2010 ANNUAL REPORT
About Healthways (NASDAQ: HWAY)
Healthways is the leading provider of specialized, comprehensive solutions to help
millions of people maintain or improve their health and well-being and as a result,
reduce overall costs. Healthways’ solutions are designed to keep healthy people
healthy, mitigate or eliminate lifestyle risk factors that can lead to disease and optimize
care for those with chronic illness.
Our proven, evidence-based programs provide highly specific and personalized
interventions for each individual in a population, irrespective of age or health status,
and are delivered to consumers by phone, mail, internet and face-to-face interactions,
both domestically and internationally. Healthways also provides a national, fully-
accredited complementary and alternative Health Provider Network and a national
Fitness Center Network, offering convenient access to individuals who seek health
services outside of, and in conjunction with, the traditional healthcare system. For
more information, please visit www.healthways.com.
Financial Highlights
Year Ended and at December 31,
(In thousands, except per share data)
Operating Data
Revenues
Adjusted revenues(1)
Net income
Diluted earnings per share
Adjusted diluted earnings per share(1)
Diluted weighted average common
shares and equivalents
Financial Position
Cash and cash equivalents
Working capital (deficit)
Total assets
Long-term debt
Other long-term liabilities
Stockholders’ equity
2010
2009
$ 720,333
$ 698,053
$ 47,330
$ 1.36
$ 1.11
$ 717,426
$ 717,426
$ 10,374
$ 0.30
$ 0.99
34,902
34,359
$ 1,064
547
861,689
243,425
39,140
430,841
$ 2,356
(44,296)
882,366
254,345
42,615
377,277
(1) See tables following letter to stockholders for a reconciliation of GAAP and non-GAAP results.
Form 10-K/Investor Contact
A copy of the Healthways, Inc. Annual Report on Form 10-K for fiscal 2010 filed with
the Securities and Exchange Commission is available on the Company’s website,
www.healthways.com. It is also available from the Company (without exhibits)
at no charge. These requests and other investor contacts should be directed to
Chip Wochomurka, Director, Investor Relations, at the Company’s corporate office.
Annual Meeting
The annual meeting of stockholders will be held on May 26, 2011, at 9:00 a.m. at the
Franklin Marriott Cool Springs, 700 Cool Springs Boulevard, Franklin, Tennessee.
Corporate Information
Corporate Office
Healthways, Inc.
701 Cool Springs Boulevard
Franklin, Tennessee 37067
(800) 327-3822
www.healthways.com
Registrar and Transfer Agent
Computershare Shareholder Services, LLC
P.O. Box 43078
Providence, Rhode Island 02940-3078
(800) 622-6757
Fellow Stockholders:
Healthways produced solid operating and financial results for 2010, even though we faced substantial
headwinds from weak economic growth and high unemployment. In addition, a long, divisive debate
about health care reform and lack of visibility with regard to the impact of its implementation
compounded market uncertainty, especially leading up to the mid-term elections. Despite these
challenges, we met our financial guidance for the year, achieving increased profitability and significant
free cash flow, which contributed to the strengthening of our financial position.
Our adjusted revenues for 2010 were $698.0 million compared with $717.4 million for 2009. Despite the
modest decline in adjusted revenues, margins improved for the year, resulting in a 12.1% increase in
adjusted net income per diluted share to $1.11 for 2010 from $0.99 for the prior year. Total debt to total
capitalization improved 400 basis points to 36.5% at the end of 2010 from 40.5% at the end of 2009.
Importantly, the debate over health care reform, and the industry’s response, crystallized an emerging
reality in the structure, operation and economics of health care. This new reality is characterized by a
shift toward more provider-centric responsibility for population health management, with a growing
focus on pay-for-value reimbursement mechanisms that align rewards according to the longitudinal
health and cost of whole populations. This shift represents radical change away from the industry’s
traditional reimbursement system, which focuses on episodic care and rewards transaction volume
without respect to results.
Despite the current market disruption caused by this transformation, we expect it to be substantially
positive for our longer-term growth prospects. Simply put, we welcome this change. For nearly two
decades we have worked to expand our value proposition in anticipation of this change. We know
of no organization better or more uniquely positioned than Healthways to address this change with
proven, integrated, comprehensive solutions that embrace whole populations regardless of age, gender
or health status and with the tools, platform and infrastructure to deliver at scale on a global basis.
Due to intense regulatory forces and economic pressures, the time for the market to prepare for this
transformation is relatively brief. Because of our unique capabilities, we expect to add new business
during 2011 that will drive growth in 2012 and beyond. We base this expectation on our strong
and growing pipeline of potential contracts, of which an unprecedented number seek unusually
comprehensive and highly sophisticated solutions designed to serve large populations. After the
market uncertainty experienced in 2010, there is a new urgency in our contracting discussions,
reflecting strategic clarity in identifying immediate priorities and compressing the decision-making
process. Many of these potential contracts will require us to apply all our capabilities and are being
pursued by both new and existing customers in our traditional health plan and employer markets, as
well as in new distribution channels created by physicians, hospitals and/or integrated delivery systems
and in support of well-being improvement needs of communities and federal and state governments.
This new momentum was recently validated by our signing of two large, innovative contracts: the
first with Hawaii Medical Service Association (“HMSA”), which is a long-term customer; and the
second with the State Government of New South Wales, which is a new customer and our third contract
in Australia. Each of these contracts expands the boundaries of integrated health management,
requiring an extraordinary level of integration with hospitals, physicians and other ancillary providers.
While these two contracts alone provide momentum for growth in 2012, we expect to sign additional
contracts during 2011 that are related to clearly emerging trends representing near-term opportunities
that Healthways is well positioned to address. Among these trends are:
1) Health plan preparation for the implementation of state insurance exchanges, which is projected
to cause significant disruption in the plans’ individual and small group fully insured business;
HEALTHWAYS 2010 ANNUAL REPORT
2) Change from a service-based to a performance-based payment system and the associated shift of
responsibility for population cost and quality from health plans to providers;
3) Increasing payer requests for a comprehensive, integrated solution that addresses longitudinal
health risk and care needs for total populations;
4) Global adoption of population health management by both foreign government and foreign
private sector health organizations; and
5) Recognition by large employers of the expanded value of improved well-being to reduce medical
cost and improve individual and company productivity and performance.
We are keenly focused on signing, implementing and successfully executing on contracts during
2011 with respect to both our new and ongoing growth opportunities, proof-points which would
have favorable implications for our prospects for long-term growth and increased shareholder value.
Our financial guidance for 2011 recognizes, however, that start-up costs for the HMSA and New
South Wales contracts and the timing of recognition of related performance-based revenues and
member enrollment will bring margins under significant pressure, resulting in an expected decline in
year-over-year earnings. Consequently, our financial guidance for 2011 includes revenue in a range
of $672 million to $710 million and net income per diluted share in a range of $0.90 to $1.08. The
impact of the emerging market trends may result in additional contracts in 2011 that have similar
financial profiles as HMSA and New South Wales, in which significant costs are required before full
revenue recognition and margin maturity are achieved, and that are not included in our guidance.
During 2012, we expect HMSA and New South Wales to reach and sustain target revenue performance
with profit margins consistent with our historical results.
As a result of these two contracts and our robust contracting pipeline, we have better visibility
to future growth than we have had since the financial crisis erupted in the fall of 2008. Given the
context of the worst economic environment of our time, we are proud of our solid results and
improved financial position during the past two years. As we have demonstrated throughout our
history, we owe our current strong market position to our willingness to continue adapting our model
to the rapidly evolving needs of the market, innovating and investing to ensure that our capabilities
deliver a continually expanding value proposition to both our existing and potential customers.
That we continued this successful strategy through the severe recessionary environment and
emerged financially fit with opportunities to drive sustainable growth speaks directly to the strength
of our colleagues throughout this Company and their shared vision of improving the health and
well-being of millions of people around the world. We thank them for their passion and commitment
and for the continuing hard work we expect of them in 2011 in executing on our opportunities to
re-establish Healthways on the path of sustainable growth for 2012 and beyond. We are confident
that the firming prospects for this growth, as we achieve proof-points during the current year, will
favorably affect the Company’s shareholder value.
Sincerely,
Ben R. Leedle, Jr.
President and Chief Executive Officer
HEALTHWAYS 2010 ANNUAL REPORT
Reconciliation of Non-GAAP Measures to GAAP Measures (Unaudited)
Reconciliation of Adjusted Revenues to Revenues, GAAP Basis (In millions)
Adjusted revenues (1)
Revenues attributable to CMS settlement (2)
Revenues, GAAP basis
Twelve Months Ended
December 31, 2010
$
$
698.0
22.3
720.3
(1) Adjusted revenues is a non-GAAP financial measure. The Company excludes revenues attributable to CMS settlement from this measure because of its comparability
to the Company’s historical operating results. The Company believes it is useful to investors to provide disclosures of its operating results and guidance on the same basis
as that used by management. You should not consider adjusted revenues in isolation or as a substitute for revenues determined in accordance with accounting principles
generally accepted in the United States.
(2) Revenues attributable to CMS settlement consists of pre-tax revenues of $22.3 million attributable to the December 2010 final settlement with The Centers for Medicare
and Medicaid Services (CMS) associated with the Company’s participation in two Medicare Health Support programs.
Reconciliation of Adjusted Diluted Earnings Per Share (EPS) to EPS, GAAP Basis
Adjusted EPS (3)
EPS attributable to earn-out adjustment
and investment gain (4)
EPS (loss) attributable to restructuring charges (5)
EPS attributable to CMS settlement (6)
EPS (loss) attributable to lawsuit settlement costs (7)
EPS, GAAP basis (8)
Twelve Months Ended
December 31, 2010
Twelve Months Ended
December 31, 2009
$
$
1.11
0.07
(0.20)
0.37
—
1.36
$
$
0.99
0.05
—
—
(0.73)
0.30
(3) Adjusted EPS is a non-GAAP financial measure. The Company excludes EPS (loss) attributable to earn-out adjustment and investment gain, restructuring charges, CMS
settlement, and lawsuit settlement costs from this measure because of its comparability to the Company’s historical operating results. The Company believes it is useful to
investors to provide disclosures of its operating results and guidance on the same basis as that used by management. You should not consider Adjusted EPS in isolation or
as a substitute for EPS determined in accordance with accounting principles generally accepted in the United States.
(4) EPS attributable to earn-out adjustment and investment gain includes income during fiscal 2010 of $3.0 million attributable to an adjustment to the estimated earn-out
liability from the 2009 HealthHonors acquisition and a $1.2 million gain during fiscal 2010 attributable to a final escrow release related to the January 2009 sale of a private
company in which we held a preferred stock investment. It also includes a $2.6 million gain during fiscal 2009 related to the sale of this investment.
(5) EPS (loss) attributable to restructuring charges includes charges of $10.3 million during fiscal 2010 associated with both domestic and international capacity consolidation
and other restructuring costs.
(6) EPS attributable to CMS settlement includes revenues of $22.3 million and expenses of $1.0 million during fiscal 2010 attributable to the December 2010 final settlement
with The Centers for Medicare and Medicaid Services (CMS) associated with the Company’s participation in two Medicare Health Support programs.
(7) EPS (loss) attributable to lawsuit settlement costs consists of pre-tax charges during fiscal 2009 of $40.0 million related to the Company’s settlement of a qui tam lawsuit.
(8) Figures do not add due to rounding.
Performance Graph
The following graph compares the total stockholder return of $100 invested on August 31, 2005 in (a) the
Company, (b) the CRSP Index for Nasdaq Stock Market (U.S. Companies), and (c) the CRSP Index for Nasdaq
Health Services Stocks (“Nasdaq Health Services”), assuming the reinvestment of all dividends.
8/31/05
8/31/06
8/31/07
8/31/08
12/31/08
12/31/09
12/31/10
HWAY
Nasdaq U.S. Stocks
Nasdaq Health Services
100.0
100.0
100.0
118.1
102.0
110.8
114.0
120.5
128.1
43.6
110.2
133.1
26.3
59.0
104.9
42.0
84.8
138.7
25.5
100.6
167.0
The stock price performance shown on
this graph is not necessarily indicative of
future price performance.
Notes: A. The lines represent annual
index levels derived from compounded
daily returns that include all dividends.
B. The indexes are reweighted daily, us-
ing the market capitalization on the pre-
vious trading day. C. If the monthly in-
terval, based on the fiscal year end, is not
a trading day, the preceding trading day
is used. D. The index level for all series
was set to $100.00 on August 31, 2005.
200
100
0
8/31/2005
8/31/2006
8/31/2007
8/31/2008
12/31/2009
12/31/2010
12/31/2008
UN
URITIES AND
SECU
NITED STAT
D EXCHANG
ington, D.C.
TES
GE COMMIS
20549
Wash
SSION
[X] Annual
Report Pursu
uant to Section
n 13 or 15(d)
of the Securi
ities Exchang
4
e Act of 1934
FORM 10-
F
-K
For
r the Fiscal Y
ear Ended De
ecember 31, 2
2010
or
[
] Transition
n Report Purs
suant to Sectio
on 13 or 15(d
d) of the Secur
rities Exchan
ge Act of 193
34
Commissio
on file number
r 000-19364
HEAL
t name of reg
LTHWAYS
gistrant as spe
S, INC.
ecified in its c
(Exac
charter)
Delaware
or other jurisd
ration or orga
(State o
incorpor
diction of
anization)
62-1
(I.R.S.
Identific
1117144
Employer
cation No.)
701 C
(Addr
Cool Springs
ress of princip
Boulevard, F
pal executive
ranklin, TN
offices) (Zip
37067
p code)
(
615) 614-492
hone number,
trant’s teleph
29
including are
(Regist
ea code)
Securities reg
gistered pursu
uant to Sectio
on 12(b) of the
e Act:
Title of each
n Stock - $.00
referred Stock
h class
01 par value, a
k Purchase Ri
and
ights
Common
related Pr
Name
e of each exch
The NASDAQ
T
hange on whi
Q Stock Mark
d
ich registered
ket LLC
Securities reg
gistered pursu
on 12(g) of the
e Act:
uant to Sectio
None
Indicate b
Securities
by check mark
s Act.
k if the registr
rant is a well-
-known seaso
oned issuer, as
s defined in R
Rule 405 of th
he
(cid:95)
Yes (cid:133) No (cid:95)
Y
Indicate b
Act.
by check mark
k if the registr
rant is not req
quired to file r
reports pursu
uant to Section
n 13 or 15(d)
of the
(cid:95)
Yes (cid:133) No (cid:95)
Y
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 12 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 (cid:95) No (cid:133)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web
site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
Yes (cid:133) No (cid:133)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of
this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
(cid:95)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-
accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated
filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer (cid:133) Accelerated filer (cid:95) Non-accelerated filer (cid:133) Smaller reporting company (cid:133)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes (cid:133) No (cid:95)
As of June 30, 2010, the last business day of the registrant’s most recently completed second fiscal quarter, the
aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant
was approximately $396.1 million based on the price at which the shares were last sold for such date on The
NASDAQ Stock Market.
As of March 8, 2011, 34,032,985 shares of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held May 26, 2011
are incorporated by reference into Part III of this Form 10-K.
2
Healthways, Inc.
Form 10-K
Table of Contents
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Removed and Reserved
Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Part I
Part II
Part III
Part IV
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Exhibits, Financial Statement Schedules
Page
4
11
17
17
18
19
21
23
24
39
42
74
74
75
75
75
75
75
75
75
3
Item 1. Business
PART I.
Founded in 1981, Healthways, Inc. provides specialized, comprehensive solutions to help people
improve physical, emotional and social well-being, reducing both direct healthcare costs and associated costs
from the loss of employee productivity.
We provide highly specific and personalized interventions for each individual in a population,
irrespective of health status, age or payor. Our evidence-based health, prevention and well-being services are
made available to consumers via phone, mobile devices, direct mail, the Internet, face-to-face consultations
and venue-based interactions.
In North America, our customers include health plans, governments, employers, pharmacy benefit
managers, and hospitals in all 50 states, the District of Columbia and Puerto Rico. We also provide health
improvement programs and services in Brazil and Australia. We operate care enhancement and coaching
centers worldwide staffed with licensed health professionals. Our fitness center network encompasses
approximately 15,000 U.S. locations. We also maintain an extensive network of over 39,000 complementary
and alternative medicine and chiropractic practitioners, which offers convenient access to the significant
number of individuals who seek health services outside of the traditional healthcare system.
Our guiding philosophy and approach to market is predicated on the fundamental belief that healthier
people cost less and are more productive. As described more fully below, our programs are designed to
improve well-being by helping people to adopt or maintain healthy behaviors, reduce health-related risk
factors, and optimize care for identified health conditions.
First, our programs are designed to help people adopt or maintain healthy behaviors by:
(cid:120)(cid:3)
fostering wellness and disease prevention through total population screening, well-being
assessments and supportive interventions; and
(cid:120)(cid:3) providing access to health improvement programs, such as fitness, weight management, and
complementary and alternative medicine.(cid:3)
Our prevention programs focus on education, physical fitness, health coaching, and behavior change
techniques and support. We believe this approach improves the well-being status of member populations and
reduces the short- and long-term direct healthcare costs for participants, including associated costs from the
loss of employee productivity.
Second, our programs are designed to help people reduce health-related risk factors by:
(cid:120)(cid:3) promoting the change and improvement of the lifestyle behaviors that lead to poor health or
chronic conditions; and
(cid:120)(cid:3) providing educational materials and personal interactions with highly trained nurses and other
healthcare professionals to create and sustain healthier behaviors for those individuals at-risk or in
the early stages of chronic conditions.
We enable our customers to engage everyone in their covered populations through specific
interventions that are sensitive to each individual’s health risks and needs. Our programs are designed to
motivate people to make positive lifestyle changes and accomplish individual goals, such as increasing
physical activity for seniors through the Healthways SilverSneakers® fitness program or overcoming nicotine
addiction through the QuitNet® on-line smoking cessation community.
4
Finally, our programs are designed to help people optimize care for identified health conditions by:
(cid:120)(cid:3)
incorporating the latest, evidence-based clinical guidelines into interventions to optimize patient
health outcomes;
(cid:120)(cid:3) developing care support plans and motivating members to set attainable goals for themselves;(cid:3)
(cid:120)(cid:3) providing local market resources to address acute episodic interventions;
(cid:120)(cid:3)
(cid:120)(cid:3) providing software licensing and management consulting in support of well-being improvement
coordinating members’ care with their healthcare providers;
services; and
(cid:120)(cid:3)(cid:3)(cid:3)(cid:3)providing high-risk care management for members at risk for hospitalization due to complex
conditions.
Our approach is to use proprietary, analytic models to identify individuals who are likely to incur
future high costs, including those who have specific gaps in care, and through evidence-based interventions
drive adherence to proven standards of care, medication regimens and physicians’ plans of care to reduce
disease progression and related medical spending.
We recognize that each individual plays a variety of roles in his or her pursuit of health, often
simultaneously. By providing the full spectrum of services to meet each individual’s needs, we believe our
interventions can be delivered at scale and in a manner that reflects those unique needs over time. We believe
creating real and sustainable behavior change generates measurable, long-term cost savings and improved
individual and business performance.
Change in Fiscal Year
In August 2008, our Board of Directors approved a change in our fiscal year-end from August 31 to
December 31. Accordingly, our 2009 fiscal year began on January 1, 2009 following a four-month transition
period ended December 31, 2008. References herein to fiscal 2009 refer to the year ended December 31,
2009; references herein to fiscal 2008 refer to the year ended August 31, 2008.
Customer Contracts
Contract Terms
We generally determine our contract fees by multiplying a contractually negotiated rate per member
per month (“PMPM”) by the number of members covered by our services during the month. We typically set
the PMPM rates during contract negotiations with customers based on the value we expect our programs to
create and a sharing of that value between the customer and the Company. In addition, some of our services,
such as the SilverSneakers® fitness program, include fees that are based upon member participation.
Our contracts with health plans generally range from three to five years with provisions for subsequent
renewal; contracts with self-insured employers, either directly or through their health plans or pharmacy
benefit manager, typically have one to three-year terms. Some of our contracts allow the customer to
terminate early.
Some of our contracts provide that a portion of our fees may be refundable to the customer
(“performance-based”) if our programs do not achieve, when compared to a baseline year, a targeted
percentage reduction in the customer’s healthcare costs and selected clinical and/or other criteria that focus on
improving the health of the members. Approximately 3% of revenues recorded during 2010 were
performance-based and were subject to final reconciliation as of December 31, 2010. We anticipate that this
percentage will fluctuate due to the level of performance-based fees in new contracts and the timing and
amount of revenue recognition associated with performance-based fees. Some contracts also provide for
5
additional fees for incentive bonuses in excess of the contractual PMPM rate if we meet or exceed contractual
performance targets.
Technology
Our solutions require sophisticated analytical, data management, Internet and computer-telephony
solutions based on state-of-the-art technology. These solutions help us deliver our services to large populations
within our customer base. Our predictive modeling capabilities allow us to identify and stratify those
participants who are most at risk for an adverse health event. We incorporate behavior-change science with
consumer-friendly interactions such as face-to-face, telephonic, print materials and web portals to facilitate
consumer preferences for engagement and convenience. We use sophisticated data analytical and reporting
solutions to validate the impact of our programs on clinical and financial outcomes. We continue to invest
heavily in technology and are continually expanding and improving our proprietary clinical, data management,
and reporting systems to continue to meet the information management requirements of our services. The
behavior change techniques and predictive modeling incorporated in our technology identify an individual’s
readiness to change and provide personalized support through appropriate messaging using any method
desired, including venue-based face-to-face; print; phone; mobile and remote devices; on-line; emerging
modalities; and any combination thereof to motivate and sustain healthy behaviors.
Backlog
Backlog represents the estimated annualized revenue at target performance for business awarded but
not yet started at December 31, 2010. Annualized revenue in backlog as of December 31, 2010 and 2009 was
as follows:
(In 000s)
Annualized revenue in backlog
December 31,
December 31,
2010
2009
$
37,100
$
32,400
Demand for our services from self-insured employer accounts, which generally begin their benefit
year on January 1, has often resulted in a disproportionate amount of our new business beginning on this date.
Business Strategy
The World Health Organization defines health as “…not only the absence of infirmity and disease,
but also a state of physical, mental, and social well-being.”
Our business strategy reflects our passion to enhance health and well-being, and as a result, reduce
overall healthcare costs and improve workforce engagement, yielding better business performance for our
customers. Our programs are designed to improve well-being by helping people to:
adopt or maintain healthy behaviors;
reduce health-related risk factors; and
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3) optimize care for identified health conditions.
Through our solutions, we work to optimize the health and well-being of entire populations, one
person at a time, domestically and internationally, thereby creating value by reducing overall healthcare costs
and improving productivity for individuals, families, health plans, governments, employers and communities.
We believe it is critical to impact an entire population’s underlying health status and well-being in a
long-term, cost effective way. Believing that what gets measured gets acted upon, in January 2008, we entered
into an exclusive, 25-year relationship with Gallup to provide a national, daily pulse of individual and
6
collective well-being. The Gallup-Healthways Well-Being IndexTM is the result of a unique partnership in
well-being measurement and research that is based on surveys of 1,000 Americans every day, seven days a
week. Under the agreement, Gallup evaluates and reports on the well-being of individuals of countries, states
and communities; Healthways provides similar services for companies, families and individuals.
To enhance health and well-being within their respective populations, our current and prospective
customers require solutions that focus on the underlying drivers of healthcare demand, address worsening
health status, reverse or slow unsustainable cost trends, foster healthy behaviors, mitigate health risk factors,
and manage chronic conditions. Our strategy is to deliver programs that engage individuals and help them
enhance their health status and well-being regardless of their starting point. We believe we can achieve health
and well-being improvements in a population and generate significant cost savings and increases in
productivity by providing effective programs that support the individual throughout his or her health journey.
