10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended February 28, 2002

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)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes X No

As of April 12, 2002 there were outstanding 15,262,422 shares of the Registrant’s Common Stock, par value $.001 per share.

Part I.

Item 1.    Financial Statements

AMERICAN HEALTHWAYS, INC.

CONSOLIDATED BALANCE SHEETS

ASSETS

			February 28,			August 31,
			2002			2001
Current assets:
	Cash and cash equivalents		$	14,541,782		$	12,375,772
	Accounts receivable, net			15,512,081			9,387,089
	Other current assets			2,345,482			1,555,643
	Income taxes receivable			669,709			—
	Deferred tax asset			3,673,000			3,673,000
		Total current assets		36,742,054			26,991,504
Property and equipment:
	Leasehold improvements			2,868,083			2,521,797
	Computer equipment, related software and other equipment			26,469,393			21,060,486
				29,337,476			23,582,283
	Less accumulated depreciation			(13,014,017	)		(10,216,069	)
				16,323,459			13,366,214
Long-term deferred tax asset				1,228,000			1,228,000
Other assets, net				1,881,628			1,720,123
Goodwill				44,628,578			28,194,045
			$	100,803,719		$	71,499,886

Certain items have been reclassified to conform to current classifications.

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AMERICAN HEALTHWAYS, INC.

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS’ EQUITY

			February 28,		August 31,
			2002		2001
Current liabilities:
	Accounts payable		$	2,082,559	$	1,597,827
	Accrued salaries and benefits			5,074,408		5,380,540
	Accrued liabilities			3,002,744		2,953,410
	Contract billings in excess of earnings			4,720,283		3,092,870
	Income taxes payable			—		629,373
	Current portion of other long-term liabilities			1,012,594		286,247
		Total current liabilities		15,892,588		13,940,267
Long-term debt				708,463		—
Other long-term liabilities				3,129,854		3,443,545
Stockholders’ equity:
	Preferred stock $.001 par value, 5,000,000 shares authorized, none outstanding			—		—
	Common stock $.001 par value, 40,000,000 shares authorized, 15,209,098 and 14,171,441 shares outstanding			15,209		14,171
	Additional paid-in capital			67,615,194		44,601,579
	Retained earnings			13,442,411		9,500,324
		Total stockholders’ equity		81,072,814		54,116,074
			$	100,803,719	$	71,499,886

Certain items have been reclassified to conform to current classifications.

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AMERICAN HEALTHWAYS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Months Ended				Six Months Ended
		February 28,				February 28,
		2002		2001		2002		2001
Revenues		$	28,379,833	$	17,699,447	$	52,922,159	$	34,235,267
Cost of services			19,359,688		13,050,876		37,545,299		25,476,723
Gross margin			9,020,145		4,648,571		15,376,860		8,758,544
Selling, general and administrative expenses			3,137,844		2,220,327		5,404,066		3,935,642
Depreciation and amortization			1,668,801		1,264,110		3,172,751		2,494,866
Interest expense			65,605		12,031		118,956		23,876
Income before income taxes			4,147,895		1,152,103		6,681,087		2,304,160
Income tax expense			1,700,000		522,000		2,739,000		1,002,000
Net income		$	2,447,895	$	630,103	$	3,942,087	$	1,302,160
Basic income per share		$	0.16	$	0.05	$	0.27	$	0.10
Fully diluted income per share		$	0.15	$	0.05	$	0.25	$	0.10
Weighted average common shares and equivalents Basic			15,074,051		12,517,061		14,661,837		12,464,316
	Fully diluted		16,326,341		13,633,716		15,900,905		13,415,285

Certain items have been reclassified to conform to current classifications.

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AMERICAN HEALTHWAYS, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

For the six months ended February 28, 2002

				Additional
		Common		Paid-in		Retained
		Stock		Capital		Earnings		Total
Balance, August 31, 2001		$	14,171	$	44,601,579	$	9,500,324	$	54,116,074
	Exercise of stock options		431		1,504,462		—		1,504,893
	Tax benefit of option exercises		—		3,726,826		—		3,726,826
	Issuance of stock in conjunction with business acquisitions		532		16,612,402		—		16,612,934
	Issuance of stock in conjunction with strategic alliance		75		1,169,925		—		1,170,000
	Net income		—		—		3,942,087		3,942,087
Balance, February 28, 2002		$	15,209	$	67,615,194	$	13,442,411	$	81,072,814

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AMERICAN HEALTHWAYS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

			Six Months Ended February 28,
			2002			2001
Cash flows from operating activities:
	Net income		$	3,942,087		$	1,302,160
		Income tax expense		2,739,000			1,002,000
	Income before income taxes			6,681,087			2,304,160
	Noncash expenses, revenues, losses and gains included in income:
		Depreciation and amortization		3,172,751			2,494,866
		Increase in working capital items		(4,465,446	)		(1,120,635	)
		Other noncash transactions		975,806			696,611
				6,364,198			4,375,002
Income taxes (net paid)				(311,256	)		(444,351	)
Increase in other assets				(30,871	)		(151,945	)
Payments on other long-term liabilities				(267,171	)		(537,119	)
		Net cash flows provided by operating activities		5,754,900			3,241,587
Cash flows from investing activities:
	Acquisition of property and equipment			(4,582,213	)		(1,341,822	)
	Business acquisitions			(371,636	)		(1,000,000	)
		Net cash flows used in investing activities		(4,953,849	)		(2,341,822	)
Cash flows from financing activities:
	Exercise of stock options			1,458,829			377,802
	Payments of long-term debt			(93,870	)		—
		Net cash flows provided by financing activities		1,364,959			377,802
Net increase in cash and cash equivalents				2,166,010			1,277,567
Cash and cash equivalents, beginning of period				12,375,772			7,025,277
Cash and cash equivalents, end of period			$	14,541,782		$	8,302,844

