontinued operations			—			—			—			57				(940	)

	Net income (loss)				$	3,157		$	148		$	3,317		$	(2,264	)		$	(1,683	)

	Basic income (loss) per share:(1)




			From continuing operations		$	0.24		$	0.01		$	0.27		$	(0.19	)		$	(0.06	)




			From discontinued operations			—			—			—			—				(0.08	)

					$	0.24		$	0.01		$	0.27		$	(0.19	)		$	(0.14	)

	Diluted income (loss) per share:(1)




			From continuing operations		$	0.22		$	0.01		$	0.25		$	(0.19	)		$	(0.06	)




			From discontinued operations			—			—			—			—				(0.08	)

					$	0.22		$	0.01		$	0.25		$	(0.19	)		$	(0.14	)

	Weighted average common shares and equivalents:(1)




			Basic			12,936			12,403			12,478			12,121				12,033




			Diluted			14,059			12,953			13,385			12,121				12,033

(1)

Restated to reflect effect of November 2001 three-for-two stock split.


Balance Sheet Data:




	Cash and cash equivalents	$	12,376	$	7,025	$	13,501	$	13,244	$	12,227




	Working capital		13,051		5,861		14,014		10,859		11,564




	Net assets of discontinued operations		—		—		—		—		16,407




	Total assets		69,118		41,355		41,014		36,857		49,373




	Other long-term liabilities		3,444		3,009		2,820		2,446		2,186




	Stockholders’ equity		54,116		29,956		30,954		26,606		40,441

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

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 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 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.


Year ended August 31,	2001			2000			1999

Health plan contracts		73	%		61	%		54	%




Hospital contracts		26	%		38	%		45	%




Other		1	%		1	%		1	%

		100	%		100	%		100	%

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

Health Plan Contracts

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.

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		2000		1999

Equivalent lives under management			349,196		198,916		111,197




Equivalent lives in backlog			14,000		13,000		21,000

	Total equivalent lives		363,196		211,916		132,197

During the fiscal years ended August 31, 2001, 2000 and 1999, approximately 43%, 44% and 43%, respectively, of the Company’s revenues were derived from contracts with two health plans that each comprised more than 10% of the Company’s revenues for those years. During fiscal 1999 and 2000, the same two health plans each comprised more than 10% of the Company’s revenues for those years; during fiscal 2001 one of these health plan contracts terminated and a contract with a new health plan comprising more than 10% of the Company’s fiscal 2001 revenues was added. The loss of either of these contracts or any other large health plan contract or a reduction in the profitability of any of these contracts would have a material negative impact on the Company’s results of operations and financial condition.

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. As proposed, the cost of this strategic alliance is approximately $1.4 million a year over five years. The Company expects this agreement to be executed in its second fiscal quarter of 2002.

Hospital Contracts

Under the terms of its contracts with hospitals, the Company provides the resources that enable the hospital to develop and operate an integrated system of care for patients with diabetes that includes: (1) programs to work with physicians to identify objectives for the patient and monitor accomplishment of the objectives during the patient’s stay; (2) clinical interventions for patients with diabetes; (3) an information network service that connects the hospital to the Company’s dedicated nationwide resources; (4) programs for specific activities related to quality improvement, cost reduction and market share increases for patients with diabetes; and (5) programs to monitor the hospital’s performance against quality indicators and processes related to diabetes patients. Also available for hospital customers are numerous other services such as (1) outpatient diabetes patient education and follow-up; (2) programs for diabetes during pregnancy and programs for insulin pump therapy; and (3) policies and procedures to help ensure formal recognition of the diabetes program at the hospital by the American Diabetes Association.


Year ended August 31,	2001			2000			1999

Contracts in effect at beginning of period		51			58			57




Contracts signed		11			8			9




Contracts discontinued		(7	)		(15	)		(8	)

Contracts in effect at end of period		55			51			58

Hospital sites where services are delivered		78			66			72

At a Special Meeting of Stockholders on October 25, 2001, the stockholders approved (i) an amendment to the Company’s Restated Certificate of Incorporation to increase the number of authorized shares of the Company’s common stock from 15,000,000 to 40,000,000 and (ii) an amendment of one of the Company’s stock plans to increase the number of shares available for issuance under the plan, to increase the number of shares issuable to any officer, key employee or consultant in any one year and to extend the term of the plan. On October 29, 2001, the Company’s Board of Directors approved a three-for-two stock split effected in the form of a 50% stock dividend to be distributed on November 23, 2001 to stockholders of record at the close of business on November 9, 2001. The accompanying balance sheets and statements of stockholders’ equity have been restated as if the split and the increase in

authorized shares had occurred on August 31, 2001. Earnings per share, weighted average common shares and equivalents and stock option information have been retroactively restated as if the split had occurred at the beginning of the periods presented.

Results of Operations

FISCAL 2001 COMPARED TO FISCAL 2000

The increase in revenues of $22.1 million from 2000 to 2001 resulted primarily from an increase in the average number of equivalent lives enrolled in the Company’s health plan disease management contracts to approximately 234,000 for 2001 from approximately 143,000 for 2000. This increase in the average number of 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 enrollees under the Company’s health plan contracts for 2001 was 5% greater than for 2000. This increase in average per member per month revenue occurred primarily as a result of an increase in equivalent lives under higher rate contracts in the fiscal 2001 period when compared with the fiscal 2000 period, improved performance under the terms of performance fee provisions of health plan contracts, revenues recognized during the 2001 periods associated with final settlement and transition services on two health plan contracts that terminated during the second and third quarters of fiscal 2001 and the positive effect of health plan contract revenue adjustments of approximately $1.2 million recorded in the third quarter of fiscal 2000. The increase in health plan contract revenues was offset partially by decreased revenues from hospital-based diabetes treatment center contracts. Revenues from the Company’s hospital contract operations for 2001 were 4% less than for 2000 on slightly higher average number of contracts in operation during 2001 as compared with 2000. Average revenue per hospital contract was approximately 5% lower in 2001 than in 2000 due primarily to contract fee reductions and to a higher percentage of relatively newer contracts in 2001 with somewhat lower fees compared with 2000. The Company anticipates that revenues for fiscal 2002 will increase over fiscal 2001 revenues primarily as a result of additional lives enrolled under its existing and anticipated new health plan contracts which may be offset somewhat by lower revenues from hospital contract operations resulting from contract fee reductions and contract terminations.

The increase in salaries and benefits of $9.2 million for 2001 over 2000 resulted primarily from higher staffing levels associated with increases in the number of equivalent lives enrolled in the Company’s health plan contracts as well as increased employee incentive compensation associated with improved operating performance compared with the prior fiscal year. Salaries and benefits as a percentage of revenues decreased to 59% for 2001 from 66% for 2000 primarily as a result of increased revenue from the Company’s health plan contract operations offset somewhat by higher staffing levels at its health plan operations and increased employee incentive compensation associated with improved operating performance. The Company anticipates salaries and benefits expense to increase during fiscal 2002 compared with fiscal 2001 primarily as a result of increased staff required for expected increases in the number of equivalent lives enrolled under the Company’s health plan contracts, for additional central operating unit call centers and increased staff costs associated with the development of its new total population care enhancement services and for increases in its Information Technology staff.

The increase in other operating expenses of $5.7 million for 2001 compared with 2000 resulted primarily from higher operating costs due to the growth of the Company’s health plan operations compared to the same periods last year and from the write off of a $250,000 minority interest investment in a small startup cancer care management company in fiscal 2001. Other operating expenses as a percentage of revenues 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 fiscal 2001 offset by increased revenue from the Company’s health plan contract operations. The Company anticipates other operating expenses will increase during fiscal

2002 compared with fiscal 2001 primarily as a result of increased costs associated with anticipated increases in the number of lives enrolled under the Company’s health plan contracts, additional central operating unit call centers, increased costs associated with the development of its new total population care enhancement services and increased costs associated with its strategic alliance with Johns Hopkins.

The increase in depreciation and amortization expense of $2.0 million for 2001 from 2000 resulted principally from increased depreciation expense associated with equipment and computer-related capital expenditures for the Company’s health plan operations and the amortization of goodwill and other intangible assets associated with the CareSteps and Empower Health acquisitions. In July 2001 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No 142 “Goodwill and Other Intangible Assets”. SFAS No. 142 requires that upon adoption, amortization of goodwill and indefinite life intangible assets will cease and instead, the carrying value of goodwill and indefinite life intangible assets will be evaluated for impairment at least on an annual basis or more frequently if certain indicators are encountered. 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 elected early adoption of this statement on September 1, 2001, the beginning of its 2002 fiscal year. As of this date, the Company will no longer amortize goodwill. Goodwill amortization expense for the fiscal year ended August 31, 2001 was $562,780. The Company anticipates depreciation and amortization expense to increase during fiscal 2002 compared with fiscal 2001 primarily as a result of additional capital expenditures associated with expected increases in the number of equivalent lives enrolled under the Company’s health plan contracts, additional central operating unit call centers and from growth and improvement in the Company’s information technology capabilities and the expenses associated with the development of its new total population care enhancement strategy offset somewhat by the discontinuance of goodwill amortization.

The Company’s interest expense of $114,516 for fiscal 2001 compared to $22,281 in fiscal 2000 resulted from fees related to outstanding letters of credit to support the Company’s performance under two health plan contracts.

The Company’s income tax expense of $2.5 million for fiscal 2001 compared to $478,000 for fiscal 2000 resulted from increased profitability in 2001 compared to 2000. 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.

FISCAL 2000 COMPARED TO FISCAL 1999

The increase in revenues of $2.9 million from 1999 to 2000 resulted primarily from an increase in the average number of equivalent lives enrolled in the Company’s health plan disease management contracts to approximately 143,000 for 2000 from approximately 89,000 for 1999. This increase in the average number of equivalent lives under management was primarily the result of new health plan contracts signed during fiscal 1999 and 2000. The average revenue per member per month for enrollees under the Company’s health plan contracts for 2000 was 27% less than for 1999. This decrease in average per member per month revenue occurred primarily as a result of a greater mix of equivalent lives from new contracts with lower revenue per chronic disease equivalent life during 2000 compared with 1999; the negative impact during 2000 of reduced revenue from a contract with one of the Company’s health plan customers which was restructured effective January 1, 2000; and as a result of negative revenue adjustments of approximately $1.2 million recorded during 2000 related to the resolution of billing eligibility issues with two health plan customers. The increase in health plan contract revenues was offset partially by decreased revenues from hospital-based diabetes treatment center contracts.

Revenues from the Company’s hospital contract operations for 2000 were 9% less than for 1999 on 5% fewer average number of contracts in operation during 2000 as compared with 1999. Average revenue per hospital contract was approximately 4% lower in 2000 than in 1999 due primarily to contract fee reductions and to a greater mix of relatively newer contracts with somewhat lower fees in 2000 compared with 1999.

The increase in salaries and benefits of $3.6 million for 2000 over 1999 resulted primarily from higher staffing levels associated with increases in the number of equivalent lives enrolled in the Company’s health plan contracts as well as increased staffing levels during 2000 associated with improvements in the Company’s health plan information technology capabilities and increases in central operating unit call center service capacity for future growth. Salaries and benefits as a percentage of revenues increased to 66% for 2000 from 63% for 1999 primarily as a result of higher staffing levels associated with its health plan operations including the costs associated with information technology improvements and service capacity expansion.

The increase in other operating expenses of $2.6 million for 2000 compared with 1999 resulted primarily from higher costs associated with increases in the average number of equivalent lives enrolled in the Company’s health plan contracts as well as from costs during 2000 associated with improvements in the Company’s health plan information technology capabilities and increases in central operating unit call center service capacity for future growth. Other operating expenses as a percentage of revenues increased to 26% for 2000 from 22% for 1999 primarily as a result of higher costs associated with increases in the average number of lives enrolled in the Company’s health plan contracts as well as from costs associated with health plan related information technology improvements and service capacity expansion.

The increase in depreciation and amortization expense of $1.8 million for 2000 from 1999 resulted principally from increased depreciation expense associated with information technology related capital expenditures for its health plan operations, including the addition of two new central operating unit call centers and the conversion of another health plan site to a central operating unit call center during fiscal 2000. In addition, depreciation and amortization expense increased during 2000 as a result of the Company’s leasehold improvements and other costs related to the Company’s relocated and expanded corporate and primary support office location in Nashville, Tennessee.

The Company’s income tax expense of $478,000 for 2000 compared to $2.4 million for 1999 resulted from decreased profitability in 2000 compared to 1999. The differences between the statutory federal income tax rate of 34% and the Company’s effective tax rates during 2000 and 1999 are due primarily to the impact of state income taxes and certain non-deductible expenses for income tax purposes, primarily the amortization of excess costs over net assets of purchased companies.

Liquidity and Capital Resources

Operating activities for fiscal 2001 generated $10.7 million in cash flow. Investing activities during this period used $6.9 million in cash which consisted of the acquisition of property and equipment primarily associated with improvements in the Company’s health plan information technology capabilities and with costs associated with the acquisitions of CareSteps and Empower Health. Financing activities for fiscal 2001 provided $1.5 million 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 $10.0 million, inclusive of the ability to issue up to $8.0 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 $5.0 million. As of August 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.

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 capital expenditures for technology improvements, additional central operating unit call centers and the issuance of letters of credit or other forms of financial assurance to guarantee the Company’s performance under the terms of new health plan contracts, the Company may need to raise additional capital through the issuance of additional debt or equity. The Company’s ability to arrange such financing may be limited and, accordingly, 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 debt or equity to provide the funding for these increased growth opportunities or may issue equity in connection with future acquisitions or strategic alliances. 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 August 31, 2001 the Company had repurchased 37,900 shares at a cost of $153,557 pursuant to this authorization.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 8. Financial Statements and Supplementary Data

AMERICAN HEALTHWAYS, INC.

CONSOLIDATED BALANCE SHEETS

ASSETS


At August 31,			2001			2000

Current assets:




	Cash and cash equivalents (Note 1b)		$	12,375,772		$	7,025,277




	Accounts receivable, net			7,005,693			5,036,051




	Other current assets (Note 1c)			1,555,643			1,465,804




	Deferred tax assets (Notes 1g, 2 and 3)			3,673,000			724,000

		Total current assets		24,610,108			14,251,132

Property and equipment (Note 1d):




	Leasehold improvements			2,521,797			2,448,285




	Computer equipment, related software and other equipment			21,060,486			16,557,524

				23,582,283			19,005,809




	Less accumulated depreciation			(10,216,069	)		(5,570,307	)

		Net property and equipment		13,366,214			13,435,502

Long-term deferred tax assets (Notes 1g, 2 and 3)				1,228,000			2,132,000

Other assets, net (Notes 1e and 2)				1,720,123			835,245

Excess of cost over net assets of purchased companies, net (Notes 1f, 1k and 2)				28,194,045			10,700,701

			$	69,118,490		$	41,354,580

See accompanying notes to the consolidated financial statements.

AMERICAN HEALTHWAYS, INC.

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS’ EQUITY


At August 31,			2001		2000

Current liabilities:




	Accounts payable		$	1,597,827	$	1,924,077




	Accrued salaries and benefits			5,380,540		3,260,418




	Accrued liabilities			3,664,884		2,373,444




	Income taxes payable (Notes 1g and 3)			629,373		126,840




	Current portion of other long-term liabilities (Note 5)			286,247		704,992

		Total current liabilities		11,558,871		8,389,771

Other long-term liabilities (Note 5)				3,443,545		3,008,901

Commitments and contingencies (Notes 4, 6 and 11)




Stockholders’ equity (Notes 7, 8, 9 and 13)




	Preferred stock




		$.001 par value, 5,000,000 shares authorized, none outstanding		—		—




	Common stock
		$.001 par value, 40,000,000 shares authorized, 14,171,441 and 8,246,504 shares outstanding		14,171		8,247




	Additional paid-in capital			44,601,579		23,604,823




	Retained earnings			9,500,324		6,342,838

		Total stockholders’ equity		54,116,074		29,955,908

			$	69,118,490	$	41,354,580

See accompanying notes to the consolidated financial statements.

AMERICAN HEALTHWAYS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS


Year ended August 31,			2001		2000		1999

Revenues (Note 1h)			$	75,120,888	$	53,029,860	$	50,052,072

Expenses:




	Salaries and benefits			44,201,818		34,975,208		31,362,186




	Other operating expenses			19,481,253		13,785,983		11,202,507




	Depreciation and amortization (Note 1)			5,655,815		3,620,305		1,805,410




	Interest			114,516		22,281		289

		Total expenses		69,453,402		52,403,777		44,370,392




Income before income taxes				5,667,486		626,083		5,681,680




	Income tax expense (Notes 1g and 3)			2,510,000		478,000		2,365,000

Net income			$	3,157,486	$	148,083	$	3,316,680

Basic income per share (Note 1i and 13)			$	0.24	$	0.01	$	0.27




Fully diluted income per share (Note 1i and 13)			$	0.22	$	0.01	$	0.25




Weighted average common shares and equivalents (Note 1i and 13) Basic				12,935,979		12,403,428		12,478,463




		Fully diluted		14,059,332		12,953,100		13,385,285

See accompanying notes to the consolidated financial statements.

AMERICAN HEALTHWAYS, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY


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

Balance, August 31, 1998			—	$	8,125		$	23,719,833		$	2,878,075	$	26,606,033




	Exercise of stock options (Note 8)		—		395			1,123,023			—		1,123,418




	Tax benefit of option exercises (Note 3)		—		—			384,860			—		384,860




	Stock repurchase (Note 7)		—		(58	)		(477,129	)		—		(477,187	)




	Net income		—		—			—			3,316,680		3,316,680

Balance, August 31, 1999			—		8,462			24,750,587			6,194,755		30,953,804




	Exercise of stock options (Note 8)		—		47			127,455			—		127,502




	Stock repurchase (Note 7)		—		(262	)		(1,273,219	)		—		(1,273,481	)




	Net income		—		—			—			148,083		148,083

Balance, August 31, 2000			—		8,247			23,604,823			6,342,838		29,955,908




	Exercise of stock options (Note 8)		—		447			1,548,055			—		1,548,502




	Tax benefit of option exercises (Note 3)		—		—			2,287,248			—		2,287,248




	Issuance of stock in conjunction with business acquisitions (Note 2)		—		754			17,166,176			—		17,166,930




	Net income		—		—			—			3,157,486		3,157,486




	Stock split effective November 2001 (Note 13)		—		4,723			(4,723	)		—		—

Balance, August 31, 2001			—	$	14,171		$	44,601,579		$	9,500,324	$	54,116,074

See accompanying notes to the consolidated financial statements.