We are adding and enhancing solutions to extend our reach and effectiveness and to meet increasing
demand for integrated solutions. The flexibility of our programs allows customers to provide those services
they deem appropriate for their organizations. Customers may select from certain single program options up
to a total-population approach, in which all members of a customer’s population are eligible to receive our
services.
Our strategy includes as a priority the ongoing expansion of our value proposition through the
introduction of our total population management solution. This solution, in addition to improving individuals’
health and reducing direct healthcare costs, targets a much larger improvement in employer profitability by
reducing the impact of lost productivity for health-related reasons. With the success of our total population
management solution, we expect to gain an even greater competitive advantage in responding to employers’
needs for a healthier, higher-performing and less costly workforce.
Our strategy also includes the further enhancement and deployment of our proprietary next generation
technology platform known as Embrace. This platform, which is essential to our total population management
solution, enables us to integrate data from the healthcare organizations and other entities interacting with an
individual. Embrace provides for the delivery of our integrated solutions and ongoing communications
between the individual and his or her medical and health experts, using any method desired, including venue-
based face-to-face; print; phone; mobile and remote devices; on-line; emerging modalities; and any
combination thereof.
We plan to increase our competitive advantage in delivering our services by leveraging our scalable,
state-of-the-art call centers, medical information content, behavior change processes and techniques, strategic
relationships, health provider networks, fitness center relationships, and proprietary technologies and
techniques. We may add new capabilities and technologies through internal development, strategic alliances
with other entities and/or through selective acquisitions or investments.
We anticipate continuing to enhance, expand and integrate additional capabilities with health plans
and to pursue opportunities with domestic government entities and communities as well as the public and
private sectors of healthcare in international markets. In addition, the significant changes in government
regulation of healthcare (see “Industry Integration and Consolidation” and “Government Regulation” below)
may afford us expanded opportunities to provide services to health plans and employers as well as collaborate
with and/or directly provide solutions to integrated medical systems and provider groups in the post healthcare
reform marketplace.
7
Segment and Major Customer Information
We have one reportable segment, well-being improvement services. During 2010, CIGNA
HealthCare, Inc. comprised approximately 19% of our revenues. No other customer accounted for 10% or
more of our revenues in 2010.
Competition
The healthcare industry is highly competitive and subject to continual change in the manner in which
services are provided. Other entities, whose financial, research, staff, and marketing resources may exceed our
resources, are marketing a variety of well-being improvement services and other services to health plans and
self-insured employers, or have announced an intention to offer such services. These entities include disease
management companies, health and wellness companies, retail drug stores, major pharmaceutical companies,
health plans, healthcare organizations, providers, pharmacy benefit management companies, medical device
and diagnostic companies, healthcare information technology companies, web-based medical content
companies, and other entities that provide services to health plans, self-insured employers and government
entities.
We believe we have advantages over our competitors because of the breadth and depth of our well-
being improvement capabilities, including our scope of strategic relationships, state-of-the-art call center
technology linked to our proprietary information technology, predictive modeling capabilities, behavior-
change techniques, the comprehensive recruitment and training of our clinical colleagues, our experienced
management team, the comprehensive clinical nature of our product offerings, our established reputation for
providing well-being improvement services to members with health risk factors or chronic diseases, and the
proven financial and clinical outcomes of our programs; however, we cannot assure you that we can compete
effectively with other companies such as those noted above.
Industry Integration and Consolidation
Consolidation has been an important factor in all aspects of the healthcare industry, including the well-
being and health management sector. While we believe the size of our membership base provides us with the
economies of scale to compete even in a consolidating market, we cannot assure you that we can effectively
compete with companies formed as a result of industry consolidation or that we can retain existing health plan
or employer customers if they are acquired by other health plans or employers which already have, or are not
interested in, our programs.
In March 2010, President Obama signed the Patient Protection and Affordable Care Act, as amended
by the Health Care and Education Reconciliation Act of 2010 (collectively, “PPACA”), into law. Among
other things, PPACA requires the U.S. Department of Health & Human Services (“HHS”) to establish a
Medicare Shared Savings Program that promotes accountability and coordination of care among providers
through the creation of Accountable Care Organizations (“ACOs”) beginning no later than January 1, 2012.
The program will allow providers, including hospitals, physicians, and other designated professionals, to form
ACOs and voluntarily work together to invest in infrastructure and redesign delivery processes to achieve high
quality and efficient delivery of services. Further, PPACA requires HHS to establish voluntary national
bundled payment programs under which participating groups of providers would receive a single payment for
certain medical conditions or episodes of care. While ACOs and bundled payments are Medicare programs
under PPACA, commercial insurers and private managed care health plans may increasingly shift to ACO and
bundled payment models as well. We expect these and other changes resulting from PPACA to further
encourage integration and increase consolidation in the healthcare industry.
8
Governmental Regulation
Governmental regulation impacts us in a number of ways in addition to those regulatory risks
presented under the “Risk Factors” below.
Patient Protection and Affordable Care Act
PPACA changes how healthcare services are covered, delivered, and reimbursed through, among other
things, significant reductions in the growth of Medicare program payments. In addition, PPACA reforms
certain aspects of health insurance, expands existing efforts to tie Medicare and Medicaid payments to
performance and quality, and contains provisions intended to strengthen fraud and abuse enforcement.
PPACA contains provisions that have, and will continue to have an impact on our customers, including
commercial health plans and Medicare Advantage programs.
Among other things, PPACA, as enacted, seeks to decrease the number of uninsured individuals and
expand coverage through the expansion of public programs and private sector health insurance in addition to a
number of health insurance market reforms. In addition, PPACA contains several provisions that encourage
utilization of preventative services and wellness programs, such as those provided by the Company. However,
PPACA also contains various provisions that directly affect the customers or prospective customers that
contract for our services and may increase their costs and/or reduce their revenues. For example, as enacted,
PPACA prohibits commercial health plans from using gender, health status, family history, or occupation to
set premium rates, eliminates pre-existing condition exclusions, and bans annual benefit limits. In addition,
PPACA mandates minimum medical loss ratios (“MLRs”) for health plans such that the percentage of health
coverage premium revenue spent on healthcare medical costs and quality improvement expenses be at least
80% for individual and small group health coverage and 85% for large group coverage and Medicare
Advantage plans, with policyholders receiving rebates if the actual loss ratios fall below these minimums. We
anticipate that a substantial majority of our services will qualify as medical expenses; however, regulations
implementing MLR requirements have yet to be finalized.
It is difficult to predict with any reasonable certainty the full impact of PPACA on the Company due
to the law’s complexity, lack of implementing regulations or interpretive guidance, gradual and potentially
delayed implementation, pending court challenges, and possible amendment. Implementation of PPACA,
particularly those provisions expanding health insurance coverage, could be delayed or even blocked due to
court challenges and efforts to repeal or amend the law. Some federal district courts have upheld the
constitutionality of PPACA or dismissed cases on procedural grounds. Others have found unconstitutional the
requirement that individuals maintain health insurance or pay a penalty and have either declared PPACA void
in its entirety or left the remainder of the law intact. These lawsuits are subject to appeal, and it is unclear how
federal lawsuits challenging the constitutionality of PPACA will be resolved or what the effect will be on any
resulting changes to the law.
Changes in laws governing reimbursement to health plans providing services under governmental
programs such as Medicare and Medicaid may affect us. As enacted, PPACA will impact Medicare
Advantage programs in a variety of ways. PPACA reduces premium payments to Medicare Advantage plans
such that the managed care per capita payments paid by the Centers for Medicare & Medicaid Services
(“CMS”) to Medicare Advantage plans are, on average, equal to those for traditional Medicare. While
PPACA will award bonuses to Medicare Advantage plans that achieve service benchmarks and quality ratings,
overall payments to Medicare Advantage plans are expected to be significantly reduced under PPACA. The
impact of these reductions on the Company’s business is not yet clear.
9
While many of the governmental and regulatory requirements affecting healthcare delivery generally
do not directly apply to us, our customers must comply with a variety of regulations including Medicare
Advantage marketing and other restrictions, the licensing and reimbursement requirements of federal, state and
local agencies and the requirements of municipal building codes and health codes. Certain of our services,
including health service utilization management and certain claims payment functions, require licensure by
government agencies. We are subject to a variety of legal requirements in order to obtain and maintain such
licenses.
Certain of our professional healthcare employees, such as nurses, must comply with individual
licensing requirements. All of our healthcare professionals who are subject to licensing requirements are
licensed in the state in which they are physically present, such as the professionals located at a call center.
Multiple state licensing requirements for healthcare professionals who provide services telephonically over
state lines may require some of our healthcare professionals to be licensed in more than one state. We
continually monitor legislative, regulatory and judicial developments in telemedicine in order to stay in
compliance with state and federal laws; however, new agency interpretations, federal or state legislation or
regulations, or judicial decisions could increase the requirement for multi-state licensing of all call center
health professionals, which would increase our costs of services.
Federal privacy regulations issued pursuant to the Health Insurance Portability and Accountability Act
of 1996 (“HIPAA”) extensively restrict the use and disclosure of individually-identifiable health information
by health plans, most healthcare providers, and certain other entities (collectively, “covered entities”). Federal
security regulations issued pursuant to HIPAA require covered entities to implement and maintain
administrative, physical and technical safeguards to protect the confidentiality, integrity and availability of
electronic individually-identifiable health information. We are required to comply with certain aspects of the
HIPAA privacy and security regulations as a result of the American Recovery and Reinvestment Act of 2009
(“ARRA”), the services we provide, and our customer contracts. We may be subject to civil and criminal
penalties for violations of the regulations. ARRA significantly increased the civil penalties for violations, with
penalties of up to $50,000 per violation for a maximum civil penalty of $1.5 million in a calendar year for
violations of the same requirement. In addition, we may be contractually or directly obligated to comply with
any applicable state laws or regulations related to the confidentiality and security of confidential personal
information. In the event of a data breach involving protected health information, we are subject to contractual
obligations and state and federal requirements that may require us to notify our customers or individuals
affected by the breach. These requirements may also require us or our customers to notify regulatory agencies
and the media of the data breach.
Federal law contains various prohibitions related to false statements and false claims, some of which
apply to private payors as well as federal programs. Actions may be brought under the federal False Claims
Act by the government as well as by private individuals, known as “whistleblowers,” who are permitted to
share in any settlement or judgment.
There are many potential bases for liability under the False Claims Act. Liability under the False
Claims Act arises when an entity knowingly submits a false claim for reimbursement to the federal
government, and the False Claims Act defines the term “knowingly” broadly. In some cases, whistleblowers,
the federal government, and some courts have taken the position that entities that allegedly have violated other
statutes, such as the “fraud and abuse” provisions of the Social Security Act, have thereby submitted false
claims under the False Claims Act. From time to time, participants in the healthcare industry, including our
company and our customers, may be subject to actions under the False Claims Act, and it is not possible to
predict the impact of such actions.
10
Employees
As of March 1, 2011, we had approximately 2,800 employees. Our employees are not subject to any
collective bargaining agreements. We believe we have a good relationship with our employees.
Available Information
Our Internet address is www.healthways.com. We make available free of charge, on or through our
Internet website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-
K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material
with, or furnish it to, the Securities and Exchange Commission.
Item 1A. Risk Factors
In the execution of our business strategy, our operations and financial condition are subject to certain
risks. A summary of certain material risks is provided below, and you should take such risks into account in
evaluating any investment decision involving our company. This section does not describe all risks applicable
to us and is intended only as a summary of certain material factors that could impact our operations in the
industry in which we operate. Other sections of this Annual Report on Form 10-K contain additional
information concerning these and other risks.
We depend on payments from customers, and cost reduction pressure on these entities may adversely
affect our business and results of operations.
The healthcare industry in which we operate currently faces significant cost reduction pressures as a
result of increased competition, constrained revenues from governmental and private revenue sources,
increasing underlying medical care costs, and general economic conditions. We believe that these pressures
will continue and possibly intensify.
We believe that our solutions, which are geared to foster wellness and disease prevention and provide
access to health improvement programs, specifically assist our customers in controlling the high costs of
healthcare; however, the pressures to reduce costs in the short term may negatively affect our ability to sign
and/or retain contracts under existing terms or to restructure these contracts on terms that would not have a
material negative impact on our results of operations. These financial pressures could have a negative impact
on our results of operations.
A significant percentage of our revenues is derived from health plan customers.
A significant percentage of our revenues is derived from health plan customers. The health plan
industry continues to undergo a period of consolidation, and we cannot assure you that we will be able to
retain health plan customers if they are acquired by other health plans that already participate in competing
programs or are not interested in our programs. In addition, a reduction in the number of covered lives
enrolled with our health plan customers or a decision by our health plan customers to take programs in-house
could adversely affect our results of operations. Our health plan customers are subject to increased obligations
under PPACA, including new benefit mandates, limitations on exclusions and factors used for rate setting,
requirements on MLRs and increased taxes. In determining how to meet these requirements, health plan
customers or prospective customers may seek reduced fees or choose to reduce or delay the purchase of our
services.
11
We currently derive a large percentage of our revenues from one customer.
Because of the size of its membership and the breadth of the services purchased from us, CIGNA
HealthCare, Inc. comprised approximately 19% of our revenues in 2010. Our contract with CIGNA continues
into 2013. The loss of, or the restructuring of a contract with, this or other large customers could have a
material adverse effect on our business and results of operations. No other customer accounted for 10% or
more of our revenues in 2010.
Our business strategy is dependent in part on developing new and additional products to complement
our existing services, as well as establishing additional distribution channels through which we may
offer our products and services.
Our strategy focuses on helping people to adopt or maintain healthy behaviors, reducing health-related
risk factors, and optimizing care for identified health conditions. While we have considerable experience in
solutions with a broad range of medical conditions, any new or modified programs will involve inherent risks
of execution, such as our ability to implement our programs within expected timelines or cost estimates; our
ability to obtain adequate financing to provide the capital that may be necessary to support our operations and
to support or guarantee our performance under new contracts; and our ability to deliver outcomes on any new
products or services. In addition, as part of our business strategy, we may enter into relationships, such as our
strategic relationship with Medco Health Solutions, Inc., to establish additional distribution channels through
which we may offer our products and services. As we offer products through new or alternative distribution
channels, we may face difficulties, such as potential customer overlap that may lead to pricing conflicts, which
may adversely affect our business.
Failure to successfully execute on the terms of our contracts could result in significant harm to our
business.
Our ability to grow and expand our business is contingent upon our ability to achieve desired financial
savings, clinical performance targets, and productivity improvements under our existing contracts and to
favorably resolve contract billing and interpretation issues with our customers. Certain customer contracts
provide that a portion of our fees may be refundable to the customer if our programs do not achieve targeted
savings performance. There is no guarantee that we will achieve the necessary cost savings and clinical
outcomes improvements under our contracts within the time frames contemplated and reach mutual agreement
with customers with respect to cost savings. Unusual and unforeseen patterns of healthcare utilization by
individuals with diseases or conditions for which we provide services could adversely affect our ability to
achieve desired financial savings and clinical outcomes. Our inability to meet or exceed the targets under our
customer contracts could have a material adverse effect on our business and results of operations. Also, our
ability to provide financial guidance with respect to performance-based contracts is contingent upon our ability
to accurately forecast performance and the timing of revenue recognition under the terms of our contracts
ahead of data collection and reconciliation.
In addition, certain of our contracts are increasing in complexity, requiring integration of data,
systems, people, programs and services, the execution of sophisticated business activities, and the delivery of a
broad array of services to large numbers of people who may be geographically disbursed. The failure to
successfully manage and execute the terms of these agreements could result in the loss of fees and/or contracts
and could adversely affect our business and results of operations.
We depend on the timely receipt of accurate data from our customers and our accurate analysis of such
data.
Identifying which members are eligible to receive our services and measuring our performance under
our contracts are highly dependent upon the timely receipt of accurate data from our customers and our
12
accurate analysis of such data. Data acquisition, data quality control and data analysis are complex processes
that carry a risk of untimely, incomplete or inaccurate data from our customers or flawed analysis of such data,
which could have a material adverse impact on our ability to recognize revenues.
Our ability to recognize estimated annualized revenue in backlog is based on certain estimates.
Our ability to recognize estimated annualized revenue in backlog in the manner and within the
timeframe we expect is based on certain estimates regarding the implementation of our services. We cannot
assure you that the amounts in backlog will ultimately result in revenues in the manner and within the
timeframe we expect.
Changes in macroeconomic conditions may adversely affect our business.
Economic difficulties and other macroeconomic conditions have reduced the demand and/or the
timing of purchases for certain of our services from customers and potential customers. A loss of a customer
or a reduction in a customer’s enrolled lives could have a material adverse effect on our business and results of
operations. In addition, current economic conditions could create liquidity and credit constraints. We cannot
assure you that we would be able to secure additional financing if needed and, if such funds were available,
whether the terms or conditions would be acceptable to us.
The expansion of our services into international markets subjects us to additional business, regulatory
and financial risks.
We intend to continue expanding our international operations as part of our business strategy. We
have incurred and expect to continue to incur costs in connection with pursuing business opportunities in
international markets. Our success in the international markets will depend in part on our ability to anticipate
the rate of market acceptance of our solutions and the individual market dynamics and regulatory requirements
in potential international markets. Because the international market for our services is relatively immature and
also involves many new solutions, there is no guarantee that we will be able to achieve the necessary cost
savings and clinical outcomes improvements under our contracts with international customers within the time
frames contemplated and reach mutual agreement with customers with respect to those outcomes. The failure
to accurately forecast the costs necessary to implement our strategy of establishing a presence in these markets
could have a material adverse effect on our business.
In addition, as a result of doing business in foreign markets, we are subject to a variety of risks which
are different from or additional to the risks we face within the United States. Our future operating results in
these countries or in other countries or regions throughout the world could be negatively affected by a variety
of factors which are beyond our control. These factors include political conditions, economic conditions, legal
and regulatory constraints, currency regulations, and other matters in any of the countries or regions in which
we operate, now or in the future. In addition, foreign currency exchange rates and fluctuations may have an
impact on our future costs or on future cash flows from our international operations, and could adversely affect
our financial performance. Other factors which may impact our international operations include foreign trade,
monetary and fiscal policies both of the United States and of other countries, laws, regulations and other
activities of foreign governments, agencies and similar organizations. Additional risks inherent in our
international operations generally include, among others, the costs and difficulties of managing international
operations, adverse tax consequences and greater difficulty in enforcing intellectual property rights in
countries other than the United States.
13
We may experience difficulties associated with the implementation and/or integration of new businesses
or technologies.
We may face substantial difficulties, costs and delays in effectively implementing and/or integrating
new businesses and technologies into our platform. Implementing internally-developed solutions and/or
integrating newly acquired organizations and technologies could be costly and time-consuming and may strain
our resources. Consequently, we may not be successful in implementing and/or integrating these new
businesses or technologies and may not achieve anticipated revenue and cost benefits.
Our level of indebtedness could adversely affect our future financial condition.
On March 30, 2010, we entered into a Fourth Amended and Restated Credit Agreement (the “Fourth
Amended Credit Agreement”). The Fourth Amended Credit Agreement contains various financial covenants,
restricts the payment of dividends, and limits the amount of repurchases of our common stock. As of
December 31, 2010, our long-term debt, including the current portion, was $241.3 million.
Our indebtedness could have a material adverse effect on our financial condition by, among other
things,:
(cid:120)
increasing our vulnerability to a downturn in general economic conditions or to increases in
interest rates, particularly with respect to the portion of our outstanding debt that is subject to
variable interest rates;
(cid:120) potentially limiting our ability to obtain additional financing or to obtain such financing on
(cid:120)
favorable terms;
causing us to dedicate a portion of future cash flow from operations to service or pay down our
debt, which reduces the cash available for other purposes, such as operations, capital expenditures,
and future business opportunities; and
(cid:120) possibly limiting our ability to adjust to changing market conditions and placing us at a
competitive disadvantage compared to our competitors who may be less leveraged.
Our ability to service our indebtedness will depend on our ability to generate cash in the future. We
cannot assure you that our business will generate sufficient cash flow from operations or that future
borrowings will be available in an amount sufficient to enable us to service our indebtedness or to fund other
liquidity needs.
We have a significant amount of goodwill and intangible assets, the value of which could become
impaired.
We have recorded significant portions of the purchase price of certain acquisitions as goodwill and/or
intangible assets. At December 31, 2010, we had approximately $496.3 million and $94.3 million of goodwill
and intangible assets, respectively. On an ongoing basis, we evaluate whether the carrying values of goodwill
and intangible assets are impaired. If we determine that the carrying values of our goodwill and/or intangible
assets are impaired, we may incur a non-cash charge to earnings which could have a material adverse effect on
our results of operations for the period in which the impairment occurs and/or could impact our compliance
with the covenant requirements of the Fourth Amended Credit Agreement.
A failure of our information systems could adversely affect our business.
Our ability to deliver our services depends on effectively using information technology. We believe
that our state-of-the-art integrated technology platform and call center technology provides us with a
competitive advantage in the industry; however, we expect to continually invest in updating and expanding our
information technology. In some cases, we may have to make systems investments before we generate
14
revenues from contracts with new customers. In addition, these system requirements expose us to technology
obsolescence risks.
The nature of our business involves the receipt and storage of a significant amount of health
information about the participants of our programs. If we experience a data security breach, we could be
exposed to government enforcement actions and private litigation. In addition, our customers could lose
confidence in our ability to protect the health information of their members, which could cause them to
discontinue usage of our services.
We rely upon our information systems for operating and monitoring all major aspects of our business.
These systems and our operations could be damaged or interrupted by natural disasters, power loss, network
failure, improper operation by our employees, security breaches, computer viruses, intentional attacks by third
parties or other unexpected events. Any disruption in the operation of our information systems, regardless of
the cause, could adversely impact our operations, which may affect our financial condition, results of
operations and cash flows.
Our revenues are subject to seasonal pressure from the disenrollment processes of employer customers
of our contracted health plans. In addition, some of our contracts with employers, either direct or
through their health plans, are one year in length, often beginning on January 1.
Employers typically make decisions on which health insurance carriers they will offer to their
employees and also may allow employees to switch between health plans on an annual basis. These annual
membership disenrollment and re-enrollment processes of employers (whose employees are the health plan
members) from health plans can result in a seasonal reduction in billed lives in January of each year.
Another seasonal impact on billed lives could occur if a health plan decided to withdraw coverage
altogether for a specific line of business, such as Medicare Advantage, or in a specific geographic area, thereby
automatically disenrolling previously covered members.
We face competition for staffing, which may increase our labor costs and reduce profitability.
We compete with other healthcare and services providers in recruiting qualified management and staff
personnel for the day-to-day operations of our business and call centers, including nurses and other healthcare
professionals. In some markets, the scarcity of nurses and other medical support personnel has become a
significant operating issue to healthcare businesses. This shortage may require us to enhance wages and
benefits to recruit and retain qualified nurses and other healthcare professionals. A failure to recruit and retain
qualified management, nurses and other healthcare professionals, or to control labor costs, could have a
material adverse effect on profitability.
We are party to litigation that could force us to pay significant damages and/or harm our reputation.
We are subject to certain legal proceedings, which potentially involve large claims and significant
defense costs (see Item 3: “Legal Proceedings”). These legal proceedings and any other claims that we may
face, whether with or without merit, could result in costly litigation, and divert the time, attention, and
resources of our management. Although we currently maintain liability insurance, there can be no assurance
that the coverage limits of such insurance policies will be adequate or that all such claims will be covered by
insurance. Although we believe that we have conducted our operations in full compliance with applicable
statutory and contractual requirements and that we have meritorious defenses to outstanding claims, it is
possible that resolution of these legal matters could have a material adverse effect on our consolidated results
of operations. In addition, legal expenses associated with the defense of these matters may be material to our
consolidated results of operations in a particular financial reporting period.
15
Compliance with new federal and state legislative and regulatory initiatives could adversely affect our
results of operations or may require us to spend substantial amounts acquiring and implementing new
information systems or modifying existing systems.