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AMERICAN HEALTHWAYS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)   Interim Financial Reporting

     The accompanying consolidated financial statements of American Healthways, Inc. and its subsidiaries (the “Company”) for the three and six month periods ended February 28, 2002 and 2001 are unaudited. However, in the opinion of the Company, all adjustments consisting of normal, recurring accruals necessary for a fair presentation have been reflected therein.

     Certain financial information, which is normally included in financial statements prepared in accordance with generally accepted accounting principles, but which is not required for interim reporting purposes, has been omitted. The accompanying consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2001.

(2)   Business Segments

     The Company provides care enhancement and disease management services to health plans and hospitals. The Company’s reportable segments are the types of customers, hospital or health plan, who contract for the Company’s services. The segments are managed separately and the Company evaluates performance based on operating profits of the respective segments. Because the Company’s services are similar for both types of customers, the Company supports both segments with common human resources, clinical, marketing and information technology resources.

     The accounting policies of the segments are the same as those discussed in the summary of significant accounting policies. There are no intersegment sales. Income (loss) before income taxes by operating segment excludes interest income, interest expense and general corporate expenses.

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     Summarized financial information by business segment is as follows:

			Three Months Ended						Six Months Ended
			February 28,						February 28,
			2002			2001			2002			2001
Revenues:
	Health plan contracts		$	23,693,388		$	12,714,638		$	43,453,854		$	24,378,325
	Hospital contracts			4,612,123			4,866,130			9,292,609			9,638,611
	Other revenue			74,322			118,679			175,696			218,331
			$	28,379,833		$	17,699,447		$	52,922,159		$	34,235,267
Income (loss) before income taxes:
	Health plan contracts		$	7,527,631		$	3,041,324		$	12,364,454		$	5,614,064
	Hospital contracts			968,063			1,229,165			2,010,607			2,420,779
	Shared support services			(3,302,136	)		(2,160,313	)		(6,022,122	)		(4,103,613	)
		Total segments		5,193,558			2,110,176			8,352,939			3,931,230
	General corporate expenses			(1,045,663	)		(958,073	)		(1,671,852	)		(1,627,070	)
			$	4,147,895		$	1,152,103		$	6,681,087		$	2,304,160

(3)   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 cease and instead, the carrying value of goodwill and indefinite life intangible assets be evaluated for impairment at least on an annual basis and 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 resulted in goodwill no longer being amortized beginning in fiscal 2002. The Company has completed its initial transition impairment assessment as required by SFAS No. 142 and concluded that no impairment of recorded goodwill exists.

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     The change in the carrying amount of goodwill for fiscal 2002 is as follows:

	Health Plan		Hospital
	Contracts		Contracts		Total
Carrying value at August 31, 2001	$	17,875,563	$	10,318,482	$	28,194,045
Empower Health contingent shares and acquisition adjustments		16,434,533		—		16,434,533
Carrying value at February 28, 2002	$	34,310,096	$	10,318,482	$	44,628,578

     In connection with the adoption of SFAS No. 142, the Company also reassessed the useful lives and the classification of its identifiable intangible assets and determined that they continue to be appropriate. The components of identifiable intangible assets, which are included in other assets on the consolidated balance sheet, are as follows:

	At February 28,			At August 31,
	2002			2001
Gross carrying amount	$	1,794,142		$	1,991,959
Accumulated amortization	$	(598,002	)	$	(422,431	)

     Amortization expense for the three and six month periods ended February 28, 2002 was $192,234 and $387,833, respectively. Estimated amortization expense for the remainder of fiscal 2002 and the five succeeding years is $303,262, $549,390, $340,114, $1,396, $1,396 and $582, respectively.

     The reconciliation of reported net income adjusted for the adoption of SFAS No. 142 is as follows:

		Three Months Ended				Six Months Ended
		February 28,				February 28,
		2002		2001		2002		2001
Net Income:
	Reported net income	$	2,447,895	$	630,103	$	3,942,087	$	1,302,160
	Add back: goodwill amortization		—		95,555		—		191,110
	Adjusted net income	$	2,447,895	$	725,658	$	3,942,087	$	1,493,270
Basic income per share
	Reported net income	$	0.16	$	0.05	$	0.27	$	0.10
	Add back: goodwill amortization		—		0.01		—		0.02
	Adjusted net income	$	0.16	$	0.06	$	0.27	$	0.12
Fully diluted income per share
	Reported net income	$	0.15	$	0.05	$	0.25	$	0.10
	Add back: goodwill amortization		—		—		—		0.01
	Adjusted net income	$	0.15	$	0.05	$	0.25	$	0.11

     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

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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.