AMERICAN HEALTHWAYS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


Year ended August 31,				2001		2000			1999

Cash flows from operating activities:




	Net income		$	3,157,486		$	148,083			$	3,316,680




		Income tax expense (Notes 1g and 3)		2,510,000			478,000				2,365,000

	Income before income taxes			5,667,486			626,083				5,681,680




	Noncash expenses, revenues, losses and gains included in income:




		Depreciation and amortization (Note 1)		5,655,815			3,620,305				1,805,410




		Decrease (increase) in working capital items		281,793			1,808,506				(2,495,717	)




		Other noncash transactions		1,000,187			1,041,300				776,102

				12,605,281			7,096,194				5,767,475




	Income taxes (net paid)			(1,165,219	)		(1,021,959	)			(1,468,748	)




	Increase in other assets			(113,553	)		(233,139	)			(454,670	)




	Payments on other long-term liabilities (Note 5)			(605,353	)		(281,121	)			(490,507	)

		Net cash flows provided by operating activities		10,721,156			5,559,975				3,353,550

Cash flows from investing activities:




	Acquisition of property and equipment			(4,719,321	)		(10,595,887	)			(3,699,640	)




	Business acquisitions (Note 2)			(2,154,521	)		—				—

		Net cash flows used in investing activities		(6,873,842	)		(10,595,887	)			(3,699,640	)

Cash flows from financing activities:




	Exercise of stock options (Note 8)			1,503,181			83,654				1,080,722




	Investment in unconsolidated subsidiaries			—			(250,000	)			—




	Stock repurchase (Note 7)			—			(1,273,481	)			(477,187	)

		Net cash flows provided by (used in) financing activities		1,503,181			(1,439,827	)			603,535

Net increase (decrease) in cash and cash equivalents				5,350,495			(6,475,739	)			257,445




Cash and cash equivalents, beginning of period				7,025,277			13,501,016				13,243,571

Cash and cash equivalents, end of period			$	12,375,772		$	7,025,277			$	13,501,016

See accompanying notes to the consolidated financial statements.

AMERICAN HEALTHWAYS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)


Year ended August 31,		2001			2000			1999

Decrease (increase) in other working capital items excluding income taxes and acquisition costs:




	Accounts receivable, net	$	(1,969,642	)	$	297,644		$	(1,710,234	)




	Other current assets		(89,839	)		(225,733	)		(441,357	)




	Accounts payable		(326,250	)		828,845			79,314




	Accrued expenses		2,667,524			907,750			(423,440	)

		$	281,793		$	1,808,506		$	(2,495,717	)

SUPPLEMENTAL NOTES TO CONSOLIDATED STATEMENTS OF CASH FLOWS

1. Other noncash transactions consist of the following:


Deferred compensation agreements	$	669,465		$	531,785	$	572,554




Realized loss on investment		250,000			—		—




Write-off of assets for terminated contracts		46,776			112,430		125,457




Deferred rent payments		(48,214	)		341,513		—




Liability insurance reserves		—			—		8,775




Miscellaneous other		82,160			55,572		69,316

	$	1,000,187		$	1,041,300	$	776,102

2. Shares of stock valued at $17,166,930 were issued in conjunction with two business acquisitions during the year ended August 31,
2001. (See Note 2.)

See accompanying notes to the consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended August 31, 2001, 2000 and 1999

1. Summary of Significant Accounting Policies

The operations of American Healthways, Inc. (the “Company”) consist primarily of American Healthways Services, Inc. (“AHSI”), a wholly-owned subsidiary that is a national provider of disease management and care enhancement services to health plans and hospitals. The Company formerly conducted business as American Healthcorp, Inc. and changed its name in December 1999.

a. Principles of Consolidation — The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned or majority-owned. All material intercompany profits, transactions and balances have been eliminated.

b. Cash and Cash Equivalents — Cash and cash equivalents are comprised principally of tax-exempt debt instruments, repurchase agreements, commercial paper and other short-term investments with maturities of less than three months and accrued interest thereon.

c. Other Current Assets — Other current assets at August 31, 2001 and 2000 are comprised of prepaid expenses, inventories and other receivables.

d. Property and Equipment — Property and equipment costs include expenditures that increase value or extend useful lives. Depreciation is recognized under the straight line method over useful lives ranging principally from 5 to 10 years for leasehold improvements, 3 to 5 years for computer software and hardware and 5 to 10 years for furniture and other office equipment.

e. Other Assets — Other assets at August 31, 2001 principally consist of identifiable intangible assets associated with business acquisitions (see Note 2) as well as net costs incurred in obtaining hospital contracts and long-term notes receivable. Such identifiable intangible assets consist primarily of non-competition agreements and acquired technology and contracts and are being amortized over their estimated useful lives (one to three years). Other assets at August 31, 2000 principally consist of net costs incurred in obtaining hospital contracts, long-term notes receivable and investments in unconsolidated subsidiaries.

f. Excess of Cost Over Net Assets of Purchased Companies — The excess cost at August 31, 2000 arose solely from a management buy-out of the Company in August 1988. This excess cost is being amortized over 40 years and has no income tax basis. The excess cost at August 31, 2001 also includes costs associated with business acquisitions made in fiscal 2001, which are being amortized over 25 years and have no income tax basis. (See Note 2). Accumulated amortization at August 31, 2001 and 2000 was $5,149,410 and $4,586,630, respectively. The Company assesses the impairment of the value of excess of cost over net assets of purchased companies and other long-lived assets in accordance with criteria consistent with the provisions of Financial Accounting Standard No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of”, primarily using estimated cash flows projected over the useful life of the related assets.

g. Income Taxes — The Company files a consolidated federal income tax return which includes all of its wholly-owned subsidiaries and computes its income tax provision under Financial Accounting Standard No. 109, “Accounting for Income Taxes”.

h. Revenue Recognition — Revenues under the Company’s contracts with hospitals and health plans are calculated based on various performance-based and fixed-fee methodologies and are recorded as services are provided. Performance-based contracts have varying degrees of risk associated with the

Company’s ability to deliver agreed performance against financial cost savings and clinical criteria. The measurement of the Company’s performance against agreed financial cost saving and clinical criteria is a data intensive and time-consuming process that is typically not finalized until well after the contract year. Adjustments for performance under the terms of the 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 interim information related to performance levels and associated fees becomes available. Management believes these estimates adequately provide for any potential adjustments that may be applied to revenues from its contracts.

i. Net Income Per Share — Net income per share is reported under Financial Accounting Standard No. 128 “Earnings per Share”. The presentation of basic earnings per share is based upon average common shares outstanding during the period. Diluted earnings per share is based on average common shares outstanding during the period plus the dilutive effect of stock options outstanding.

j. Management Estimates — The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

k. Recently Issued Accounting Standards — In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations”, and SFAS No. 142, “Goodwill and Other Intangible Assets”. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001 and prohibit the use of the pooling-of-interest method for those business combinations. Furthermore, SFAS No. 141 applies to all business combinations accounted for by the purchase method for which the date of acquisition is July 1, 2001, or later. SFAS No. 142, requires that upon adoption, amortization of goodwill and indefinite life intangible assets will cease and instead, the carrying value of goodwill and indefinite life intangible assets will be evaluated for impairment at least on an annual basis; impairment of carrying value will be evaluated more frequently if certain indicators are encountered. Identifiable intangible assets with a determinable useful life will continue to be amortized over that period 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 except for goodwill and intangible assets acquired after June 30, 2001, which are subject immediately to the nonamortization provisions of this statement. The Company elected early adoption of SFAS No. 142 on September 1, 2001, the beginning of its 2002 fiscal year. The adoption of this standard will result in goodwill no longer being amortized beginning in fiscal 2002. The Company has six months from the date of adoption to complete the initial transition impairment assessment as required by SFAS No. 142 and this analysis has not yet been completed.

In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which supersedes SFAS No. 121 and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,

Unusual and Infrequently Occurring Events and Transactions”. This statement retains certain requirements of SFAS No. 121 relating to the recognition and measurement of impairment of long-lived assets to be held and used. Additionally, this statement results in one accounting model, based on the framework established in SFAS No. 121, for long-lived assets to be disposed of by sale and also addresses certain implementation issues related to SFAS No. 121, including the removal of goodwill from its scope due to the issuance of SFAS No. 142. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The Company has not yet determined the impact of the adoption of SFAS No. 144 on its financial position and results of operations.

2. Business Acquisitions

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. The purchase price paid for the assets acquired in both transactions was $20,082,770 which consisted of cash of $1,000,000, the Company’s common stock valued at $17,166,930 and acquisition costs and assumed liabilities of $1,915,840. The terms of the Empower agreement also provide for contingent consideration of up to an additional 355,000 shares of common stock to be issued if the Company’s average closing price exceeds certain targeted levels from October 1, 2001 to September 30, 2006.

The purchase price of the aforementioned acquisitions was assigned as follows:


Working capital		$	17,281




Property and equipment			35,528




Deferred tax asset			600,000




Identifiable intangible assets			1,373,836




Excess of cost over net assets of purchased companies			18,056,125

	Acquisition purchase price	$	20,082,770

Had these transactions occurred September 1, 1998, unaudited pro forma revenues for the years ended August 31, 2001, 2000 and 1999 would have been approximately $75,531,000, $53,030,000 and $50,052,000, respectively. Unaudited pro forma net income (loss) for the years ended August 31, 2001, 2000 and 1999 would have been approximately $607,000, ($1,941,000) and $3,317,000, respectively, and pro forma diluted earnings (loss) per share would have been $0.06, ($0.21) and $0.37, respectively.

3. Income Taxes

Income tax expense is comprised of the following:


Year ended August 31,			2001		2000		1999

Current taxes Federal			$	1,264,000	$	10,000	$	1,665,000




	State			424,000		22,000		251,000




Deferred taxes				822,000		446,000		449,000

		Total	$	2,510,000	$	478,000	$	2,365,000

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s net deferred tax asset for the fiscal years ended August 31, 2001 and 2000 are as follows:


At August 31,		2001		2000

Deferred tax assets:




	Stock option compensation	$	2,267,000	$	—




	Financial accruals without economic performance		628,000		722,000




	Spin-off stock option adjustment		1,177,000		1,338,000




	Deferred compensation		1,234,000		1,196,000




	Acquired net operating loss carryforward (Note 2)		536,000		—

			5,842,000		3,256,000

Deferred tax liability:




	Tax over book depreciation		846,000		310,000




	Tax over book amortization		95,000		90,000

			941,000		400,000

Net deferred tax assets		$	4,901,000	$	2,856,000

Net current deferred tax assets		$	3,673,000	$	724,000




Net long-term deferred tax assets			1,228,000		2,132,000

		$	4,901,000	$	2,856,000

The Company has not provided a valuation allowance on its deferred tax assets because management believes their ultimate realization is more likely than not. The Company’s net operating loss carryforwards will begin expiring in year 2019. The change in the Company’s net deferred tax assets for the fiscal year ended August 31, 2001 includes deferred tax assets established in connection with acquisitions and stock option compensation for options that were exercised in calendar 2001 which will not be deductible for tax purposes until fiscal 2002. The tax benefit of the option compensation is recorded as additional paid-in capital.

The difference between income tax expense computed using the effective tax rate and the statutory federal income tax rate follows:


Year ended August 31,		2001		2000		1999

Statutory federal income tax from continuing operations		$	1,927,000	$	213,000	$	1,932,000




State income taxes, less Federal income tax benefit			304,000		34,000		224,000




Amortization of excess cost over net assets of purchased companies			216,000		130,000		130,000




Other			63,000		101,000		79,000

	Income tax expense	$	2,510,000	$	478,000	$	2,365,000

4. Long-Term Debt

In January 2000, the Company executed a financing agreement with a financial institution. This agreement was amended May 12, 2000 and January 4, 2001. The amended agreement provides the Company with up to $10.0 million in borrowing capacity, including the ability to issue up to $8.0 million of letters of credit, under a credit facility that expires in January 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 $5.0 million. As of August 31, 2001, there were no borrowings outstanding under this agreement, however, there are letters of credit outstanding totaling approximately $7.2 million to support the Company’s performance under contracts with two health plans.

5. Other Long-Term Liabilities

The Company has a non-qualified deferred compensation plan under which officers of the Company and certain subsidiaries may defer a portion of their salaries and receive a Company matching contribution plus a contribution based on the performance of the Company. Company contributions vest at 25% per year. The plan is unfunded and remains an unsecured obligation of the Company. Participants in these plans elect payout dates for their account balances, which can be no earlier than four years from the period of the deferral. Included in other long-term liabilities are vested amounts under these plans of $2,880,010 and $2,372,645 as of August 31, 2001 and 2000, respectively, net of the current portion of $238,033 and $656,778, respectively. Plan payments required in the five years subsequent to August 31, 2001 for the Company are $238,033, $577,984, $226,877, $322,081, and $354,382.

6. Leases

The Company has operating lease agreements principally for its corporate office space and for certain health plan central operating unit call center offices. The present corporate office lease for approximately 44,000 square feet expires September 2007. The health plan office rentals are approximately 2,000 to 15,000 square feet each and have terms of three to ten years. Rent expense under lease agreements for the years ended August 31, 2001, 2000 and 1999 was approximately $1,807,000, $1,293,000 and $1,053,000, respectively.

The future minimum lease commitments, net of sublease income, for each of the next five years following August 31, 2001 for the Company for all non-cancelable operating leases are as follows:


Year ending August 31,
2002		$	1,913,982




2003			1,932,907




2004			1,757,006




2005			1,726,610




2006			1,364,224

	Total	$	8,694,729

7. Stockholders’ Equity

During March 2000, the Company’s Board of Directors authorized the repurchase of up to 500,000 shares of the Company’s common stock. The authorization enables the Company to make repurchases from time to time in open market and private transactions prior to March 1, 2002. As of August 31, 2001, the Company had repurchased 37,900 shares at a cost of $153,557 pursuant to this authorization.

In January 1998, the Company’s Board of Directors authorized the repurchase and cancellation of up to 400,000 shares of the Company’s common stock. The authorization enabled the Company to make repurchases from time to time in open market and private transactions prior to January 1, 2000. As of the expiration of this authorization on January 1, 2000, the Company had repurchased 361,987 shares at a cost of $2,283,118.

8. Stock Options

The Company has several stock option plans under which non-qualified options to purchase the Company’s common stock have been granted. Options under these plans are normally granted at market value at the time of the grant and normally vest over four years at the rate of 25% per year. Options have a term of 10 years from the date of grant. At August 31, 2001, 630,891 shares were reserved for future option grants.

Stock option activity for the three years ended August 31, 2001 is summarized below:


		Number of			Weighted Average
		Shares			Exercise Price

Outstanding at August 31, 1998			2,244,296		$	2.35




	Options granted		435,413		$	5.10




	Options exercised		(585,896	)	$	1.86




	Options terminated		(43,655	)	$	4.59

Outstanding at August 31, 1999			2,050,158		$	3.03




	Options granted		746,385		$	3.68




	Options exercised		(57,608	)	$	1.45




	Options terminated		(78,107	)	$	3.63

Outstanding at August 31, 2000			2,660,828		$	3.21




	Options granted		1,004,814		$	11.41




	Options exercised		(664,220	)	$	2.26




	Options terminated		(77,916	)	$	4.34

Outstanding at August 31, 2001			2,923,506		$	6.21

The following table summarizes information concerning outstanding and exercisable options at August 31, 2001:


	Options Outstanding						Options Exercisable

			Weighted		Weighted				Weighted
			Average		Average				Average
Range of	Number		Remaining		Exercise		Number		Exercise
Exercise Prices	Outstanding		Life (Yrs.)		Price		Exercisable		Price

Less than $3.00		568,586		5.6	$	1.83		381,551	$	1.39




$3.01 - $4.00		814,013		7.4		3.47		371,765		3.13




$4.01 - $5.00		859,823		6.4		4.41		412,385		4.41




More than $5.00		681,084		9.2		15.43		74,630		6.18

		2,923,506		7.2		6.21		1,240,331		3.21

The Company has also reserved 75,000 shares of common stock to be granted as restricted stock as part of the Company’s Board of Directors compensation program of which 47,124 shares have been granted.

The Company accounts for its stock options issued to employees and outside directors pursuant to Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”. Accordingly, no compensation expense has been recognized in connection with the issuance of stock options. The estimated weighted average fair values of the options at the date of grant using the Black-Scholes option pricing model as promulgated by Financial Accounting Standard No. 123, “Accounting for Stock Based Compensation” in the years ended August 31, 2001, 2000 and 1999 are $6.20, $1.92 and $2.87 per share, respectively. In applying the Black-Scholes model, the Company assumed no dividends,

an expected life for the options of six and one-half years, a forfeiture rate of 3% and an average risk free interest rate of 5.3%, 6.2% and 5.2% for the years ended August 31, 2001, 2000 and 1999, respectively. The Company also utilized a volatility rate of 55%, 52% and 53% for the years ended August 31, 2001, 2000 and 1999, respectively. Had the Company used the Black-Scholes estimates to determine compensation expense for options granted during the years ended August 31, 2001, 2000 and 1999, net income (loss) and net income (loss) per share would have been reduced to the following pro forma amounts:


Year ended August 31,		2001		2000			1999

Net income (loss) As reported		$	3,157,486	$	148,083		$	3,316,680




	Pro forma	$	792,486	$	(526,917	)	$	2,909,680




Net income (loss) per fully diluted share As reported		$	0.22	$	0.01		$	0.25




	Pro forma	$	0.06	$	(0.04	)	$	0.22

9. Stockholder Rights Plan

On June 19, 2000, the Company’s Board of Directors adopted a stockholder rights plan under which holders of common stock as of June 30, 2000 received preferred stock purchase rights as a dividend at the rate of one right per share. Each right initially entitles its holder to purchase one one-hundredth of a new Series A preferred share at $32, subject to adjustment. Upon becoming exercisable, each right will allow the holder (other than the person or group whose actions have triggered the exercisability of the rights), under alternative circumstances, to buy either securities of the Company or securities of the acquiring company (depending on the form of the transaction) having a value of twice the then current exercise price of the rights. With certain exceptions, each right will become exercisable only when a person or group acquires, or commences a tender or exchange offer for, 15% or more of the Company’s outstanding common stock. Rights will also become exercisable in the event of certain mergers or asset sales involving more than 50% of the Company’s assets or earning power. The rights will expire on June 19, 2010.

10. Employee Benefits

The Company has a Section 401(k) Retirement Savings Plan (“Plan”) available to substantially all employees of the Company and its wholly owned subsidiaries. Employee contributions are limited to a percentage of their base compensation as defined in the Plan and are supplemented by Company contributions, which are subject to vesting requirements. Company contributions under the Plan totaled $457,970, $414,318 and $334,860 for the years ended August 31, 2001, 2000 and 1999, respectively.

11. Contingencies

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.

12. Business Segments

The Company provides care 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 managed separately and the Company evaluates performance based on operating profits of the respective segments. The Company supports both segments with shared 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 by operating segment excludes interest income, interest expense and general corporate expenses.