Our customers are subject to considerable state and federal government regulation. Many of these
regulations are vaguely written and subject to differing interpretations that may, in certain cases, result in
unintended consequences that could impact our ability to effectively deliver services. The ARRA legislation
strengthening the privacy and security requirements of HIPAA is one such example.
We believe that federal requirements governing the confidentiality of individually-identifiable health
information permit us to obtain individually-identifiable health information for well-being improvement
purposes from a covered entity; however, state legislation or regulation could preempt federal confidentiality
and security regulations if it is more restrictive. We are required by contract, the services we provide, and
ARRA to comply with certain aspects of the federal confidentiality and security regulations.
Although we continually monitor the extent to which federal and state legislation or regulations may
govern our operations, new federal or state legislation or regulation in this area that restricts our ability to
obtain and handle individually-identifiable health information or that otherwise restricts our operations could
have a material negative impact on our results of operations.
Government regulators may interpret current regulations or adopt new legislation governing our
operations in a manner that subjects us to penalties or negatively impacts our ability to provide services.
Broadly written Medicare fraud and abuse laws and regulations that are subject to varying
interpretations may expose us to potential civil and criminal litigation regarding the structure of current and
past contracts entered into with our customers.
Expanding the well-being and health management industry to Medicare beneficiaries enrolled in
Medicare Advantage plans could lead to increased direct regulation of well-being and health management
services. Further, providing services to Medicare Advantage beneficiaries may result in our being subject
directly to various federal laws and regulations, including provisions related to fraud and abuse, false claims
and billing and reimbursement for services, and the federal False Claims Act.
In addition, certain of our services, including health utilization management and certain claims
payment functions, require licensure by government agencies. We are subject to a variety of legal
requirements in order to obtain and maintain such licenses, but little guidance is available to determine the
scope of some of these requirements. Failure to obtain and maintain any required licenses or failure to comply
with other laws and regulations applicable to our business could have a material negative impact on our
operations.
Certain of our professional healthcare employees, such as nurses, must comply with individual licensing
requirements.
All of our healthcare professionals who are subject to licensing requirements, such as the professionals
located at a call center, are licensed in the state in which they are physically present. Multiple state licensing
requirements for healthcare professionals who provide services telephonically over state lines may require us
to license some of our healthcare professionals in more than one state. We continually monitor legislative,
regulatory and judicial developments in telemedicine; however, new agency interpretations, federal or state
legislation or regulations, or judicial decisions could increase the requirement for multi-state licensing of all
call center health professionals, which would increase our costs of services.
16
Healthcare reform legislation may result in a reduction to our revenues from government health plans
and private insurance companies.
In March 2010, President Obama signed PPACA into law. Among other things, PPACA seeks to
decrease the number of uninsured individuals and expand coverage through the expansion of public programs
and private sector health insurance and a number of health insurance market reforms. PPACA also contains
several provisions that encourage the utilization of preventive services and wellness programs, such as those
provided by the Company. However, PPACA also contains various provisions that directly affect the
customers or prospective customers that contract for our services and may increase their costs and/or reduce
their revenues. For example, as enacted, PPACA prohibits commercial health plans from using gender, health
status, family history, or occupation to set premium rates, eliminates pre-existing condition exclusions, and
bans annual benefit limits. In addition, PPACA mandates minimum MLRs for health plans such that the
percentage of health coverage premium revenue spent on healthcare medical costs and quality improvement
expenses must be at least 80% for individual and small group health coverage and 85% for large group
coverage and Medicare Advantage plans, with policyholders receiving rebates if the actual loss ratios fall
below these minimums. While we anticipate that a substantial majority of our services will qualify as medical
expenses in MLR calculations, we cannot guarantee that the final regulations implementing the MLR mandate
will define our services as medical expenses.
Increased obligations of health plans under PPACA as well as PPACA’s complexity, lack of
implementing regulations or interpretive guidance, gradual and potentially delayed implementation, pending
court challenges, and possible amendment or repeal may cause our customers or prospective customers to
reduce or delay the purchase of our services or to demand reduced fees. PPACA also reduces funding to
Medicare Advantage programs, which may cause some Medicare Advantage plans to raise premiums or limit
benefits, potentially reducing demand for our programs, either through Medicare Advantage plans eliminating
our programs or causing some Medicare beneficiaries to terminate their Medicare Advantage coverage. While
we believe that our programs and services specifically assist our customers in controlling their costs and
improving their competitiveness, it is possible that some provisions of PPACA will adversely affect the
profitability of our customers in such a manner that the demand for our programs and services would be
reduced. Because of the many variables involved, we are unable to predict all of the ways in which PPACA
could impact the Company. These changes, other reforms imposed by PPACA, future legislative initiatives,
and/or government regulation could adversely affect our operations or reduce the demand for our services.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
We lease approximately 264,000 square feet of office space in Franklin, Tennessee, which contains
our corporate headquarters and one of our call centers, pursuant to an agreement that expires in February 2023.
We also lease office space for our 12 other call center locations for an aggregate of approximately
300,000 square feet of space with lease terms expiring on various dates from 2011 to 2016. Our operations
support and training offices contain approximately 130,000 square feet in aggregate and have lease terms
expiring from 2011 to 2016.
17
Item 3. Legal Proceedings
Securities Class Action Litigation
Beginning on June 5, 2008, Healthways and certain of its present and former officers and/or directors
were named as defendants in two putative securities class actions filed in the U.S. District Court for the Middle
District of Tennessee, Nashville Division. On August 8, 2008, the court ordered the consolidation of the two
related cases, appointed lead plaintiff and lead plaintiff’s counsel, and granted lead plaintiff leave to file a
consolidated amended complaint.
The amended complaint, filed on September 22, 2008, alleged that the Company and the individual
defendants violated Sections 10(b) of the Securities Exchange Act of 1934 (the “Act”) and that the individual
defendants violated Section 20(a) of the Act as “control persons” of Healthways. The amended complaint
further alleged that certain of the individual defendants also violated Section 20A of the Act based on their
stock sales. The plaintiff purports to bring these claims for unspecified monetary damages on behalf of a class
of investors who purchased Healthways stock between July 5, 2007 and August 25, 2008.
In support of these claims, the lead plaintiff alleged generally that, during the proposed class period,
the Company made misleading statements and omitted material information regarding (1) the purported loss or
restructuring of certain contracts with customers, (2) the Company’s participation in the Medicare Health
Support (“MHS”) pilot program for CMS, and (3) the Company’s guidance for fiscal year 2008. The
defendants filed a motion to dismiss the amended complaint on November 13, 2008. On March 9, 2009, the
Court denied the defendants’ motion to dismiss. On April 27, 2010, the parties reached an agreement in
principle to settle this matter for $23.6 million. The District Court gave final approval to the settlement by an
order entered on September 24, 2010. As a result of the Company’s insurance coverage, this settlement did
not result in any charge to the Company.
Shareholder Derivative Lawsuits
On June 27, 2008 and July 24, 2008, respectively, two shareholders filed putative derivative actions
purportedly on behalf of Healthways in the Chancery Court for the State of Tennessee, Twentieth Judicial
District, Davidson County, against certain directors and officers of the Company. These actions are based
upon substantially the same facts alleged in the securities class action litigation described above. The
plaintiffs are seeking to recover damages in an unspecified amount and equitable and/or injunctive relief.
On August 13, 2008, the Court consolidated these two lawsuits and appointed lead counsel. On
October 3, 2008, the Court ordered that the consolidated action be stayed until the motion to dismiss in the
securities class action had been resolved by the District Court. By stipulation of the parties, the plaintiffs filed
their consolidated complaint on May 9, 2009. On June 19, 2009, the defendants filed a motion to dismiss the
consolidated complaint. The Court granted the defendants’ motion to dismiss on October 14, 2009. The
plaintiffs filed a notice of appeal on November 12, 2009. The Tennessee Court of Appeals heard argument on
the appeal on October 13, 2010 and affirmed the trial court’s dismissal on March 14, 2011.
ERISA Lawsuits
On July 31, 2008, a purported class action alleging violations of the Employee Retirement Income
Security Act (“ERISA”) was filed in the U.S. District Court for the Middle District of Tennessee, Nashville
Division against Healthways, Inc. and certain of its directors and officers alleging breaches of fiduciary duties
to participants in the Company’s 401(k) plan. The central allegation is that Company stock was an imprudent
investment option for the 401(k) plan.
18
An amended complaint was filed on September 29, 2008, naming as defendants the Company, the
Board of Directors, certain officers, and members of the Investment Committee charged with administering the
401(k) plan. The amended complaint alleged that the defendants violated ERISA by failing to remove the
Company stock fund from the 401(k) plan when it allegedly became an imprudent investment, by failing to
disclose adequately the risks and results of the MHS pilot program to 401(k) plan participants, and by failing
to seek independent advice as to whether to continue to permit the plan to hold Company stock. It further
alleged that the Company and its directors should have been more closely monitoring the Investment
Committee and other plan fiduciaries. The amended complaint sought damages in an undisclosed amount and
other equitable relief. The defendants filed a motion to dismiss on October 29, 2008. On January 28, 2009,
the Court granted the defendants’ motion to dismiss the plaintiff’s claims for breach of the duty to disclose
with regard to any non-public information and information beyond the specific disclosure requirements of
ERISA and denied Defendants’ motion to dismiss as to the remainder of the plaintiff’s claims. A period of
discovery ensued.
On May 12, 2009, the plaintiff filed a motion for class certification. After the plaintiff failed, without
explanation, to appear for his scheduled deposition, the Court issued an Order on July 10, 2009 warning the
plaintiff that his failure to participate in the lawsuit could result in sanctions, including but not limited to
dismissal. After the plaintiff’s failure to participate continued, on July 23, 2009, the defendants filed a motion
to dismiss for failure to prosecute the action. On August 6, 2009, the parties filed a stipulation of dismissal
with prejudice as to the named plaintiff but otherwise without prejudice, and the Court entered an Order to that
effect on the same date.
On February 1, 2010, a new named plaintiff filed another putative class action complaint in the United
States District Court for the Middle District of Tennessee, Nashville Division, alleging ERISA violations in
the administration of the Company’s 401(k) plan. The new complaint is identical to the original complaint,
including the allegations and the requests for relief. Defendants’ answer to this complaint was filed on March
22, 2010. A scheduling order was entered on April 1, 2010, and discovery commenced thereafter. On April
30, 2010, Plaintiff filed a motion for class certification. On June 23, 2010, the parties reached an agreement in
principle to settle this matter for $1.3 million, with such settlement being funded by the Company’s fiduciary
liability insurance carrier. On December 31, 2010, the District Court gave preliminary approval of the
proposed settlement, ordered that the notice be provided to the class, and set the Fairness Hearing for final
approval on April 25, 2011. As a result of the Company’s insurance coverage, this settlement is not expected
to result in any charge to the Company.
Contract Dispute
We currently are involved in a contractual dispute with Blue Cross Blue Shield of Minnesota
regarding fees paid to us as part of a former contractual relationship. In 2010, we received a notice of
arbitration under the terms of our agreement alleging a violation of certain contract provisions. An arbitration
hearing has been scheduled for July 11, 2011. We believe we performed our services in compliance with the
terms of our agreement and that the assertions made in the arbitration notice are without merit.
Item 4. Removed and Reserved.
Not applicable.
Executive Officers of the Registrant
The following table sets forth certain information regarding our executive officers as of December 31,
2010. Executive officers of the Company serve at the pleasure of the Board of Directors.
19
Officer
Ben R. Leedle, Jr.
Age
49
Stefen F. Brueckner
61
Mary A. Chaput
Matthew E. Kelliher
Alfred Lumsdaine
Anne M. Wilkins
60
55
45
44
Position
Chief Executive Officer and director of the Company since
September 2003, President from May 2002 through October
2008, Executive Vice President and Chief Operating Officer
of the Health Plan Group from 2000 until May 2002. Senior
Vice President from 1996 until 2000.
President and Chief Operating Officer of the Company since
October 2008. Vice President, Senior Products, for Humana
Inc., from 2005 to 2008 and Vice President, Market
Operations and Large Group Underwriting, from 2001 to
2005.
Chief Financial Officer and Secretary of the Company since
October 2001.
President, International Business, of the Company since
September 2004.
Chief Accounting Officer since February 2002.
Vice President, Marketing and Strategy, of the Company since
May 2008. Partner and Managing Director and lead of the
North America Payer practice of the Boston Consulting Group
from 2003 to 2008.
20
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Market Information
Our common stock is traded over-the-counter on The NASDAQ Stock Market (“NASDAQ”) under
the symbol HWAY.
The following table sets forth the high and low sales prices per share of Common Stock as reported by
NASDAQ for the relevant periods.
Year ended December 31, 2010
First quarter
Second quarter
Third quarter
Fourth quarter
Year ended December 31, 2009
First quarter
Second quarter
Third quarter
Fourth quarter
High
Low
$
$
19.50 $
17.64
15.18
12.49
15.52 $
14.78
16.86
19.44
14.76
11.78
11.44
9.50
7.01
8.27
12.03
13.31
Holders
At March 1, 2011, there were approximately 15,000 holders of our common stock, including 194
stockholders of record.
Dividends
We have never declared or paid a cash dividend on our common stock. We intend to retain our earnings to
finance the growth and development of our business and do not expect to declare or pay any cash dividends in
the foreseeable future. Our Board of Directors will review our dividend policy from time to time and may
declare dividends at its discretion; however, our Fourth Amended Credit Agreement places restrictions on the
payment of dividends. For further discussion of the Fourth Amended Credit Agreement, see “Management’s
Discussion and Analysis of Financial Condition and Results of Operation - Liquidity and Capital Resources.”
21
Repurchases of Common Stock
The following table contains information for shares of our common stock that we repurchased during
the fourth quarter of 2010:
Total
Number of
Shares
Purchased
Average Price
Paid per
Share
Total Number of Shares
Purchased as Part of
Publicly Announced Plans
or Programs (1)
Period
Maximum Approximate
Dollar Value of Shares that
May Yet Be Purchased
Under the Plans or
Programs (1)
October 1 through 31
November 1 through 30
December 1 through 31
10,000
182,200
237,454
$10.34
$10.64
$10.33
10,000
192,200
429,654
$59,896,600
$57,957,992
$55,505,092
Total
429,654
(1) All share repurchases between October 1, 2010 and December 31, 2010 were made pursuant to a share
repurchase program authorized by the Company’s Board of Directors and publicly announced on October 21,
2010, which allows for the repurchase of up to $60 million of our common stock from time to time in the open
market or in privately negotiated transactions through October 19, 2012.
22
Item 6. Selected Financial Data
(In thousands, except per share data)
Operating Results:
Revenues
Cost of services (exclusive of
depreciation and amortization included
below)
Selling, general and administrative
expenses
Depreciation and amortization
Impairment loss
Restructuring and related charges
Operating income
Gain on sale of investment
Interest expense
Legal settlement and related costs
Income before income taxes
Income tax expense
Net income
Basic income per share: (1)
Diluted income per share: (1)
Weighted average common shares and
equivalents:
Basic
Diluted
Balance Sheet Data:
Cash and cash equivalents
Working capital (deficit)
Total assets
Long-term debt
Other long-term liabilities
Stockholders’ equity
Other Operating Data:
Annualized revenue in backlog
Year Ended
December 31,
Year Ended
December 31,
Four Months
Ended
December 31,
Year Ended August 31,
2010
(1)
2009
(1)
2008
(1)
2008
(1)
2007
(1)
2006
$
720,333 $
717,426 $
244,737
$ 736,243 $ 615,586
$ 412,308
493,713
522,999
177,651
503,940 417,721
281,161
72,830
52,756
—
10,258
90,776 $
(1,163)
14,164
—
77,775 $
30,445
47,330 $
71,535
49,289
—
—
73,603 $
(2,581)
15,717
39,956
20,511 $
10,137
10,374 $
27,790
16,188
4,344
10,264
8,500
—
6,757
—
71,342 67,352
47,479 37,044
—
—
$ 113,482 $ 93,469
—
20,927 18,185
—
—
—
—
—
44,417
24,517
—
—
$ 62,213
—
1,053
—
1,743
1,009
734
$ 92,555 $ 75,284
37,740 30,163
$ 54,815 $ 45,121
$ 61,160
24,009
$ 37,151
1.39 $
0.31 $
0.02
1.36 $
0.30 $
0.02
$
$
1.57 $
1.29
1.50 $
1.22
$
$
1.08
1.02
$
$
$
$
$
34,129
34,902
33,730
34,359
33,616
34,038
34,977
36,597
35,049
37,002
34,348
36,379
$
1,064 $
2,356 $
5,157
$ 35,242 $ 47,655
$ 154,792
547
861,689
243,425
39,140
430,841
(44,296)
882,366
254,345
42,615
377,277
(6,034)
883,090
304,372
39,533
357,036
21,276
10,792
906,813 828,845
345,395 297,059
14,388
354,334 362,750
31,227
124,469
382,386
236
10,853
274,873
$
37,100 $
32,400 $
35,900
$ 13,600 $ 39,900
$
6,625
(1)
Includes operating results, balance sheet data, and other operating data of Axia Health Management, Inc. since the
date of the acquisition, which was December 1, 2006.
23
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Founded in 1981, Healthways, Inc. provides specialized, comprehensive solutions to help people
improve physical, emotional and social well-being, reducing both direct healthcare costs and associated costs
from the loss of employee productivity.
We provide highly specific and personalized interventions for each individual in a population,
irrespective of health status, age or payor. Our evidence-based health, prevention and well-being services are
made available to consumers via phone, mobile devices, direct mail, the Internet, face-to-face consultations
and venue-based interactions.
In North America, our customers include health plans, governments, employers, pharmacy benefit
managers, and hospitals in all 50 states, the District of Columbia and Puerto Rico. We also provide health
improvement programs and services in Brazil and Australia. We operate care enhancement and coaching
centers worldwide staffed with licensed health professionals. Our fitness center network encompasses
approximately 15,000 U.S. locations. We also maintain an extensive network of over 39,000 complementary
and alternative medicine and chiropractic practitioners, which offers convenient access to the significant
number of individuals who seek health services outside of the traditional healthcare system.
Our guiding philosophy and approach to market is predicated on the fundamental belief that healthier
people cost less and are more productive. As described more fully below, our programs are designed to
improve well-being by helping people to adopt or maintain healthy behaviors, reduce health-related risk
factors, and optimize care for identified health conditions.
First, our programs are designed to help people adopt or maintain healthy behaviors by:
(cid:120)(cid:3)
fostering wellness and disease prevention through total population screening, well-being
assessments and supportive interventions; and
(cid:120)(cid:3) providing access to health improvement programs, such as fitness, weight management, and
complementary and alternative medicine.(cid:3)
Our prevention programs focus on education, physical fitness, health coaching, and behavior change
techniques and support. We believe this approach improves the well-being status of member populations and
reduces the short- and long-term direct healthcare costs for participants, including associated costs from the
loss of employee productivity.
Second, our programs are designed to help people reduce health-related risk factors by:
(cid:120)(cid:3) promoting the change and improvement of the lifestyle behaviors that lead to poor health or
chronic conditions; and
(cid:120)(cid:3) providing educational materials and personal interactions with highly trained nurses and other
healthcare professionals to create and sustain healthier behaviors for those individuals at-risk or in
the early stages of chronic conditions.
We enable our customers to engage everyone in their covered populations through specific
interventions that are sensitive to each individual’s health risks and needs. Our programs are designed to
motivate people to make positive lifestyle changes and accomplish individual goals, such as increasing
physical activity for seniors through the Healthways SilverSneakers fitness program or overcoming nicotine
addiction through the QuitNet® on-line smoking cessation community.(cid:3)
24
Finally, our programs are designed to help people optimize care for identified health conditions by:
(cid:120)(cid:3)
incorporating the latest, evidence-based clinical guidelines into interventions to optimize patient
health outcomes;
(cid:120)(cid:3) developing care support plans and motivating members to set attainable goals for themselves;(cid:3)
(cid:120)(cid:3) providing local market resources to address acute episodic interventions;
(cid:120)(cid:3)
(cid:120)(cid:3) providing software licensing and management consulting in support of well-being improvement
coordinating members’ care with their healthcare providers;
services; and
(cid:120)(cid:3) providing high-risk care management for members at risk for hospitalization due to complex
conditions.
Our approach is to use proprietary, analytic models to identify individuals who are likely to incur
future high costs, including those who have specific gaps in care, and through evidence-based interventions
drive adherence to proven standards of care, medication regimens and physicians’ plans of care to reduce
disease progression and related medical spending.
We recognize that each individual plays a variety of roles in his or her pursuit of health, often
simultaneously. By providing the full spectrum of services to meet each individual’s needs, we believe our
interventions can be delivered at scale and in a manner that reflects those unique needs over time. We believe
creating real and sustainable behavior change generates measurable, long-term cost savings and improved
individual and business performance.
Change in Fiscal Year
In August 2008, our Board of Directors approved a change in our fiscal year-end from August 31 to
December 31. Accordingly, our 2009 fiscal year began on January 1, 2009 following a four-month transition
period ended December 31, 2008. References herein to fiscal 2009 refer to the year ended December 31,
2009; references herein to fiscal 2008 refer to the year ended August 31, 2008.
Forward-Looking Statements
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. Forward-looking statements include all statements that do not relate solely to historical or
current facts, and can be identified by the use of words like “may,” “believe,” “will,” “expect,” “project,”
“estimate,” “anticipate,” “plan,” or “continue.” In order for us to use the “safe harbor” provisions of the
Private Securities Litigation Reform Act of 1995, we caution you that the following important factors, among
others, may affect these forward-looking statements. Consequently, actual operations and results may differ
materially from those expressed in the forward-looking statements. The important factors include but are not
limited to:
(cid:120)(cid:3) our ability to sign and implement new contracts for our solutions;
(cid:120)(cid:3) our ability to accurately forecast the costs required to fully implement new contracts;
(cid:120) our ability to retain existing customers and to renew or maintain contracts with our customers under
existing terms or restructure these contracts on terms that would not have a material negative impact
on our results of operations;
(cid:120)(cid:3) our ability to accurately forecast performance and the timing of revenue recognition under the terms of
our customer contracts ahead of data collection and reconciliation in order to provide forward-looking
guidance;
the impact of PPACA on our operations and/or the demand for our services;
(cid:120)(cid:3)
25
(cid:120)(cid:3)
the impact of any new or proposed legislation, regulations and interpretations relating to the
Medicare Prescription Drug, Improvement, and Modernization Act of 2003, including the potential
expansion to Phase II for Medicare Health Support programs and any legislative or regulatory changes
with respect to Medicare Advantage;
(cid:120)(cid:3) our ability to anticipate the rate of market acceptance of our solutions in potential international
markets;
(cid:120)(cid:3) our ability to accurately forecast the costs necessary to implement our strategy of establishing a
(cid:120)(cid:3)
(cid:120)(cid:3)
presence in international markets;
the risks associated with foreign currency exchange rate fluctuations and our ability to hedge against
such fluctuations; (cid:3)
the risks associated with deriving a significant concentration of our revenues from a limited number of
customers;
(cid:120)(cid:3) our ability to achieve the contractually required cost savings and clinical outcomes improvements and
reach mutual agreement with customers with respect to cost savings, or to achieve such savings and
improvements within the time frames contemplated by us;
(cid:120)(cid:3) our ability to achieve estimated annualized revenue in backlog in the manner and within the timeframe
we expect, which is based on certain estimates regarding the implementation of our services;
(cid:120)(cid:3) our ability and/or the ability of our customers to enroll participants and to estimate their level of
(cid:120)(cid:3)
enrollment and participation in our programs in a manner and within the timeframe anticipated by us;
the ability of our customers to provide timely and accurate data that is essential to the operation and
measurement of our performance under the terms of our contracts;
(cid:120)(cid:3) our ability to favorably resolve contract billing and interpretation issues with our customers;
(cid:120)(cid:3) our ability to service our debt and make principal and interest payments as those payments become
(cid:120)(cid:3)
(cid:120)(cid:3)
due;
the risks associated with changes in macroeconomic conditions, which may reduce the demand and/or
the timing of purchases for our services from customers or potential customers, reduce the number of
covered lives of our existing customers, or restrict our ability to obtain additional financing;
counterparty risk associated with our interest rate swap agreements and foreign currency exchange
contracts;
(cid:120)(cid:3) our ability to integrate acquired businesses or technologies into our business and to accurately forecast
the related costs;
the impact of any impairment of our goodwill or other intangible assets;
(cid:120)(cid:3)
(cid:120)(cid:3) our ability to develop new products and deliver outcomes on those products;
(cid:120)(cid:3) our ability to implement our new integrated data and technology solutions platform within the required
timeframe and expected cost estimates;
(cid:120)(cid:3) our ability to obtain adequate financing to provide the capital that may be necessary to support our
operations and to support or guarantee our performance under new contracts;
(cid:120)(cid:3) unusual and unforeseen patterns of healthcare utilization by individuals with diseases or conditions for
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3)
which we provide services;
the ability of our customers to maintain the number of covered lives enrolled in the plans during the
terms of our agreements;
the impact of legal proceedings involving us and/or our subsidiaries;
the impact of future state, federal, and international legislation and regulations applicable to our
business, including PPACA, on our ability to deliver our services and on the financial health of our
customers and their willingness to purchase our services;
current geopolitical turmoil, the continuing threat of domestic or international terrorism, and the
potential emergence of a health pandemic; and
(cid:120)(cid:3) other risks detailed in this Annual Report on Form 10-K, including those set forth in Item 1A.