(4)   Business Acquisitions

     The terms of the Empower Health, Inc. agreement and plan of merger dated June 5, 2001, provided for contingent consideration of up to an additional 532,500 shares of common stock to be issued if the Company’s average closing price exceeded certain targeted levels from October 1, 2001 to September 30, 2006. On December 3, 2001, those targets were met and the Company issued 532,494 unregistered shares of common stock to the original shareholders of Empower Health, Inc. The value of the shares issued was recorded in goodwill.

(5)   Stockholders’ Equity

     In December 2001, the Company entered into a strategic alliance agreement with Johns Hopkins University and Health System for the establishment of an outcomes verification program to independently evaluate and verify the effectiveness of clinical interventions and their clinical and financial results. This five year strategic alliance agreement was effective December 1, 2001 and provides annual compensation of $1.0 million per year and the issuance of 75,000 unregistered shares of common stock to Johns Hopkins, of which 37,500 shares vested immediately. The remaining 37,500 shares vest on December 1, 2003.

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

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

     American Healthways, Inc. (the “Company”), a corporation formed in 1981, provides specialized, comprehensive care enhancement and disease management services to health plans and hospitals. The Company’s integrated care enhancement programs serve entire health plan populations through member and physician care support interventions, advanced neural network predictive modeling, and a confidential, secure Internet-based application that provides patients and physicians with individualized health information and data. American Healthways’ Integrated Care Enhancement Programs enable health plans to develop relationships with all of their members, not just the chronically ill, and to identify those at highest risk for a health problem, allowing for early interventions.

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     The Company’s Integrated Care Enhancement product line includes programs for members with key chronic diseases, programs for conditions of significant health and financial impact and programs for those health plan members identified as being at high risk for significant and costly episodes of illness. The product line is supported by a variety of integrated tools and technologies that are designed to deliver the best clinical and financial outcomes to American Healthways’ customers.

     Healthways Cardiac, Healthways Respiratory for COPD and Healthways Diabetes are designed to meet the total health care needs of the entire population diagnosed with these conditions, whether or not those needs are related to their chronic disease, through a system of interventions intended to improve patients’ health in the short term and prevent, delay or reduce the severity of long-term complications. Healthways Respiratory for asthma provides asthma-specific interventions only and includes a focus on pediatric populations.

     Healthways Impact Conditions addresses the total health care needs of populations diagnosed with health conditions for which research has identified significant gaps in care against published evidence-based medical guidelines, including low back pain, fibromyalgia, acid-related disorders and others. This group of impact conditions affects a significant percentage of the population and provides major opportunity for improvement in health care quality and cost.

     My Healthways^SM Personal Health Management program creates a health care relationship between the health plan and its members, particularly those who have few meaningful ties to the plan, are not significant users of the plan’s health care services and, therefore, comprise the majority of member turnover. My Healthways^SM also identifies those at the highest risk for costly health care episodes and provides services to help all members, and their physicians, to coordinate, integrate and manage their individual health care needs.

     As of February 28, 2002, the Company had contracts to provide its services to 20 health plans in 74 markets and also had 54 contracts to provide its services at 75 hospitals.

     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

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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; the impact of litigation involving the Company; 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.

     The following table sets forth the sources of the Company’s revenues by customer type as a percentage of total revenues for the three and six months ended February 28, 2002 and 2001.

	Three Months Ended						Six Months Ended
	February 28.						February 28.
	2002			2001			2002			2001
Health plan contracts		84	%		72	%		82	%		71	%
Hospital contracts		16			27			18			28
Other		—			1			—			1
		100	%		100	%		100	%		100	%

     The Company believes that a substantial portion of its future revenue growth will result from health plan customer contracts.

Critical Accounting Policies

     The Company’s accounting policies are described in Note 1 of the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2001. The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which 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.

     The following policy is considered by management to be the most critical in understanding the judgments involved in preparing the financial statements and the uncertainties that could impact the Company’s results of operations, financial condition and cash flows.

     Revenue Recognition — Fees under the Company’s hospital contracts are generally fixed-fee and are recorded as services are provided.

     Fees under the Company’s contracts with its health plan customers are determined by multiplying a contractually negotiated rate per health plan

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member per month (PMPM) by the number of health plan members covered by the Company’s services during the month. In some contracts, the PMPM rate may differ based on the health plan product groups (e.g. PPO, HMO, Medicare). 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 may be refundable (“performance-based”) based on achieving a targeted percentage reduction in the customer’s healthcare costs, in addition to clinical and other criteria that focus on improving the health of the members, compared to a baseline year. Approximately 27% of the Company’s health plan revenues recorded during the six months ended February 28, 2002 are performance-based. Certain contracts also provide opportunities for additional incentive fees in excess of the contractual PMPM rate if the Company is able to achieve a higher percentage reduction in the customer’s healthcare costs compared to the baseline year.