Summarized financial information by business segment is as follows:


Year ended August 31,				2001			2000			1999

Revenues:




	Health plan contracts			$	55,050,687		$	32,183,378		$	27,152,389




	Hospital contracts				19,635,812			20,416,807			22,330,858




	Other revenue				434,389			429,675			568,825

				$	75,120,888		$	53,029,860		$	50,052,072

Income (loss) before income taxes:




	Health plan contracts			$	12,727,687		$	4,477,579		$	6,509,044




	Hospital contracts				5,242,427			5,569,057			6,502,002




	Shared support services				(8,895,011	)		(7,099,502	)		(5,287,320	)

			Total segments		9,075,103			2,947,134			7,723,726




	General corporate				(3,407,617	)		(2,321,051	)		(2,042,046	)

				$	5,667,486		$	626,083		$	5,681,680

Depreciation and amortization:




	Health plan contracts			$	2,979,705		$	1,731,944		$	825,840




	Hospital contracts				214,906			186,073			176,877




	Shared support services				1,277,793			843,572			200,370

			Total segments		4,472,404			2,761,589			1,203,087




	General corporate				1,183,411			858,716			602,323

				$	5,655,815		$	3,620,305		$	1,805,410

Expenditures for long-lived assets:




	Health plan contracts			$	1,845,559		$	5,719,951		$	1,768,722




	Hospital contracts				371,570			203,879			156,658




	Shared support services				1,264,208			1,581,344			1,530,935

			Total segments		3,481,337			7,505,174			3,456,315




	General corporate				1,500,124			3,398,662			431,938

				$	4,981,461		$	10,903,836		$	3,888,253

Identifiable assets:




	Health plan contracts			$	31,406,645		$	11,580,554		$	7,282,246




	Hospital contracts				3,045,002			2,412,637			2,591,055




	Shared support services				2,739,227			2,651,835			2,174,652

			Total segments		37,190,874			16,645,026			12,047,953




	General corporate				16,708,134			11,152,853			14,580,790




	Assets not allocated:




		Deferred tax assets			4,901,000			2,856,000			3,302,000




		Excess of cost over net assets of purchased companies			10,318,482			10,700,701			11,082,920

				$	69,118,490		$	41,354,580		$	41,013,663

All of the Company’s operations are in the United States. During the year ended August 31, 2001, revenues of $21.0 million and $10.9 million were derived from contracts with two health plan customers. During the year ended August 31, 2000, revenues of $11.1 million and $12.2 million were derived from contracts with two health plan customers. During the year ended August 31, 1999, revenues of $16.6 million and $4.8 million were derived from contracts with two health plan customers.

13. Subsequent Events

At a Special Meeting of Stockholders on October 25, 2001, the stockholders approved (i) an amendment to the Company’s Restated Certificate of Incorporation to increase the number of authorized shares of the Company’s common stock from 15,000,000 to 40,000,000 and (ii) an amendment of one of the Company’s stock plans to increase the number of shares available for issuance under the plan, to increase the number of shares issuable to any officer, key employee or consultant in any one year and to extend the term of the plan. On October 29, 2001, the Company’s Board of Directors approved a three-for-two stock split effected in the form of a 50% stock dividend to be distributed on November 23, 2001 to stockholders of record at the close of business on November 9, 2001. The balance sheets and statements of stockholders’ equity have been restated as if the split and the increase in authorized shares had occurred on August 31, 2001. Earnings per share, weighted average common shares and equivalents and stock option information have been retroactively restated as if the split had occurred at the beginning of the periods presented.

INDEPENDENT AUDITORS’ REPORT

Board of Directors and Stockholders
American Healthways, Inc.
Nashville, Tennessee

We have audited the accompanying consolidated balance sheets of American Healthways, Inc. (formerly American Healthcorp, Inc.) and subsidiaries as of August 31, 2001 and 2000, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the three years in the period ended August 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of American Healthways, Inc. and subsidiaries as of August 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 2001 in conformity with accounting principles generally accepted in the United States of America.

DELOITTE & TOUCHE LLP

Nashville, Tennessee
October 16, 2001 (November 26, 2001 with respect to the stock split described in Note 13)

Quarterly Financial Information (unaudited):
(In thousands except per share data)


Fiscal 2001	First		Second		Third		Fourth

Revenues	$	16,536	$	17,699	$	18,459	$	22,427




Income before income taxes	$	1,152	$	1,152	$	1,487	$	1,876




Net income	$	672	$	630	$	840	$	1,015




Diluted income per share (1) (2)	$	0.05	$	0.05	$	0.06	$	0.07


Fiscal 2000	First		Second		Third			Fourth

Revenues	$	13,065	$	13,213	$	11,617		$	15,135




Income (loss) before income taxes	$	1,004	$	486	$	(1,563	)	$	699




Net income	$	585	$	175	$	(1,013	)	$	401




Diluted income per share (1) (2)	$	0.04	$	0.01	$	(0.08	)	$	0.03

(1) Income (loss) per share calculations for each of the quarters was based on the weighted average number of shares and dilutive options outstanding for each period. Accordingly, the sum of the quarters may not necessarily be equal to the full year income (loss) per share.

(2) Restated to reflect the effect of a three-for-two stock split effective November 2001.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

PART III

Item 10. Directors and Executive Officers of the Registrant

Information concerning the directors of the Company is included in pages 5-7 under the caption “Election of Directors” of the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held January 22, 2002, to be filed with the Securities and Exchange Commission pursuant to Rule 14a-6(c), and is incorporated herein by reference.

Pursuant to General Instruction G(3), information concerning executive officers of the Company is included in Part I, under the caption “Executive Officers of the Registrant” of this Form 10-K.

Item 11. Executive Compensation

Information required by this item is contained in the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held January 22, 2002, to be filed with the Securities and Exchange Commission pursuant to Rule 14a-6(c), and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

Item 13. Certain Relationships and Related Transactions

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) The following documents are filed as part of this Annual Report on Form 10-K:

1. The financial statements filed as part of this report are included in Part II, Item 8 of this Annual Report on Form 10-K.

2. All Financial Statement Schedules have been omitted because they are not required under the instructions to the applicable accounting regulations of the Securities and Exchange Commission or the information to be set forth therein is included in the financial statements or in the notes thereto.

3. Exhibits


			3.1			Restated Certificate of Incorporation for American Healthways, Inc., as amended












			3.2			Bylaws [incorporated by reference to Exhibit 3.2 to Registration Statement on Form S-1 (Registration No. 33-41119)]












			4.1			Article IV of the Company’s Restated Certificate of Incorporation (included in Exhibit 3.1)












			10.1			Credit Agreement and Revolving Credit Note between American Healthways, Inc. and SunTrust Bank dated January 4, 2000 (incorporated by reference to Exhibit 10.1 to Form 10-Q of the Company’s fiscal quarter ended November 30, 1999)












			10.2			First Amendment to Credit Agreement between American Healthways, Inc. and SunTrust Bank dated May 12, 2000 (incorporated by reference to Exhibit 10.1 to Form 10-Q of the Company’s fiscal quarter ended May 31, 2000)












			10.3			Amendment Agreement between American Healthways Services, Inc., American Healthways Management, Inc., Arthritis and Osteoporosis Care Center, Inc. and SunTrust Bank dated May 12, 2000 (incorporated by reference to Exhibit 10.2 to Form 10-Q of the Company’s fiscal quarter ended May 31, 2000)












			10.4			Second Amendment to Credit Agreement and First Amendment to Revolving Credit Note between American Healthways, Inc. and SunTrust Bank dated January 9, 2001 (incorporated by reference to Exhibit 10.1 to Form 10-Q of the Company’s fiscal quarter ended November 30, 2000)












			10.5			Agreement and Plan of Merger, dated April 30, 2001 by and among American Healthways, Inc., CareSteps.com, Inc. and C-Steps Acquisition Company (incorporated by reference to Exhibit 2 to Form 8-K of the Company dated June 6, 2001)












			10.6			Agreement and Plan of Merger, dated June 5, 2001 by and among American Healthways, Inc., Empower Health, Inc. and all the stockholders of Empower Health, Inc. (incorporated by reference to Exhibit 2 to Form 8-K of the Company dated June 15, 2001)

Management Contracts and Compensatory Plans


			10.7			Employment Agreement as Amended and Restated dated August 31, 1992 between the Company and Thomas G. Cigarran (incorporated by reference to Exhibit 10.3 to Form 10-K of the Company for its fiscal year ended August 31, 1992)












			10.8			Employment Agreement as Amended and Restated dated August 31, 1992 between the Company and Robert E. Stone (incorporated by reference to Exhibit 10.6 to Form 10-K of the Company for its fiscal year ended August 31, 1992)












			10.9			Employment Agreement dated March 1, 2001 between the Company and David A. Sidlowe (incorporated by reference to Exhibit 10.1 to Form 10-Q of the Company’s fiscal quarter ended February 28, 2001)












			10.10			Employment Agreement dated September 1, 2000 between the Company and Ben R. Leedle (incorporated by reference to Exhibit 10.2 to Form 10-Q of the Company’s fiscal quarter ended February 28, 2001)












			10.11			Employment Agreement dated June 1, 2001 between the Company and Jeffrey J. Rice, M.D. (incorporated by reference to Exhibit 10.1 to Form 10-Q of the Company’s fiscal quarter ended May 31, 2001)












			10.12			Employment Agreement dated June 5, 2001 between the Company and Richard R. Rakowski (incorporated by reference to Exhibit 10.2 to Form 10-Q of the Company’s fiscal quarter ended May 31, 2001)












			10.13			Employment Agreement dated September 1, 2000 between the Company and Mary D. Hunter












			10.14			Employment Agreement dated October 1, 2001 between the Company and Mary A. Chaput












			10.15			Capital Accumulation Plan, as amended [incorporated by reference to Exhibit 10.11 to Registration Statement on Form S - 1 (Registration No. 33-41119) and Exhibit 10.8 to Form 10-K of the Company for its fiscal year ended August 31, 1995]












			10.16			Non-Statutory Stock Option Plan of 1988 [incorporated by reference to Exhibit 10.12 to Registration Statement on Form S-1 (Registration No. 33-41119)]












			10.17			1991 Employee Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.10 to Form 10-K of the Company for its fiscal year ended August 31, 1992)












			10.18			1991 Stock Option Plan for Outside Directors [incorporated by reference to Exhibit 10.14 to Registration Statement on Form S-1 (Registration No. 33-41119)]












			10.19			1991 Outside Directors Discretionary Stock Option Plan [incorporated by reference to Exhibit 4(c) to Registration Statement on Form S-8 (Registration No. 33-42909)]












			10.20			Form of Indemnification Agreement by and among the Company and the Company’s directors [incorporated by reference to Exhibit 10.15 to Registration Statement on Form S-1 (Registration No. 33-41119)]


			10.21			1996 Stock Incentive Plan, as amended












			21			Subsidiaries of the registrant












			23			Independent Auditor’s Consent

(b) Reports on Form 8-K

A Current Report on Form 8-K dated June 6, 2001 and amended on Form 8-K/A dated August 15, 2001 and again on Form 8-K/A dated August 21, 2001 was filed during the quarter ended August 31, 2001 to announce the completion of the acquisition of CareSteps.com, Inc. with financial statements and pro forma statements related to the acquisition.

A Current Report on Form 8-K dated June 15, 2001 and amended on Form 8-K/A dated August 20, 2001 was filed during the quarter ended August 31, 2001 to announce the completion of the acquisition of Empower Health, Inc. with financial statements and pro forma statements related to the acquisition as well as reporting a live broadcast of the third quarter conference call to analysts on the Internet.

Refer to Item 14(a)(3) above.

(d) Not applicable

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.


	AMERICAN HEALTHWAYS, INC.
























November 29, 2001	By:	/s/ Thomas G. Cigarran

		Thomas G. Cigarran
		Chairman of the Board and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated.


Signature	Title	Date





























/s/ Thomas G. Cigarran	Chairman of the Board, Chief	November 29, 2001
	Executive Officer, Director
Thomas G. Cigarran	(Principal Executive Officer)




























/s/ Mary A. Chaput *	Executive Vice President, Chief	November 29, 2001
	Financial Officer, (Principal
Mary A. Chaput	Financial Officer)




























/s/ David A. Sidlowe	Senior Vice President and Controller	November 29, 2001
David A. Sidlowe	(Principal Accounting Officer)




























/s/ Frank A. Ehmann	Director	November 29, 2001

Frank A. Ehmann




























/s/ Henry D. Herr *	Director	November 29, 2001

Henry D. Herr




























/s/ Martin J. Koldyke	Director	November 29, 2001

Martin J. Koldyke




























/s/ C. Warren Neel	Director	November 29, 2001

C. Warren Neel




























/s/ William C. O’Neil, Jr.	Director	November 29, 2001

William C. O’Neil, Jr.

* Mr. Herr retired as Executive Vice President and Chief Financial Officer in October 2001 and was replaced by Ms. Chaput. Mr. Herr still serves on the Company’s Board of Directors and as a consultant to the Company.