We undertake no obligation to update or revise any such forward-looking statements.
26
Critical Accounting Policies
We describe our accounting policies in Note 1 of the Notes to the Consolidated Financial Statements.
We prepare the consolidated financial statements in conformity with U.S. GAAP, which requires us to make
estimates and judgments that affect the reported amounts of assets and liabilities and related disclosures at the
date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results may differ from those estimates.
We believe the following accounting policies are the most critical in understanding the estimates and
judgments that are involved in preparing our financial statements and the uncertainties that could impact our
results of operations, financial condition and cash flows.
Revenue Recognition
We generally determine our contract fees by multiplying a contractually negotiated rate per member
per month (“PMPM”) by the number of members covered by our services during the month. We typically set
the PMPM rates during contract negotiations with customers based on the value we expect our programs to
create and a sharing of that value between the customer and the Company. In addition, some of our services,
such as the SilverSneakers fitness program, include fees that are based upon member participation.
Our contracts with health plans generally range from three to five years with provisions for subsequent
renewal; contracts with self-insured employers, either directly or through their health plans or pharmacy
benefit manager, typically have one to three-year terms. Some of our contracts allow the customer to terminate
early.
Some of our contracts provide that a portion of our fees may be refundable to the customer
(“performance-based”) if our programs do not achieve, when compared to a baseline year, a targeted
percentage reduction in the customer’s healthcare costs and selected clinical and/or other criteria that focus on
improving the health of the members. Approximately 3% of revenues recorded during 2010 were
performance-based and were subject to final reconciliation as of December 31, 2010. We anticipate that this
percentage will fluctuate due to the level of performance-based fees in new contracts and the timing and
amount of revenue recognition associated with performance-based fees. Some contracts also provide for
additional fees for incentive bonuses in excess of the contractual PMPM rate if we meet or exceed contractual
performance targets.
We generally bill our customers each month for the entire amount of the fees contractually due for the
prior month’s enrollment, which typically includes the amount, if any, that is performance-based and may be
subject to refund should we not meet performance targets. Deferred revenues arise from contracts which
permit upfront billing and collection of fees covering the entire contractual service period, generally 12
months. We typically bill for any incentive bonus after the contract is settled. Fees for service are typically
billed in the month after the services are provided.
We recognize revenue as follows: 1) we recognize the fixed portion of PMPM fees and fees for service
as revenue during the period we perform our services; 2) we recognize the performance-based portion of the
monthly fees based on the most recent assessment of our performance, which represents the amount that the
customer would legally be obligated to pay if the contract were terminated as of the latest balance sheet date;
and 3) we recognize additional incentive bonuses based on the most recent assessment of our performance, to
the extent we consider such amounts collectible.
We assess our level of performance for our contracts based on medical claims and other data that the
customer is contractually required to supply. A minimum of four to six months’ data is typically required for
us to measure performance. In assessing our performance, we may include estimates such as medical claims
27
incurred but not reported and a medical cost trend compared to a baseline year. In addition, we may also
provide contractual allowances for billing adjustments (such as data reconciliation differences) as appropriate.
In 2005, we began participating in two Medicare Health Support programs, which concluded in
January 2008 and July 2008, respectively. Substantially all of the fees under these programs were
performance-based. In late April 2009, we received the final reconciliation report from CMS’ independent
financial reconciliation contractor. We submitted our objections to the final reconciliation report and engaged
in discussions with CMS regarding our objections. Based upon this final reconciliation report as well as our
performance over the term of the programs, as of September 30, 2010, we had recognized $9.5 million of
cumulative performance-based fees related to these programs and $12.2 million of fixed fees. In December
2010 we reached a final settlement with CMS associated with our participation in both of these programs. As
a result of the settlement, we recorded additional revenues of $22.3 million during the fourth quarter of 2010,
bringing the total revenues recognized for the programs to $44.0 million. Additionally, we refunded $28.0
million, which resulted in a reduction to our contract billings in excess of earned revenue balance sheet
account during the fourth quarter of 2010.
If data is insufficient or incomplete to measure performance, or interim performance measures indicate
that we are not meeting performance targets, we do not recognize performance-based fees subject to refund as
revenues but instead record them in a current liability account entitled “contract billings in excess of earned
revenue.” Only in the event we do not meet performance levels by the end of the measurement period,
typically one year, are we contractually obligated to refund some or all of the performance-based fees. We
would only reverse revenues that we had already recognized if performance to date in the measurement period,
previously above targeted levels, subsequently dropped below targeted levels. Historically, any such
adjustments have been immaterial to our financial condition and results of operations.
During the settlement process under a contract, which generally occurs six to eight months after the
end of a contract year, we settle any performance-based fees and reconcile healthcare claims and clinical data.
As of December 31, 2010, performance-based fees that have not yet been settled with our customers but that
have been recognized as revenue in the current and prior years totaled approximately $38.8 million, all of
which was based on actual data received from our customers. Data reconciliation differences, for which we
provide contractual allowances until we reach agreement with respect to identified issues, can arise between
the customer and us due to customer data deficiencies, omissions, and/or data discrepancies.
Performance-related adjustments (including any amounts recorded as revenue that were ultimately
refunded), changes in estimates, data reconciliation differences, or adjustments to incentive bonuses may cause
us to recognize or reverse revenue in a current fiscal year that pertains to services provided during a prior
fiscal year. During fiscal 2010, we recognized a net increase in revenue of $25.8 million that related to
services provided prior to fiscal 2010, which included the aforementioned $22.3 million related to a final
settlement with CMS.
Impairment of Intangible Assets and Goodwill
We review goodwill for impairment on an annual basis (during the fourth quarter of our fiscal year) or
more frequently whenever events or circumstances indicate that the carrying value may not be recoverable. We
completed an annual goodwill impairment test as of October 31, 2010 and concluded that no impairment of
goodwill exists.
We estimate the fair value of each reporting unit using a discounted cash flow model and reconcile the
aggregate fair value of our reporting units to our consolidated market capitalization. The discounted cash flow
model requires significant judgments, including management’s estimate of future cash flows, which is
dependent on internal forecasts, estimation of the long-term growth rate for our business, the useful life over
which cash flows will occur, and determination of our weighted average cost of capital. Changes in these
28
estimates and assumptions could materially affect the estimate of fair value and goodwill impairment for each
reporting unit.
If we determined that the carrying value of goodwill was impaired based upon an impairment review,
we would calculate any impairment using a fair-value-based goodwill impairment test as required by U.S.
GAAP. The fair value of a reporting unit is the price that would be received to sell the unit as a whole in an
orderly transaction between market participants at the measurement date.
Except for certain trade names which have an indefinite life and are not subject to amortization, we
amortize identifiable intangible assets, such as acquired technologies and customer contracts, using the
straight-line method over their estimated useful lives. We assess the potential impairment of intangible assets
subject to amortization whenever events or changes in circumstances indicate that the carrying values may not
be recoverable.
We review intangible assets not subject to amortization on an annual basis or more frequently
whenever events or circumstances indicate that the assets might be impaired. We estimate the fair value of
trade names using a present value technique, which requires management’s estimate of future revenues
attributable to these trade names, estimation of the long-term growth rate for these revenues, and determination
of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect
the estimate of fair value for the trade names.
If we determine that the carrying value of other identifiable intangible assets may not be recoverable,
we calculate any impairment using an estimate of the asset’s fair value based on the estimated price that would
be received to sell the asset in an orderly transaction between market participants.
Future events could cause us to conclude that impairment indicators exist and that goodwill and/or
other intangible assets associated with our acquired businesses are impaired. Any resulting impairment loss
could have a material adverse impact on our financial condition and results of operations.
Income Taxes
The objectives of accounting for income taxes are to recognize the amount of taxes payable or
refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in an entity’s financial statements or tax returns. Accounting for income taxes
requires significant judgment in determining income tax provisions, including determination of deferred tax
assets, deferred tax liabilities, and any valuation allowances that might be required against deferred tax assets,
and in evaluating tax positions.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the
tax position will be sustained on examination by the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements from such a position should be measured
based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
U.S. GAAP also provides guidance on derecognition of income tax assets and liabilities, classification of
current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax
positions, and income tax disclosures. Judgment is required in assessing the future tax consequences of events
that have been recognized in our financial statements or tax returns. Variations in the actual outcome of these
future tax consequences could materially impact our financial position, results of operations, or cash flows.
Share-Based Compensation
We measure and recognize compensation expense for all share-based payment awards based on
estimated fair values at the date of grant. Determining the fair value of share-based awards at the grant date
29
requires judgment in developing assumptions, which involve a number of variables. These variables include,
but are not limited to, the expected stock price volatility over the term of the awards and expected stock option
exercise behavior. In addition, we also use judgment in estimating the number of share-based awards that are
expected to be forfeited.
Business Strategy
The World Health Organization defines health as “…not only the absence of infirmity and disease, but
also a state of physical, mental, and social well-being.”
Our business strategy reflects our passion to enhance health and well-being, and as a result, reduce
overall healthcare costs and improve workforce engagement, yielding better business performance for our
customers. Our programs are designed to improve well-being by helping people to:
(cid:3)
(cid:3)
(cid:3)
adopt or maintain healthy behaviors;
reduce health-related risk factors; and
(cid:120)(cid:3)
(cid:120)(cid:3)
(cid:120)(cid:3) optimize care for identified health conditions.
Through our solutions, we work to optimize the health and well-being of entire populations, one
person at a time, domestically and internationally, thereby creating value by reducing overall healthcare costs
and improving productivity for individuals, families, health plans, governments, employers and communities.
We believe it is critical to impact an entire population’s underlying health status and well-being in a
long-term, cost effective way. Believing that what gets measured gets acted upon, in January 2008, we entered
into an exclusive, 25-year relationship with Gallup to provide a national, daily pulse of individual and
collective well-being. The Gallup-Healthways Well-Being IndexTM is the result of a unique partnership in
well-being measurement and research that is based on surveys of 1,000 Americans every day, seven days a
week. Under the agreement, Gallup evaluates and reports on the well-being of individuals of countries, states
and communities; Healthways provides similar services for companies, families and individuals.
To enhance health and well-being within their respective populations, our current and prospective
customers require solutions that focus on the underlying drivers of healthcare demand, address worsening
health status, reverse or slow unsustainable cost trends, foster healthy behaviors, mitigate health risk factors,
and manage chronic conditions. Our strategy is to deliver programs that engage individuals and help them
enhance their health status and well-being regardless of their starting point. We believe we can achieve health
and well-being improvements in a population and generate significant cost savings and increases in
productivity by providing effective programs that support the individual throughout his or her health journey.
We are adding and enhancing solutions to extend our reach and effectiveness and to meet increasing
demand for integrated solutions. The flexibility of our programs allows customers to provide those services
they deem appropriate for their organizations. Customers may select from certain single program options up
to a total-population approach, in which all members of a customer’s population are eligible to receive our
services.
Our strategy includes as a priority the ongoing expansion of our value proposition through the
introduction of our total population management solution. This solution, in addition to improving individuals’
health and reducing direct healthcare costs, targets a much larger improvement in employer profitability by
reducing the impact of lost productivity for health-related reasons. With the success of our total population
management solution, we expect to gain an even greater competitive advantage in responding to employers’
needs for a healthier, higher-performing and less costly workforce.
30
Our strategy also includes the further enhancement and deployment of our proprietary next generation
technology platform known as Embrace. This platform, which is essential to our total population management
solution, enables us to integrate data from the healthcare organizations and other entities interacting with an
individual. Embrace provides for the delivery of our integrated solutions and ongoing communications
between the individual and his/her medical and health experts, using any method desired, including venue-
based face-to-face; print; phone; mobile and remote devices; on-line; emerging modalities; and any
combination thereof.
We plan to increase our competitive advantage in delivering our services by leveraging our scalable,
state-of-the-art call centers, medical information content, behavior change processes and techniques, strategic
relationships, health provider networks, fitness center relationships, and proprietary technologies and
techniques. We may add new capabilities and technologies through internal development, strategic alliances
with other entities and/or through selective acquisitions or investments.
We anticipate continuing to enhance, expand and integrate additional capabilities with health plans
and to pursue opportunities with domestic government entities and communities as well as the public and
private sectors of healthcare in international markets. In addition, the significant changes in government
regulation of healthcare may afford us expanded opportunities to provide services to health plans and
employers as well as collaborate with and/or directly provide solutions to integrated medical systems and
provider groups in the post healthcare reform marketplace.
Results of Operations
The following table shows the components of the statements of operations for the fiscal years ended
December 31, 2010 and 2009, the four months ended December 31, 2008 and 2007, and the fiscal year ended
August 31, 2008 expressed as a percentage of revenues.
Revenues
Cost of services (exclusive of depreciation
and amortization included below)
Selling, general and administrative expenses
Depreciation and amortization
Impairment loss
Restructuring and related charges
Operating income (1)
Gain on sale of investment
Interest expense
Legal settlement
Income before income taxes
Income tax expense
Year Ended
December 31,
Four Months Ended
December 31,
Year
Ended
August 31,
2010
2009
2008
2007
2008
100.0%
100.0% 100.0% 100.0%
100.0%
68.5%
10.1%
7.3%
—
1.4%
12.6%
(0.2)%
2.0%
—
10.8%
4.2%
72.9%
10.0%
6.9%
—
—
10.3%
(0.4)%
2.2%
5.6%
2.9%
1.4%
72.6%
11.4%
6.6%
1.8%
4.2%
3.5%
—
2.8%
—
0.7%
0.4%
69.9%
9.3%
5.8%
—
—
15.0%
—
3.0%
—
68.4%
9.7%
6.4%
—
—
15.4%
—
2.8%
—
11.9%
4.9%
12.6%
5.1%
Net income (1)
6.6%
1.4%
0.3%
7.0%
7.4%
(1) Figures may not add due to rounding.
31
Revenues
Revenues for fiscal 2010 increased $2.9 million, or 0.4%, over fiscal 2009, primarily due to the
following:
(cid:120)(cid:3)
(cid:120)
(cid:120)
the commencement of contracts with new customers;
the recognition of revenues in connection with a final settlement with CMS associated with our
participation in two Medicare Health Support programs; and
an increase in participation in our fitness center programs as well as in the number of members
eligible to participate in such programs.
These increases were somewhat offset by decreases in revenues primarily due to the following:
(cid:120)(cid:3)
(cid:120)
contract restructurings and terminations with certain customers; and
a decrease in performance-based revenues due to our inability to measure and achieve
performance targets on certain contracts during fiscal 2010.
Revenues for fiscal 2009 decreased $18.8 million, or 2.6%, over fiscal 2008, primarily due to the
following:
contract restructurings and terminations with certain customers; and
(cid:120)(cid:3)
(cid:120) decreased revenues related to our Medicare Health Support programs, which ended in January and
July 2008, respectively.
These decreases were somewhat offset by increases in revenues primarily due to the following:
(cid:120)(cid:3)
(cid:120)(cid:3)
the commencement of contracts with new customers;
an increase in participation in our fitness center programs as well as in the number of members
eligible to participate in such programs;
(cid:120)(cid:3) growth in the number of self-insured employer lives under existing customer contracts;
(cid:120)(cid:3)
increased performance-based revenues due to our ability to measure and achieve performance
targets on certain contracts during fiscal 2009; and
increased membership in customers’ existing programs.
(cid:120)(cid:3)
Revenues for the four months ended December 31, 2008 increased $10.5 million, or 4.5%, over
revenues for the four months ended December 31, 2007, primarily due to the following:
the commencement of new contracts;
(cid:3)
(cid:120)
(cid:120) growth in the number of self-insured employers on behalf of our health plan customers; and
(cid:120)(cid:3)
the addition of new programs or the expansion of existing programs into additional populations
with existing customers.
These increases were partially offset by decreases in revenues primarily due to contract restructurings and
terminations with certain customers, program terminations by certain customers, and the loss by some of our
health plan customers of their administrative services only (“ASO”) employer accounts.
Cost of Services
Cost of services (excluding depreciation and amortization) as a percentage of revenues for fiscal 2010
decreased to 68.5% compared to 72.9% for fiscal 2009, primarily due to the following:
32
(cid:120)
(cid:120)
(cid:120)
a decrease in the level of short-term incentive compensation based on the Company’s year-to-date
financial performance against established internal targets for these periods;
a decrease in salaries and benefits expense, primarily due to 1) a restructuring of the Company,
which was largely completed during the fourth quarter of calendar 2008 but for which some
employee terminations continued into early 2009; 2) certain employee reductions in 2010; and 3)
a net decrease in health insurance costs related to changes in employee medical plan design,
which included a number of wellness initiatives aimed at improving employee health, in 2010;
and
cost savings related to certain operational efficiencies.
These decreases were somewhat offset by the following increases in cost of services as a percentage of
revenues:
(cid:120)(cid:3)
(cid:120)(cid:3)
an increase in consulting expenses primarily related to implementation of our new Embrace
platform and the implementation of our first total population health contract; and
a higher portion of our revenue being generated by fitness center and certain health improvement
programs, which typically have a higher cost of services as a percentage of revenue than our other
programs.
Cost of services (excluding depreciation and amortization) as a percentage of revenues for fiscal 2009
increased to 72.9% compared to 68.4% for fiscal 2008, primarily due to the following:
(cid:120)
(cid:120)
(cid:120)
(cid:120)(cid:3)
an increased portion of our revenue generated by fitness center and certain health improvement
programs, which typically have a higher cost of services as a percentage of revenue than our other
programs;
the addition of certain participating locations to our fitness center network that have a higher cost
of services as a percentage of revenue;
contract restructurings with certain customers that resulted in either decreased revenues or lower
per member fees without a proportional corresponding decrease in costs; and
an increase in the level of short-term incentive compensation based on the Company’s financial
performance against established internal targets during these periods.
These increases were somewhat offset by the following decreases in cost of services as a percentage of
revenues:
(cid:120)(cid:3)
(cid:120)(cid:3)
a decrease in salaries and benefits expense, primarily due to a restructuring of the Company that
was largely completed during the fourth calendar quarter of 2008 and a decrease in health
insurance costs related to changes in employee medical plan design in fiscal 2009, which included
a number of wellness initiatives aimed at improving employee health; and
cost savings related to certain cost management initiatives.
Cost of services (excluding depreciation and amortization) as a percentage of revenues increased to
72.6% for the four months ended December 31, 2008 compared to 69.9% for the four months ended December
31, 2007, primarily due to the following:
(cid:120)
the completion of an offer to purchase from our employees, excluding the chief executive officer
and Board of Directors, outstanding options to acquire shares of common stock of the Company
that were granted between September 1, 2004 and August 15, 2008 under our shareholder-
approved stock option plans (the “Tender Offer”) on December 30, 2008. The Tender Offer
resulted in additional stock-based compensation expense within cost of services of $7.4 million,
33
representing the remaining compensation cost for these options as measured at the grant date but
not yet recognized prior to the completion of the Tender Offer;
increased member utilization of fitness centers for contracts for which we receive a fixed fee per
member;
contract restructurings with certain customers, as noted above, that resulted in decreased revenues
without a proportional corresponding decrease in costs; and
increased costs related to information technology hosting security and storage for the four months
ended December 31, 2008.
(cid:120)(cid:3)
(cid:120)
(cid:120)(cid:3)
These increases were somewhat offset by the following decreases in cost of services as a percentage of
revenues:
(cid:120) decreased costs related to the two Medicare Health Support programs in which we participated,
which ended in January 2008 and July 2008, respectively; and
cost savings related to certain cost management initiatives.
(cid:120)
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of revenues remained relatively
consistent for fiscal 2010 compared to fiscal 2009.
Selling, general and administrative expenses as a percentage of revenues increased to 10.0% for fiscal
2009 compared to 9.7% for fiscal 2008, primarily due to the following:
(cid:120)
(cid:120)
a net increase in salaries and benefits expense, primarily due to the Company restructuring in the
fourth calendar quarter of 2008, which included an increased focus on research and development
activities, resulting in an increase in personnel dedicated to these activities that more than offset
the reduction in headcount resulting from this restructuring and other workforce reductions; and
an increase in the level of short-term incentive compensation based on the Company’s financial
performance against established internal targets during these periods.
These increases were partially offset by a decrease in professional consulting fees primarily related to product
innovation and strategic and organizational design initiatives in fiscal 2008.
Selling, general and administrative expenses as a percentage of revenues increased to 11.4% for the
four months ended December 31, 2008 compared to 9.3% for the four months ended December 31, 2007,
primarily due to the completion of the Tender Offer on December 30, 2008, which resulted in additional stock-
based compensation expense within selling, general and administrative expenses of $4.1 million, representing
the remaining compensation cost for these options as measured at the grant date but not yet recognized prior to
the completion of the Tender Offer.
Depreciation and Amortization
Depreciation and amortization expense increased 7.0% for fiscal 2010 compared to fiscal 2009,
primarily due to increased depreciation expense resulting from the implementation of our new Embrace
platform and other capital expenditures related to computer software, somewhat offset by a decrease in
amortization expense related to certain intangible assets that became fully amortized in November 2009.
Depreciation and amortization expense increased 3.8% for fiscal 2009 compared to fiscal 2008,
primarily due to increased depreciation expense resulting from capital expenditures of computer software,
which we made to enhance our information technology capabilities, somewhat offset by a decrease in
amortization expense related to certain intangible assets that became fully amortized in September 2008.
34
Depreciation and amortization expense increased 18.3% for the four months ended December 31, 2008
compared to the four months ended December 31, 2007, primarily due to increased depreciation expense
resulting from capital expenditures of computer software and hardware, which we made to enhance our
information technology capabilities, and capital expenditures related to our new corporate headquarters. This
increase was partially offset by a decrease in amortization expense related to certain intangible assets that
became fully amortized in September 2008.
Restructuring and Related Charges and Impairment Loss
During fiscal 2010, we incurred net charges of $10.3 million related to a restructuring of the Company
in the fourth quarter of 2010, which primarily consisted of one-time termination benefits and costs associated
with both domestic and international capacity consolidation.
During the four months ended December 31, 2008, we incurred net charges of $10.3 million related to
a restructuring of the Company, which primarily consisted of severance costs, net of equity forfeitures, and
capacity consolidation costs.