     The Company bills its customers each month for the entire amount of the fees contractually due for the prior month’s enrollment, which always includes the amount, if any, that may be subject to refund, but does not include any potential incentive fees. The Company recognizes these fees as revenue during the period the services are performed as follows: the fixed portion of these fees are recognized as revenue during the period the services are performed; the performance-based portion of these fees as well as any additional incentive fees are recognized based on contract-to-date performance. The Company determines its level of performance based on medical claims and other data contractually required to be supplied monthly by the health plan customer. In the event these interim performance measures indicate that performance targets are not being met, or data from the health plan is insufficient to measure performance, fees subject to refund are not recognized as revenues but rather are recorded as a current liability in contract billings in excess of earnings.

     The contractual settlement process under a contract, which generally is not completed until six to eight months after the end of a contract year, involves reconciliation of health care claims and clinical data. Data reconciliation differences between the Company and the customer can arise due to health plan data deficiencies, omissions and/or data discrepancies, for which the Company provides contractual allowances until agreement is reached with respect to identified issues.

Health Plan Contracts

     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 five 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.

     At February 28, 2002, the Company had contracts with 20 health plans to provide disease management services in 74 health plan markets compared with contracts with 16 health plans in 61 markets as of February 28, 2001. 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, 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 differs from a diabetes enrollee and varies 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 of its respiratory disease lives is similar to that of its diabetes lives. The number of equivalent lives under management and generating

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revenues for the Company as well as the backlog of equivalent lives under contract and scheduled for implementation but not currently generating revenues are shown below at February 28, 2002 and 2001.

At February 28,		2002			2001
Equivalent lives under management			344,506			215,149
Equivalent lives in backlog			170,000	*		142,000
	Total equivalent lives		514,506			357,149

* The backlog increased by 14,000 to 184,000 equivalent lives as a result of a health plan contract executed on March 14, 2002.

     During the three and six months ended February 28, 2002, approximately 56% and 54%, respectively, of the Company’s revenues were derived from contracts with two health plans. The loss of either of these contracts or a reduction in the profitability of these contracts could have a material negative impact on the Company’s results of operations.

     During the quarter ended February 28, 2002, no health plan contracts were subject to renewal. Three health plan customer contracts representing 1% of the Company’s revenues for the six months ended February 28, 2002 are subject to renewal or termination under the terms of the contracts during the remainder of fiscal 2002. No assurances can be given that the results from contract restructurings or possible terminations at renewal would not have a material negative impact on the Company’s results of operations. On July 1, 2002 lives under management is expected to decrease by 26,000 due to the Company’s decision to exercise an early termination clause in one of its health plan contracts.

     In December 2001, the Company entered into a strategic alliance agreement with Johns Hopkins University and Health System for the establishment of an outcomes verification program to independently evaluate and verify the effectiveness of clinical interventions and their clinical and financial results. This five year strategic alliance agreement was effective December 1, 2001 and provides annual compensation of $1.0 million per year and the issuance of 75,000 unregistered shares of common stock to Johns Hopkins, of which 37,500 shares vested immediately. The remaining 37,500 shares vest on December 1, 2003.

Hospital Contracts

     The Company’s hospital-based diabetes treatment centers are located in and operated under contracts with general acute care hospitals. Fees under the Company’s hospital contracts are generally fixed-fee and are recorded as services are provided. As of February 28, 2002, the Company had 54 hospital contracts to provide services at 75 hospital sites compared with the 55 contracts at 74 hospital sites as of February 28, 2001. The number of hospital contracts and hospital sites for the period ended February 28, 2001 included an Arthritis and Osteoporosis Care Center contract with a hospital to provide comprehensive arthritis and osteoporosis services. This contract terminated on April 30, 2001.

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     Components of changes in the total number of hospital contracts and hospital sites under these contracts for the three and six months ended February 28, 2002 and 2001 are presented below.

	Three Months Ended						Six Months Ended
	February 28,						February 28,
	2002			2001			2002			2001
Contracts in effect at beginning of period		55			53			55			51
Contracts signed		—			3			1			6
Contracts discontinued		(1	)		(1	)		(2	)		(2	)
Contracts in effect at end of period		54			55			54			55
Hospital sites where services are delivered		75			74			75			74

During the three month period ended February 28, 2002, three contracts were renewed for the Company’s hospital-based diabetes treatment centers. During the remainder of fiscal 2002, 15 contracts are either subject to expiration if not renewed or have early cancellation provisions that could result in contract termination.

     The hospital industry continues to experience pressures on its profitability as a result of constrained revenues from governmental and private revenue sources as well as from increasing underlying medical care costs. As a result, average revenue per hospital contract for the three and six month periods ended February 28, 2002 declined by 7% and 6%, respectively, compared with the same periods in 2001. The Company believes that these pressures will continue. While the Company believes that its products are geared specifically to assist hospitals in controlling the high costs associated with the treatment of chronic diseases, the pressures to reduce costs immediately may have a negative effect, in certain circumstances, on the ability of or the length of time required by the Company to sign new hospital contracts as well as on the Company’s ability to retain hospital contracts. This focus on cost reduction may also result in a continuation of downward pressure on the fee structures of existing contracts. There can be no assurance that these financial pressures will not continue to have a negative impact on the Company’s hospital contract operations.