47 EX-3.1 3 g72997ex3-1.txt RESTATED CERTIFICATE OF INCORPORATION Exhibit 3.1 RESTATED CERTIFICATE OF INCORPORATION, AS AMENDED OF AMERICAN HEALTHWAYS, INC. (Originally incorporated on September 2, 1981) FIRST: The name of the corporation (hereinafter called the "Corporation") is American Healthways, Inc. SECOND: The address of the registered office of the Corporation in the State of Delaware is 1209 Orange Street, City of Wilmington, County of New Castle. The name of the registered agent of the Corporation at such address is The Corporation Trust Company. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH: The aggregate number of shares of capital stock the Corporation is authorized to issue is 45,000,000 shares, of which 40,000,000 shares shall be Common Stock, par value $.001 per share (the "Common Stock"), and 5,000,000 shares shall be preferred stock, par value $.001 per share (the "Preferred Stock"), of which 400,000 shares are designated as Series A Preferred Stock (the "Series A Preferred Stock"). The designations and the powers, preferences and relative, participating, optional or other rights of the capital stock and the qualifications, limitations or restrictions thereof are as follows: A. COMMON STOCK PROVISIONS 1. Voting Rights. Except as otherwise required by law or expressly provided herein, the holder of each share of Common Stock shall have one vote on each matter submitted to a vote of the stockholders of the Corporation. 2. Dividend Rights. Subject to the provisions of law, the holders of the Common Stock shall be entitled to receive dividends at such times and in such amounts as may be determined by the Board of Directors of the Corporation. 3. Liquidation Rights. In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, after payment or provision for payment of the debts and other liabilities of the Corporation and the preferential amounts to which the holders of any outstanding shares of Preferred Stock shall be entitled upon dissolution, liquidation, or winding up, the holders of the Common Stock shall be entitled to share ratably in the remaining assets of the Corporation. B. PREFERRED STOCK PROVISIONS 1. Designation. The Board of Directors is authorized, subject to any limitations prescribed by law, to provide for the issuance of the shares of Preferred Stock in series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences, and rights of the shares of each such series and any qualifications, limitations or restrictions thereof. The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the Common Stock without a vote of the holders of the Preferred Stock, or of any series thereof, unless a vote of any such holders is required pursuant to the certificate or certificates establishing the series of Preferred Stock. 2. Liquidation Rights. If upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the assets available for distribution to holders of shares of Preferred Stock of all series shall be insufficient to pay such holders the full preferential amount to which they are entitled, then such assets shall be distributed ratably among the shares of all series of Preferred Stock in accordance with the respective preferential amounts payable with respect thereto. 3. Series A Preferred Stock. Pursuant to the authority vested in the Board of Directors in accordance with the provisions of this Article Fourth of the Restated Certificate of Incorporation, the Board of Directors does hereby create, authorize and provide for the issuance of the Series A Preferred Stock out of the class of 5,000,000 shares of Preferred Stock, having the voting powers, designation, relative, participating, optional and other special rights, preferences, and qualifications, limitations and restrictions thereof that are set forth as follows: (a) Designation and Amount. The shares of such series shall be designated as Series A Preferred Stock ("Series A Preferred Stock") and the number of shares constituting such series shall be 150,000. Such number of shares may be adjusted by appropriate action of the Board of Directors. 2 (b) Dividends and Distributions. Subject to the prior and superior rights of the holders of any shares of any other series of Preferred Stock or any other shares of Preferred Stock of the Corporation ranking prior and superior to the shares of Series A Preferred Stock with respect to dividends, each holder of one one-hundredth (1/100) of a share (a "Unit") of Series A Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for that purpose, dividends at the same rate as dividends are paid with respect to the Common Stock. In the event that the Corporation shall at any time after June 19, 2000 (the "Rights Dividend Declaration Date") (i) declare or pay any dividend on outstanding shares of Common Stock payable in shares of Common Stock; (ii) subdivide outstanding shares of Common Stock; or (iii) combine outstanding shares of Common Stock into a smaller number of shares, then in each such case the amount to which the holder of a Unit of Series A Preferred Stock was entitled immediately prior to such event pursuant to the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which shall be the number of shares of Common Stock that are outstanding immediately after such event and the denominator of which shall be the number of shares of Common Stock that were outstanding immediately prior to such event. (c) Voting Rights. The holders of Units of Series A Preferred Stock shall have the following voting rights: (i) Subject to the provision for adjustment hereinafter set forth, each Unit of Series A Preferred Stock shall entitle the holder thereof to one vote on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time after the Rights Dividend Declaration Date (i) declare any dividend on outstanding shares of Common Stock payable in shares of Common Stock; (ii) subdivide outstanding shares of Common Stock; or (iii) combine the outstanding shares of Common Stock into a smaller number of shares, then in each such case the number of votes per Unit to which holders of Units of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which shall be the number of shares of Common Stock that are outstanding immediately after such event and the denominator of which shall be the number of shares of Common Stock that were outstanding immediately prior to such event. (ii) Except as otherwise provided herein or by law, the holders of Units of Series A Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (iii) Except as set forth herein or required by law, holders of Units of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of 3 shares of Common Stock as set forth herein) for the taking of any corporate action. (d) Reacquired Shares. Any Units of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such Units shall, upon their cancellation, become authorized but unissued Units of Series A Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. (e) Liquidation. Upon any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of Units of Series A Preferred Stock shall be entitled to share in any assets remaining ratably with the holders of the Common Stock. In the event the Corporation shall at any time after the Rights Dividend Declaration Date (i) increase by way of stock split or similar transaction the number of outstanding shares of Common Stock; (ii) subdivide the outstanding shares of Common Stock; or (iii) combine the outstanding shares of Common Stock into a smaller number of shares, then in each such case the aggregate amount to which holders of Units of Series A Preferred Stock were entitled prior to such event shall be adjusted by multiplying such amount by a fraction, the numerator of which shall be the number of shares of Common Stock that are outstanding immediately after such event and the denominator of which shall be the number of shares of Common Stock that were outstanding immediately prior to such event. (f) Share Exchange, Merger, Etc. In case the Corporation shall enter into any share exchange, merger, combination or other transaction in which the shares of Common Stock are exchanged for or converted into other stock or securities, cash and/or any other property, then in any such case Units of Series A Preferred Stock shall at the same time be similarly exchanged for or converted into an amount per Unit (subject to the provision for adjustment hereinafter set forth) equal to the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is converted or exchanged. In the event the Corporation shall at any time after the Rights Dividend Declaration Date (i) declare any dividend on outstanding shares of Common Stock payable in shares of Common Stock; (ii) subdivide outstanding shares of Common Stock; or (iii) combine outstanding shares of Common Stock into a smaller number of shares, then in each such case the amount set forth in the immediately preceding sentence with respect to the exchange or conversion of Units of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which shall be the number of shares of Common Stock that are outstanding immediately after such event and the denominator of which shall be the number of shares of Common Stock that were outstanding immediately prior to such event. 4 (g) Redemption. The Units of Series A Preferred Stock shall not be redeemable at the option of the Corporation or any holder thereof. Notwithstanding the foregoing sentence of this Section, the Corporation may acquire Units of Series A Preferred Stock in any other manner permitted by law and the Certificate of Incorporation or Bylaws of the Corporation. (h) Ranking. The Units of Series A Preferred Stock shall rank junior to all other series of the Preferred Stock and to any other class of Preferred Stock that hereafter may be issued by the Corporation as to the payment of dividends and the distribution of assets, unless the terms of any such series or class shall provide otherwise. (i) Amendment. The Certificate of Incorporation, including without limitation the provisions hereof, shall not hereafter be amended, either directly or indirectly, or through merger or share exchange with another corporation, in any manner that would alter or change the powers, preferences or special rights of the Series A Preferred Stock so as to affect the holders thereof adversely without the affirmative vote of the holders of a majority or more of the outstanding Units of Series A Preferred Stock, voting separately as a class. (j) Fractional Shares. The Series A Preferred Stock may be issued in Units or other fractions of a share, which Units or fractions shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Preferred Stock. FIFTH: (a) The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. Except as otherwise fixed by or pursuant to the provisions of Article FOURTH hereof relating to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect additional directors under specified circumstances, the number of directors shall be fixed by or in the manner provided in the by-laws of the Corporation. (b) The directors, other than those who may be elected by the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, shall be divided into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly equal in number as possible, of one-third of the total number of directors constituting the entire Board of Directors. At each annual meeting of stockholders, successors to the class of directors whose term expires at that annual meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible. 5 (c) A director shall hold office until the annual meeting of stockholders for the year in which his or her term expires and until his or her successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office. Any additional director of any class appointed or elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case will a decrease in the number of directors shorten the term of any incumbent director. (d) Elections of directors need not be by written ballot unless the by-laws of the Corporation so provide. SIXTH: In furtherance and not in limitation of the powers conferred by statute and unless otherwise provided herein, the Board of Directors, by a majority vote taken at any meeting at which a quorum is present, is expressly authorized to make, alter or repeal the by-laws of the Corporation. SEVENTH: No director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided, however, that this provision shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law or (iv) for any transaction from which the director derived an improper personal benefit. EIGHTH: (a) Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a director or an officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (hereinafter an "indemnitee"), whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith; provided, however, that, except as provided in Section (c) of this Article EIGHTH with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such indemnitee in connection with a 6 proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. (b) Right to Advancement of Expenses. The right to indemnification conferred in Section (a) of this Article EIGHTH shall include the right to be paid by the Corporation the expenses (including attorneys' fees) incurred in defending any such proceeding in advance of its final disposition (hereinafter an "advancement of expenses"); provided, however, that, if the Delaware General Corporation Law requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a "final adjudication") that such indemnitee is not entitled to be indemnified for such expenses under this Section (b) or otherwise. The rights to indemnification and to the advancement of expenses conferred in Sections (a) and (b) of this Article EIGHTH shall be contract rights and such rights shall continue as to an indemnitee who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the indemnitee's heirs, executors and administrators. (c) Right of Indemnitee to Bring Suit. If a claim under Section (a) or (b) of this Article EIGHTH is not paid in full by the Corporation within sixty (60) days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty (20) days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) in any suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met any applicable standard for indemnification set forth in the Delaware General Corporation Law. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the 7 burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Article EIGHTH or otherwise shall be on the Corporation. (d) Non-Exclusivity of Rights. The rights to indemnification and to the advancement of expenses conferred in this Article EIGHTH shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the Corporation's Restated Certificate of Incorporation, by-laws, agreement, vote of stockholders or disinterested directors or otherwise. (e) Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. (f) Indemnification of Employees and Agents of the Corporation. The Corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification and to the advancement of expenses to any employee or agent of the Corporation to the fullest extent of the provisions of this Article EIGHTH with respect to the indemnification and advancement of expenses of directors and officers of the Corporation. NINTH: No amendment to or repeal of Article SEVENTH or EIGHTH of this Restated Certificate of Incorporation shall apply to or have any effect on the rights of any individual referred to in Article SEVENTH or EIGHTH for or with respect to acts or omissions of such individual occurring prior to such amendment or repeal. TENTH: A. Vote Required For Certain Business Combinations 1. In addition to any affirmative vote required by law or this Restated Certificate of Incorporation, and except as otherwise expressly provided in Section B of this Article TENTH: (a) any merger or consolidation of the Corporation or any Subsidiary (as hereinafter defined) with (i) any Interested Stockholder (as hereinafter defined) or (ii) any other corporation (whether or not itself an Interested Stockholder) which is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) of an Interested Stockholder; or (b) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Stockholder or any Affiliate of any Interested Stockholder of any assets of the Corporation or any Subsidiary having an aggregate Fair Market Value of $30,000,000 or more; or (c) the issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of transactions) of any securities of the Corporation or any 8 Subsidiary to any Interested Stockholder or any Affiliate of any Interested Stockholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value of $10,000,000 or more; or (d) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of an Interested Stockholder or any Affiliate of any Interested Stockholder; or (e) any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Stockholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which is directly or indirectly owned by any Interested Stockholder or any Affiliate of any Interested Stockholder; shall require the affirmative vote of the holders of at least 80% of the voting power of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (the "Voting Stock"), excluding shares held by the Interested Stockholder, voting together as a single class (it being understood that for purposes of this Article TENTH, each share of the Voting Stock shall have the number of votes granted to it pursuant to Article FOURTH of this Restated Certificate of Incorporation). Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law or in any agreement with any national securities exchange or otherwise. 2. The term "Business Combination" as used in this Article TENTH shall mean any transaction which is referred to in any one or more of subparagraphs (a) through (e) of paragraph 1 of this Section A. B. When Higher Vote Is Not Required. The provisions of Section A of this Article TENTH shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote as is required by law and any other provision of this Restated Certificate of Incorporation, if all of the conditions specified in either of the following paragraphs 1 or 2 are met: 1. The Business Combination shall have been approved by a majority of the Disinterested Directors (as hereinafter defined). 2. All of the following conditions shall have been met: (a) The aggregate amount of the cash and the Fair Market Value (as hereinafter defined) as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of Common Stock in such Business Combination shall be at least equal to the higher of the following: 9 I. (if applicable) the Highest Per Share Price (as hereinafter defined) (including the brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder for any shares of Common Stock acquired by it (X) within the two year period immediately prior to the first public announcement of the proposal of the Business Combination (the "Announcement Date") or (Y) in the transaction in which it became an Interested Stockholder, whichever is higher; and II. the Fair Market Value per share of Common Stock on the Announcement Date or on the date on which the Interested Stockholder became an Interested Stockholder (such latter date is referred to in this Article TENTH as the "Determination Date"), whichever is higher. (b) The aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of shares of any class of outstanding Voting Stock other than Common Stock shall be at least equal to the highest of the following (it being intended that the requirements of this subparagraph (b) shall be required to be met with respect to every such class of outstanding Voting Stock, whether or not the Interested Stockholder has previously acquired any shares of a particular class of Voting Stock): I. (if applicable) the Highest Per Share Price (as hereinafter defined) (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder for any shares of such class of Voting Stock acquired by it (X) within the two-year period immediately prior to the Announcement Date or (Y) in the transaction in which it became an Interested Stockholder, whichever is higher; II. (if applicable) the highest preferential amount per share to which the holders of shares of such class of Voting Stock are entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation; and III. the Fair Market Value per share of such class of Voting Stock on the Announcement Date or on the Determination Date, whichever is higher. (c) The consideration to be received by holders of a particular class of outstanding Voting Stock (including Common Stock) shall be in cash or in the same form as the Interested Stockholder has previously paid for shares of such class of Voting Stock. If the Interested Stockholder has paid for shares of any class of Voting Stock with varying forms of consideration, the form of consideration for such class of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class of Voting Stock previously acquired by it. 10 (d) After such Interested Stockholder has become an Interested Stockholder and prior to the consummation of such Business Combination: (i) except as approved by a majority of the Disinterested Directors, there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) on any outstanding Preferred Stock; (ii) there shall have been (x) no reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any subdivision of the Common Stock), except as approved by a majority of the Disinterested Directors, and (y) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding shares of the Common Stock, unless the failure so to increase such annual rate is approved by a majority of the Disinterested Directors; and (iii) such Interested Stockholder shall have not become the beneficial owner of any additional shares of Voting Stock except as part of the transaction which results in such Interested Stockholder becoming an Interested Stockholder. (e) After such Interested Stockholder has become an Interested Stockholder, such Interested Stockholder shall not have received the benefit, directly or indirectly (except proportionately as a stockholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Corporation, whether in anticipation of or in connection with such Business Combination or otherwise. (f) A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934, as amended ("Exchange Act"), and the rules and regulations thereunder (or any subsequent provisions replacing the Exchange Act, rules or regulations) shall be mailed to public stockholders of the Corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to the Exchange Act or subsequent provisions). C. Certain Definitions. For the purposes of this Article TENTH: 1. A "person" shall mean any individual, firm, corporation or other entity. 2. "Interested Stockholder" shall mean any person (other than the Corporation or any Subsidiary) who or which: (a) is the beneficial owner, directly or indirectly, of more than 20% of the voting power of the outstanding Voting Stock; or 11 (b) is an Affiliate of the Corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, within the meaning of Rule 13d-3 under the Exchange Act, of 20% or more of the voting power of the then outstanding Voting Stock; or (c) is an assignee of or has otherwise succeeded to any shares of Voting Stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by any Interested Stockholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. 3. A person shall be a "beneficial owner" of any Voting Stock: (a) which such person or any of its Affiliates or Associates (as hereinafter defined) beneficially owns, directly or indirectly, within the meaning of Rule 13d-3 under the Exchange Act; or (b) which such person or any of its Affiliates or Associates has (i) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (ii) the right to vote pursuant to any agreement, arrangement or understanding (but neither such person nor any such Affiliate or Associate shall be deemed to be the beneficial owner of any shares of Voting Stock solely by reason of a revocable proxy granted for a particular meeting of stockholders, pursuant to a public solicitation of proxies for such meeting, and with respect to which shares neither such person nor any such Affiliate or Associate is otherwise deemed the beneficial owner); or (c) which are beneficially owned, directly or indirectly, within the meaning of Rule 13d-3 under the Exchange Act, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purposes of acquiring, holding, voting (other than solely by reason of a revocable proxy as described in subparagraph (b) of this paragraph (3)) or disposing of any shares of Voting Stock; provided, however, that in the case of any employee stock ownership or similar plan of the Corporation or of any Subsidiary in which the beneficiaries thereof possess the right to vote any shares of Voting Stock held by such plan, no such plan nor any trustee with respect thereto (nor any Affiliate of such trustee), solely by reason of such capacity of such trustee, shall be deemed, for any purposes hereof, to beneficially own any shares of Voting Stock held under any such plan. 4. For the purposes of determining whether a person is an Interested Stockholder pursuant to paragraph 2 of this Section C, the number of shares of Voting Stock deemed to be 12 outstanding shall include shares deemed owned by such person through application of paragraph 3 of this Section C but shall not include any other shares of Voting Stock which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. 5. "Affiliate" or "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. 6. "Subsidiary" means any corporation of which a majority of any class of equity security is owned, directly or indirectly, by the Corporation; provided, however, that for the purposes of the definition of Interested Stockholder set forth in paragraph 2 of this Section C, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by the Corporation. 7. "Disinterested Director" means any member of the Board of Directors who is unaffiliated with the Interested Stockholder and was a member of the Board of Directors prior to the time that the Interested Stockholder became an Interested Stockholder, and any successor of a Disinterested Director who is unaffiliated with the Interested Stockholder and is recommended to succeed a Disinterested Director by a majority of Disinterested Directors then on the Board of Directors. 