In December 2008, we decided to discontinue offering one of our products as a standalone program.
As a result of this decision we did not renew the expiring trade name associated with this product and recorded
an impairment loss of $4.3 million during the four months ended December 31, 2008 to write off this
intangible asset.
Gain on Sale of Investment
In January 2009, a private company in which we held preferred stock was acquired by a third
party. As part of this sale, we received two payments totaling $11.6 million in January and February 2009 and
recorded a gain of $2.6 million during the first quarter of 2009. During the second quarter of 2010, we
recognized a gain of $1.2 million related to the receipt of a final escrow payment.
Interest Expense
Interest expense for fiscal 2010 decreased $1.6 million compared to fiscal 2009, primarily as a result
of a decrease in floating interest rates on outstanding borrowings as well as a lower average level of
outstanding borrowings under our credit agreement during fiscal 2010 compared to fiscal 2009.
Interest expense for fiscal 2009 decreased $5.2 million compared to fiscal 2008, primarily as a result
of a decrease in floating interest rates on outstanding borrowings under our credit agreement during fiscal 2009
compared to fiscal 2008.
Interest expense for the four months ended December 31, 2008 decreased $0.4 million compared to the
four months ended December 31, 2007, primarily as a result of a decrease in interest rates on outstanding
borrowings somewhat offset by a higher average level of outstanding borrowings under our credit agreement
during the four months ended December 31, 2008 compared to the four months ended December 31, 2007.
Legal Settlement and Related Costs
In March 2009, our Board of Directors approved a settlement of a qui tam lawsuit filed in 1994 on
behalf of the United States government related to the Company’s former Diabetes Treatment Center of
America business. As a result of the settlement, which was effective as of April 1, 2009, we incurred a charge
of approximately $40 million, including a $28 million payment to the United States government and payment
35
of approximately $12 million for other costs and fees related to the settlement, including the estimated legal
costs and expenses of the plaintiff’s attorneys.
Income Tax Expense
Our effective tax rate decreased to 39.1% for fiscal 2010 compared to 49.4% for fiscal 2009, primarily
due to the relatively small base of pretax income for fiscal 2009 in relation to certain unrecognized tax benefits
and non-deductible expenses, in addition to the favorable impact on the effective tax rate of two earn-out
adjustments recorded during fiscal 2010 (see Note 7). These favorable impacts on the effective tax rate were
partially offset by an increase during 2010 in the level of certain expenses related to international operations
for which we do not receive a tax benefit.
Our effective tax rate increased to 49.4% for fiscal 2009 compared to 40.8% for fiscal 2008, primarily
due to a relatively small base of pretax income for fiscal 2009 in relation to both the lack of tax benefit on
certain expenses incurred in international initiatives and certain non-deductible expenses.
Our effective tax rate increased to 57.9% for the four months ended December 31, 2008 compared to
41.1% for the four months ended December 31, 2007, primarily due to a relatively small base of pretax income
for the four months ended December 31, 2008 in relation to the lack of tax benefit on certain expenses incurred
in international initiatives, the impact of tax interest accruals, and the impact of certain non-deductible
expenses for income tax purposes.
Outlook
We anticipate that revenues for fiscal 2011 will likely decrease slightly as compared to fiscal 2010
primarily due to the recognition during fiscal 2010 of revenues in connection with a final settlement with CMS
associated with our participation in two Medicare Health Support programs.
We expect cost of services and selling, general and administrative expenses as a percentage of
revenues for fiscal 2011 to increase compared to fiscal 2010 primarily due to implementation costs associated
with significant new and innovative contracts and investments in longer term initiatives to position our
company for new and evolving markets. We anticipate depreciation and amortization expense for fiscal 2011
will remain relatively consistent with fiscal 2010.
As discussed in “Liquidity and Capital Resources” below, a significant portion of our long-term debt
is subject to fixed interest rate swap agreements; however, we cannot predict the potential for changes in
interest rates, which would impact our variable rate debt. We anticipate that our effective tax rate for fiscal
2011 will increase slightly over 2010 due to certain events in 2010 that we do not expect to recur in 2011;
however, we continue to evaluate the impact on our effective tax rate of both international operations and any
future adjustments related to uncertain tax positions.
Liquidity and Capital Resources
Operating activities for fiscal 2010 generated cash of $72.9 million compared to $112.9 million for
fiscal 2009. The decrease in operating cash flow resulted primarily from the following:
(cid:120) payments during fiscal 2010 related to short-term incentive compensation earned and accrued
over the sixteen months ended December 31, 2009;
(cid:120) payments during fiscal 2010 related to a final settlement with CMS; and
(cid:120) payments during 2010 related to several significant vendor invoices accrued at December 31,
2009.
36
These decreases were somewhat offset by increases in operating cash flow primarily related to the following:
(cid:120) payments during fiscal 2009 related to the aforementioned legal settlement and related costs and
fees;
(cid:120) payments during fiscal 2009 related to a restructuring of the Company that was largely completed
during the fourth quarter of calendar 2008, which primarily consisted of severance costs and costs
associated with capacity consolidation; and
income tax payments, which were higher during fiscal 2009 primarily due to a change in the
timing of estimated tax payments resulting from the change in our fiscal year.
(cid:120)
Investing activities during fiscal 2010 used $48.8 million in cash, which primarily consisted of capital
expenditures associated with our new Embrace platform.
Financing activities during fiscal 2010 used $25.4 million in cash primarily due to net payments on
borrowings under our credit agreement and repurchases of our common stock.
On March 30, 2010, we entered into the Fourth Amended and Restated Credit Agreement (the “Fourth
Amended Credit Agreement”). The Fourth Amended Credit Agreement provides us with a $55.0 million
revolving credit facility from March 30, 2010 to December 1, 2011 (the “2011 Revolving Credit Facility”) and
a $345.0 million revolving credit facility from March 30, 2010 to December 1, 2013 (the “2013 Revolving
Credit Facility”), including a swingline sub facility of $20.0 million and a $75.0 million sub facility for letters
of credit. The Fourth Amended Credit Agreement also provides a continuation of the term loan facility
provided pursuant to the Third Amended and Restated Credit Agreement, of which $192.0 million remained
outstanding on December 31, 2010, and an uncommitted incremental accordion facility of $200.0 million. As
of December 31, 2010, availability under our revolving credit facility totaled $297.4 million as calculated
under the most restrictive covenant.
Revolving advances under the Fourth Amended Credit Agreement are drawn first under the 2013
Revolving Credit Facility, with any advances in excess of $345.0 million being drawn under the 2011
Revolving Credit Facility. Revolving advances under the 2013 Revolving Credit Facility generally bear
interest, at our option, at 1) LIBOR plus a spread of 1.875% to 2.750% or 2) the greater of the federal funds
rate plus 0.5%, or the prime rate, plus a spread of 0.375% to 1.250%. Revolving advances under the 2011
Revolving Credit Facility generally bear interest, at our option, at 1) LIBOR plus a spread of 0.875% to
1.750% or 2) the greater of the federal funds rate plus 0.5%, or the prime rate, plus a spread of 0.000% to
0.250%. Term loan borrowings bear interest, at our option, at 1) LIBOR plus 1.50% or 2) the greater of the
federal funds rate plus 0.5%, or the prime rate. See below for a description of our interest rate swap
agreements. The Fourth Amended Credit Agreement also provides for a fee ranging between 0.150% and
0.300% of the unused commitments under the 2011 Revolving Credit Facility and 0.275% and 0.425% of the
unused commitments under the 2013 Revolving Credit Facility. The Fourth Amended Credit Agreement is
secured by guarantees from most of the Company’s domestic subsidiaries and by security interests in
substantially all of the Company’s and such subsidiaries’ assets.
We are required to repay outstanding revolving loans on the applicable commitment termination date,
which is December 1, 2011 for the 2011 Revolving Credit Facility and December 1, 2013 for the 2013
Revolving Credit Facility. We are required to repay term loans in quarterly principal installments aggregating
$0.5 million each, which commenced on March 31, 2007. The entire unpaid principal balance of the term
loans is due and payable at maturity on December 1, 2013.
The Fourth Amended Credit Agreement contains various financial covenants, which require us to
maintain, as defined, ratios or levels of 1) total funded debt to EBITDA, 2) fixed charge coverage, and 3) net
worth. The Fourth Amended Credit Agreement also restricts the payment of dividends and limits the amount
37
of repurchases of the Company’s common stock. As of December 31, 2010, we were in compliance with all of
the covenant requirements of the Fourth Amended Credit Agreement.
In order to reduce our exposure to interest rate fluctuations on our floating rate debt commitments, we
maintain interest rate swap agreements with original notional amounts of $275.0 million ($115.0 million of
which become effective in January 2012) and with termination dates ranging from March 30, 2011 to
December 31, 2013. These interest rate swap agreements effectively modify our exposure to interest rate risk
by converting a portion of our floating rate debt to fixed obligations with interest rates ranging from 3.375% to
3.855%, thus reducing the impact of interest rate changes on future interest expense. Under these agreements,
we receive a variable rate of interest based on LIBOR, and we pay a fixed rate of interest.
We believe that cash flows from operating activities, our available cash, and our anticipated available
credit under the Fourth Amended Credit Agreement will continue to enable us to meet our contractual
obligations and to fund our current operations for the foreseeable future. However, if our operations require
significant additional financing resources, such as capital expenditures for technology improvements,
additional call centers and/or letters of credit or other forms of financial assurance to guarantee our
performance under the terms of new contracts, or if we are required to refund performance-based fees pursuant
to contract terms, we may need to raise additional capital by expanding our existing credit facility and/or
issuing debt or equity. If we face a limited ability to arrange such financing, it may restrict our ability to
effectively operate our business. We cannot assure you that we would always be able to secure additional
financing if needed and, if such funds were available, whether the terms or conditions would be acceptable to
us.
If contract development accelerates or acquisition opportunities arise, we may need to issue additional
debt or equity to provide the funding for these increased growth opportunities. We may also issue equity in
connection with future acquisitions or strategic alliances. We cannot assure you that we would be able to issue
additional debt or equity on terms that would be acceptable to us.
Contractual Obligations
The following schedule summarizes our contractual cash obligations by the indicated period as of
December 31, 2010:
(In $000s)
Deferred compensation plan payments (1)
Long-term debt (2)
Operating lease obligations (3)
Capital lease obligations (4)
Purchase obligations
Other contractual cash obligations (5)
Total contractual cash obligations (6)
Payments Due By Year Ended December 31,
2012 -
2014 -
2016 and
$
2011
3,675
15,167
15,043
1,580
9,432
15,952
$ 60,849
$
$
2013
10,455
260,332
25,900
3,160
—
13,921
313,768
$
$
2015
993
—
19,769
1,185
—
2,000
23,947
$
After
5,516
—
48,289
—
—
17,000
$ 70,805
$
$
Total
20,639
275,499
109,001
5,925
9,432
48,873
469,369
(1) Includes scheduled payments under a non-qualified deferred compensation plan and long-term performance
cash awards.
(2) Includes scheduled principal payments, repayment of outstanding revolving loans, and estimated interest
payments on outstanding borrowings under our credit agreement. Estimated interest payments are as follows:
$13.1 million for fiscal 2011 and $21.0 million for fiscal 2012 and 2013 combined.
38
(3) Excludes total sublease income of $1.9 million.
(4) Includes scheduled principal payments and estimated interest payments on capital lease obligations.
Estimated interest payments are as follows: $0.3 million for fiscal 2011 and $0.3 million for fiscal 2012 and
2013 combined.
(5) Other contractual cash obligations primarily represent a perpetual license agreement and 25-year strategic
relationship agreement that we entered into in January 2008. We have remaining contractual cash obligations
of $30.0 million related to these agreements, $10.0 million of which will occur ratably during the next two
years, and the remaining $20.0 million of which will occur ratably over the following 20 years.
(6) We have excluded long-term liabilities of $1.1 million related to uncertain tax positions as we are unable to
reasonably estimate the timing of these payments in individual years due to uncertainties in the timing of
effective settlement of tax positions.
Recently Issued Accounting Standards
In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06, “Improving
Disclosures about Fair Value Measurements”, an amendment to ASC Topic 820, “Fair Value Measurements
and Disclosures”. This amendment requires an entity to: 1) disclose separately the amounts of significant
transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers
and 2) present separate information for Level 3 activity pertaining to gross purchases, sales, issuances, and
settlements (rather than presenting such information on a net basis). ASU No. 2010-06 is effective for the
Company for interim and annual reporting periods beginning after December 15, 2009, except for item 2)
above, which is effective for interim and annual reporting periods beginning after December 15, 2010. The
adoption of item 1) of this ASU did not have a material impact on our results of operations or statement of
financial position. We expect the adoption of item 2) above will not have a material impact on the results of
operations or statement of financial position.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are subject to market risk related to interest rate changes, primarily as a result of the Fourth
Amended Credit Agreement, which bears interest based on floating rates. Revolving advances under the 2011
Revolving Credit Facility generally bear interest, at our option, at 1) LIBOR plus a spread of 0.875% to
1.750% or 2) the greater of the federal funds rate plus 0.5%, or the prime rate, plus a spread of 0.000% to
0.250%. Revolving advances under the 2013 Revolving Credit Facility generally bear interest, at our option,
at 1) LIBOR plus a spread of 1.875% to 2.750% or 2) the greater of the federal funds rate plus 0.5%, or the
prime rate, plus a spread of 0.375% to 1.250%. Term loan borrowings bear interest, at our option, at 1)
LIBOR plus 1.50% or 2) the greater of the federal funds rate plus 0.5%, or the prime rate.
In order to manage our interest rate exposure under the Fourth Amended Credit Agreement, we have
entered into interest rate swap agreements effectively converting our floating rate debt to fixed obligations
with interest rates ranging from 3.375% to 3.855%.
A one-point interest rate change would have resulted in interest expense fluctuating approximately
$0.9 million for fiscal 2010.
As a result of our investment in international initiatives, as of December 31, 2010 we are also exposed
to foreign currency exchange rate risks. Because a significant portion of these risks is economically hedged
with currency options and forwards contracts and because our international initiatives are not yet material to
our consolidated results of operations, a 10% change in foreign currency exchange rates would not have had a
39
material impact on our results of operations or financial position for fiscal 2010. We do not execute
transactions or hold derivative financial instruments for trading purposes.
40
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Healthways, Inc.
We have audited the accompanying consolidated balance sheets of Healthways, Inc. as of December 31, 2010
and 2009 and the related consolidated statements of operations, stockholders' equity, and cash flows for the
years ended December 31, 2010 and 2009, the four months ended December 31, 2008 and the year ended
August 31, 2008. These financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Healthways, Inc. at December 31, 2010 and 2009 and the consolidated
results of its operations and its cash flows for the years ended December 31, 2010 and 2009, the fourth months
ended December 31, 2008 and the year ended August 31, 2008, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), Healthways, Inc.’s internal control over financial reporting as of December 31, 2010, based on
criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March15, 2011 expressed an unqualified
opinion thereon.
/s/ Ernst & Young LLP
Nashville, Tennessee
March 15, 2011
41
Item 8. Financial Statements and Supplementary Data
HEALTHWAYS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net
Prepaid expenses
Other current assets
Income taxes receivable
Deferred tax asset
Total current assets
Property and equipment:
Leasehold improvements
Computer equipment and related software
Furniture and office equipment
Capital projects in process
Less accumulated depreciation
Other assets
Customer contracts, net
Other intangible assets, net
Goodwill, net
December 31,
December 31,
2010
2009
$
1,064 $
89,108
12,577
3,064
8,695
11,272
125,780
2,356
100,833
10,433
4,945
6,452
24,197
149,216
40,662
207,077
27,328
10,117
285,184
(154,528)
130,656
40,609
166,448
28,096
23,052
258,205
(134,046)
124,159
14,733
11,498
23,654
70,601
496,265
29,343
71,704
496,446
Total assets
$
861,689 $
882,366
See accompanying notes to the consolidated financial statements.
42
HEALTHWAYS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued salaries and benefits
Accrued liabilities
Deferred revenue
Contract billings in excess of earned revenue
Current portion of long-term debt
Current portion of long-term liabilities
Total current liabilities
Long-term debt
Long-term deferred tax liability
Other long-term liabilities
Stockholders’ equity:
Preferred stock
$
December 31,
2010
December 31,
2009
$
22,555
39,157
31,532
5,931
18,814
3,935
3,309
125,233
243,425
23,050
39,140
29,171
58,212
25,004
4,639
70,440
2,192
3,854
193,512
254,345
14,617
42,615
$.001 par value, 5,000,000 shares
authorized, none outstanding
Common stock
$.001 par value, 120,000,000 and 75,000,000 shares authorized,
34,018,706 and 33,858,917 shares outstanding
Additional paid-in capital
Retained earnings
Treasury stock, at cost, 429,654 and 0 shares in treasury
Accumulated other comprehensive loss
Total stockholders’ equity
—
—
34
232,524
206,210
(4,494)
(3,433)
430,841
34
222,472
158,880
—
(4,109)
377,277
Total liabilities and stockholders’ equity
$
861,689
$
882,366
See accompanying notes to the consolidated financial statements.
43
HEALTHWAYS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except earnings per share data)
Year Ended December 31,
Four Months Ended
December 31,
Year Ended
August 31,
2010
720,333 $
$
2009
2008
717,426 $
244,737 $
2008
736,243
Revenues
Cost of services (exclusive of depreciation
and amortization of $39,203, $35,433,
$11,805, and $34,105, respectively,
included below)
Selling, general and administrative
expenses
Depreciation and amortization
Impairment loss
Restructuring and related charges
Operating income
Gain on sale of investment
Interest expense
Legal settlement and related costs
Income before income taxes
Income tax expense
Net income
Earnings per share:
Basic
Diluted
$
$
$
Weighted average common shares and
equivalents
Basic
Diluted
493,713
522,999
177,651
503,940
72,830
52,756
—
10,258
90,776
(1,163)
14,164
—
77,775
30,445
71,535
49,289
—
—
73,603
(2,581))
15,717
39,956
20,511
10,137
27,790
16,188
4,344
10,264
8,500
—
6,757
—
1,743
1,009
71,342
47,479
—
—
113,482
—
20,927
—
92,555
37,740
47,330 $
10,374 $
734 $
54,815
1.39 $
0.31 $
0.02 $
1.57
1.36 $
0.30 $
0.02 $
1.50
34,129
34,902
33,730
34,359
33,616
34,038
34,977
36,597
See accompanying notes to the consolidated financial statements.
44
HEALTHWAYS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
Additional
Preferred Common
Stock
Stock
Paid-in
Capital
$—
$35 $188,126
Accumulated
Other
Retained
Treasury Comprehensive
Earnings
$174,641
Stock
—
Income (Loss)
$(52)
Total
$362,750
Balance, August 31, 2007
Cumulative effect of a change in accounting
principle – adoption of FIN 48
Comprehensive income:
Net income
Net change in fair value of interest rate
swap, net of income tax benefit of $1,064
Foreign currency translation adjustment
Total comprehensive income
Repurchases of common stock
Exercise of stock options and other
Tax benefit of option exercises
Share-based employee compensation expense
Balance, August 31, 2008
Comprehensive income:
Net income
Net change in fair value of interest rate
swaps, net of income tax benefit of $3,371
Change in fair value of investment, net of
income taxes of $1,094
Foreign currency translation adjustment
Total comprehensive loss
Write-off of deferred tax assets related to the
repurchase of stock options
Exercise of stock options
Tax effect of option exercises
Share-based employee compensation expense
Balance, December 31, 2008
Comprehensive income:
Net income
Net change in fair value of interest rate
swaps, net of income taxes of $1,783
Change in fair value of investment, net of
income tax benefit of $49
Sale of investment, net of income taxes of
$1,045
Foreign currency translation adjustment
Total comprehensive income
Repurchase of stock options
Exercise of stock options
Tax effect of option exercises
—
—
—
—
—
—
—
—
$—
—
—
—
—
—
—
—
—
$—
—
—
—
—
—
—
—
—
—
—
—
—
(687)
54,815
—
—
—
—
—
(13,341)
(2)
6,710
1
—
9,893
— 16,530
$34 $207,918
(80,997)
—
—
—
$147,772
734
—
—
—
—
—
—
—
$148,506
10,374
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— (9,088)
56
—
—
(340)
— 14,915
$34 $213,461
—
—
—
—
—
—
—
—
—
—
(736)
—
—
727
— (1,193)
45
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(687)
54,815
(1,510)
172
—
—
—
—
$(1,390 )
(1,510)
172
53,477
(94,340)
6,711
9,893
16,530
$354,334
—
734
(5,007)
(5,007)
1,607
(175)
1,607
(175)
(2,841)
—
—
—
—
$(4,965 )
(9,088)
56
(340)
14,915
$357,036
—
10,374
2,418
2,418
(71)
(71)
(1,536)
45
—
—
—
(1,536)
45
11,230
(736)
727
(1,193)
Share-based employee compensation expense
Balance, December 31, 2009
Comprehensive income:
Net income
Net change in fair value of interest rate
swap, net of income taxes of $12
Foreign currency translation adjustment
Total comprehensive income
Repurchases of common stock
Exercise of stock options
Tax effect of stock options and restricted
stock units
Share-based employee compensation expense
Balance, December 31, 2010
—
$—
—
—
—
—
—
—
—
$—
— 10,213
—
$34 $222,472
$158,880
—
—
—
—
—
—
—
—
—
1,133
— (2,531)
— 11,450
$34 $232,524
47,330
—
—
—
—
—
—
—
—
—
—
—
(4,494)
—
—
—
—
10,213
$(4,109 )
$377,277
—
47,330
20
656
—
—
20
656
48,006
(4,494)
1,133
—
—
$(3,433 )
(2,531)
11,450
$430,841
$206,210 $(4,494)
See accompanying notes to the consolidated financial statements.
46
HEALTHWAYS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities, net of business acquisitions:
Depreciation and amortization
Gain on sale of investment
Loss on disposal of property and equipment
Impairment loss
Amortization of deferred loan costs
Share-based employee compensation expense
Excess tax benefits from share-based payment arrangements
Decrease (increase) in accounts receivable, net
(Increase) decrease in other current assets
(Decrease) increase in accounts payable
(Decrease) increase in accrued salaries and benefits
(Decrease) increase in other current liabilities
Deferred income taxes
Other
(Increase) decrease in other assets
Payments on other long-term liabilities
Net cash flows provided by operating activities
Cash flows from investing activities:
Acquisition of property and equipment
Sale of investment
Business acquisitions, net of cash acquired, and equity investments
Change in restricted cash
Other
Net cash flows used in investing activities
Cash flows from financing activities:
Proceeds from issuance of long-term debt
Deferred loan costs
Repurchases of common stock
Repurchase of stock options
Excess tax benefits from share-based payment arrangements
Exercise of stock options
Payments of long-term debt
Change in outstanding checks and other
Net cash flows used in financing activities
Effect of exchange rate changes on cash
Net decrease in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosure of cash flow information:
Cash paid during the period for interest
Cash paid during the period for income taxes
Noncash Activities:
Assets acquired through capital lease obligation and exchange of
noncash assets
See accompanying notes to the consolidated financial statements.