Results of Operations

     Revenues for the three and six month periods ended February 28, 2002 increased 60% and 55%, respectively, over the same periods in 2001. This increase in revenues resulted primarily from an increase in the average number of equivalent lives enrolled in the Company’s health plan contracts to approximately 350,000 lives and 348,000 lives, respectively, for the three and six month periods ended February 28, 2002 from approximately 218,000 lives and 213,000 lives, respectively, for the comparable three and six month periods during the prior year and a contract performance incentive bonus of approximately $1.0 million recognized during the second quarter of fiscal 2002. The increase in the average number of equivalent lives under management was primarily the result of new health plan contracts signed during fiscal 2001 and 2002. The average revenue per member per month for equivalent lives enrolled under the Company’s health plan contracts was 16% and 9% greater during the three and six month periods ended February 28, 2002, respectively, than during the prior year periods. This increase in average per member per month revenue occurred primarily as a result of a greater mix of equivalent lives under contracts with higher revenue and service levels in the fiscal 2002 period when compared with the fiscal 2001 period and improved performance under the terms of incentive fee provisions of health plan contracts including a contract performance incentive bonus of approximately $1.0 million recognized during the fiscal 2002 period. Revenues from the Company’s hospital contract operations for the three and six month periods ended February 28, 2002 were 5% and 4%, respectively, less than hospital contract revenues for the comparable periods last year on a higher average number of contracts

15

in operation principally due to rate reductions on certain contract renewals. The Company anticipates that revenues for the remainder of 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.

     Cost of services for the three and six month periods ended February 28, 2002 increased 48% and 47%, respectively, compared with the prior fiscal year periods primarily from higher staffing levels associated with increases in the number of equivalent lives enrolled in the Company’s health plan contracts and the opening of an additional care enhancement center. Cost of services as a percentage of revenues decreased to 68% and 71%, respectively, for the three and six month periods ended February 28, 2002, compared to 74% for both the three and six month periods in the prior year primarily as a result of improved revenue performance at the Company’s health plan contract operations and the impact of a contract performance incentive bonus of approximately $1.0 million recognized during the second quarter of fiscal 2002. The Company anticipates cost of services will increase during the remainder of fiscal 2002 compared with fiscal 2001 primarily as a result of increased operating staff required for expected increases in the number of equivalent lives enrolled under the Company’s health plan contracts, increased indirect staff costs associated with the development and implementation of its new total population care enhancement services and increases in information technology staff.

     Selling, general and administrative expenses for the three and six month periods ended February 28, 2002 increased 41% and 37%, respectively, from the comparable periods in the prior year. The increase for the three and six month periods was primarily attributable to an increase in selling and marketing expenses associated with the Company’s investment in sales and marketing expertise and strategic relationships gained through the acquisition of Empower Health in June 2001, and an increase in general corporate expenses attributable to growth in the Company’s health plan operations. Selling, general and administrative expenses as a percentage of revenues for the three and six month periods ended February 28, 2002 decreased to 11% and 10%, respectively, from 13% and 12%, respectively, for the comparable periods in the prior year primarily as a result of the Company’s ability to more effectively leverage its selling, general and administrative expenses as a result of growth in the Company’s health plan operations and the effect of an approximately $1.0 million contract performance incentive bonus recognized during the second quarter of fiscal 2002. The Company anticipates selling, general and administrative expenses will increase during the remainder of fiscal 2002 compared with fiscal 2001 primarily as a result of increased sales and marketing expenses accompanying the Empower Health acquisition, increased support costs required for the Company’s rapidly growing health plan segment, and increased costs associated with the Company’s strategic alliance with Johns Hopkins University and Health System.

     The increase in depreciation and amortization expense to $1.7 million and $3.2 million, respectively, for the three and six month periods ended February 28, 2002 from $1.3 million and $2.5 million for the comparable periods last year principally resulted from increased depreciation and amortization expense associated with equipment, software development, and computer-related capital expenditures associated with enhancements in the Company’s health plan information technology capabilities, the addition of one care enhancement center and expansion of two existing centers offset by the discontinuance of goodwill amortization in the fiscal 2002 period as a result of the adoption of SFAS No. 142. The Company anticipates depreciation and amortization expense to increase during the remainder of 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 care enhancement centers, growth and improvement in the Company’s information technology capabilities and the development of its new total population care enhancement strategy offset partially by the discontinuance of goodwill amortization.

     The Company’s interest expense of $65,605 and $118,956, respectively, for the three and six month periods ended February 28, 2002 compared to $12,031 and $23,876 for the comparable periods last

16

year resulted from fees related to outstanding letters of credit to support the Company’s requirement to repay fees previously received under two health plan contracts in the event the Company does not perform at established target levels and does not repay the fees due in accordance with the terms of the contracts.

     The Company’s income tax expense for the three and six month periods ended February 28, 2002 was $1.7 million and $2.7 million, respectively, compared to $522,000 and $1.0 million for the comparable periods in the prior year. The increase in the income tax expense between these periods resulted primarily from an increase in profitability. The differences between the statutory federal income tax rate of 34% and the Company’s effective tax rate of 41% in fiscal 2002 are due primarily to the impact of state income taxes and certain non-deductible expenses for income tax purposes. The differences between the statutory federal income tax rate of 34% and the Company’s effective tax rates in fiscal 2001 are due primarily to the impact of state income taxes and certain non-deductible expenses for income tax purposes, primarily amortization of excess costs over net assets of purchased companies.