8. "Fair Market Value" means: (a) in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock on the Composite Tape for New York Stock Exchange-Listed Stocks, or, if such stock is not quoted on the Composite Tape, on the New York Stock Exchange, or, if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Exchange Act on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the 30-day period preceding the date in question on the National Association of Securities Dealers Automated Quotation System or any system then in use, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by the Board of Directors in good faith, in each case with respect to any class of stock, appropriately adjusted for any dividend or distribution in shares of such stock or any stock split or reclassification of outstanding shares of such stock into a greater number of shares of such stock or any combination or reclassification of outstanding shares of such stock into a smaller number of shares of such stock; and (b) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by the Board of Directors in good faith. 9. References to "Highest Per Share Price" shall in each case with respect to any class of stock reflect an appropriate adjustment for any dividend or distribution in shares of such stock or any stock split or reclassification of outstanding shares of such stock into a greater number of shares of such stock or any combination or reclassification of outstanding shares of such stock into a smaller number of shares of such stock. 13 10. In the event of any Business Combination in which the Corporation survives, the phrase "consideration other than cash" as used in subparagraphs (a) and (b) of paragraph 2 of Section B of this Article TENTH shall include the shares of Common Stock and/or the shares of any other class of outstanding Voting Stock retained by the holders of such shares. D. Powers of the Board of Directors. A majority of the directors of the Corporation shall have the power and duty to determine for the purposes of this Article TENTH, on the basis of information known to them after reasonable inquiry, (a) whether a person is an Interested Stockholder, (b) the number of shares of Voting Stock beneficially owned by any person, (c) whether a person is an Affiliate or Associate of another and (d) whether the assets which are the subject of any Business Combination have, an aggregate Fair Market Value of $30,000,000 or more, or the consideration to be received for the issuance or transfer of securities by the Corporation or any Subsidiary in any Business Combination has, an aggregate Fair Market Value of $10,000,000 or more. E. No Effect on Fiduciary Obligations of Interested Stockholders. Nothing contained in this Article TENTH shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law. F. Amendment or Repeal. Notwithstanding any other provisions of this Restated Certificate of Incorporation or the by-laws of the Corporation (and notwithstanding the fact that a lesser percentage may be specified by law, this Restated Certificate of Incorporation or the by-laws of the Corporation), the affirmative vote of the holders of 80% or more of the outstanding Voting Stock, excluding shares held by an Interested Stockholder, voting together as a single class, shall be required to amend or repeal, or adopt any provisions inconsistent with this Article TENTH. ELEVENTH: No action required to be taken or which may be taken at any annual or special meeting of stockholders of the Corporation may be taken without a meeting, and the power of stockholders to consent, in writing, without a meeting, to the taking of any action is specifically denied. 14 TWELFTH: The Corporation shall not be governed by the provisions of Section 203 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, this Restated Certificate of Incorporation which restates, integrates and amends the provisions of the Certificate of Incorporation of the Corporation, and which has been duly adopted in accordance with Section 242 of the General Corporation Law of the State of Delaware, has been executed by its President and attested by its Secretary, this ____ day of August, 1991. AMERICAN HEALTHWAYS, INC. By: /s/ Thomas G. Cigarran ------------------------------- President ATTEST: /s/ Henry D. Herr - ----------------------------- Henry D. Herr Secretary 15 EX-10.13 4 g72997ex10-13.txt EMPLOYMENT AGREEMENT/MARY D. HUNTER Exhibit 10.13 EMPLOYMENT AGREEMENT This Employment Agreement entered into this 1st day of September, 2000, by and between American Healthways, Inc., a Delaware corporation with its principal place of business at 3841 Green Hills Village Drive, Nashville, Tennessee 37215 ("Company"), and Mary D. Hunter (" Officer"). W I T N E S S E T H: 1. Employment. In consideration of the mutual promises and agreements contained herein and, as additional compensation for entering into this Employment Agreement, the grant by the Company, simultaneously with this Employment Agreement, to the Officer of an option to purchase 20,000 shares of American Healthways, Inc.'s common stock, the Company employs Officer and Officer hereby accepts employment under the terms and conditions hereinafter set forth. 2. Duties. Officer is engaged as Senior Vice President and Chief Operating Officer, Hospital Group. Her powers and duties in that capacity shall be those normally associated with the position. During the terms of this Agreement, Officer shall also serve without additional compensation in such other offices of the Company or its subsidiaries or affiliates to which she may be elected or appointed by the Board of Directors or by the Chief Executive Officer of the Company. A significant change in the title or duties of Officer or a change in the location in which such duties are to be performed to a location outside of the Metropolitan Nashville Statistical Area without the written consent of Officer shall be considered, at Officer's option, termination without just cause and in such event Officer shall receive the payments and benefits set forth in Section 8 hereof, with the date of termination for purposes of Section 8 hereof being the date Officer delivers written notice of her exercise of this option. Officer may exercise this option by delivering written notice to the Company at any time within a 30-day period following receipt of notice of such change. 3. Term. Subject to the terms and conditions set forth herein, Officer shall be employed hereunder for a term beginning on September 1, 2000, and terminating on August 31, 2003 (the "Expiration Date") unless sooner terminated or further extended as hereinafter set forth. The Expiration Date shall be automatically extended for one additional year beginning on August 31, 2001 and on each August 31 thereafter (so that on each August 31 anniversary date the term of this Agreement shall be extended automatically to be three years and no more), unless the Company notifies Officer in writing (the "Termination Notice") on or before sixty (60) days prior to August 31 of the then current contract year that this automatic extension provision is canceled and is of no further force and effect. Notwithstanding the automatic extension of the Expiration Date or any other provisions herein, this Agreement shall expire on the date that Officer becomes 65 years of age. 4. Compensation. For all duties rendered by Officer, the Company shall pay Officer a minimum salary of $187,000 per year ("Minimum Salary"), payable in equal monthly installments at the end of each month. In addition thereto, commencing September 1, 2001, the Minimum Salary shall be increased and adjusted upward, based upon any increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers, U.S. All City Average Report, of the U.S. Bureau of Labor Statistics (the "Consumer Price Index") or such index fulfilling the same or similar purpose in the event the Consumer Price Index is no longer maintained. For purposes of determining the increase in the Minimum Salary, the base month used in the Consumer Price Index shall be August, 2000. Such increase shall not be made retroactive for the first year, but commencing September 1, 2001, such increase shall be made, no more frequently than annually, based upon any such increase in the Consumer Price Index. In determining the amount of the annual increase based on any increase in the Consumer Price Index, the percentage of increase in the Consumer Price Index shall be multiplied times the Minimum Salary plus all other salary increases previously granted by the Board of Directors to officer and plus all previous adjustments based upon increases in the Consumer Price Index ("Base Salary"). In addition thereto, each year beginning September 1, 2001, Officer's compensation will be reviewed by the Chief Executive Officer of the Company and, after taking into consideration performance, the Chief Executive Officer of the Company may increase Officer's Base Salary. Officer shall participate in the Company's performance bonus plan and any bonuses paid under such plan shall be in addition to the Base Salary provided for in this Agreement but shall not be included as part of Base Salary for the purpose of determining the increase or adjustment based upon the Consumer Price Index. All compensation payable hereunder shall be subject to withholding for federal income taxes, FICA and all other applicable federal, state and local withholding requirements. 5. Extent of Service. Officer shall devote substantially all of her working time, attention and energies to the business of the Company and shall not during the term of this Agreement take directly or indirectly an active role in any other business activity without the prior written consent of the Chief Executive Officer of the Company; but this Section shall not prevent Officer from making real estate or other investments of a passive nature or from participating without compensation in the activities of a nonprofit charitable organization where such participation does not require a substantial amount of time and does not adversely affect her ability to perform her duties under this Agreement. Officer shall not serve on the board of directors of an entity outside the Company and its affiliates without prior approval of the Chief Executive Officer of the Company. 6. Disability. During any period in which Officer fails to perform her duties hereunder as a result of incapacity due to physical or mental illness, Officer shall continue to receive her Base Salary until her employment is terminated hereunder. In the case of incapacity due to physical or mental illness resulting in Officer being absent from her duties hereunder on a full time basis for more than ninety (90) consecutive days or for more than one hundred and twenty (120) days in any consecutive six (6) month period or in the case of a determination by the Board of Directors that Officer is permanently and totally disabled from performing her duties hereunder, the Company may terminate Officer's employment hereunder by the delivery of written notice of termination. In the event the Company so terminates Officer under this Section, such termination shall be considered termination without just cause and the Company shall pay Officer such amounts and provide such benefits as are required by Section 8 hereof, reduced by the benefits payable to Officer under the Company's disability insurance policies. For purposes of this Section, the determination of whether Officer is incapacitated due to physician or mental illness and, therefore, disabled shall be made by the Chief Executive Officer of the Company upon advice of a licensed physician. In the event of Officer's incapacity due to physical or mental illness. Officer shall be entitled to participate in the Company's health insurance and life insurance programs so long as is permitted under the provisions of these coverages. If Officer is no longer eligible for coverage in the Company's health insurance plan, the Company shall pay the difference between the cost of COBRA medical insurance coverage (available after active eligibility has ended) and Officer's contribution to the plan immediately preceding the disability but in no event shall the Company pay this difference for any period beyond the unexpired term of this Agreement or beyond the period of Officer's eligibility to participate in COBRA health insurance benefits. Following Officer's termination for disability, Officer's benefits for past participation in the Company's bonus, capital accumulation and stock option plans shall be determined in accordance with the provisions of those plans and Officer shall not be eligible for further participation in these plans beyond the date of termination. 7. Termination for Just Cause. For purposes of this Agreement, the Company shall have the right to terminate Officer for "just cause" if, in the good faith opinion of the Chief Executive Officer of the Company, Officer is guilty of (i) intoxication while on duty, (ii) theft or dishonesty in the conduct of the Company's business, (iii) conviction of a crime involving moral turpitude, or (iv) willful and continued neglect or gross negligence by Officer in the performance of her duties as an officer. For purposes of this Section 7, "willful" shall be determined by the Chief Executive Officer of the Company. In making such determination, the Chief Executive Officer of the Company shall not act unreasonably or arbitrarily. 8. Termination Without Just Cause. Officer's employment under this Agreement may be terminated (i) by the Company at any time "without just cause" by providing Officer with written notice, (ii) by Officer at any time within twelve (12) months following the occurrence of a Change in Control (as defined in Section 19 herein) for Good Reason (as defined in Section 19) and (iii) by Officer for Any Reason (as defined in Section 19 herein). Officer's termination date shall be deemed the date Officer receives her written notice of termination from the Company or the date the Company receives notice from the Officer of her termination in accordance with Section 8 (ii) or 8 (iii) herein. In the event of such termination: (a) If Officer has been terminated by the Company pursuant to 8(i) above prior to a Change of Control and subject to compliance by Officer with the provisions of Section 11 herein, the Company shall pay Officer from the termination date, for a total of two (2) years or the remaining term of this Agreement, whichever is greater, monthly during her lifetime, an amount equal to her monthly base salary on the termination date. If Officer has been terminated by the Company pursuant to 8(i) above after a Change of Control has occurred or the Officer terminates her employment pursuant to 8(ii) above, the Company shall pay to Officer in one lump sum, within 30 days of the Officer's termination date, an amount equal to 24 months of Officer's base salary or base salary for the remaining months left in the term of this contract, whichever is greater, calculated using the Officer's monthly base salary on the termination date. If employment is terminated pursuant to 8 (iii) above, the Company shall pay to officer in one lump sum within 30 days of the Officer's termination date, an amount equal to the greater of 12 months salary or an amount equal to the salary for one half of the remaining months under the unexpired term of this Agreement all calculated using the Officer's monthly base salary on the termination date. (b) Officer shall cease as of the termination date her further participation in the Company's stock option plans, capital accumulation plans, bonus plans, monthly automobile allowance and any other benefit or compensation plan in which Officer participated or was eligible to participate except as set forth in Section 8(c) below. The Officer's termination date shall be utilized for any vesting provisions of the plans listed above in this subparagraph (b). (c) Following termination by the Company without just cause, Officer shall be eligible to obtain COBRA health insurance coverage under the Company's health insurance plan for a period of time generally available to other participants eligible for such coverage. If the Officer elects this COBRA health insurance coverage, Officer's contribution to such coverage will continue at rates contributed by the Company's other officers as may be in effect from time to time while the Officer's COBRA health insurance coverage is in place. While life and disability insurance coverage cannot be provided following the Officer's termination under the terms of these group insurance plans, the Company will pay to officer the equivalent amount of the Company's contribution to the premiums for these coverages for the remaining payment term of this contract in an amount equal to the amount contributed by the Company for these coverages for other officers of the Company in effect while Officer's coverage following termination is in place. If Officer maintains COBRA health coverage with the company upon new employment following termination from the Company, the full cost of the COBRA health insurance coverage shall be the responsibility of the Officer. In addition, upon new employment following termination from the Company, the Company's reimbursement of life and disability insurance premium contributions will also terminate. (d) No payments of Base Salary or of any other type or character shall be made to Officer after Officer becomes sixty five (65) years of age. (e) The Company shall be entitled to offset and reduce any payments due to Officer hereunder if the Company has terminated the Officer's employment pursuant to 8(i) above prior to a Change of Control by the amount earned by Officer in any active employment that she may receive during the remaining unexpired payment term of this Agreement from any other source whatsoever, except said funds shall not include income from dividends, investments or passive income. As a condition for Officer receiving payments from the Company pursuant to termination pursuant to 8(i) above prior to a Change of Control, she agrees to furnish Company annually with full information regarding such other employment, to permit inspection of her records regarding any such employment and to provide a copy of her federal income tax returns for such periods on a timely basis. (f) The Company shall be entitled to offset and reduce any payments due to Officer hereunder by the amounts of unemployment insurance, social security insurance or like benefits received by Officer if employment has been terminated pursuant to 8 (i) above prior to a Change of Control. (g) All payments hereunder will cease upon the death of Officer. 9. Termination by Officer. Officer may terminate her employment hereunder at any time upon sixty (60) days written notice. Upon such termination by Officer, other than termination in accordance with Section 8(ii) or 8(iii) herein, the Company shall pay the Officer her Base Salary due through the date on which her employment is terminated at the rate in effect at the time of notice of termination. The Company shall than have no further obligation to Officer under this Agreement. 10. Termination Upon Death. If Officer dies during the term of this Agreement, the Company shall pay her Base Salary due through the date of her death at the rate in effect at the time of her death. The company shall then have no further obligations to Officer or any representative of her estate or her heirs except that Officer's estate or beneficiaries as the case may be shall be paid such amounts as may be payable under the Company's life insurance policies and other plans as they relate to benefits following death then in effect for the benefit of Officer. 11. Restrictive Covenants. (a) Confidential Information. In the course of Officer's employment, Officer will have access to trade secrets and confidential information of the Company and its clients. Accordingly, Officer agrees not to disclose, either during the time she is employed by the Company or following termination of her employment hereunder, to any person other than a person to whom disclosure is necessary in connection with the performance of her duties or to any person specifically authorized by the Chief Executive Officer of the Company any material confidential information concerning the Company, its customers and its employees, including, but not limited to identities of customers and prospective customers, identities of individual contacts at customers, information about Company colleagues, models and strategies, contract formats, business plans and related operation methodologies, financial information or measures, data bases, computer programs, treatment protocols, operating procedures and organization structures. Officer will return to the Company all property and confidential information in the Officer's possession and agrees not to copy or otherwise record in anyway such information. (b) Non-Competition. During the term of employment provided hereunder and continuing during the period while any amounts are being paid to Officer pursuant to the terms of the Agreement, and for a period of one (1) year thereafter, Officer will not (a) directly or indirectly own, manage, operate, control or participate in the ownership, management, operation or control of, or be connected as an officer, employee, partner, director or otherwise with, or any have financial interest in, or aid or assist anyone else in the conduct of, any business which is in competition with any business conducted by the Company or which Officer knew or had reason to know the Company was actively evaluating for possible entry, provided that ownership of five (5) percent or less of the voting stock of any public corporation shall not constitute a violation hereof. (c) Non-Solicitation. During the term of employment provided for hereunder and continuing during the period while any amounts are being paid to Officer pursuant to the terms of this Agreement, and for a period of one (1) year thereafter, Officer will not (a) directly or indirectly solicit business which could reasonably be expected to conflict with the Company's interest from any entity, organization or person which has contracted with the Company, which has been doing business with the Company, from which the Company was soliciting business at the time of the termination of employment or from which Officer knew or had reason to know that Company was going to solicit business at the time of termination of employment, or (b) employ, solicit for employment, or advise or recommend to any other persons that they employ or solicit for employment, any employee of the Company. (d) Consultation. Officer shall, at the Company's written request, during the period she is receiving any payment from the Company hereunder, cooperate with the Company in concluding any matters in which Officer was involved during the term of her employment and will make himself available for consultation with the Company on other matters otherwise of interest to the Company. The Company agrees that such requests shall be reasonable in number and will consider Officer's time required for other employment and/or employment search. (e) Enforcement. Officer and the Company acknowledge and agree that any of the covenants contained in this Section 11 may be specifically enforced through injunctive relief but such right to injunctive relief shall not preclude the Company from other remedies which may be available to it. (f) Continuing Obligation. Notwithstanding any provision to the contrary or otherwise contained in this Agreement, the Agreement and covenants contained in this Section 11 shall not terminate upon Officer's termination of her employment with the Company or upon the termination of this Agreement under any other provision of this Agreement. 12. Vacation. During each year of this Agreement, Officer shall be entitled to vacation in accordance with Company policy in effect from time to time. 13. Benefits. In addition to the benefits specifically provided for herein, Officer shall be entitled to participate while employed by the Company in all benefit plans maintained by the Company for officers generally according to the terms of such plans. 14. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and sent by registered or certified mail to her residence in the case of Officer, or to its principal office in the case of the Company and the date of mailing shall be deemed the date which such notice has been provided. 15. Waiver of Breach. The waiver by either party of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach by the other party. 16. Assignment. The rights and obligations of the Company under this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of the Company. The Officer acknowledges that the services to be rendered by her are unique and personal, and Officer may not assign any of her rights or delegate any of her duties or obligations under this Agreement. 17. Entire Agreement. This instrument contains the entire agreement of the parties and supersedes all other prior agreements, employment contracts and understandings, both written and oral, express or implied with respect to the subject matter of this Agreement and may not be changed orally but only by an agreement in writing signed by the party against whom enforcement of any waiver, change modification, extension or discharge is sought. This Agreement shall be governed by the laws of the State of Tennessee. 18. Headings. The sections, subjects and headings of this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. 19. Definitions. For purposes of this Agreement, the following definitions shall apply: (a) A "Change of Control" shall be deemed to mean: (i) a transaction or series of transactions (occurring within 24 months of each other) in which all or any substantial (defined as more than fifty percent (50%) of the assets of American Healthways, Inc. have been acquired through a merger, business combination, purchase or similar transaction by any entity or person, other than an entity controlled by American Healthways, Inc. or (ii) a transfer or series of transfers (occurring within 24 months of each other) in which securities representing control of American Healthways, Inc. ("control" being defined as greater than fifty percent (50%) of the outstanding voting power of the outstanding securities of American Healthways, Inc.) are acquired by or otherwise are beneficially owned, directly or indirectly, by any corporation, person or "group" (as such term is used in Section 13(d)(3) of the Securities Exchange Act of 1934). (iii) The sale by the Company of the Hospital Group. (b) A "Good Reason" shall exist if after the occurrence of a Change of Control: (i) there is a significant change in the nature or scope of the Officer's authority and responsibilities; (ii) there is a reduction in Officer's rate of Base Salary or (for reasons other than Company performance) overall compensation; or (iii) the Company changes the principal location in which Officer is required to perform services outside a fifteen mile radius of the present location without Officer's consent. (c) "For Any Reason" shall mean, after a Change of Control at the sole discretion of Officer. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first written. ------------------------------------------ Mary D. Hunter AMERICAN HEALTHWAYS, INC. By: ------------------------------------------ Title: President & Chief Executive Officer EX-10.14 5 g72997ex10-14.txt EMPLOYMENT AGREEMENT/MARY A. CHAPUT Exhibit 10.14 EMPLOYMENT AGREEMENT This Employment Agreement is entered into this 1st day of October, 2001, by and between American Healthways, Inc., a Delaware corporation ("Company") and Mary A. Chaput ("Officer"). W I T N E S S E T H I. Employment. In consideration of the mutual promises and agreements contained herein, the Company employs Officer and Officer hereby accepts employment under the terms and conditions hereinafter set forth. II. Duties. Officer is engaged as an Executive Vice President and Chief Financial Officer of the Company. Her powers and duties in that capacity shall be those normally associated with the position of Executive Vice President and Chief Financial Officer. During the terms of this Agreement, Officer shall also serve without additional compensation in such other offices of the Company or its subsidiaries or affiliates to which she may be elected or appointed by the Board of Directors or by the Chief Executive Officer of the Company. If a Good Reason For Termination exists then it shall be considered, at Officer's option, Termination Without Just Cause and in such event Officer shall receive the payments and benefits set forth in Section VIII hereof, with the date of termination for purposes of Section VIII hereof being the date Officer delivers written notice of her exercise of this option. Officer may exercise this option by delivering written notice to the Company at any time within a 30-day period following her receipt of notice of the existence of a Good Reason For Termination. III. Term. Subject to the terms and conditions set forth herein, Officer shall be employed hereunder for a term beginning on October 1, 2001 and terminating on September 30, 2003 (the "Expiration Date") unless sooner terminated or further extended as hereinafter set forth. The Expiration Date shall be automatically extended for one additional year at the end of the first term of this Agreement and at the end of each year thereafter (so that the term of this Agreement shall be extended automatically for one year and no more), unless the Company notifies Officer in writing (the "Termination Notice") on or before sixty (60) days prior to the Expiration Date that this automatic extension provision is canceled and is of no further force and effect. Officer will continue to be paid full pay and benefits during this sixty (60) day period. Notwithstanding the automatic extension of the Expiration Date or any other provisions herein, this Agreement shall expire on the date that Officer becomes 65 years of age. IV. Compensation. For all duties rendered by Officer, the Company shall pay Officer a minimum salary of $200,000 per year ("Minimum Salary"), payable in equal monthly installments at the end of each month. In addition thereto, commencing October 1, 2002, one year from the start of this Agreement and annually thereafter -1- should this Agreement be extended, the Minimum Salary shall be increased and adjusted upward, based upon any increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers, U.S. All City Average Report, of the U.S. Bureau of Labor Statistics (the "Consumer Price Index") or such index fulfilling the same or similar purpose in the event the Consumer Price Index is no longer maintained, in an amount not to exceed 5%. For purposes of determining the increase in the Minimum Salary, the base month used in the Consumer Price Index shall be the first full month preceding the commencement of this Agreement. Such increase shall not be made retroactive for the first year and such increase shall be made, no more frequently than annually, based upon any such increased in the Consumer Price Index. In determining the amount of the annual increase based on any increase in the Consumer Price Index, the percentage of increase in the Consumer Price Index shall be multiplied times the Minimum Salary plus all other salary increases previously granted by the Board of Directors to Officer and plus all previous adjustments based upon increases in the Consumer Price Index ("Base Salary"). In addition thereto, each year beginning October 1, 2002, Officer's compensation will be reviewed by the Chief Executive Officer of the Company and, after taking into consideration performance, the Chief Executive Officer of the Company may increase Officer's Base Salary. Should such increase be equal to or greater than the cost of living increase, or 5%, no cost of living increase will be granted for that year. Officer shall participate in the Company's performance bonus plan and any bonuses paid under such plan shall be in addition to the Base Salary provided for in this Agreement but shall not be included as part of Base Salary for the purpose of determining the increase or adjustment based upon the Consumer Price Index. All compensation payable hereunder shall be subject to withholding for federal income taxes, FICA and all other applicable federal, state and local withholding requirements. V. Extent of Service. Officer shall devote substantially all of her working time, attention and energies to the business of the Company and shall not during the term of this Agreement take directly or indirectly an active role in any other business activity without the prior written consent of the Chief Executive Officer of the Company; but this Section shall not prevent Officer from making real estate or other investments of a passive nature or from participating without compensation in the activities of a nonprofit charitable organization where such participation does not require a substantial amount of time and does not adversely affect her ability to perform her duties under this Agreement. Officer shall not serve on the board of directors of an entity outside of the Company and its affiliates without the prior approval of the Chief Executive Officer of the Company. VI. Disability. During any period in which Officer fails to perform her duties hereunder as a result of incapacity due to physical or mental illness, Officer shall continue to receive her Base Salary until her employment is terminated hereunder. In the case of incapacity due to physical or mental illness resulting in Officer being absent from her duties hereunder on a full time basis for more than ninety (90) consecutive days or for more than one hundred and twenty (120) days in any consecutive six (6) month period or in the case of a determination by the Board of Directors that Officer is -2- permanently and totally disabled from performing her duties hereunder, the Company may terminate Officer's employment hereunder by the delivery of written notice of termination. In the event the Company so terminates Officer under this Section, such termination shall be considered termination without just cause and the Company shall pay Officer such amounts and provide such benefits as are required by Section VIII hereof, reduced by the benefits payable to Officer under the Company's disability insurance policies. For purposes of this Section, the determination of whether Officer is incapacitated due to physical or mental illness and therefore disabled shall be made by the Chief Executive Officer of the Company upon advice of a licensed physician. Any dispute which shall arise between the parties hereto regarding whether the Officer is disabled as contemplated in this Section shall be settled by arbitration as provided in Section XV. In the event of Officer's incapacity due to physical or mental illness, Officer shall be entitled to participate in the Company's health insurance and life insurance programs so long as is permitted under the provisions of these coverage's. If Officer is no longer eligible for coverage in the Company's health insurance plan, the Company shall pay the difference between the cost of COBRA medical insurance coverage (available after active eligibility has ended) and Officer's contribution to the plan immediately preceding the disability but in no event shall the Company pay this difference for any period beyond the unexpired term of this Agreement or beyond the period of Officer's eligibility to participate in COBRA health insurance benefits. Following Officer's termination for disability, Officer's benefits for past participation in the Company's bonus, capital accumulation and stock option plans shall be determined in accordance with the provisions of those plans and Officer shall not be eligible for further participation in these plans beyond the date of termination. VII. Termination for Just Cause. For purposes of this Agreement, the Company shall have the right to terminate Officer for "just cause" if, in the good faith opinion of the Chief Executive Officer of the Company, Officer is guilty of (i) intoxication while on duty, (ii) theft or dishonesty, (iii) conviction of a crime involving moral turpitude, or (iv) upon written notice to Officer, there is failure to cure within 30 days any willful and continued neglect or gross negligence by Officer in the performance of her duties as an officer or (v) upon written notice to Officer, there is failure to cure within 30 days any violation of Company Policy or Code of Conduct. For purposes of this Section VII, the Chief Executive Officer of the Company shall make determination of a violation. In making such determination, the Chief Executive Officer of the Company shall not act unreasonably or arbitrarily. Any dispute which shall arise between the parties hereto regarding whether Officer has committed any act which could give Company "cause" to terminate this Agreement shall be settled by arbitration as provided in Section XV. VIII. Termination Without Just Cause. Officer's employment under this Agreement may be terminated (i) by the Company at any time "without just cause" by providing Officer with written notice, (ii) by the Company by providing Officer with -3- Termination Notice (as defined in Section III), (iii) by Officer at any time within twelve (12) months following the occurrence of a Change In Control (as defined in Section XIX herein), or (iv) by Officer within 30 days of an event that provides Good Reason For Termination (as defined in Sections II and XIX). Officer's termination date shall be deemed the date Officer receives her written notice of termination or Termination Notice from the Company or the date the Company receives notice from the Officer of her termination in accordance with Section IX herein. In the event of such termination: a. Subject to compliance by Officer with the provisions of Section VIII herein, the Company shall pay Officer from the termination date for a total of one (1) year or the remaining term of this Agreement, whichever is greater, except in the event Officer terminates this Agreement pursuant to Section VIII(iii), following a change of control, payment shall be for two (2) years in an amount equal to her monthly Base Salary. In addition, Officer will be paid any unpaid vacation pay earned by her, up to and including the date of termination, on the termination date. b. Officer shall cease as of the termination date her further participation in the Company's stock option plans, capital accumulation plans, bonus plans, monthly automobile allowance and any other benefit or compensation plan in which Officer participated or was eligible to participate except as set forth in Section VIII(c) below. The Officer's termination date shall be utilized for any vesting provisions of the plans listed above in this subparagraph (b). c. Following termination by the Company without just cause, Officer shall be eligible to obtain COBRA health insurance coverage under the Company's health insurance plan for a period of time generally available to other participants eligible for such coverage. If the Officer elects this COBRA health insurance coverage, Officer's contribution to such coverage will continue at rates contributed by the Company's other officers as may be in effect from time to time while the Officer's COBRA health insurance coverage is in place. While life and disability insurance coverage cannot be provided following the Officer's termination under the terms of these group insurance plans, the Company will pay to Officer the equivalent amount of the Company's contribution to the premiums for these coverage's for the remaining payment term of this contract in an amount equal to the amount contributed by the Company for these coverage's for other officers of the Company in effect while Officer's coverage following termination is in place. If Officer maintains COBRA health coverage with the Company upon new employment following termination from the Company, the full cost of the COBRA health insurance coverage shall be the responsibility of the Officer. In addition, upon new employment following termination from the Company, the Company's reimbursement of life and disability insurance premium contributions will also terminate. -4- d. No payments of Base Salary or of any other type of compensation shall be made to Officer after Officer becomes sixty five (65) years of age. e. All payments hereunder will cease upon the death of Officer. IX. Termination by Officer. Officer may terminate her employment hereunder at any time upon sixty (60) days written notice. Upon such termination by Officer, other than termination in accordance with Section VIII. (iii) and (iv) herein, the Company shall pay the Officer her Base Salary due through the date on which her employment is terminated at the rate in effect at the time of notice of termination. The Company shall then have no further obligation to Officer under this Agreement. X. Termination Upon Death. If Officer dies during the term of this Agreement, the Company shall pay her Base Salary due through the date of her death at the rate in effect at the time of her death. The Company shall then have no further obligations to Officer or any representative of her estate or her heirs except that Officer's estate or beneficiaries as the case may be shall be paid such amounts as may be payable under the Company's life insurance policies and other plans as they relate to benefits following death then in effect for the benefit of Officer. XI. Restrictive Covenants. (a) Confidential Information. Officer agrees not to disclose, either during the time she is employed by the Company or following termination of her employment hereunder, to any person other than a person to whom disclosure is necessary in connection with the performance of her duties or to any person specifically authorized by the Chief Executive Officer of the Company any material confidential information concerning the Company, including, but not limited to identities of customers and prospective customers identities of individual contacts at customers, information about Company colleagues, models and strategies, contract formats, business plans and related operation methodologies, financial information or measures, data bases, computer programs, treatment protocols, operating procedures and organization structures. (b) Non-Competition. During the term of employment provided hereunder and continuing during the period while any amounts are being paid to Officer pursuant to the terms of the Agreement, and for a period of one (1) year thereafter, Officer will not (a) directly or indirectly own, manage, operate, control or participate in the ownership, management, operation or control of, or be connected as an officer, employee, partner, director or otherwise with, or any have financial interest in, or aid or assist anyone else in the conduct of, any business which is in competition with any business -5- conducted by the Company or which Officer knew or had reason to know the Company was actively evaluating for possible entry, provided that ownership of five (5) percent or less of the voting stock of any public corporation shall not constitute a violation hereof. (c) Non-Solicitation. During the term of employment provided for hereunder and continuing during the period while any amounts are being paid to Officer pursuant to the terms of this Agreement, and for a period of one (1) year thereafter, Officer will not (a) directly or indirectly solicit business which could reasonably be expected to conflict with the Company's interest from any entity, organization or person which has contracted with the Company, which has been doing business with the Company, from which the Company was soliciting business at the time of the termination of employment or from which Officer knew or had reason to know that Company was going to solicit business at the time of termination of employment, or (b) employ, solicit for employment, or advise or recommend to any other persons that they employ or solicit for employment, any employee of the Company. (d) Consultation. Officer shall, at the Company's written request, during the period she is receiving any payment from the Company hereunder, cooperate with the Company in concluding any matters in which Officer was involved during the term of her employment and will make herself available for consultation with the Company on other matters otherwise of interest to the Company. The Company agrees that such requests shall be reasonable in number and will consider Officer's time required for other employment and/or employment search. (e) Enforcement. Officer and the Company acknowledge and agree that any of the covenants contained in this Section XI may be specifically enforced through injunctive relief but such right to injunctive relief shall not preclude the Company from other remedies, which may be available to it. (f) Continuing Obligation. Notwithstanding any provision to the contrary or otherwise contained in this Agreement, the Agreement and covenants contained in this Section XI shall not terminate upon Officer's termination of her employment with the Company or upon the termination of this Agreement under any other provision of this Agreement. -6- XII. Vacation. During each year of this Agreement, Officer shall be entitled to vacation in accordance with Company policy in effect from time to time, but in any event not less than 4 weeks per year. XIII. Benefits. In addition to the benefits specifically provided for herein, Officer shall be entitled to participate while employed by the Company in all benefit plans maintained by the Company for officers generally according to the terms of such plans. XIV. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and sent by registered or certified mail to her residence in the case of Officer, or to its principal office in the case of the Company and the date of mailing shall be deemed the date which such notice has been provided. XV. Arbitration. Any dispute between the parties hereto shall be settled by final and binding arbitration in Nashville, Tennessee, in accordance with the then effective rules of the American Arbitration Association, and judgment upon the award rendered may be entered in any court having jurisdiction thereof. XVI. Waiver of Breach. The waiver by either party of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach by the other party. XVII. Assignment. The rights and obligations of the Company under this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of the Company. The Officer acknowledges that the services to be rendered by him are unique and personal, and Officer may not assign any of her rights or delegate any of her duties or obligations under this Agreement. XVIII. Entire Agreement. This instrument contains the entire agreement of the parties and supersedes all other prior agreement, employment contracts and understandings, both written and oral, express or implied with respect to the subject matter of this Agreement and may not be changed orally but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. The laws of the State of Tennessee shall govern this Agreement. XIX. Headings. The sections, subjects and headings of this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. XX. Definitions. For purposes of this Agreement, the following definitions shall apply: (a) A "Change of Control" shall be deemed to mean: -7- (i) a transaction or series of transactions (occurring within 24 months of each other) in which all or any substantial (defined as more than fifty percent (50%) of the assets of American Healthways, Inc.) portion of Company assets have been acquired through a merger, business combination, purchase or similar transaction by any entity or person, other than an entity controlled by American Healthways, Inc. or (ii) a transfer or series of transfers (occurring within 24 months of each other) in which securities representing control of American Healthways, Inc. ("control" being defined as greater than fifty percent (50%) of the outstanding voting power of the outstanding securities of American Healthways, Inc.) are acquired by or otherwise are beneficially owned, directly or indirectly, by any corporation, person or "group" (as such term is used in Section 13(d)(3) of the Securities Exchange Act of 1934). (b) A "Good Reason For Termination" shall exist if: (i) there is a change in Officer's title, Officer no longer reports to Company's Chief Executive Officer or there is a significant change in the nature or scope of the Officer's authority, or responsibilities or title unacceptable to Officer; (ii) there is a reduction in Officer's rate of base salary (for reasons other than Company performance) or overall compensation, including benefit programs, including, but not limited to, any stock option plan, investment plan, savings plan, incentive compensation plan or life insurance, medical plans or disability plans provided by the Company to the Officer and in which the Officer is participating or under which the Company is covered unless such changes apply to all Officers of the Executive Vice President level. -8- (iii) the Company changes the principal location in which Officer is required to perform services outside a twenty-mile radius of Metropolitan Nashville without Officer's consent; IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first written. ------------------------------------------- Mary A. Chaput AMERICAN HEALTHWAYS, INC. By: --------------------------------------- Title: Chairman and Chief Executive Officer -9- EX-10.21 6 g72997ex10-21.txt 1996 STOCK INCENTIVE PLAN Exhibit 10.21 AMERICAN HEALTHCORP, INC. 1996 STOCK INCENTIVE PLAN SECTION 1. PURPOSE; DEFINITIONS. The purpose of the American Healthcorp, Inc. 1996 Stock Incentive Plan (the "Plan") is to enable American Healthcorp, Inc. (the "Corporation") to attract, retain and reward key employees of and consultants to the Corporation and its Subsidiaries and Affiliates, and directors who are not also employees of the Corporation, and strengthen the mutuality of interests between such key employees, consultants and directors by awarding such key employees, consultants and directors performance-based stock incentives and/or other equity interests or equity-based incentives in the Corporation, as well as performance-based incentives payable in cash. The creation of the Plan shall not diminish or prejudice other compensation programs approved from time to time by the Board. For purposes of the Plan, the following terms shall be defined as set forth below: A. "Affiliate" means any entity other than the Corporation and its Subsidiaries that is designated by the Board as a participating employer under the Plan, provided that the Corporation directly or indirectly owns at least 20% of the combined voting power of all classes of stock of such entity or at least 20% of the ownership interests in such entity. B. "Board" means the Board of Directors of the Corporation. C. "Common Stock" means the Corporation's Common Stock, par value $.001 per share. D. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. E. "Committee" means the Committee referred to in Section 2 of the Plan. F. "Corporation" means American Healthcorp, Inc., a corporation organized under the laws of the State of Delaware or any successor corporation. G. "Disability" means disability as determined under the Corporation's long-term disability insurance policy. H. "Disinterested Person" shall have the meaning set forth in Rule 16b-3(c)(2)(i) as promulgated by the Securities and Exchange Commission ("Commission") under the Securities Exchange Act of 1934, as amended, or any successor definition adopted by the Commission. I. "Early Retirement" means retirement, for purposes of this Plan with the express consent of the Corporation at or before the time of such retirement, from active employment with the Corporation and any Subsidiary or Affiliate prior to age 65, in accordance with any applicable early retirement policy of the Corporation then in effect or as may be approved by the Committee. J. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and any successor thereto. K. "Fair Market Value" means with respect to the Stock, as of any given date or dates, unless otherwise determined by the Committee in good faith, the reported closing price of a share of such class of Stock on The Nasdaq Stock Market ("Nasdaq Stock Market") or such other exchange or market as is the principal trading market for such class of Stock, or, if no such sale of a share of such class of Stock is reported on the Nasdaq Stock Market or other exchange or principal trading market on such date, the fair market value of a share of such class of Stock as determined by the Committee in good faith. L. "Incentive Stock Option" means any Stock Option intended to be and designated as an "Incentive Stock Option" within the meaning of Section 422 of the Code. M. "Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option. N. "Normal Retirement" means retirement from active employment with the Corporation and any Subsidiary or Affiliate on or after age 65. O. "Other Stock-Based Award" means an award under Section 8 below that is valued in whole or in part by reference to, or is otherwise based on, Stock. P. "Outside Director" means a member of the Board who is not an officer or employee of the Corporation or any Subsidiary or Affiliate of the Corporation. Q. "Outside Director Restricted Stock" shall have the meaning provided in Section 9. R. "Plan" means this American Healthcorp, Inc. 1996 Stock Incentive Plan, as amended from time to time. S. "Restricted Stock" means an award of shares of Stock that is subject to restrictions under Section 7 below. T. "Restriction Period" shall have the meaning provided in Section 7. U. "Retirement" means Normal or Early Retirement. V. "Stock" means the Common Stock. W. "Stock Appreciation Right" means the right pursuant to an award granted under Section 6 below to surrender to the Corporation all (or a portion) of a Stock Option in exchange for an amount equal to the difference between (i) the Fair Market Value, as of the date such Stock Option (or such portion thereof) is surrendered, of the shares of Stock covered by such Stock Option (or such portion thereof), subject, where applicable, to the pricing provisions in Section 6(b)(ii), and (ii) the aggregate exercise price of such Stock Option (or such portion thereof). X. "Stock Option" or "Option" means any option to purchase shares of Stock (including Restricted Stock, if the Committee so determines) granted pursuant to Section 5 below. Y. "Subsidiary" means any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation if each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. 