Year Ended December 31,
2010
2009
Four Months
Ended December
31,
2008
Year Ended
August 31,
2008
$
47,330
$
10,374
$
734
$
54,815
52,756
(1,163)
160
-
1,827
11,450
(1,067)
12,207
(159)
(2,256)
(19,715)
(45,206)
16,682
4,424
(1,121)
(3,262)
72,887
(44,431)
1,163
-
-
(5,581)
(48,849)
656,997
(3,219)
(4,494)
-
1,067
1,133
(673,188)
(3,717)
(25,421)
91
(1,292)
2,356
1,064
49,289
(2,581)
1,584
-
1,518
10,213
(381)
14,352
(1,972)
6,565
24,991
(11,067)
8,076
6,049
(172)
(3,970)
112,868
(49,110)
11,626
(19,486)
(538)
(4,918)
(62,426)
405,400
(784)
-
(736)
381
727
(457,303)
(1,113)
(53,428)
185
(2,801)
5,157
2,356
16,188
-
1,568
4,344
415
14,915
(68)
(1,796)
(3,011)
(3,620)
1,549
3,374
(14,133)
1,672
540
(504)
22,167
(13,753)
-
(449)
-
(2,208)
(16,410)
55,000
(290)
-
-
68
56
(96,825)
6,149
(35,842)
47,479
-
-
-
1,168
16,530
(9,480)
(33,131)
3,927
2,516
12,652
11,491
(10,835)
11,761
(1,367)
(2,220)
105,306
(82,521)
-
-
(452)
(3,690)
(86,663)
85,420
-
(94,340)
-
9,480
6,711
(38,327)
-
(31,056)
-
-
(30,085)
(12,413)
35,242
5,157
47,655
35,242
12,137
13,231
$
$
12,717
18,390
$
$
8,297
10,914
$
$
19,117
41,249
8,435
-
-
-
$
$
$
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2010 and 2009, Four Months Ended December 31, 2008, and Year Ended
August 31, 2008
1.
Summary of Significant Accounting Policies
Healthways, Inc. and its wholly-owned subsidiaries provide specialized, comprehensive solutions to
help people improve physical, emotional and social well-being, reducing both direct healthcare costs and the
costs associated with the loss of health-related employee productivity. In North America, our customers
include health plans, governments, employers, pharmacy benefit managers, and hospitals in all 50 states, the
District of Columbia and Puerto Rico. We also provide health improvement programs and services in Brazil
and Australia.
a. Principles of Consolidation - The consolidated financial statements include the accounts of the
Company and its subsidiaries, all of which are wholly-owned. We have eliminated all intercompany profits,
transactions and balances.
b. Cash and Cash Equivalents - Cash and cash equivalents primarily include cash, tax-exempt debt
instruments, commercial paper, and other short-term investments with original maturities of less than three
months.
c. Accounts Receivable, net - Billed receivables primarily represent fees that are contractually due in
the ordinary course of providing our services, net of contractual adjustments and allowances for doubtful
accounts. Unbilled receivables primarily represent fees for services based on the estimated utilization of
fitness facilities and are generally billed in the following month. Historically, we have experienced minimal
instances of customer non-payment and therefore consider our accounts receivable to be collectible, but we
provide reserves, when appropriate, for doubtful accounts and for billing adjustments (such as data
reconciliation differences) on a specific identification basis.
d. Property and Equipment - Property and equipment is carried at cost and includes expenditures that
increase value or extend useful lives. We recognize depreciation using the straight-line method over useful
lives of three to seven years for computer software and hardware and four to seven years for furniture and
other office equipment. Leasehold improvements are depreciated over the shorter of the estimated life of the
asset or the life of the lease, which ranges from two to fifteen years. Depreciation expense for the years ended
December 31, 2010 and 2009, the four months ended December 31, 2008, and the year ended August 31, 2008
was $40.4 million, $36.6 million, $12.1 million, and $31.5 million, respectively, including amortization of
assets recorded under capital leases.
e. Other Assets - Other assets consist primarily of long-term investments and deferred loan costs net
of accumulated amortization.
f. Intangible Assets - Intangible assets are initially recognized and measured at cost. Intangible assets
subject to amortization primarily include customer contracts, acquired technology, patents, distributor and
provider networks, and other intangible assets which we amortize on a straight-line basis over estimated useful
lives ranging from three to 25 years. We assess the potential impairment of intangible assets subject to
amortization whenever events or changes in circumstances indicate that the carrying values may not be
recoverable.
Intangible assets not subject to amortization at December 31, 2010 and 2009 consist of trade names of
$29.9 million. We review intangible assets not subject to amortization on an annual basis or more frequently
48
whenever events or circumstances indicate that the assets might be impaired. See Note 4 for further
information on intangible assets.
g. Goodwill - We recognize goodwill for the excess of the purchase price over the fair value of
tangible and identifiable intangible net assets of businesses that we acquire.
We review goodwill at the reporting unit level (operating segment or one level below an operating
segment) on an annual basis or more frequently whenever events or circumstances indicate that the carrying
value may not be recoverable. We estimate the fair value of each reporting unit using a discounted cash flow
model and reconcile the aggregate fair value of our reporting units to our consolidated market capitalization.
We allocate goodwill to reporting units based on the reporting unit expected to benefit from the combination.
We completed our annual impairment test during our fourth quarter and concluded that no impairment of
goodwill exists.
h. Contract Billings in Excess of Earned Revenue - Contract billings in excess of earned revenue
primarily represent performance-based fees subject to refund that we have not recognized as revenues because
either 1) data from the customer is insufficient or incomplete to measure performance; or 2) interim
performance measures indicate that we are not currently meeting performance targets.
i. Income Taxes - We file a consolidated federal income tax return that includes all of our domestic
wholly-owned subsidiaries. U.S. GAAP generally requires that we record deferred income taxes for the tax
effect of differences between the book and tax bases of our assets and liabilities. We recognize the tax benefit
from an uncertain tax position only if it is more likely than not that the tax position will be sustained on
examination by the taxing authorities, based on the technical merits of the position. The tax benefits
recognized in the financial statements from such a position are measured based on the largest benefit that has a
greater than 50% likelihood of being realized upon ultimate settlement.
j. Revenue Recognition - We generally determine our contract fees by multiplying a contractually
negotiated rate per member per month (“PMPM”) by the number of members covered by our services during
the month. We typically set the PMPM rates during contract negotiations with customers based on the value
we expect our programs to create and a sharing of that value between the customer and the Company. In
addition, some of our services, such as the SilverSneakers fitness program, include fees that are based upon
member participation.
Some of our contracts provide that a portion of our fees may be refundable to the customer
(“performance-based”) if our programs do not achieve, when compared to a baseline year, a targeted
percentage reduction in the customer’s healthcare costs and selected clinical and/or other criteria that focus on
improving the health of the members. Approximately 3% of revenues recorded during fiscal 2010 were
performance-based and were subject to final reconciliation as of December 31, 2010. We anticipate that this
percentage will fluctuate due to the level of performance-based fees in new contracts and the timing and
amount of revenue recognition associated with performance-based fees. Some contracts also provide for
additional fees for incentive bonuses in excess of the contractual PMPM rate if we meet or exceed contractual
performance targets.
We generally bill our customers each month for the entire amount of the fees contractually due for the
prior month’s enrollment, which typically includes the amount, if any, that is performance-based and may be
subject to refund should we not meet performance targets. Deferred revenues can arise from contracts which
permit upfront billing and collection of fees covering the entire contractual service period, generally 12
months. We typically bill for any incentive bonus after the contract is settled. Fees for service are typically
billed in the month after the services are provided.
49
We recognize revenue as follows: 1) we recognize the fixed portion of PMPM fees and fees for service
as revenue during the period we perform our services; 2) we recognize the performance-based portion of the
monthly fees based on the most recent assessment of our performance, which represents the amount that the
customer would legally be obligated to pay if the contract were terminated as of the latest balance sheet date;
and 3) we recognize additional incentive bonuses based on the most recent assessment of our performance, to
the extent we consider such amounts collectible.
We assess our level of performance for our contracts based on medical claims and other data that the
customer is contractually required to supply. A minimum of four to six months’ data is typically required for
us to measure performance. In assessing our performance, we may include estimates such as medical claims
incurred but not reported and a medical cost trend compared to a baseline year. In addition, we may also
provide contractual allowances for billing adjustments (such as data reconciliation differences) as appropriate.
In 2005, we began participating in two Medicare Health Support programs, which concluded in
January 2008 and July 2008, respectively. Substantially all of the fees under these programs were
performance-based. In late April 2009, we received the final reconciliation report from CMS’ independent
financial reconciliation contractor. We submitted our objections to the final reconciliation report and engaged
in discussions with CMS regarding our objections. Based upon this final reconciliation report as well as our
performance over the term of the programs, as of September 30, 2010, we had recognized $9.5 million of
cumulative performance-based fees related to these programs and $12.2 million of fixed fees. In December
2010 we reached a final settlement with CMS associated with our participation in both of these programs. As
a result of the settlement, we recorded additional revenues of $22.3 million during the fourth quarter of 2010,
bringing the total revenues recognized for the programs to $44.0 million. Additionally, we refunded $28.0
million, which resulted in a reduction to our contract billings in excess of earned revenue balance sheet
account during the fourth quarter of 2010.
If data is insufficient or incomplete to measure performance, or interim performance measures indicate
that we are not meeting performance targets, we do not recognize performance-based fees subject to refund as
revenues but instead record them in a current liability account entitled “contract billings in excess of earned
revenue.” Only in the event we do not meet performance levels by the end of the measurement period,
typically one year, are we contractually obligated to refund some or all of the performance-based fees. We
would only reverse revenues that we had already recognized if performance to date in the measurement period,
previously above targeted levels, subsequently dropped below targeted levels. Historically, any such
adjustments have been immaterial to our financial condition and results of operations.
During the settlement process under a contract, which generally occurs six to eight months after the
end of a contract year, we settle any performance-based fees and reconcile healthcare claims and clinical data.
As of December 31, 2010, performance-based fees that have not yet been settled with our customers but that
have been recognized as revenue in the current and prior years totaled approximately $38.8 million, all of
which was based on actual data received from our customers. Data reconciliation differences, for which we
provide contractual allowances until we reach agreement with respect to identified issues, can arise between
the customer and us due to customer data deficiencies, omissions, and/or data discrepancies.
Performance-related adjustments (including any amounts recorded as revenue that were ultimately
refunded), changes in estimates, data reconciliation differences, or adjustments to incentive bonuses may cause
us to recognize or reverse revenue in a current fiscal year that pertains to services provided during a prior
fiscal year. During fiscal 2010, we recognized a net increase in revenue of approximately $25.8 million that
related to services provided prior to fiscal 2010.
k. Earnings Per Share – We calculate basic earnings per share using weighted average common shares
outstanding during the period. We calculate diluted earnings per share using weighted average common shares
50
outstanding during the period plus the effect of all dilutive potential common shares outstanding during the
period. See Note 18 for a reconciliation of earnings per share.
l. Share-Based Compensation – We recognize all share-based payments to employees, including
grants of employee stock options, in the statement of operations based on their fair values. See Note 14 for
further information on share-based compensation.
m. Derivative Instruments and Hedging Activities – We record all derivatives at estimated fair value
as either assets or liabilities on the balance sheet and recognize the unrealized gains and losses in either the
balance sheet or statement of operations, depending on whether the derivative is designated as a hedging
instrument. As permitted under our master netting arrangements, the fair value amounts of our derivative
instruments are presented on a net basis by counterparty in the consolidated balance sheet. See Note 6 for
further information.
n. Management Estimates – In preparing our consolidated financial statements in conformity with
generally accepted accounting principles, management must make estimates and assumptions that affect: 1) the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements; and 2) the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
o. Fiscal Year - In August 2008, our Board of Directors approved a change in our fiscal year-end from
August 31 to December 31. Accordingly, our 2009 fiscal year began on January 1, 2009 following a four-
month transition period ended December 31, 2008. References herein to fiscal 2009 refer to the year ended
December 31, 2009; references herein to fiscal 2008 refer to the year ended August 31, 2008.
2.
Recently Issued Accounting Standards
In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06, “Improving
Disclosures about Fair Value Measurements”, an amendment to ASC Topic 820, “Fair Value Measurements
and Disclosures”. This amendment requires an entity to: 1) disclose separately the amounts of significant
transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers
and 2) present separate information for Level 3 activity pertaining to gross purchases, sales, issuances, and
settlements (rather than presenting such information on a net basis). ASU No. 2010-06 is effective for the
Company for interim and annual reporting periods beginning after December 15, 2009, except for item 2)
above, which is effective for interim and annual reporting periods beginning after December 15, 2010. The
adoption of item 1) of this ASU did not have a material impact on our results of operations or statement of
financial position. We expect the adoption of item 2) above will not have a material impact on the results of
operations or statement of financial position.
3.
Goodwill
The change in carrying amount of goodwill during the four months ended December 31, 2008 and the years
ended December 31, 2009 and 2010 is shown below:
(In $000s)
Balance, August 31, 2008
Earn-out payments
Balance, December 31, 2008
HealthHonors purchase
Balance, December 31, 2009
HealthHonors purchase price adjustment
Balance, December 31, 2010
$
$
484,305
291
484,596
11,850
496,446
(181)
496,265
51
In October 2009, we acquired HealthHonors, a behavioral economics company that specializes in
behavior change science and optimized use of incentives, for a net cash payment of $14.5 million and a multi-
year earn-out arrangement with an acquisition date fair value of $3.0 million.
4.
Intangible Assets
Intangible assets subject to amortization at December 31, 2010 consisted of the following:
(In $000s)
Gross Carrying
Amount
Accumulated
Amortization
Net
Customer contracts
Acquired technology
Patents
Distributor and provider networks
Other
Total
$
$
55,240
26,757
23,987
8,709
17,487
132,180
$
$
31,586
21,090
7,771
4,986
2,442
67,875
$ 23,654
5,667
16,216
3,723
15,045
$ 64,305
Intangible assets subject to amortization at December 31, 2009 consisted of the following:
(In $000s)
Gross Carrying
Amount
Accumulated
Amortization
Net
Customer contracts
Acquired technology
Patents
Distributor and provider networks
Other
Total
$
$
55,240
26,757
23,405
8,709
12,486
126,597
$
$
25,897
19,009
5,419
3,765
1,410
55,500
$ 29,343
7,748
17,986
4,944
11,076
$ 71,097
Intangible assets subject to amortization are being amortized over estimated useful lives ranging from three to
25 years. Total amortization expense for the years ended December 31, 2010 and 2009, four months ended
December 31, 2008 and year ended August 31, 2008 was $12.4 million, $12.7 million, $4.0 million, and $16.0
million, respectively. The following table summarizes the estimated amortization expense for each of the next
five years and thereafter:
(In $000s)
Year ending December 31,
2011
2012
2013
2014
2015
2016 and thereafter
Total
$ 12,416
10,511
10,389
9,410
6,150
15,429
$ 64,305
Intangible assets not subject to amortization at December 31, 2010 and 2009 consist of trade names of
$29.9 million.
52
5.
Income Taxes
Income tax expense (benefit) is comprised of the following:
(In $000s)
Current taxes
Federal
State
Deferred taxes
Federal
State
Total
Year Ended December 31,
2010
2009
Four Months
Ended
December 31,
Year Ended
August 31,
2008
2008
$
8,810 $
2,719
835 $
754
11,946
2,827
16,952
1,964
30,445 $
7,638
910
10,137 $
(11,308)
(2,456)
1,009
$
$
47,147
9,569
(15,500)
(3,476)
37,740
Deferred income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax
purposes. The following table shows the significant components of our net deferred tax asset (liability) as of
December 31, 2010 and 2009:
(In $000s)
December 31,
December 31,
2010
2009
Deferred tax asset:
Accruals and reserves
Deferred compensation
Share-based payments
Net operating loss carryforwards
Other assets and liabilities
Advance receipts
Valuation allowance
Deferred tax liability:
Property and equipment
Intangible assets
Other assets and liabilities
Net deferred tax asset (liability)
Net current deferred tax asset
Net long-term deferred tax liability
$
$
$
$
$
$
12,174
12,129
15,594
7,142
2,780
—
49,819
(1,985)
47,834
$
$
(34,976) $
(24,115)
(521)
(59,612)
(11,778) $
$
11,272
(23,050)
(11,778) $
10,710
9,253
15,877
8,344
3,381
14,220
61,785
(1,648)
60,137
(22,668)
(27,805)
(84)
(50,557)
9,580
24,197
(14,617)
9,580
Based on the Company’s historical and expected future taxable earnings, and a consideration of
available tax planning strategies, we believe it is more likely than not that the Company will realize the benefit
of the existing deferred tax assets, net of the valuation allowance, at December 31, 2010.
53
For fiscal 2010, 2009, and 2008, the tax benefit of share-based compensation, excluding the tax
benefit related to the deferred tax asset for share-based payments, was recorded as additional paid-in capital.
We recorded an immaterial tax effect in fiscal 2010, a tax effect of $1.8 million in fiscal 2009, a tax benefit of
$3.4 million during the four months ended December 31, 2008, and a tax benefit of $1.1 million in fiscal 2008
related to our interest rate swap agreements (see Note 6) to stockholders’ equity as a component of other
comprehensive income (loss).
At December 31, 2010, we had foreign net operating loss carryforwards, before valuation allowances,
of approximately $7.6 million with an indefinite carryforward period, approximately $13.5 million of federal
loss carryforwards originating from acquired entities, and approximately $10.0 million of state loss
carryforward. The federal loss carryforwards are subject to an annual limitation under Internal Revenue Code
Section 382 and also have expiration dates ranging from 2011 until 2025. The state loss carryforward is
expected to be fully utilized during 2011.
The difference between income tax expense computed using the statutory federal income tax rate and
the effective rate is as follows:
(In $000s)
Year Ended December 31,
Four Months
Ended
December 31,
Year Ended
August 31,
2010
2009
2008
2008
$
Statutory federal income tax
State income taxes, less federal income tax benefit
Other
Income tax expense
$
27,221
3,318
(94)
30,445
$
7,179 $
970
1,988
$ 10,137 $
610 $
62
337
1,009 $
32,394
3,910
1,436
37,740
Uncertain Tax Positions
As of December 31, 2010 and 2009, we had $1.1 million of unrecognized tax benefits that, if
recognized, would affect our effective tax rate. Our policy is to include interest and penalties related to
unrecognized tax benefits in income tax expense. During fiscal 2010, fiscal 2009, the four months ended
December 31, 2008, and fiscal 2008, we included approximately $20,000, $0.2 million, $0.1 million, and $0.5
million respectively, of net interest related to uncertain tax positions as a component of income tax expense.
The aggregate changes in the balance of unrecognized tax benefits, exclusive of interest, were as
follows:
(In $000s)
Unrecognized tax benefits at September 1, 2007
Decreases based on tax positions related to fiscal 2008
Lapse of statutes of limitation
Unrecognized tax benefits at August 31, 2008 and December 31, 2008
Change based upon settlements with taxing authorities
Increases based upon tax positions related to fiscal 2009
Unrecognized tax benefits at December 31, 2009 and December 31, 2010
$
$
11,050
(8,534 )
(140 )
2,376
(2,376 )
1,072
1,072
54
We file income tax returns in the U.S. Federal jurisdiction and in various state and foreign
jurisdictions. Tax years remaining subject to examination in these jurisdictions include 2007 to present.
6.
Derivative Instruments and Hedging Activities
We use derivative instruments to manage risks related to interest rates and foreign currencies. We
record all derivatives at estimated fair value as either assets or liabilities on the balance sheet and recognize the
unrealized gains and losses in either the balance sheet or statement of operations, depending on whether the
derivative is designated as a hedging instrument. As permitted under our master netting arrangements, at
December 31, 2010 and 2009, the fair value amounts of our derivative instruments are presented on a net basis
by counterparty in the consolidated balance sheet.
Interest Rate
In order to reduce our exposure to interest rate fluctuations on our floating rate debt commitments, we
maintain interest rate swap agreements with original notional amounts of $275.0 million ($115.0 million of
which become effective in January 2012) and with termination dates ranging from March 30, 2011 to
December 31, 2013. These interest rate swap agreements effectively modify our exposure to interest rate risk
by converting a portion of our floating rate debt to fixed obligations with interest rates ranging from 3.375% to
3.855%, thus reducing the impact of interest rate changes on future interest expense. Under these agreements,
we receive a variable rate of interest based on LIBOR, and we pay a fixed rate of interest. We have designated
these interest rate swap agreements as qualifying cash flow hedges. We currently meet the hedge accounting
criteria under U.S. GAAP in accounting for these interest rate swap agreements.
Foreign Currency
We enter into foreign currency options and/or forward contracts in order to minimize our earnings
exposure to fluctuations in foreign currency exchange rates. Our foreign currency exchange contracts do not
qualify for hedge accounting treatment under U.S. GAAP. We routinely monitor our foreign currency
exposures to maximize the overall effectiveness of our foreign currency hedge positions. We do not execute
transactions or hold derivative financial instruments for trading or other purposes.
The estimated gross fair values of derivative instruments at December 31, 2010 and 2009, excluding
the impact of netting derivative assets and liabilities when a legally enforceable master netting agreement
exists, were as follows:
55
December 31, 2010
December 31, 2009
Foreign
currency
exchange
contracts
Interest
rate swap
agreements
Foreign
currency
exchange
contracts
Interest
rate swap
agreements
$136
$—
$—
$—
—
$136
—
$—
—
$—
88
$88
$245
$—
$12
$—
— 4,465
— 2,593
$7,058
$245
236
—
— 6,942
$7,178
$12
(In $000s)
Assets:
Derivatives not designated as hedging instruments:
Other current assets
Derivatives designated as hedging instruments:
Other assets
Total assets
Liabilities:
Derivatives not designated as hedging instruments:
Accrued liabilities
Derivatives designated as hedging instruments:
Accrued liabilities
Other long-term liabilities
Total liabilities
See also Note 7.
Cash Flow Hedges
Derivative instruments that are designated and qualify as cash flow hedges are recorded at estimated
fair value in the balance sheet, with the effective portion of the gains and losses being reported in accumulated
other comprehensive income or loss (“accumulated OCI”). These gains and losses are reclassified into
earnings in the same period during which the hedged transaction affects earnings or the period in which all or a
portion of the hedge becomes ineffective. As of December 31, 2010, we expect to reclassify $4.5 million of
net losses on interest rate swap agreements from accumulated OCI to interest expense within the next 12
months due to the scheduled payment of interest associated with our debt.
Gains and losses representing either hedge ineffectiveness or hedge components excluded from the
assessment of effectiveness are recognized in current earnings. The following table shows the effect of our
cash flow hedges on the consolidated statement of operations (or when applicable, the consolidated balance
sheet) during the years ended December 31, 2010 and 2009:
Year Ended December 31, 2010
Year Ended December 31, 2009
Amount of
Gain (Loss)
Recognized in
Accumulated
OCI on
Derivatives
(Effective
Portion)
Location of
Gain (Loss)
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)
Amount of
Gain (Loss)
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)
Amount of
Gain (Loss)
Recognized
in
Accumulated
OCI on
Derivatives
(Effective
Portion)
Location of
Gain (Loss)
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)
Amount of
Gain (Loss)
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)
$(5,614)
Interest
expense
$(5,646)
$(2,541)
Interest
expense
$(6,742)
Derivatives in
Cash Flow Hedging
Relationships
Interest rate swap
agreements, gross
of tax effect
56
During the years ended December 31, 2010 and 2009, there were no gains or losses on cash flow
hedges recognized in income resulting from hedge ineffectiveness.
Derivative Instruments Not Designated as Hedging Instruments
Our foreign currency exchange contracts require current period mark-to-market accounting, with any
change in fair value being recorded each period in the statement of operations in selling, general and
administrative expenses. As of December 31, 2010 and 2009, we had forward contracts with notional amounts
of $8.4 million and $1.1 million, respectively, to exchange foreign currencies, primarily the Australian dollar
and Euro, that were entered into to hedge forecasted foreign net income (loss) and intercompany debt.
These forward contracts did not have a material effect on our consolidated statement of operations
during fiscal 2010 or 2009.
7.
Fair Value Measurements
We account for certain assets and liabilities at fair value. Fair value is defined as the price that would
be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market
participants at the measurement date, assuming the transaction occurs in the principal or most advantageous
market for that asset or liability.