Liquidity and Capital Resources

     Operating activities for the six months ended February 28, 2002 generated $5.8 million in cash flow. Investing activities during this period used $5.0 million in cash which consisted of the acquisition of property and equipment primarily associated with enhancements in the Company’s health plan information technology capabilities, the addition of one care enhancement center and expansion of two existing centers, and costs associated with the acquisitions of CareSteps and Empower Health. Financing activities for the six months ended February 28, 2002 provided $1.4 million in cash proceeds from the exercise of options to purchase the Company’s common stock.

     In December 2001, the Company amended its existing credit agreement with a financial institution to provide borrowing capacity of up to $15.0 million, inclusive of the ability to issue up to $15.0 million of letters of credit. This agreement expires on March 31, 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 February 28, 2002, there were no borrowings outstanding under this agreement; however, there were letters of credit outstanding under the agreement totaling approximately $6.9 million to support the Company’s requirement to repay fees previously received under two health plan contracts in the event the Company does not perform at established target levels and does not repay the fees due in accordance with the terms of the 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 care enhancement 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 expansion of the Company’s existing credit facility and/or issuance of 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

17

assurance can be given that the Company would be able to issue additional debt or equity on terms that would be acceptable to the Company.

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

     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 February 28, 2002, the Company had repurchased 37,900 shares at a cost of $153,557 pursuant to this authorization.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     Not Applicable

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Part II

Item 1.   Legal Proceedings.

     In November 1994, the Company received an administrative subpoena for documents from a regional office of the Office of the Inspector General (“OIG”) of the Department of Health and Human Services in connection with an investigation of a wholly-owned subsidiary of the Company, American Healthways Services, Inc. (“AHSI”), formerly Diabetes Treatment Centers of America, Inc., under certain federal Medicare and Medicaid statutes. On February 10, 1995, the Company learned that the federal government had declined to take over and pursue a civil “whistle blower” action brought under seal in June 1994 on behalf of the government by a former employee dismissed by the Company in February 1994. The Company believes that this lawsuit triggered the OIG investigation. The civil suit was filed in June 1994 against the Company, AHSI, and certain named and unnamed medical directors and client hospitals and was kept under seal to permit the government to determine whether to take over the lawsuit. The complaint alleges violations by AHSI, the client hospitals and the medical directors of the federal False Claims Act as a result of alleged violations of the federal anti-kickback statute and provisions of the Social Security Act prohibiting physician self-referrals. Although no specific monetary damage has been claimed, the plaintiff seeks treble damages on behalf of the federal government, plus civil penalties. The plaintiff has requested an award of 30% of any judgment plus expenses. 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 2.   Changes in Securities and Use of Proceeds.

     On December 1, 2001, the Company issued 75,000 shares of unregistered common stock to Johns Hopkins University and Health System in connection with a strategic alliance agreement to provide an outcomes verification program to independently evaluate and verify the effectiveness of clinical interventions and their clinical and financial results. Of these 75,000 shares, 37,500 vested on December 1, 2001 and the remainder vest on December 1, 2003. The issuance was made in reliance on the exemption provided by Section 4(2) of the Securities Act of 1933, as amended, for a transaction not involving a public offering.

     On December 7, 2001, the Company issued 532,494 shares of unregistered common stock to the former shareholders of Empower Health, Inc. in connection with the merger of Empower Health with and into the Company. The issuances were made in reliance on the exemption provided by Section 4(2) of the Securities Act of 1933, as amended, for a transaction not involving a public offering.

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Item 3.   Defaults Upon Senior Securities.

     Not Applicable.

Item 4.   Submission of Matters to a Vote of Security Holders.

(a) The Annual Meeting of Stockholders of American Healthways, Inc. was held on January 22, 2002.

(c) The following proposal was voted upon at the Annual Meeting of Stockholders:

(i) Nominations to elect Thomas G. Cigarran and Dr. C. Warren Neel as Directors of the Company. The results of the election of the above mentioned nominees were as follows:

	For		Against		Withheld
Thomas G. Cigarran		10,653,304		—		1,494,516
Dr. C. Warren Neel		10,515,837		—		1,631,983

Item 5.   Other Information.

                Not Applicable.

Item 6.   Exhibits and Reports on Form 8-K.

(a) Exhibits

10.1 Employment Agreement between the Company and Donald B. Taylor dated February 10, 2002.

10.2 1996 Stock Incentive Plan, as amended

11. Reconciliation of basic and diluted earnings per share.

(b) Reports on Form 8-K

A Current Report on Form 8-K dated December 7, 2001 was filed during the quarter ended February 28, 2002 reporting a live broadcast of the first quarter conference call to analysts on the Internet.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

American Healthways, Inc.