2 In addition, the terms "Change in Control," "Potential Change in Control" and "Change in Control Price" shall have the meanings set forth, respectively in Sections 10(b), (c) and (d) below and the term "Cause" shall have the meaning set forth in Section 5(j) below. SECTION 2. ADMINISTRATION. The Plan shall be administered by a Committee of not less than two Disinterested Persons, who shall be appointed by the Board and who shall serve at the pleasure of the Board. The functions of the Committee specified in the Plan may be exercised by an existing Committee of the Board composed exclusively of Disinterested Persons. The initial Committee shall be the Compensation Committee of the Board. The Committee shall have authority to grant, pursuant to the terms of the Plan, to officers, other key employees and consultants eligible under Section 4: (i) Stock Options, (ii) Stock Appreciation Rights, (iii) Restricted Stock, and/or (iv) Other Stock-Based Awards. In particular, the Committee shall have the authority, consistent with the terms of the Plan: (a) to select the officers and other key employees of and consultants to the Corporation and its Subsidiaries and Affiliates to whom Stock Options, Stock Appreciation Rights, Restricted Stock, and/or Other Stock-Based Awards may from time to time be granted hereunder; (b) to determine whether and to what extent Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock, and/or Other Stock-Based Awards, or any combination thereof, are to be granted hereunder to one or more eligible employees; (c) to determine the number of shares to be covered by each such award granted hereunder; (d) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder (including, but not limited to, the share price and any restriction or limitation, or any vesting acceleration or waiver of forfeiture restrictions regarding any Stock Option or other award and/or the shares of Stock relating thereto, based in each case on such factors as the Committee shall determine, in its sole discretion); and to amend or waive any such terms and conditions to the extent permitted by Section 11 hereof; (e) to determine whether and under what circumstances a Stock Option may be settled in cash or Restricted Stock under Section 5(m) or (n), as applicable, instead of Stock; (f) to determine whether, to what extent and under what circumstances Option grants and/or other awards under the Plan are to be made, and operate, on a tandem basis vis-a-vis other awards under the Plan and/or cash awards made outside of the Plan; (g) to determine whether, to what extent and under what circumstances Stock and other amounts payable with respect to an award under this Plan shall be deferred either automatically or at the election of the participant (including providing for and determining the amount (if any) of any deemed earnings on any deferred amount during any deferral period); and (h) to determine whether to require payment withholding requirements in shares of Stock. The Committee shall have the authority to adopt, alter and repeal such rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan 3 and any award issued under the Plan (and any agreements relating thereto); and to otherwise supervise the administration of the Plan. All decisions made by the Committee pursuant to the provisions of the Plan shall be made in the Committee's sole discretion and shall be final and binding on all persons, including the Corporation and Plan participants. Notwithstanding the foregoing, the Committee shall have no authority to determine the terms or conditions of awards to Outside Directors, which shall be governed solely by Section 9 hereof. SECTION 3. SHARES OF STOCK SUBJECT TO PLAN. The aggregate number of shares of Stock reserved and available for distribution under the Plan shall not exceed 1,980,000 shares, which includes 50,000 shares reserved for issuance pursuant to Section 9 hereof. Any number of shares of Stock may be awarded so long as the total shares of Stock awarded does not exceed 380,000 shares. Such shares of Common Stock may consist, in whole or in part, of authorized and unissued shares or treasury shares. If any shares of Stock that have been optioned cease to be subject to a Stock Option, or if any shares of Stock that are subject to any Restricted Stock or Other Stock-Based Award granted hereunder are forfeited prior to the payment of any dividends, if applicable, with respect to such shares of Stock, or any such award otherwise terminates without a payment being made to the participant in the form of Stock, such shares shall again be available for distribution in connection with future awards under the Plan. In the event of any merger, reorganization, consolidation, recapitalization, extraordinary cash dividend, Stock dividend, Stock split or other change in corporate structure affecting the Stock, an appropriate substitution or adjustment shall be made in the aggregate number of shares reserved for issuance under the Plan, in the number and option price of shares subject to outstanding Options granted under the Plan, and in the number of shares subject to other outstanding awards granted under the Plan as may be determined to be appropriate by the Committee, in its sole discretion, provided that the number of shares subject to any award shall always be a whole number. Such adjusted option price shall also be used to determine the amount payable by the Corporation upon the exercise of any Stock Appreciation Right associated with any Stock Option. The maximum number of shares that may be awarded to any participant under Section 4 of this Plan will be adjusted in the same manner as the number of shares subject to outstanding Options. SECTION 4. ELIGIBILITY. Officers and other key employees of and consultants to the Corporation and its Subsidiaries and Affiliates (but excluding members of the Committee and any person who serves only as a director, except as otherwise provided in Section 9) who are responsible for or contribute to the management, growth and/or profitability of the business of the Corporation and/or its Subsidiaries and Affiliates are eligible to be granted awards under the Plan. No officer or key employee shall be eligible to receive awards relative to shares of Stock which exceed 150,000 shares during any consecutive 3-year period. SECTION 5. STOCK OPTIONS. Stock Options may be granted alone, in addition to or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve. 4 Stock Options granted under the Plan may be of two types: (i) Incentive Stock Options and (ii) Non-Qualified Stock Options. Incentive Stock Options may be granted only to individuals who are employees of the Corporation or any Subsidiary of the Corporation. The Committee shall have the authority to grant to any optionee Incentive Stock Options, Non-Qualified Stock Options, or both types of Stock Options (in each case with or without Stock Appreciation Rights). Options granted to officers, key employees and consultants under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable. (a) Option Price. The option price per share of Stock purchasable under a Stock Option shall be determined by the Committee at the time of grant but shall be not less than 100% (or, in the case of any employee who owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Corporation or of any of its Subsidiaries, not less than 110%) of the Fair Market Value of the Stock at grant, in the case of Incentive Stock Options, and not less than 50% of the Fair Market Value of the Stock at grant, in the case of Non-Qualified Stock Options. (b) Option Term. The term of each Stock Option shall be fixed by the Committee, but no Incentive Stock Option shall be exercisable more than ten years (or, in the case of an employee who owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Corporation or any of its Subsidiaries or parent corporations, more than five years) after the date the Option is granted. (c) Exercisability. Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee at or after grant; provided, however, that except as provided in Section 5(g) and (h) and Section 10, unless otherwise determined by the Committee at or after grant, no Stock Option shall be exercisable prior to the first anniversary date of the granting of the Option. The Committee may provide that a Stock Option shall vest over a period of future service at a rate specified at the time of grant, or that the Stock Option is exercisable only in installments. If the Committee provides, in its sole discretion, that any Stock Option is exercisable only in installments, the Committee may waive such installment exercise provisions at any time at or after grant in whole or in part, based on such factors as the Committee shall determine, in its sole discretion. The Committee may establish performance conditions or other conditions to the exercisability of any Stock Options, as determined by the Committee in its sole discretion, which conditions may be waived by the Committee in its sole discretion. (d) Method of Exercise. Subject to whatever installment exercise restrictions apply under Section 5(c), Stock Options may be exercised in whole or in part at any time during the option period, by giving written notice of exercise to the Corporation specifying the number of shares to be purchased. Such notice shall be accompanied by payment in full of the purchase price, either by check, note or such other instrument as the Committee may accept. As determined by the Committee, in its sole discretion, at or (except in the case of an Incentive Stock Option) after grant, payment in full or in part may also be made in the form of unrestricted Stock already owned by the optionee or, in the case of the exercise of a Non-Qualified Stock Option or Restricted Stock, subject to an award hereunder (valued at the Fair Market Value of the Stock on the date the option is exercised, as determined by the Committee). If payment of the exercise price is made in part or in full with Stock, the Committee may award to the employee a new Stock Option to replace the Stock which was surrendered. 5 If payment of the option exercise price of a Non-Qualified Stock Option is made in whole or in part in the form of Restricted Stock, such Restricted Stock (and any replacement shares relating thereto) shall remain (or be) restricted in accordance with the original terms of the Restricted Stock award in question, and any additional Stock received upon the exercise shall be subject to the same forfeiture restrictions, unless otherwise determined by the Committee, in its sole discretion, at or after grant. No shares of Stock shall be issued until full payment therefor has been made. An optionee shall generally have the rights to dividends or other rights of a stockholder with respect to shares subject to the Option when the optionee has given written notice of exercise, has paid in full for such shares, and, if requested, has given the representation described in Section 13(a). (e) Non-Transferability of Options. No Stock Option shall be transferable by the optionee otherwise than by will or by the laws of descent and distribution, and all Stock Options shall be exercisable, during the optionee's lifetime, only by the optionee. (f) Bonus for Taxes. In the case of a Non-Qualified Stock Option, the Committee in its discretion may award at the time of grant or thereafter the right to receive upon exercise of such Stock Option a cash bonus calculated to pay part or all of the federal and state, if any, income tax incurred by the optionee upon such exercise. (g) Termination by Death. Subject to Section 5(k), if an optionee's employment by the Corporation and any Subsidiary or (except in the case of an Incentive Stock Option) Affiliate terminates by reason of death, any Stock Option held by such optionee may thereafter be exercised, to the extent such option was exercisable at the time of death or (except in the case of an Incentive Stock Option) on such accelerated basis as the Committee may determine at or after grant (or except in the case of an Incentive Stock Option, as may be determined in accordance with procedures established by the Committee) by the legal representative of the estate or by the legatee of the optionee under the will of the optionee, for a period of one year (or such other period as the Committee may specify at or after grant) from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. (h) Termination by Reason of Disability. Subject to Section 5(k), if an optionee's employment by the Corporation and any Subsidiary or (except in the case of an Incentive Stock Option) Affiliate terminates by reason of Disability, any Stock Option held by such optionee may thereafter be exercised by the optionee, to the extent it was exercisable at the time of termination or (except in the case of an Incentive Stock Option) on such accelerated basis as the Committee may determine at or after grant (or, except in the case of an Incentive Stock Option, as may be determined in accordance with procedures established by the Committee), for a period of (i) three years (or such other period as the Committee may specify at or after grant) from the date of such termination of employment or until the expiration of the stated term of such Stock Option, whichever period is the shorter, in the case of a Non-Qualified Stock Option and (ii) one year from the date of termination of employment or until the expiration of the stated term of such Stock Option, whichever period is shorter, in the case of an Incentive Stock Option; provided however, that, if the optionee dies within the period specified in (i) above (or other such period as the committee shall specify at or after grant), any unexercised Non-Qualified Stock Option held by such optionee shall thereafter be exercisable to the extent to which it was exercisable at the time of death for a period of twelve months from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is shorter. In the event of termination of employment by reason of Disability, if an Incentive Stock Option is exercised after the expiration of the exercise period applicable to Incentive Stock Options, but before the expiration of any period that would apply if such Stock Option were a Non-Qualified Stock Option, such Stock Option will thereafter be treated as a Non-Qualified Stock Option. 6 (i) Termination by Reason of Retirement. Subject to Section 5(k), if an optionee's employment by the Corporation and any Subsidiary or (except in the case of an Incentive Stock Option) Affiliate terminates by reason of Normal or Early Retirement, any Stock Option held by such optionee may thereafter be exercised by the optionee, to the extent it was exercisable at the time of such Retirement or (except in the case of an Incentive Stock Option) on such accelerated basis as the Committee may determine at or after grant (or, except in the case of an Incentive Stock Option, as may be determined in accordance with procedures established by the Committee), for a period of (i) three years (or such other period as the Committee may specify at or after grant) from the date of such termination of employment or the expiration of the stated term of such Stock Option, whichever period is the shorter, in the case of a Non-Qualified Stock Option and (ii) three months from the date of such termination of employment or the expiration of the stated term of such Stock Option, whichever period is the shorter, in the event of an Incentive Stock Option; provided however, that, if the optionee dies within the period specified in (i) above (or other such period as the Committee shall specify at or after grant), any unexercised Non-Qualified Stock Option held by such optionee shall thereafter be exercisable to the extent to which it was exercisable at the time of death for a period of twelve months from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is shorter. In the event of termination of employment by reason of Retirement, if an Incentive Stock Option is exercised after the expiration of the exercise period applicable to Incentive Stock Options, but before the expiration of the period that would apply if such Stock Option were a Non-Qualified Stock Option, the option will thereafter be treated as a Non-Qualified Stock Option. (j) Other Termination. Subject to Section 5(k), unless otherwise determined by the Committee (or pursuant to procedures established by the Committee) at or (except in the case of an Incentive Stock Option) after grant, if an optionee's employment by the Corporation and any Subsidiary or (except in the case of an Incentive Stock Option) Affiliate is involuntarily terminated for any reason other than death, Disability or Normal or Early Retirement, the Stock Option shall thereupon terminate, except that such Stock Option may be exercised, to the extent otherwise then exercisable, for the lesser of three months or the balance of such Stock Option's term if the involuntary termination is without Cause. For purposes of this Plan, "Cause" means (i) a felony conviction of a participant or the failure of a participant to contest prosecution for a felony, or (ii) a participant's willful misconduct or dishonesty, which is directly and materially harmful to the business or reputation of the Corporation or any Subsidiary or Affiliate. If an optionee voluntarily terminates employment with the Corporation and any Subsidiary or (except in the case of an Incentive Stock Option) Affiliate (except for Disability, Normal or Early Retirement), the Stock Option shall thereupon terminate; provided, however, that the Committee at grant or (except in the case of an Incentive Stock Option) thereafter may extend the exercise period in this situation for the lesser of three months or the balance of such Stock Option's term. (k) Incentive Stock Options. Anything in the Plan to the contrary notwithstanding, no term of this Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify the Plan under Section 422 of the Code, or, without the consent of the optionee(s) affected, to disqualify any Incentive Stock Option under such Section 422. No Incentive Stock Option shall be granted to any participant under the Plan if such grant would cause the aggregate Fair Market Value (as of the date the Incentive Stock Option is granted) of the Stock with respect to which all Incentive Stock Options issued after December 31, 1986 are exercisable for the first time by such participant during any calendar year (under all such plans of the Company and any Subsidiary) to exceed $100,000. To the extent permitted under Section 422 of the Code or the applicable regulations thereunder or any applicable Internal Revenue Service pronouncement: 7 (i) if (x) a participant's employment is terminated by reason of death, Disability or Retirement and (y) the portion of any Incentive Stock Option that is otherwise exercisable during the post-termination period specified under Section 5(g), (h) or (i), applied without regard to the $100,000 limitation contained in Section 422(d) of the Code, is greater than the portion of such Option that is immediately exercisable as an "Incentive Stock Option" during such post-termination period under Section 422, such excess shall be treated as a Non-Qualified Stock Option; and (ii) if the exercise of an Incentive Stock Option is accelerated by reason of a Change in Control, any portion of such Option that is not exercisable as an Incentive Stock Option by reason of the $100,000 limitation contained in Section 422(d) of the Code shall be treated as a Non-Qualified Stock Option. (l) Buyout Provisions. The Committee may at any time offer to buy out for a payment in cash, Stock or Restricted Stock an Option previously granted, based on such terms and conditions as the Committee shall establish and communicate to the optionee at the time that such offer is made. (m) Settlement Provisions. If the option agreement so provides at grant or (except in the case of an Incentive Stock Option) is amended after grant and prior to exercise to so provide (with the optionee's consent), the Committee may require that all or part of the shares to be issued with respect to the spread value of an exercised Option take the form of Restricted Stock, which shall be valued on the date of exercise on the basis of the Fair Market Value (as determined by the Committee) of such Restricted Stock determined without regards to the forfeiture restrictions involved. (n) Performance and Other Conditions. The Committee may condition the exercise of any Option upon the attainment of specified performance goals or other factors as the Committee may determine, in its sole discretion. Unless specifically provided in the option agreement, any such conditional Option shall vest immediately prior to its expiration if the conditions to exercise have not theretofore been satisfied. The shares of Common Stock acquired pursuant to any conditional Option shall not be transferable by an Optionee subject to Section 16(a) of the Exchange Act within six months of the date such Option first becomes exercisable. SECTION 6. STOCK APPRECIATION RIGHTS. (a) Grant and Exercise. Stock Appreciation Rights may be granted in conjunction with all or part of any Stock Option granted under the Plan. In the case of a Non-Qualified Stock Option, such rights may be granted either at or after the time of the grant of such Stock Option. In the case of an Incentive Stock Option, such rights may be granted only at the time of the grant of such Stock Option. A Stock Appreciation Right or applicable portion thereof granted with respect to a given Stock Option shall terminate and no longer be exercisable upon the termination or exercise of the related Stock Option, subject to such provisions as the Committee may specify at grant where a Stock Appreciation Right is granted with respect to less than the full number of shares covered by a related Stock Option. A Stock Appreciation Right may be exercised by an optionee, subject to Section 6(b), in accordance with the procedures established by the Committee for such purpose. Upon such exercise, the optionee shall be entitled to receive an amount determined in the manner prescribed in Section 6(b). Stock Options relating to exercised Stock Appreciation Rights shall no longer be exercisable to the extent that the related Stock Appreciation Rights have been exercised. 8 (b) Terms and Conditions. Stock Appreciation Rights shall be subject to such terms and conditions, not inconsistent with the provisions of the Plan, as shall be determined from time to time by the Committee, including the following: (i) Stock Appreciation Rights shall be exercisable only at such time or times and to the extent that the Stock Options to which they relate shall be exercisable in accordance with the provisions of Section 5 and this Section 6 of the Plan; provided, however, that any Stock Appreciation Right granted to an optionee subject to Section 16(a) of the Exchange Act subsequent to the grant of the related Stock Option shall not be exercisable during the first six months of its term. The exercise of Stock Appreciation Rights held by optionees who are subject to Section 16(a) of the Exchange Act shall comply with Rule 16b-3(e) thereunder, to the extent applicable. In particular, such Stock Appreciation Rights shall be exercisable only pursuant to an irrevocable election made at least six months prior to the date of exercise or within the applicable ten business day "window" periods specified in Rule 16b-3(e)(3). (ii) Upon the exercise of a Stock Appreciation Right, an optionee shall be entitled to receive an amount in cash and/or shares of Stock equal in value to the excess of the Fair Market Value of one share of Stock over the option price per share specified in the related Stock Option multiplied by the number of shares in respect of which the Stock Appreciation Right shall have been exercised, with the Committee having the right to determine the form of payment. When payment is to be made in shares, the number of shares to be paid shall be calculated on the basis of the Fair Market Value of the shares on the date of exercise. When payment is to be made in cash, such amount shall be calculated on the basis of the average of the highest and lowest quoted selling price, regular way, of the Stock on the Nasdaq Stock Market or such other exchange or market as is the principal trading market for the Stock, or, if no such sale of Stock is reported on such date, the fair market value of the Stock as determined by the Committee in good faith. (iii) Stock Appreciation Rights shall be transferable only when and to the extent that the underlying Stock Option would be transferable under Section 5(e) of the Plan. (iv) Upon the exercise of a Stock Appreciation Right, the Stock Option or part thereof to which such Stock Appreciation Right is related shall be deemed to have been exercised for the purpose of the limitation set forth in Section 3 of the Plan on the number of shares of Stock to be issued under the Plan. (v) The Committee, in its sole discretion, may also provide that, in the event of a Change in Control and/or a Potential Change in Control, the amount to be paid upon the exercise of a Stock Appreciation Right shall be based on the Change in Control Price, subject to such terms and conditions as the Committee may specify at grant. (vi) The Committee may condition the exercise of any Stock Appreciation Right upon the attainment of specified performance goals or other factors as the Committee may determine, in its sole discretion. Unless specifically provided in the applicable award agreement, any such conditional Stock Appreciation Right held by a grantee subject to Section 16(a) of the Exchange Act shall not be exercisable until the expiration of six months following the satisfaction of the condition giving rise to such Stock Appreciation Right. 