Fair Value Hierarchy
The hierarchy below lists three levels of fair value based on the extent to which inputs used in
measuring fair value are observable in the market. We categorize each of our fair value measurements in one
of these three levels based on the lowest level input that is significant to the fair value measurement in its
entirety. These levels are:
Level 1: Quoted prices in active markets for identical assets or liabilities;
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical
or similar instruments in markets that are not active; and model-based valuation techniques in
which all significant assumptions are observable in the market or can be corroborated by
observable market data for substantially the full term of the assets or liabilities; and
Level 3: Unobservable inputs that are supported by little or no market activity and typically
reflect management’s estimates of assumptions that market participants would use in pricing
the asset or liability.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present our assets and liabilities measured at fair value on a recurring basis at
December 31, 2010 and 2009:
57
(In 000s)
December 31, 2010
Assets:
Foreign currency exchange contracts
Liabilities:
Foreign currency exchange contracts
Interest rate swap agreements
Contingent consideration liability
(In 000s)
December 31, 2009
Assets:
Interest rate swap agreements
Liabilities:
Foreign currency exchange contracts
Interest rate swap agreements
Contingent consideration liability
$
$
$
$
Level 2
Level 3
Gross Fair
Value
Netting (1)
Net Fair
Value
136 $
245 $
7,058
—
— $
136 $
(116) $
20
— $
—
—
245 $
7,058
—
(116) $
—
—
129
7,058
—
Level 2
Level 3
Gross Fair
Value
Netting (1)
Net Fair
Value
88 $
— $
88 $
— $
88
7,178
12 $
— $
—
— 3,043
12 $
7,178
3,043
— $
—
—
12
7,178
3,043
(1) This column reflects the impact of netting derivative assets and liabilities by counterparty when a legally
enforceable master netting agreement exists.
The fair values of forward foreign currency exchange contracts are valued using broker quotations of
similar assets or liabilities in active markets. The fair values of interest rate swap agreements are primarily
determined based on the present value of future cash flows using internal models and third-party pricing
services with observable inputs, including interest rates, yield curves and applicable credit spreads.
The contingent consideration liability represents the fair value of a multi-year earn-out arrangement in
connection with a business combination entered into during the fourth quarter of 2009. The fair value was
determined using a discounted cash flow model based on management’s estimate of future cash flows. During
fiscal 2010, we revised our estimate of future cash flows, resulting in a write-off of $3.0 million in the fair
value of the contingent consideration liability, which was recorded to other income. The change in the
contingent consideration liability during the year ended December 31, 2010 was as follows:
(In $000s)
Balance, January 1, 2010
Adjustment to liability
Balance, December 31, 2010
Contingent
Consideration
Liability
$
$
3,043
3,043
—
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
We measure certain assets at fair value on a nonrecurring basis in the fourth quarter of our fiscal year,
including the following:
(cid:120)
(cid:120)
reporting units measured at fair value in the first step of a goodwill impairment test; and
indefinite-lived intangible assets measured at fair value for impairment assessment.
58
Each of the assets above is classified as Level 3 within the fair value hierarchy. Based on their estimated fair
values, we did not record any impairment losses during the three months ended December 31, 2010 or 2009.
We estimate the fair value of each reporting unit using a discounted cash flow model and reconcile the
aggregate fair value of our reporting units to our consolidated market capitalization. The discounted cash flow
model requires significant judgments, including management’s estimate of future cash flows, which is
dependent on internal forecasts, estimation of the long-term growth rate for our business, the useful life over
which cash flows will occur, and determination of our weighted average cost of capital. Changes in these
estimates and assumptions could materially affect the estimate of fair value and goodwill impairment for each
reporting unit.
We estimate the fair value of indefinite-lived intangible assets, which consist of trade names, using a
present value technique, which requires management’s estimate of future revenues attributable to these trade
names, estimation of the long-term growth rate for these revenues, and determination of our weighted average
cost of capital. Changes in these estimates and assumptions could materially affect the estimate of fair value
for the trade names.
Fair Value of Other Financial Instruments
In addition to foreign currency exchange contracts and interest rate swap agreements, the estimated fair
values of which are disclosed above, the estimated fair value of each class of financial instruments at
December 31, 2010 was as follows:
(cid:120)(cid:3) Cash and cash equivalents – The carrying amount of $1.1 million approximates fair value because
of the short maturity of those instruments (less than three months).
(cid:120)(cid:3) Long-term debt –The estimated fair value of outstanding borrowings under our credit agreement is
based on the average of the prices set by the issuing bank given current market conditions and is
not necessarily indicative of the amount we could realize in a current market exchange. The
estimated fair value and carrying amount of outstanding borrowings under the Fourth Amended
Credit Agreement at December 31, 2010 are $223.4 million and $241.3 million, respectively.
8.
Long-Term Debt
On March 30, 2010, we entered into the Fourth Amended and Restated Credit Agreement (the “Fourth
Amended Credit Agreement”). The Fourth Amended Credit Agreement provides us with a $55.0 million
revolving credit facility from March 30, 2010 to December 1, 2011 (the “2011 Revolving Credit Facility”) and
a $345.0 million revolving credit facility from March 30, 2010 to December 1, 2013 (the “2013 Revolving
Credit Facility”), including a swingline sub facility of $20.0 million and a $75.0 million sub facility for letters
of credit. The Fourth Amended Credit Agreement also provides a continuation of the term loan facility
provided pursuant to the Third Amended and Restated Credit Agreement, of which $192.0 million remained
outstanding on December 31, 2010, and an uncommitted incremental accordion facility of $200.0 million.
Revolving advances under the Fourth Amended Credit Agreement are drawn first under the 2013
Revolving Credit Facility, with any advances in excess of $345.0 million being drawn under the 2011
Revolving Credit Facility. Revolving advances under the 2013 Revolving Credit Facility generally bear
interest, at our option, at 1) LIBOR plus a spread of 1.875% to 2.750% or 2) the greater of the federal funds
rate plus 0.5%, or the prime rate, plus a spread of 0.375% to 1.250%. Revolving advances under the 2011
Revolving Credit Facility generally bear interest, at our option, at 1) LIBOR plus a spread of 0.875% to
1.750% or 2) the greater of the federal funds rate plus 0.5%, or the prime rate, plus a spread of 0.000% to
0.250%. Term loan borrowings bear interest, at our option, at 1) LIBOR plus 1.50% or 2) the greater of the
federal funds rate plus 0.5%, or the prime rate. See Note 6 for a description of our interest rate swap
59
agreements. The Fourth Amended Credit Agreement also provides for a fee ranging between 0.150% and
0.300% of the unused commitments under the 2011 Revolving Credit Facility and 0.275% and 0.425% of the
unused commitments under the 2013 Revolving Credit Facility. The Fourth Amended Credit Agreement is
secured by guarantees from most of the Company’s domestic subsidiaries and by security interests in
substantially all of the Company’s and such subsidiaries’ assets.
We are required to repay outstanding revolving loans on the applicable commitment termination date,
which is December 1, 2011 for the 2011 Revolving Credit Facility and December 1, 2013 for the 2013
Revolving Credit Facility. We are required to repay term loans in quarterly principal installments aggregating
$0.5 million each, which commenced on March 31, 2007. The entire unpaid principal balance of the term
loans is due and payable at maturity on December 1, 2013.
The following table summarizes the minimum annual principal payments and repayments of the
revolving advances under the Fourth Amended Credit Agreement for each of the next five years and thereafter:
(In $000s)
Year ending December 31,
2011
2012
2013
2014
2015
2016 and thereafter
Total
$
2,000
2,000
237,300
—
—
—
$ 241,300
The Fourth Amended Credit Agreement contains various financial covenants, which require us to
maintain, as defined, ratios or levels of 1) total funded debt to EBITDA, 2) fixed charge coverage, and 3) net
worth. The Fourth Amended Credit Agreement also restricts the payment of dividends and limits the amount
of repurchases of the Company’s common stock. As of December 31, 2010, we were in compliance with all of
the covenant requirements of the Fourth Amended Credit Agreement.
As described in Note 6 above, as of December 31, 2010, we are a party to interest rate swap
agreements for which we receive a variable rate of interest based on LIBOR and for which we pay a fixed rate
of interest.
9.
Other Long-Term Liabilities
We have a non-qualified deferred compensation plan under which certain employeees may defer a
portion of their salaries and receive a Company matching contribution plus a contribution based on our
performance. Company contributions vest at 25% per year. We do not fund the plan and carry it as an
unsecured obligation. Participants in the plan elect payout dates for their account balances, which can be no
earlier than four years from the period of the deferral.
As of December 31, 2010 and 2009, other long-term liabilities included vested amounts under the non-
qualified deferred compensation plan of $8.7 and $7.8 million, respectively, net of the current portions of $1.6
and $2.7 million, respectively. For the next five years ended December 31, we must make estimated plan
payments of $1.6 million, $1.2 million, $1.1 million, $0.8 million, and $0.2 million, respectively.
In addition, under our stock incentive plan, we issue performance cash awards to certain employees
based on pre-established performance metrics. Based on achievement of the performance metrics, the awards
vest on the third anniversary of the grant date and are paid shortly thereafter.
60
As of December 31, 2010 and 2009, other long-term liabilities included accrued performance cash
amounts of $7.9 and $2.9 million, respectively, net of the current portions of $1.6 million and $0, respectively.
For the next five years ended December 31, we must make estimated plan payments of $1.6 million, $5.0
million, $2.9 million, $0 and $0, respectively.
10.
Restructuring and Related Charges and Impairment Loss
In November 2010, we began a restructuring of the Company primarily focused on aligning resources
with current and emerging markets and consolidating operating capacity, which was largely completed by the
end of fiscal 2010. Through December 31, 2010, we had incurred cumulative net cash and non-cash charges
of approximately $10.3 million, which primarily consisted of one-time termination benefits and costs
associated with both domestic and international capacity consolidation. For the year ended December 31,
2010, these charges were presented as a separate line item in the consolidated statement of operations. We do
not expect to incur significant additional costs or adjustments related to this restructuring.
The change in accrued restructuring and related charges related to the November 2010 restructuring
activities described above during the year ended December 31, 2010 was as follows:
(In 000s)
Accrued restructuring and related charges at January 1, 2010
Additions
Payments
Accrued restructuring and related charges at December 31, 2010
$
$
—
8,507
(900)
7,607
The table above excludes non-cash charges of approximately $1.8 million, which primarily consisted
of share-based compensation costs.
In 2008, we began a restructuring of the Company primarily focused on streamlining management and
better positioning the Company to deliver fully integrated solutions, which was largely completed by the end
of calendar 2008. For the four months ended December 31, 2008, these charges were presented as a separate
line item in the consolidated statement of operations.
In December 2008, we decided to discontinue offering one of our products as a standalone program.
As a result of this decision, we did not renew the expiring trade name associated with this product and
recorded an impairment loss of $4.3 million in December 2008 to write off this intangible asset.
11.
Legal Settlement and Related Costs
In March 2009, our Board of Directors approved a settlement of a qui tam lawsuit filed in 1994 on
behalf of the United States government related to the Company’s former Diabetes Treatment Center of
America business. As a result of the settlement, which was effective as of April 1, 2009, we incurred a charge
of approximately $40 million, including a $28 million payment to the United States government and payment
of approximately $12 million for other costs and fees related to the settlement, including the estimated legal
costs and expenses of the plaintiff’s attorneys.
12.
Commitments and Contingencies
Securities Class Action Litigation
Beginning on June 5, 2008, Healthways and certain of its present and former officers and/or directors
were named as defendants in two putative securities class actions filed in the U.S. District Court for the Middle
61
District of Tennessee, Nashville Division. On August 8, 2008, the court ordered the consolidation of the two
related cases, appointed lead plaintiff and lead plaintiff’s counsel, and granted lead plaintiff leave to file a
consolidated amended complaint.
The amended complaint, filed on September 22, 2008, alleged that the Company and the individual
defendants violated Sections 10(b) of the Securities Exchange Act of 1934 (the “Act”) and that the individual
defendants violated Section 20(a) of the Act as “control persons” of Healthways. The amended complaint
further alleged that certain of the individual defendants also violated Section 20A of the Act based on their
stock sales. The plaintiff purports to bring these claims for unspecified monetary damages on behalf of a class
of investors who purchased Healthways stock between July 5, 2007 and August 25, 2008.
In support of these claims, the lead plaintiff alleged generally that, during the proposed class period,
the Company made misleading statements and omitted material information regarding (1) the purported loss or
restructuring of certain contracts with customers, (2) the Company’s participation in the Medicare Health
Support (“MHS”) pilot program for the Centers for Medicare & Medicaid Services, and (3) the Company’s
guidance for fiscal year 2008. The defendants filed a motion to dismiss the amended complaint on November
13, 2008. On March 9, 2009, the Court denied the defendants’ motion to dismiss. On April 27, 2010, the
parties reached an agreement in principle to settle this matter for $23.6 million. The District Court gave final
approval to the settlement by an order entered on September 24, 2010. As a result of the Company’s insurance
coverage, this settlement did not result in any charge to the Company.
Shareholder Derivative Lawsuits
On June 27, 2008 and July 24, 2008, respectively, two shareholders filed putative derivative actions
purportedly on behalf of Healthways in the Chancery Court for the State of Tennessee, Twentieth Judicial
District, Davidson County, against certain directors and officers of the Company. These actions are based
upon substantially the same facts alleged in the securities class action litigation described above. The
plaintiffs are seeking to recover damages in an unspecified amount and equitable and/or injunctive relief.
On August 13, 2008, the Court consolidated these two lawsuits and appointed lead counsel. On
October 3, 2008, the Court ordered that the consolidated action be stayed until the motion to dismiss in the
securities class action had been resolved by the District Court. By stipulation of the parties, the plaintiffs filed
their consolidated complaint on May 9, 2009. On June 19, 2009, the defendants filed a motion to dismiss the
consolidated complaint. The Court granted the defendants’ motion to dismiss on October 14, 2009. The
plaintiffs filed a notice of appeal on November 12, 2009. The Tennessee Court of Appeals heard argument on
the appeal on October 13, 2010 and affirmed the trial court’s dismissal on March 14, 2011.
ERISA Lawsuits
On July 31, 2008, a purported class action alleging violations of the Employee Retirement Income
Security Act (“ERISA”) was filed in the U.S. District Court for the Middle District of Tennessee, Nashville
Division against Healthways, Inc. and certain of its directors and officers alleging breaches of fiduciary duties
to participants in the Company’s 401(k) plan. The central allegation is that Company stock was an imprudent
investment option for the 401(k) plan.
An amended complaint was filed on September 29, 2008, naming as defendants the Company, the
Board of Directors, certain officers, and members of the Investment Committee charged with administering the
401(k) plan. The amended complaint alleged that the defendants violated ERISA by failing to remove the
Company stock fund from the 401(k) plan when it allegedly became an imprudent investment, by failing to
disclose adequately the risks and results of the MHS pilot program to 401(k) plan participants, and by failing
to seek independent advice as to whether to continue to permit the plan to hold Company stock. It further
alleged that the Company and its directors should have been more closely monitoring the Investment
62
Committee and other plan fiduciaries. The amended complaint sought damages in an undisclosed amount and
other equitable relief. The defendants filed a motion to dismiss on October 29, 2008. On January 28, 2009,
the Court granted the defendants’ motion to dismiss the plaintiff’s claims for breach of the duty to disclose
with regard to any non-public information and information beyond the specific disclosure requirements of
ERISA and denied Defendants’ motion to dismiss as to the remainder of the plaintiff’s claims. A period of
discovery ensued.
On May 12, 2009, the plaintiff filed a motion for class certification. After the plaintiff failed, without
explanation, to appear for his scheduled deposition, the Court issued an Order on July 10, 2009 warning the
plaintiff that his failure to participate in the lawsuit could result in sanctions, including but not limited to
dismissal. After the plaintiff’s failure to participate continued, on July 23, 2009, the defendants filed a motion
to dismiss for failure to prosecute the action. On August 6, 2009, the parties filed a stipulation of dismissal
with prejudice as to the named plaintiff but otherwise without prejudice, and the Court entered an Order to that
effect on the same date.
On February 1, 2010, a new named plaintiff filed another putative class action complaint in the United
States District Court for the Middle District of Tennessee, Nashville Division, alleging ERISA violations in
the administration of the Company’s 401(k) plan. The new complaint is identical to the original complaint,
including the allegations and the requests for relief. Defendants’ answer to this complaint was filed on March
22, 2010. A scheduling order was entered on April 1, 2010, and discovery commenced thereafter. On April
30, 2010, Plaintiff filed a motion for class certification. On June 23, 2010, the parties reached an agreement in
principle to settle this matter for $1.3 million, with such settlement being funded by the Company’s fiduciary
liability insurance carrier. The District Court gave preliminary approval of the settlement on December 1,
2010. As a result of the Company’s insurance coverage, this settlement is not expected to result in any charge
to the Company.
Contract Dispute
We currently are involved in a contractual dispute with Blue Cross Blue Shield of Minnesota
regarding fees paid to us as part of a former contractual relationship. In 2010, we received a notice of
arbitration under the terms of our agreement alleging a violation of certain contract provisions. An arbitration
hearing has been scheduled for July 11, 2011. We believe we performed our services in compliance with the
terms of our agreement and that the assertions made in the arbitration notice are without merit. We are not
able to reasonably estimate a range of potential losses.
Outlook
We are also subject to other contractual disputes, claims and legal proceedings that arise from time to
time in the ordinary course of our business. While we are unable to estimate a range of potential losses, we do
not believe that any of the legal proceedings pending against us as of the date of this report will have a
material adverse effect on our liquidity or financial condition; however, we may settle disputes, claims, sustain
judgments or incur expenses relating to these matters in a particular fiscal quarter which may adversely affect
our results of operations. As these matters are subject to inherent uncertainties, our view of these matters may
change in the future.
Contractual Commitment
In January 2008, we entered into a perpetual license agreement and 25-year strategic relationship
agreement. We have remaining contractual cash obligations of $30.0 million related to these agreements,
$10.0 million of which will occur ratably during the next two years, and the remaining $20.0 million of which
will occur ratably over the following 20 years.
63
13.
Leases
We maintain operating lease agreements principally for our corporate office space, our call centers,
and our operations support and training offices. We lease approximately 264,000 square feet of office space in
Franklin, Tennessee, which contains our corporate headquarters and one of our call centers. This lease
commenced in March 2008 and expires in February 2023. We also lease office space for our 12 other call
center locations for an aggregate of approximately 300,000 square feet of space with lease terms expiring on
various dates from 2011 to 2016. Our operations support and training offices contain approximately 130,000
square feet in aggregate and have lease terms expiring from 2011 to 2016.
Our corporate office lease agreement contains escalation clauses and provides for two renewal options
of five years each at then prevailing market rates. The base rent for the initial 15-year term ranges from $4.2
million to $6.3 million per year over the term of the lease. The landlord provided a tenant improvement
allowance equal to approximately $10.3 million. We record leasehold improvement incentives as deferred rent
and amortize them as reductions to rent expense over the lease term.
Most of our operating leases include escalation clauses, some of which are fixed amounts, and some of
which reflect changes in price indices. We recognize rent expense on a straight-line basis over the lease term.
Certain operating leases contain renewal options to extend the lease for additional periods. For the years
ended December 31, 2010 and 2009, four months ended December 31, 2008, and year ended August 31, 2008,
rent expense under lease agreements was approximately $14.2 million, $14.5 million, $5.0 million, and $16.9
million, respectively. Our capital lease obligations, which primarily include computer equipment leases, are
included in long-term debt and the current portion of long-term debt.
The following table summarizes our future minimum lease payments, net of total sublease income of
$1.9 million, under all capital leases and non-cancelable operating leases for each of the next five years:
(In $000s)
Year ending December 31,
2011
2012
2013
2014
2015
2016 and thereafter
Total minimum lease payments
Less amount representing interest
Present value of minimum lease payments
Less current portion
Operating
Leases
$
14,435
13,049
11,578
10,339
9,429
48,289
$ 107,119
Capital
Leases
1,580
1,580
1,580
1,185
—
—
5,925
(631)
5,294
(1,290)
4,004
$
$
14. Share-Based Compensation
We have several shareholder-approved stock incentive plans for employees and directors. We
currently have three types of share-based awards outstanding under these plans: stock options, restricted stock
units, and restricted stock. We believe that such awards align the interests of our employees and directors with
those of our stockholders.
We grant options under these plans at market value on the date of grant. The options generally vest
over or at the end of four years based on service conditions and expire seven or ten years from the date of
64
grant. Restricted share awards generally vest over or at the end of four years. We recognize share-based
compensation expense on a straight-line basis over the vesting period. Certain option and restricted share
awards generally provide for accelerated vesting upon a change in control or normal or early retirement (as
defined in the plans). At December 31, 2010, we have reserved approximately 0.9 million shares for future
equity grants under our stock incentive plans.
On December 30, 2008, we completed an offer to purchase from our employees, excluding the chief
executive officer and Board of Directors, outstanding options to acquire shares of common stock of the
Company that were granted between September 1, 2004 and August 15, 2008 under our shareholder-approved
stock option plans (the “Tender Offer”). We purchased stock options representing the right to acquire 1.1
million shares of the Company’s common stock in exchange for $0.7 million in cash. We also recognized
$11.5 million of additional stock-based compensation expense in December 2008, which represented the
remaining compensation cost for these options as measured at the grant date but not yet recognized prior to the
completion of the Tender Offer on December 30, 2008.
Following are certain amounts recognized in the statement of operations for share-based compensation
arrangements for the years ended December 31, 2010 and 2009, four months ended December 31, 2008, and
year ended August 31, 2008. We did not capitalize any share-based compensation costs during these periods.
Year Ended
Four Months
Ended
December 31, December 31, December 31,
Year Ended
August 31,
(In millions)
Total share-based compensation
Share-based compensation included in cost of services
Share-based compensation included in selling, general
$
and administrative expenses
Share-based compensation included in restructuring
and related charges
Total income tax benefit recognized
2010
2009
2008
2008
11.5 $
5.0
10.2 $
4.4
14.9 (1) $
10.0
5.0
1.5
4.5
5.8
—
4.0
6.5
(1.6)
5.9
16.5
8.0
8.5
—
6.5
(1) Includes $11.5 million of additional expense related to the Tender Offer described above.
As of December 31, 2010, there was $25.8 million of total unrecognized compensation cost related to
nonvested share-based compensation arrangements granted under the stock incentive plans. That cost is
expected to be recognized over a weighted average period of 2.9 years.
Stock Options
We use a lattice-based binomial option valuation model (“lattice binomial model”) to estimate the fair
values of stock options. We base expected volatility on historical volatility due to the low volume of traded
options on our stock. The expected term of options granted is derived from the output of the lattice binomial
model and represents the period of time that options granted are expected to be outstanding. We used
historical data to estimate expected option exercise and post-vesting employment termination behavior within
the lattice binomial model.
The following table shows the weighted average grant-date fair values of options and the weighted
average assumptions we used to develop the fair value estimates under each of the option valuation models for
the years ended December 31, 2010 and 2009, four months ended December 31, 2008, and year ended August
31, 2008:
65
Weighted average grant-date fair value of options
$
7.22
$
6.72
$
4.97
$
22.16
Year Ended
December 31,
Four Months
Ended
December 31,
Year Ended
August 31,
2010
2009
2008
2008
Assumptions:
Expected volatility
Expected dividends
Expected term (in years)
Risk-free rate
51.9%
—
5.5
3.2%
51.6%
—
6.1
2.5%
46.5%
—
5.1
3.6%
37.8%
—
6.6
4.2%
A summary of option activity as of December 31, 2010 and the changes during the year then ended is
presented below:
Options
Outstanding at January 1, 2010
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2010
Exercisable at December 31, 2010
Shares
(000s)
4,936
1,848
(223)
(353)
6,208
3,569
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic Value
($000s)
$
18.46
12.53
4.96
19.46
17.12
19.45
5.5
3.2
$
$
3,619
2,281
The total intrinsic value, which represents the difference between the underlying stock’s market price
and the option’s exercise price, of options exercised during the years ended December 31, 2010 and 2009, four
months ended December 31, 2008, and year ended August 31, 2008 was $1.9 million, $1.0 million, $0.2
million, and $27.5 million, respectively.