(Registrant)

Date April 15, 2002
By /s/ Mary A. Chaput
Mary A. Chaput
Executive Vice President
Chief Financial Officer
(Principal Financial Officer)

Date April 15, 2002
By /s/ Alfred Lumsdaine
Alfred Lumsdaine
Vice President and
Controller
(Principal Accounting Officer)

21

Exhibit Index

10.1	Employment Agreement between the Company and Donald B. Taylor dated February 10, 2002.
10.2	1996 Stock Incentive Plan, as amended
11.	Reconciliation of basic and diluted earnings per share.

22 EX-10.1 3 g75534ex10-1.txt EMPLOYMENT AGREEMENT EXHIBIT 10.1 EMPLOYMENT AGREEMENT This Employment Agreement is entered into this 10th day of February, 2002, by and between American Healthways, Inc., a Delaware corporation ("Company") and Donald B. Taylor ("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 of the Company. 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 he may be elected or appointed by the Board of Directors or by the Chief Executive Officer of the Company. III. Term. Subject to the terms and conditions set forth herein, Officer shall be employed hereunder for a term beginning on February 10, 2002 and terminating on February 10, 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 salary of $240,000 per year ("Base Salary"), payable in equal monthly installments at the end of each month. 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 his 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 his ability to perform his duties under this -1- 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 his duties hereunder as a result of incapacity due to physical or mental illness, Officer shall continue to receive his Base Salary until his employment is terminated hereunder. In the case of incapacity due to physical or mental illness resulting in Officer being absent from his 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 his 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 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. 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 negligence by Officer in the performance of his duties as an officer -2- 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. Upon such termination by the Company, the Company shall have no further obligation to the Officer under this Agreement. 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 Termination Notice (as defined in Section III), or (iii) by Officer at any time within twelve (12) months following the occurrence of a Change In Control (as defined in Section XIX herein). Officer's termination date shall be deemed the date Officer receives his written notice of termination or Termination Notice from the Company or the date the Company receives notice from the Officer of his 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 monthly from the termination date for a total of one (1) year or the remaining term of this Agreement, whichever is greater. In addition, Officer will be paid any unpaid vacation pay earned by him, up to and including the date of termination, on the termination date. b. Officer shall cease as of the termination date his 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 -3- 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. 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 his 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), the Company shall pay the Officer his Base Salary due through the date on which his 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 his Base Salary due through the date of his death at the rate in effect at the time of his death. The Company shall then have no further obligations to Officer or any representative of his estate or his 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. 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 agrees not to disclose to any person other than a person to whom disclosure is necessary in connection with the performance of his 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, -4- 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 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 he 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 his 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 -5- 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 his employment with the Company or upon the termination of this Agreement under any other provision of this Agreement. 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 his 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 his rights or delegate any of his 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. -6- 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, a "Change of Control" shall be deemed to mean: (a) 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 (b) 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). IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first written. /s/ Donald B. Taylor ------------------------------------------- Donald B. Taylor AMERICAN HEALTHWAYS, INC. By: /s/ Thomas G. Cigarran --------------------------------------- Title: Chairman and Chief Executive Officer -7- EX-10.2 4 g75534ex10-2.txt 1996 STOCK INCENTIVE PLAN,AS AMENDED EXHIBIT 10.2 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. 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. 2 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 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. 3 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 1,980,000 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 year. 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. 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). 4 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. 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 5 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. (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 6 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: (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 7 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. (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 8 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. 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 9 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 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. 10 (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 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) 11 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; (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 12 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 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. 13 (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 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 14 (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: (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. 15 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 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- 16 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 October 25, 2011 may be extended beyond that date. 17 EX-11 5 g75534ex11.txt RECONCILIATION OF BASIC AND DILUTED EARNINGS EXHIBIT 11 AMERICAN HEALTHWAYS, INC. EARNINGS PER SHARE FEBRUARY 28, 2002 The following is a reconciliation of the numerator and denominators of basic and diluted income per share (adjusted for the stock split effective November 2001 for the prior year periods):

------------------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ------------------------------------------------------- For the three months ended February 28, 2002: Basic income per share: Net income $2,447,895 15,074,051 $ 0.16 Effect of dilutive stock options outstanding -- 1,252,290 -------------------------------------- Diluted income per share $2,447,895 16,326,341 $ 0.15 ====================================== For the three months ended February 28, 2001: Basic income per share: Net income $ 630,103 12,517,061 $ 0.05 Effect of dilutive stock options outstanding -- 1,116,655 -------------------------------------- Diluted income per share $ 630,103 13,633,716 $ 0.05 ====================================== For the six months ended February 28, 2002: Basic income per share: Net income $3,942,087 14,661,837 $ 0.27 Effect of dilutive stock options outstanding -- 1,239,068 -------------------------------------- Diluted income per share $3,942,087 15,900,905 $ 0.25 ====================================== For the six months ended February 28, 2001: Basic income per share: Net income $1,302,160 12,464,316 $ 0.10 Effect of dilutive stock options outstanding -- 950,969 -------------------------------------- Diluted income per share $1,302,160 13,415,285 $ 0.10 ======================================

-----END PRIVACY-ENHANCED MESSAGE-----

EX-10.1

                                                                    EXHIBIT 10.1

                              EMPLOYMENT AGREEMENT

         This Employment Agreement is entered into this 10th day of February,
2002, by and between American Healthways, Inc., a Delaware corporation
("Company") and Donald B. Taylor ("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 of
the Company. 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 he may be elected or appointed by the Board
of Directors or by the Chief Executive Officer of the Company.