9 SECTION 7. RESTRICTED STOCK. (a) Administration. Shares of Restricted Stock may be issued either alone, in addition to or in tandem with other awards granted under the Plan and/or cash awards made outside the Plan. The Committee shall determine the eligible persons to whom, and the time or times at which, grants of Restricted Stock will be made, the number of shares of Restricted Stock to be awarded to any person, the price (if any) to be paid by the recipient of Restricted Stock (subject to Section 7(b)), the time or times within which such awards may be subject to forfeiture, and the other terms, restrictions and conditions of the awards in addition to those set forth in Section 7(c). The Committee may condition the grant of Restricted Stock upon the attainment of specified performance goals or such other factors as the Committee may determine, in its sole discretion. The provisions of Restricted Stock awards need not be the same with respect to each recipient. (b) Awards and Certificates. The prospective recipient of a Restricted Stock award shall not have any rights with respect to such award, unless and until such recipient has executed an agreement evidencing the award and has delivered a fully executed copy thereof to the Corporation, and has otherwise complied with the applicable terms and conditions of such award. (i) The purchase price for shares of Restricted Stock shall be established by the Committee and may be zero. (ii) Awards of Restricted Stock must be accepted within a period of 60 days (or such shorter period as the Committee may specify at grant) after the award date, by executing a Restricted Stock Award Agreement and paying whatever price (if any) is required under Section 7(b)(i). (iii) Each participant receiving a Restricted Stock award shall be issued a stock certificate in respect of such shares of Restricted Stock. Such certificate shall be registered in the name of such participant, and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such award. (iv) The Committee shall require that the stock certificates evidencing such shares be held in custody by the Corporation until the restrictions thereon shall have lapsed, and that, as a condition of any Restricted Stock award, the participant shall have delivered a stock power, endorsed in blank, relating to the Stock covered by such award. (c) Restrictions and Conditions. The shares of Restricted Stock awarded pursuant to this Section 7 shall be subject to the following restrictions and conditions: (i) In accordance with the provisions of this Plan and the award agreement, during a period set by the Committee commencing with the date of such award (the "Restriction Period"), the participant shall not be permitted to sell, transfer, pledge, assign or otherwise encumber shares of Restricted Stock awarded under the Plan. Within these limits, the Committee, in its sole discretion, may provide for the lapse of such restrictions in installments and may accelerate or waive such restrictions in whole or in part, based on service, performance and/or such other factors or criteria as the Committee may determine, in its sole discretion. (ii) Except as provided in this paragraph (ii) and Section 7(c)(i), the participant shall have, with respect to the shares of Restricted Stock, all of the rights of a stockholder of the Corporation, including the right to vote the shares, and the right to receive any cash dividends. The Committee, in its sole discretion, as determined at the time of award, may permit or require the payment of cash dividends to be deferred and, if the Committee so determines, reinvested, subject to Section 14(e), in additional 10 Restricted Stock to the extent shares are available under Section 3, or otherwise reinvested. Pursuant to Section 3 above, Stock dividends issued with respect to Restricted Stock shall be treated as additional shares of Restricted Stock that are subject to the same restrictions and other terms and conditions that apply to the shares with respect to which such dividends are issued. If the Committee so determines, the award agreement may also impose restrictions on the right to vote and the right to receive dividends. (iii) Subject to the applicable provisions of the award agreement and this Section 7, upon termination of a participant's employment with the Corporation and any Subsidiary or Affiliate for any reason during the Restriction Period, all shares still subject to restriction will vest, or be forfeited, in accordance with the terms and conditions established by the Committee at or after grant. (iv) If and when the Restriction Period expires without a prior forfeiture of the Restricted Stock subject to such Restriction Period, certificates for an appropriate number of unrestricted shares shall be delivered to the participant promptly. (d) Minimum Value Provisions. In order to better ensure that award payments actually reflect the performance of the Corporation and service of the participant, the Committee may provide, in its sole discretion, for a tandem performance-based or other award designed to guarantee a minimum value, payable in cash or Stock to the recipient of a restricted stock award, subject to such performance, future service, deferral and other terms and conditions as may be specified by the Committee. SECTION 8. OTHER STOCK-BASED AWARDS. (a) Administration. Other Stock-Based Awards, including, without limitation, performance shares, convertible preferred stock, convertible debentures, exchangeable securities and Stock awards or options valued by reference to earnings per share or Subsidiary performance, may be granted either alone or in addition to or in tandem with Stock Options, Stock Appreciation Rights or Restricted Stock granted under the Plan and/or cash awards made outside of the Plan; provided that no such Other Stock-Based Awards may be granted in tandem with Incentive Stock Options if that would cause such Stock Options not to qualify as Incentive Stock Options pursuant to Section 422 of the Code. Subject to the provisions of the Plan, the Committee shall have authority to determine the persons to whom and the time or times at which such awards shall be made, the number of shares of Stock to be awarded pursuant to such awards, and all other conditions of the awards. The Committee may also provide for the grant of Stock upon the completion of a specified performance period. The provisions of Other Stock-Based Awards need not be the same with respect to each recipient. (b) Terms and Conditions. Other Stock-Based Awards made pursuant to this Section 8 shall be subject to the following terms and conditions: (i) Shares subject to awards under this Section 8 and the award agreement referred to in Section 8(b)(v) below, may not be sold, assigned, transferred, pledged or otherwise encumbered prior to the date on which the shares are issued, or, if later, the date on which any applicable restriction, performance or deferral period lapses. (ii) Subject to the provisions of this Plan and the award agreement and unless otherwise determined by the Committee at grant, the recipient of an award under this Section 8 shall be entitled to receive, currently or on a deferred basis, interest or dividends or interest or dividend equivalents with respect to the number of shares covered by the award, as determined at the time of the award by the 11 Committee, in its sole discretion, and the Committee may provide that such amounts (if any) shall be deemed to have been reinvested in additional Stock or otherwise reinvested. (iii) Any award under Section 8 and any Stock covered by any such award shall vest or be forfeited to the extent so provided in the award agreement, as determined by the Committee, in its sole discretion. (iv) In the event of the participant's Retirement, Disability or death, or in cases of special circumstances, the Committee may, in its sole discretion, waive in whole or in part any or all of the remaining limitations imposed hereunder (if any) with respect to any or all of an award under this Section 8. (v) Each award under this Section 8 shall be confirmed by, and subject to the terms of, an agreement or other instrument by the Corporation and the participant. (vi) Stock (including securities convertible into Stock) issued on a bonus basis under this Section 8 may be issued for no cash consideration. Stock (including securities convertible into Stock) purchased pursuant to a purchase right awarded under this Section 8 shall be priced at least 85% of the Fair Market Value of the Stock on the date of grant. SECTION 9. AWARDS TO OUTSIDE DIRECTORS. (a) The provisions of this Section 9 shall apply only to awards to Outside Directors in accordance with this Section 9. The Committee shall have no authority to determine the timing of or the terms or conditions of any award under this Section 9. (b) On the date of each Annual Meeting of Stockholders of the Corporation, commencing with the 1996 Annual Meeting of Stockholders, each Outside Director will receive an automatic grant of restricted stock pursuant to this Section 9 (the "Outside Directors Restricted Stock") in a number of shares of stock which will be determined by dividing: (i) $10,000 by (ii) the average of the daily closing bid price of the Stock for the first five (5) trading days of the month in which the Annual Meeting is held (as reported in The Wall Street Journal), rounding up or down any fractional share of Stock to the nearest whole share. The Outside Director Restricted Stock award shall be adjusted annually on the date of the Annual Meeting of Stockholders by the percentage change from the previous year in the Consumer Price Index, Urban Wage Earners and Clerical Workers (1982-1984 = 100), All Cities Average; provided, however, that such annual increase shall not exceed six percent. (c) The Outside Director Restricted Stock shall vest as follows: (i) Of the aggregate number of shares of Outside Director Restricted Stock granted on the date of each Annual Meeting of Stockholders, one-third of the Outside Director Restricted Stock shall immediately vest on the date of grant; 12 (ii) At the first Annual Meeting of Stockholders following the Annual Meeting at which the Outside Director Restricted Stock was granted, if the grantee is still serving as a director of the Corporation, the Outside Director Restricted Stock shall vest with respect to one-half of the remaining shares of the Outside Director Restricted Stock; and (iii) At the second Annual Meeting of Stockholders following the Annual Meeting at which the Outside Director Restricted Stock was granted, if the director is still serving as a director of the Corporation, the Outside Director Restricted Stock shall vest with respect to the remaining shares of the Outside Director Restricted Stock. (d) Until the earlier of (i) five years from the date of grant and (ii) the date on which the Outside Director ceases to serve as a director of the Corporation (the"Outside Director Period of Restriction), no Outside Director Restricted Stock may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, otherwise than by will or by the laws of descent and distribution. Each certificate representing Outside Director Restricted Stock granted pursuant to this Section 9 shall bear the following legend: "The sale or other transfer of the shares represented by this certificate, whether voluntary, involuntary, or by operation of law, is subject to certain restrictions on transfer set forth in the American Healthcorp, Inc. 1996 Stock Incentive Plan (the "Plan"), and rules of administration adopted pursuant to such Plan. A copy of the Plan and the rules of such Plan may be obtained from the Secretary of American Healthcorp, Inc." Once the Outside Director Period of Restriction has lapsed, the grantee shall be entitled to have the legend required by this Section 9 removed from such stock certificate(s); provided however, that such certificate shall be subject to any legend required by applicable state or federal law. (e) From the date on which the Outside Director Restricted Stock is granted, grantees awarded such Stock may exercise full voting rights with respect to the Outside Director Restricted Stock. (f) Grantees holding Outside Director Restricted Stock that has vested in accordance with Section 9(c) hereof, shall be entitled to receive all dividends and other distributions paid with respect to such shares of Stock while they are so held. If any such dividends, or distributions are paid in Stock, such shares of Stock shall be subject to the same restrictions on transferability as the shares of Outside Director Restricted Stock with respect to which they were paid. (g) Grantees of Outside Director Restricted Stock shall enter into a Restricted Stock Award Agreement with the Corporation setting forth the restrictions imposed on the Stock granted to him or her. (h) All restrictions imposed on the Outside Director Restricted Stock shall expire automatically upon a Change in Control, but shall not otherwise be subject to Section 10 hereof. (i) All shares of Outside Director Restricted Stock which have not vested in accordance with Section 9(c) hereof, at the time of a grantee's resignation, removal or failure to be elected as a member of the Board of Directors shall be forfeited and such forfeited shares shall again be available for award hereunder. (j) The Board may not amend or alter this Section 9, except as provided in Section 11, without the approval of the holders of a majority of the issued and outstanding shares of Common Stock, and in no event shall 13 this Section 9 be amended more than once every six months, other than to comply with changes in the Exchange Act, Code or the Employee Retirement Income Security Act of 1974, as amended, or the regulations thereunder. SECTION 10. CHANGE IN CONTROL PROVISIONS. (a) Impact of Event. In the event of: (1) a "Change in Control" as defined in Section 10(b) or (2) a "Potential Change in Control" as defined in Section 10(c), but only if and to the extent so determined by the Committee or the Board at or after grant (subject to any right of approval expressly reserved by the Committee or the Board at the time of such determination), the following acceleration and valuation provisions shall apply if so determined by the Board in its sole discretion: (i) Any Stock Appreciation Rights (including, without limitation, any Limited Stock Appreciation Rights) outstanding for at least six months and any Stock Option awarded under the Plan not previously exercisable and vested shall become fully exercisable and vested. (ii) The restrictions applicable to any Restricted Stock and Other Stock-Based Awards, in each case to the extent not already vested under the Plan, shall lapse and such shares and awards shall be deemed fully vested. (iii) Except as otherwise provided in Section 10(a)(iv) below, the value of all outstanding Stock Options, Stock Appreciation Rights, Restricted Stock and Other Stock-Based Awards, in each case to the extent vested, shall, unless otherwise determined by the Committee in its sole discretion at or (except in the case of an Incentive Stock Option) after grant but prior to any Change in Control, be cashed out on the basis of the "Change in Control Price" as defined in Section 10(d) as of the date such Change in Control or such Potential Change in Control is determined to have occurred or such other date as the Committee may determine prior to the Change in Control. (iv) In the case of any Stock Options, Stock Appreciation Rights, Restricted Stock and Other Stock-Based Awards held by any person subject to Section 16(a) of the Exchange Act, the value of all such Stock Options, Stock Appreciation Rights, Restricted Stock or Other Stock-Based Awards, in each case to the extent that they are vested and have been held for at least six months, shall (unless otherwise determined by the Committee in its sole discretion) be cashed out on the basis of the "Change in Control Price" as defined in Section 10(d) as of the date of such Change in Control or such Potential Change in Control is determined to have occurred, but only if the Change in Control or Potential Change in Control is outside the control of the grantee for purposes of Rule 16b-3(e)(3) under the Exchange Act, or any successor provision promulgated by the Securities and Exchange Commission. (b) Definition of Change in Control. For purposes of Section 10(a), a "Change in Control" means the happening of any of the following: (i) any person or entity, including a "group" as defined in Section 13(d)(3) of the Exchange Act, other than the Corporation or a wholly-owned subsidiary thereof or any employee benefit plan of the Corporation or any of its Subsidiaries, becomes the beneficial owner of the Corporation's securities having 35% or more of the combined voting power of the then outstanding securities of the Corporation that may be cast for the election of directors of the 14 Corporation (other than as a result of an issuance of securities initiated by the Corporation in the ordinary course of business); or (ii) as the result of, or in connection with, any cash tender or exchange offer, merger or other business combination, sales of assets or contested election, or any combination of the foregoing transactions, less than a majority of the combined voting power of the then outstanding securities of the Corporation or any successor corporation or entity entitled to vote generally in the election of the directors of the Corporation or such other corporation or entity after such transaction are held in the aggregate by the holders of the Corporation's securities entitled to vote generally in the election of directors of the Corporation immediately prior to such transaction; or (iii) during any period of two consecutive years, individuals who at the beginning of any such period constitute the Board cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Corporation's stockholders, of each director of the Corporation first elected during such period was approved by a vote of at least two-thirds of the directors of the Corporation then still in office who were directors of the Corporation at the beginning of any such period. (c) Definition of Potential Change in Control. For purposes of Section 10(a), a "Potential Change in Control" means the happening of any one of the following: (i) The approval by stockholders of an agreement by the Corporation, the consummation of which would result in a Change in Control of the Corporation as defined in Section 10(b); or (ii) The acquisition of beneficial ownership, directly or indirectly, by any entity, person or group (other than the Corporation or a Subsidiary or any Corporation employee benefit plan (including any trustee of such plan acting as such trustee)) of securities of the Corporation representing 5% or more of the combined voting power of the Corporation's outstanding securities and the adoption by the Committee of a resolution to the effect that a Potential Change in Control of the Corporation has occurred for purposes of this Plan. (d) Change in Control Price. For purposes of this Section 10, "Change in Control Price" means the highest price per share paid in any transaction reported on the Nasdaq Stock Market or such other exchange or market as is the principal trading market for the Stock, or paid or offered in any bona fide transaction related to a Potential or actual Change in Control of the Corporation at any time during the 60 day period immediately preceding the occurrence of the Change in Control (or, where applicable, the occurrence of the Potential Change in Control event), in each case as determined by the Committee except that, in the case of Incentive Stock Options and Stock Appreciation Rights relating to Incentive Stock Options, such price shall be based only on transactions reported for the date on which the optionee exercises such Stock Appreciation Rights or, where applicable, the date on which a cash out occurs under Section 10(a)(iii). SECTION 11. AMENDMENTS AND TERMINATION. The Board may amend, alter, or discontinue the Plan, but no amendment, alteration, or discontinuation shall be made which would impair the rights of an optionee or participant under a Stock Option, Stock Appreciation Right, Restricted Stock, Other Stock-Based Award or Outside Director Restricted Stock theretofore granted, without the optionee's or participant's consent or which, without the approval of the Corporation's stockholders, would: 15 (a) except as expressly provided in this Plan, increase the total number of shares reserved for the purpose of the Plan; (b) materially increase the benefits accruing to participants under the Plan; or (c) materially modify the requirements as to eligibility for participation in the Plan. The Committee may amend the terms of any Stock Option or other award theretofore granted, prospectively or retroactively, but, subject to Section 3 above, no such amendment shall impair the rights of any holder without the holder's consent. The Committee may also substitute new Stock Options for previously granted Stock Options (on a one for one or other basis), including previously granted Stock Options having higher option exercise prices. Subject to the above provisions, the Board shall have broad authority to amend the Plan to take into account changes in applicable securities and tax laws and accounting rules, as well as other developments. SECTION 12. UNFUNDED STATUS OF PLAN. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a participant or optionee by the Corporation, nothing contained herein shall give any such participant or optionee any rights that are greater than those of a general creditor of the Corporation. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Stock or payments in lieu of or with respect to awards hereunder; provided, however, that, unless the Committee otherwise determines with the consent of the affected participant, the existence of such trusts or other arrangements is consistent with the "unfunded" status of the Plan. SECTION 13. GENERAL PROVISIONS. (a) The Committee may require each person purchasing shares pursuant to a Stock Option or other award under the Plan to represent to and agree with the Corporation in writing that the optionee or participant is acquiring the shares without a view to distribution thereof. The certificates for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. All certificates for shares of Stock or other securities delivered under the Plan shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Stock is then listed, and any applicable Federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (b) Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. (c) The adoption of the Plan shall not confer upon any employee of the Corporation or any Subsidiary or Affiliate any right to continued employment with the Corporation or a Subsidiary or Affiliate, as the case may be, nor shall it interfere in any way with the right of the Corporation or a Subsidiary or Affiliate to terminate the employment of any of its employees at any time. (d) No later than the date as of which an amount first becomes includible in the gross income of the participant for Federal income tax purposes with respect to any award under the Plan, the participant shall pay to 16 the Corporation, or make arrangements satisfactory to the Committee regarding the payment of, any Federal, state, or local taxes of any kind required by law to be withheld with respect to such amount. The Committee may require withholding obligations to be settled with Stock, including Stock that is part of the award that gives rise to the withholding requirement. The obligations of the Corporation under the Plan shall be conditional on such payment or arrangements and the Corporation and its Subsidiaries or Affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the participant. (e) The actual or deemed reinvestment of dividends or dividend equivalents in additional Restricted Stock (or other types of Plan awards) at the time of any dividend payment shall only be permissible if sufficient shares of Stock are available under Section 3 for such reinvestment (taking into account then outstanding Stock Options and other Plan awards). (f) The Plan and all awards made and actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Delaware. (g) The members of the Committee and the Board shall not be liable to any employee or other person with respect to any determination made hereunder in a manner that is not inconsistent with their legal obligations as members of the Board. In addition to such other rights of indemnification as they may have as directors or as members of the Committee, the members of the Committee shall be indemnified by the Corporation against the reasonable expenses, including attorneys' fees actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan or any option granted thereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Corporation) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such Committee member is liable for negligence or misconduct in the performance of his duties; provided that within 60 days after institution of any such action, suit or proceeding, the Committee member shall in writing offer the Corporation the opportunity, at its own expense, to handle and defend the same. (h) In addition to any other restrictions on transfer that may be applicable under the terms of this Plan or the applicable award agreement, no Option, Stock Appreciation Right, Restricted Stock award, or Other Stock-Based Award or other right issued under this Plan is transferable by the participant other than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined under the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended. The designation of a beneficiary will not constitute a transfer. SECTION 14. EFFECTIVE DATE OF PLAN. The Plan shall be effective as of the date of approval of the Plan by a majority of the votes cast by the holders of the Corporation's Stock. SECTION 15. TERM OF PLAN. No Stock Option, Stock Appreciation Right, Restricted Stock award, Other Stock-Based Award or Outside Director Restricted Stock award shall be granted pursuant to the Plan on or after October 25, 2011, but awards granted prior to such tenth anniversary may be extended beyond that date. 17 EX-21 7 g72997ex21.txt SUBSIDIARY OF THE REGISTRANT EXHIBIT 21 SUBSIDIARY LIST AS OF NOVEMBER 26, 2001
STATE OF OWNERSHIP NAME OF SUBSIDIARY ORGANIZATION OWNED BY PERCENTAGE - -------------------------------------------------------------------------------------------------------------- American Healthways Services, Inc. DE American Healthways, Inc. 100% Arthritis and Osteoporosis Care Center, Inc. DE American Healthways, Inc. 100% American Healthways Management, Inc. DE American Healthways, Inc. 100% CareSteps.com, Inc. DE American Healthways, Inc. 100% Axonal Information Solutions, Inc. DE CareSteps.com, Inc. 100%
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(1)		Income (loss) per share calculations for each of the quarters was based on the weighted average number of shares and dilutive options outstanding for each period. Accordingly, the sum of the quarters may not necessarily be equal to the full year income (loss) per share.

(2)		Restated to reflect the effect of a three-for-two stock split effective November 2001.