Cash received from option exercises under all share-based payment arrangements during fiscal 2010
was $1.1 million. The actual tax benefit realized during fiscal 2010 for the tax deductions from option
exercises totaled $0.8 million. We issue new shares of common stock upon exercise of stock options.
Restricted Stock and Restricted Stock Units
The fair value of restricted stock and restricted stock units (“nonvested shares”) is determined based
on the closing bid price of the Company’s common stock on the grant date. The weighted average grant-date
fair value of nonvested shares granted during the years ended December 31, 2010 and 2009, four months
ended December 31, 2008, and year ended August 31, 2008 was $11.32, $11.10, $9.20, and $43.17,
respectively.
The following table shows a summary of our nonvested shares as of December 31, 2010 as well as
activity during the year then ended. The total grant-date fair value of shares vested during the years ended
December 31, 2010 and 2009, four months ended December 31, 2008, and year ended August 31, 2008 was
$10.0 million, $3.9 million, $1.5 million, and $0.8 million, respectively.
66
Nonvested Shares
Nonvested at January 1, 2010
Granted
Vested
Forfeited
Nonvested at December 31, 2010
Shares (000s)
1,015
629
(414)
(77)
1,153
Weighted
Average Grant
Date Fair Value
22.21
$
11.32
24.18
25.86
15.29
$
15.
Sale of Investment
In January 2009, a private company in which we held preferred stock (recorded in “other assets”) was
acquired by a third party. As part of this sale, we received two payments totaling $11.6 million in January and
February 2009 and recorded a gain of $2.6 million during the first quarter of 2009. During the second quarter
of 2010, we recognized a gain of $1.2 million related to the receipt of a final escrow payment.
16.
Share Repurchases
Repurchases of Common Stock
The following table contains information for shares of our Common Stock that we repurchased during
the fourth quarter of 2010:
Total
Number of
Shares
Purchased
Average Price
Paid per
Share
Total Number of Shares
Purchased as Part of
Publicly Announced Plans
or Programs (1)
Period
Maximum Approximate
Dollar Value of Shares that
May Yet Be Purchased
Under the Plans or
Programs (1)
October 1 through 31
November 1 through 30
December 1 through 31
10,000
182,200
237,454
$10.34
$10.64
$10.33
10,000
192,200
429,654
$59,896,600
$57,957,992
$55,505,092
Total
429,654
(1) All share repurchases between October 1, 2010 and December 31, 2010 were made pursuant to a share
repurchase program authorized by the Company’s Board of Directors and publicly announced on October 21,
2010, which allows for the repurchase of up to $60 million of our common stock from time to time in the open
market or in privately negotiated transactions through October 19, 2012.
17.
Comprehensive Income
Comprehensive income (loss), net of income taxes, was $48.0 million, $11.2 million, ($2.8) million,
and $53.5 million, for the years ended December 31, 2010 and 2009, four months ended December 31, 2008,
and year ended August 31, 2008, respectively.
67
18.
Earnings Per Share
The following is a reconciliation of the numerator and denominator of basic and diluted earnings per
share for the years ended December 31, 2010 and 2009, the four months ended December 31, 2008, and year
ended August 31, 2008:
(In 000s except per share data)
Year Ended December 31,
Four Months
Ended
December 31,
Year Ended
August 31,
Numerator:
Net income - numerator for basic earnings per share
2010
2009
2008
$
47,330 $
10,374 $
734 $
2008
54,815
Denominator:
Shares used for basic earnings per share
Effect of dilutive stock options and restricted stock units
outstanding:
Non-qualified stock options
Restricted stock units
Shares used for diluted earnings per share
Earnings per share:
Basic
Diluted
34,129
33,730
33,616
34,977
384
389
34,902
336
293
34,359
270
152
34,038
1,477
143
36,597
$
$
1.39 $
1.36 $
0.31 $
0.30 $
0.02 $
0.02 $
1.57
1.50
Dilutive securities outstanding not included in the computation
of earnings per share because their effect is antidilutive:
Non-qualified stock options
Restricted stock units
3,863
81
3,521
186
2,820
268
1,547
111
68
19.
Unaudited Financial Information
Below are the unaudited statement of operations and statement of cash flows for the four months
ended December 31, 2007:
(In 000s except per share data)
Revenues
Cost of services (exclusive of depreciation and
amortization)
Selling, general and administrative expenses
Depreciation and amortization
Operating income
Interest expense
Income before income taxes
Income tax expense
Net income
Earnings per share:
Basic
Diluted
$
$
$
$
Weighted average common shares and equivalents
Basic
Diluted
Four Months Ended
December 31, 2007
234,277
163,750
21,741
13,682
35,104
7,118
27,986
11,506
16,480
0.46
0.44
35,770
37,739
69
Four Months Ended
December 31, 2007
$
16,480
13,682
221
389
5,057
(6,072)
(12,084)
1,513
(2,429)
1,848
10,257
(3,025)
3,951
303
(111)
29,980
(25,045)
(15)
(25,060)
(132)
6,072
3,070
(21,070)
(12,060)
(7,140)
47,655
40,515
(In 000s)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities, net of
business acquisitions:
Depreciation and amortization
Loss on disposal of property and equipment
Amortization of deferred loan costs
Share-based employee compensation expense
Excess tax benefits from share-based payment
arrangements
Increase in accounts receivable, net
Decrease in other current assets
Decrease in accounts payable
Increase in accrued salaries and benefits
Increase in other current liabilities
Deferred income taxes
Other
Decrease in other assets
Payments on other long-term liabilities
Net cash flows provided by operating activities
Cash flows from investing activities:
Acquisition of property and equipment
Acquisitions, net of cash acquired
Net cash flows used in investing activities
Cash flows from financing activities:
Repurchases of common stock
Excess tax benefits from share-based payment
arrangements
Exercise of stock options
Payments of long-term debt
Net cash flows used in financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
$
70
20.
Stockholder Rights Plan
On June 19, 2000, the Board of Directors adopted a stockholder rights plan under which holders of
common stock as of June 30, 2000 received preferred stock purchase rights as a dividend at the rate of one
right per share. As amended in June 2004 and July 2006, each right initially entitles its holder to purchase one
one-hundredth of a Series A preferred share at $175.00, subject to adjustment. Upon becoming exercisable,
each right will allow the holder (other than the person or group whose actions have triggered the exercisability
of the rights), under alternative circumstances, to buy either securities of the Company or securities of the
acquiring company (depending on the form of the transaction) having a value of twice the then current
exercise price of the rights.
With certain exceptions, each right will become exercisable only when a person or group acquires, or
commences a tender or exchange offer for, 15% or more of our outstanding common stock. Rights will also
become exercisable in the event of certain mergers or asset sales involving more than 50% of our assets or
earning power. The rights will expire on June 15, 2014. The Board of Directors of the Company reviews the
plan at least once every three years to determine if the maintenance and continuance of the plan is still in the
best interests of the Company and its stockholders.
21.
Employee Benefits
We have a 401(k) Retirement Savings Plan (the “Plan”) available to substantially all of our employees.
Employees can contribute up to a certain percentage of their base compensation as defined in the Plan. The
Company matching contributions are subject to vesting requirements. Company contributions under the Plan
totaled $3.6 million, $3.9 million, $1.3 million, and $4.3 million for the years ended December 31, 2010 and
2009, four months ended December 31, 2008, and year ended August 31, 2008, respectively.
22.
Segment Disclosures
We have aggregated our operating segments into one reportable segment, well-being improvement
services. Our integrated well-being improvement product line includes programs for various diseases,
conditions, and wellness programs. It is impracticable for us to report revenues by program. Further, we
report revenues from our external customers on a consolidated basis since well-being improvement is the only
service that we provide.
During fiscal 2010 and 2009 as well as the four months ended December 31, 2008, we derived
approximately 19% of our revenues from one customer, with no other customer comprising 10% or more of
our revenues. In fiscal 2008, two customers each comprised 10% or more of our revenues. Revenues from
each of these customers individually totaled approximately 20% and 10%, respectively, of fiscal 2008
revenues.
71
23.
Quarterly Financial Information (unaudited)
(In thousands, except per share data)
Twelve Months Ended
December 31, 2010
Revenues
Gross margin
Income before income taxes
Net income
First
Second
(1)
Third
Fourth
(2)
$ 178,999
39,898
$
15,920
$
9,414
$
$ 175,523
43,610
$
19,045
$
11,838
$
$ 170,487
41,492
$
17,122
$
10,524
$
$ 195,324
$ 62,417
$ 25,687
$ 15,554
Basic earnings per share (3)
Diluted earnings per share (3)
$
$
0.28
0.27
$
$
0.35
0.34
$
$
0.31
0.30
$
$
0.45
0.45
Twelve Months Ended
December 31, 2009
First
(4)
Second
Third
Fourth
Revenues
Gross margin
Income (loss) before income taxes
Net income (loss)
$ 182,736
41,112
$
$ (22,572)
$ (14,813)
$ 177,836
41,534
$
15,534
$
8,876
$
$ 181,642
40,627
$
15,484
$
8,802
$
$ 175,212
$ 35,720
$ 12,065
7,509
$
Basic earnings (loss) per share (3)
Diluted earnings (loss) per share (3)
$
$
$
(0.44)
(0.44)(5) $
0.26
0.26
$
$
0.26
0.26
$
$
0.22
0.22
(1) Includes revenues related to an adjustment to a multi-year earn-out arrangement in connection with a
business combination entered into during the fourth quarter of 2009 of $1.5 million and an investment
gain of $1.2 million.
(2) Includes revenues related to an adjustment to a multi-year earn-out arrangement in connection with a
business combination entered into during the fourth quarter of 2009 of $1.5 million, restructuring
charges of $10.3 million (which were presented as a separate line item in the consolidated statement of
operations), and revenues of $22.3 million and expenses of $1.0 million attributable to a settlement
with CMS.
(3) We calculated earnings per share for each of the quarters based on the weighted average number of
shares and dilutive options outstanding for each period. Accordingly, the sum of the quarters may not
necessarily be equal to the full year income per share.
(4) Includes a legal settlement of approximately $40.0 million (which was presented as a separate line
item in the consolidated statement of operations).
(5) The assumed exercise of stock-based compensation awards for this period was not considered because
the impact would have been anti-dilutive.
72
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Healthways, Inc.
We have audited Healthways, Inc.’s internal control over financial reporting as of December 31, 2010, based
on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Healthways, Inc.’s management is
responsible for maintaining effective internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting included in the accompanying Management’s Annual
Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the
company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, Healthways, Inc. maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of Healthways, Inc. as of December 31, 2010 and 2009, and
the related consolidated statements of operations, stockholders’ equity, and cash flows for the years ended
December 31, 2010 and 2009, the four months ended December 31, 2008, and the year ended August 31, 2008
of Healthways, Inc. and our report dated March 15, 2011 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Nashville, Tennessee
March 15, 2011
73
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Management’s Annual Report on Internal Control over Financial Reporting
Management, including the principal executive officer and principal financial officer, is responsible
for establishing and maintaining adequate internal control over financial reporting. Internal control over
financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) is a process
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies and procedures may deteriorate.
Management has performed an assessment of the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2010 based on criteria established by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”), Internal Controls - Integrated Framework, and
believes that the COSO framework is a suitable framework for such an evaluation. Management has concluded
that the Company’s internal control over financial reporting was effective as of December 31, 2010.
Ernst & Young LLP, the independent registered public accounting firm that audited the Company’s
consolidated financial statements for the year ended December 31, 2010, has issued an attestation report on the
Company’s internal control over financial reporting which is included in this Annual Report on Form 10-K.
Our chief executive officer and chief financial officer have reviewed and evaluated the effectiveness
of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under
the Securities Exchange Act of 1934 (the “Exchange Act”)) as of December 31, 2010. Based on that
evaluation, the chief executive officer and chief financial officer have concluded that our disclosure controls
and procedures are effective. They are designed to ensure that information required to be disclosed in the
reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Commission’s rules and forms and to ensure that information
required to be disclosed in the reports that the Company files or submits under the Exchange Act is
accumulated and communicated to management, including our chief executive officer and chief financial
officer, to allow timely decisions regarding required disclosure.
There have been no changes in our internal controls over financial reporting during the quarter ended
December 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
74
Item 9B. Other Information
Not applicable.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
Information concerning our directors, audit committee, audit committee financial experts, code of
ethics, and compliance with Section 16(a) of the Exchange Act will be included in our Proxy Statement for the
Annual Meeting of Stockholders to be held May 26, 2011, to be filed with the Securities and Exchange
Commission pursuant to Rule 14a-6(c), and is incorporated herein by reference.
Pursuant to General Instruction G(3), information concerning our executive officers is included in Part
I of this Annual Report on Form 10-K, under the caption “Executive Officers of the Registrant.”
Item 11. Executive Compensation
Information required by this item will be contained in our Proxy Statement for the Annual Meeting of
Stockholders to be held May 26, 2011, to be filed with the Securities and Exchange Commission pursuant to
Rule 14a-6(c), and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Except as set forth below, information required by this item will be contained in our Proxy Statement
for the Annual Meeting of Stockholders to be held May 26, 2011, to be filed with the Securities and Exchange
Commission pursuant to Rule 14a-6(c), and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information required by this item will be contained in our Proxy Statement for the Annual Meeting of
Stockholders to be held May 26, 2011, to be filed with the Securities and Exchange Commission pursuant to
Rule 14a-6(c), and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
Information required by this item will be contained in our Proxy Statement for the Annual Meeting of
Stockholders to be held May 26, 2011, to be filed with the Securities and Exchange Commission pursuant to
Rule 14a-6(c), and is incorporated herein by reference.
Item 15. Exhibits, Financial Statement Schedules
PART IV
(a)
The following documents are filed as part of this Annual Report on Form 10-K:
The financial statements filed as part of this report are included in Part II, Item 8 of this Annual Report
1.
on Form 10-K.
We have omitted all Financial Statement Schedules because they are not required under the
2.
instructions to the applicable accounting regulations of the Securities and Exchange Commission or the
information to be set forth therein is included in the financial statements or in the notes thereto.
75
3.
Exhibits
2.1
3.1
3.2
3.3
Stock Purchase Agreement dated October 11, 2006 among Healthways,
Inc., Axia Health Management, Inc., and Axia Health Management LLC
[incorporated herein by reference to Exhibit 2.1 to the Company’s Current
Report on Form 8-K dated December 1, 2006]
Restated Certificate of Incorporation for Healthways, Inc., as amended
[incorporated by reference to Exhibit 3.1 to Form 10-Q of the Company’s
fiscal quarter ended February 29, 2008]
Bylaws, as amended [incorporated by reference to Exhibit 3.1 to Form 10-
Q of the Company’s fiscal quarter ended February 29, 2004]
Amendment to bylaws, as amended [incorporated by reference to Exhibit
3.1 to the Company’s Current Report on Form 8-K dated November 15,
2007]
3.4
Amendment No. 2 to bylaws, as amended [incorporated by reference to
Exhibit 3.1 to the Company’s Current Report on Form 8-K dated
September 3, 2008]
4.1
Article IV of the Company's Restated Certificate of Incorporation
(included in Exhibit 3.1)
4.2
4.3
Rights Agreement, dated June 19, 2000, between American Healthways,
Inc. and SunTrust Bank, including the Form of Rights Certificate (Exhibit
A), the Form of Summary of Rights (Exhibit B) and the Form of
Certificate of Amendment to the Restated Certificate of Incorporation of
American Healthways, Inc. (Exhibit C) [incorporated herein by reference
to Exhibit 4 to the Company’s Current Report on Form 8-K dated June 21,
2000]
Amendment No. 1 to Rights Agreement, dated June 15, 2004, between
American Healthways, Inc. and SunTrust Bank [incorporated herein by
reference to Exhibit 4 to the Company’s Current Report on Form 8-K
dated June 17, 2004]
4.4
Amendment No. 2 to Rights Agreement, dated July 19, 2006, between
Healthways, Inc. and SunTrust Bank [incorporated herein by reference to
Exhibit 4.1 to the Company’s Current Report on Form 8-K dated July 19,
2006]
10.1
Fourth Amended and Restated Revolving Credit and Term Loan
Agreement (“Fourth Amended Credit Agreement”) between the Company
and SunTrust Bank as Administrative Agent, U.S. Bank National
Association and Regions Bank as Co-Documentation Agents, and
JPMorgan Chase Bank, N.A., and Fifth Third Bank, N.A. as Co-
Syndication Agents dated March 30, 2010 [incorporated by reference to
Exhibit 10.1 to Company’s Current Report on Form 8-K dated April 5,
2010]
76
10.2
Office Lease by and between Healthways, Inc. and Highwoods/Tennessee
Holdings, L.P., dated as of May 4, 2006 [incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K dated May 5,
2006]
Management Contracts and Compensatory Plans
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
Employment Agreement dated December 19, 2008 between the Company
and Ben R. Leedle, Jr. [incorporated by reference to Exhibit 10.1 to the
Company’s Form 10-QT of the Company’s transition period ended
December 31, 2008]
Employment Agreement dated December 19, 2008 between the Company
and Mary A. Chaput [incorporated by reference to Exhibit 10.2 to the
Company’s Form 10-QT of the Company’s transition period ended
December 31, 2008]
Transition Employment Agreement dated December 31, 2010 between the
Company and Mary A. Chaput [incorporated by reference to Exhibit 10.1
to the Company’s Current Report on Form 8-K dated January 6, 2011]
Employment Agreement dated December 19, 2008 between the Company
and Anne Wilkins [incorporated by reference to Exhibit 10.1 to Form 10-
Q of the Company’s fiscal quarter ended March 31, 2010]
Employment Agreement dated December 10, 2008 between the Company
and Matthew Kelliher [incorporated by reference to Exhibit 10.4 to Form
10-QT of the Company’s transition period ended December 31, 2008]
Employment Agreement dated October 11, 2008 between the Company
and Stefen F. Brueckner [incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K dated October 16, 2008]
Employment Agreement dated December 31, 2010 between the Company
and Alfred Lumsdaine [incorporated by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-K dated January 6, 2011]
Employment Agreement dated December 31, 2010 between the Company
and Thomas Cox
Employment Agreement dated March 8, 2011 between the Company and
James W. Elrod
Long-term performance award agreement dated September 28, 2006
between the Company and Matthew E. Kelliher [incorporated by
reference to Exhibit 10.2 to Form 10-Q of the Company’s fiscal quarter
ended February 28, 2007]
77
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
21
23
Long-term performance award agreement dated October 26, 2010
between the Company and Matthew E. Kelliher [incorporated by
reference to Exhibit 10.1 to Form 10-Q of the Company’s fiscal quarter
ended September 30, 2010]
Capital Accumulation Plan, as amended and restated [incorporated by
reference to Exhibit 10.4 to Form 10-Q of the Company’s fiscal quarter
ended June 30, 2010]
Form of Indemnification Agreement by and among the Company and the
Company's directors [incorporated by reference to Exhibit 10.15 to
Registration Statement on Form S-1 (Registration No. 33-41119)]
2007 Stock Incentive Plan, as amended [incorporated by reference to
Exhibit 10.1 to Form 10-Q of the Company’s fiscal quarter ended June 30,
2010]
1996 Stock Incentive Plan, as amended [incorporated by reference to
Exhibit 10.20 to Form 10-K of the Company’s fiscal year ended August
31, 2006]
2001 Amended and Restated Stock Option Plan, as amended
[incorporated by reference to Exhibit 10.21 to Form 10-K of the
Company’s fiscal year ended August 31, 2006]
Form of Non-Qualified Stock Option Agreement under the Company’s
2007 Stock Incentive Plan [incorporated by reference to Exhibit 10.24 to
Form 10-K of the Company’s fiscal year ended August 31, 2007]
Form of Restricted Stock Unit Award Agreement under the Company’s
2007 Stock Incentive Plan [incorporated by reference to Exhibit 10.25 to
Form 10-K of the Company’s fiscal year ended August 31, 2007]
Form of Non-Qualified Stock Option Agreement (for Directors) under the
Company’s 2007 Stock Incentive Plan [incorporated by reference to
Exhibit 10.2 to Form 10-Q of the Company’s fiscal quarter ended June 30,
2010]
Form of Restricted Stock Unit Award Agreement (for Directors) under the
Company’s 2007 Stock Incentive Plan [incorporated by reference to
Exhibit 10.3 to Form 10-Q of the Company’s fiscal quarter ended June 30,
2010]
2007 Stock Incentive Plan Performance Cash Award Agreement
[incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K dated March 4, 2009]
Subsidiary List
Consent of Ernst & Young LLP
78
31.1
31.2
32
Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002
made by Ben R. Leedle, Jr., Chief Executive Officer
Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002
made by Alfred Lumsdaine, Chief Financial Officer
Certification Pursuant to 18 U.S.C section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 made by Ben R. Leedle,
Jr., Chief Executive Officer and Alfred Lumsdaine, Chief Financial
Officer
(b)
Exhibits
Refer to Item 15(a)(3) above.
(c)
Not applicable
79
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
March 15, 2011
HEALTHWAYS, INC
By: /s/ Ben R. Leedle, Jr.
Ben R. Leedle, Jr.
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
/s/ Ben R. Leedle, Jr.
Ben R. Leedle, Jr.
Chief Executive Officer and Director (Principal
Executive Officer)
Date
March 15, 2011
Chief Financial Officer (Principal Financial Officer)
March 15, 2011
Chairman of the Board and Director
March 15, 2011
/s/ Alfred Lumsdaine
Alfred Lumsdaine
/s/ Thomas G. Cigarran
Thomas G. Cigarran
/s/ John A. Wickens
John A. Wickens
/s/ William D. Novelli
William D. Novelli
Director
Director
/s/ William C. O’Neil, Jr.
William C. O'Neil, Jr.
Director
/s/ John W. Ballantine
John W. Ballantine
Director
/s/ Mary Jane England, M.D.
Mary Jane England, M.D.
Director
/s/ Alison Taunton-Rigby
Alison Taunton-Rigby
/s/ Jay C. Bisgard, M.D.
Jay C. Bisgard, M.D.
/s/ C. Warren Neel
C. Warren Neel
Director
Director
Director
80
March 15, 2011
March 15, 2011
March 15, 2011
March 15, 2011
March 15, 2011
March 15, 2011
March 15, 2011
March 15, 2011
Board of Directors
John W. Ballantine
Former Executive Vice President
and Chief Risk Management Officer
First Chicago NBD Corporation
J. Cris Bisgard, M.D., M.P.H.
Former Director of Health Services
Delta Air Lines
Thomas G. Cigarran
Chairman
and former Chief Executive Officer
Healthways, Inc.
Mary Jane England, M.D.
President of Regis College
Ben R. Leedle, Jr.
President and Chief Executive Officer
Healthways, Inc.
C. Warren Neel, Ph.D.
Executive Director of the
Center for Corporate Governance
University of Tennessee
William D. Novelli
Professor
McDonough School of Business
Georgetown University
Former Chief Executive Officer of AARP
William C. O’Neil, Jr.
Former Chairman, President
and Chief Executive Officer
ClinTrials Research, Inc.
Alison Taunton-Rigby, Ph.D.
Chief Executive Officer
RiboNovix, Inc.
John A. Wickens
Former National Health Plan President
UnitedHealth Group
Executive Officers
Ben R. Leedle, Jr.
President and Chief Executive Officer
Thomas F. Cox
Vice President
& Chief Operating Officer
Matthew E. Kelliher
President, International Business
Alfred Lumsdaine, CPA
Vice President
& Chief Financial Officer
James W. Elrod
Vice President,
General Counsel and Secretary
Stay in touch.
Connect with us:
800-327-3822
WWW.HEALTHWAYS.COM
info@healthways.com
701 Cool Springs Blvd.
Franklin, TN 37067