         III.     Term. Subject to the terms and conditions set forth herein,
Officer shall be employed hereunder for a term beginning on February 10, 2002
and terminating on February 10, 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 salary of $240,000 per year ("Base Salary"), payable in
equal monthly installments at the end of each month. 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
his 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 his ability to perform his duties
under this


                                      -1-


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 his duties hereunder as a result of incapacity due to physical or
mental illness, Officer shall continue to receive his Base Salary until his
employment is terminated hereunder. In the case of incapacity due to physical
or mental illness resulting in Officer being absent from his 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 his 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 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.

         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 negligence by Officer in the performance of his duties as an officer


                                      -2-


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. Upon such
termination by the Company, the Company shall have no further obligation to the
Officer under this Agreement.


         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 Termination Notice (as defined in Section III), or (iii)
by Officer at any time within twelve (12) months following the occurrence of a
Change In Control (as defined in Section XIX herein). Officer's termination
date shall be deemed the date Officer receives his written notice of
termination or Termination Notice from the Company or the date the Company
receives notice from the Officer of his 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 monthly
                  from the termination date for a total of one (1) year or the
                  remaining term of this Agreement, whichever is greater. In
                  addition, Officer will be paid any unpaid vacation pay earned
                  by him, up to and including the date of termination, on the
                  termination date.

         b.       Officer shall cease as of the termination date his 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


                                      -3-


                  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.

         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 his 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), the Company shall pay the Officer his Base Salary due through the
date on which his 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 his Base Salary due through the date of
his death at the rate in effect at the time of his death. The Company shall
then have no further obligations to Officer or any representative of his estate
or his 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. 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
                           agrees not to disclose to any person other than a
                           person to whom disclosure is necessary in connection
                           with the performance of his 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,


                                      -4-


                           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 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 he 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 his
                           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


                                      -5-


                           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 his employment with the Company or
                           upon the termination of this Agreement under any
                           other provision of this Agreement.

         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 his 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 his rights or delegate any of his 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.


                                      -6-


         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, a "Change of
Control" shall be deemed to mean:

                  (a)      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

                  (b)      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).


         IN WITNESS WHEREOF, the parties have executed this Agreement on the
day and year first written.


                                     /s/ Donald B. Taylor
                                     -------------------------------------------
                                     Donald B. Taylor


                                     AMERICAN HEALTHWAYS, INC.


                                     By: /s/ Thomas G. Cigarran
                                         ---------------------------------------
                                     Title: Chairman and Chief Executive Officer


                                      -7-

EX-10.2

                                                                    EXHIBIT 10.2

                           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.

         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.


                                       2


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 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.


                                       3


         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 1,980,000 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 year.


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.

         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).


                                       4


         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.

                  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


                                       5


         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.

                  (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


                                       6


         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:

                               (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


                                       7


                  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.

         (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


                                       8


         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.

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


                                       9


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 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.


                                      10


         (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
         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)


                                      11


         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;

                  (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


                                      12


         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 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.


                                      13


                           (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 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


                                      14


                           (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:

                  (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.


                                      15


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
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-


                                      16


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 October 25, 2011 may be extended beyond that date.


                                      17

EX-11

                                                                      EXHIBIT 11

                           AMERICAN HEALTHWAYS, INC.
                               EARNINGS PER SHARE
                               FEBRUARY 28, 2002


        The following is a reconciliation of the numerator and denominators of
basic and diluted income per share (adjusted for the stock split effective
November 2001 for the prior year periods):



                                                         -------------------------------------------------------
                                                               Income               Shares            Per Share
                                                             (Numerator)         (Denominator)          Amount
                                                         -------------------------------------------------------
                                                                                             
For the three months ended February 28, 2002:
  Basic income per share:
    Net income                                                $2,447,895            15,074,051          $ 0.16
    Effect of dilutive stock options outstanding                      --             1,252,290
                                                         --------------------------------------
    Diluted income per share                                  $2,447,895            16,326,341          $ 0.15
                                                         ======================================

For the three months ended February 28, 2001:
  Basic income per share:
    Net income                                                $  630,103            12,517,061          $ 0.05
    Effect of dilutive stock options outstanding                      --             1,116,655
                                                         --------------------------------------
    Diluted income per share                                  $  630,103            13,633,716          $ 0.05
                                                         ======================================



For the six months ended February 28, 2002:
  Basic income per share:
    Net income                                                $3,942,087            14,661,837          $ 0.27
    Effect of dilutive stock options outstanding                      --             1,239,068
                                                         --------------------------------------
    Diluted income per share                                  $3,942,087            15,900,905          $ 0.25
                                                         ======================================

For the six months ended February 28, 2001:
  Basic income per share:
    Net income                                                $1,302,160            12,464,316          $ 0.10
    Effect of dilutive stock options outstanding                      --               950,969
                                                         --------------------------------------
    Diluted income per share                                  $1,302,160            13,415,285          $ 0.10
                                                         ======================================