UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended December 31, 2016
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 Commission file number 000-19364
TIVITY HEALTH, INC.
(Exact name of registrant as specified in its
charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
62-1117144
(I.R.S. Employer
Identification No.)
701 Cool Springs Boulevard, Franklin, TN 37067
(Address of principal executive offices) (Zip code)
(615) 614-4929
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock - $.001 par value
Name of each exchange on which registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.
Yes (cid:1407)
No (cid:1409)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes (cid:1407)
No (cid:1409)
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:1409)
No (cid:1407)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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:1409)
No (cid:1407)
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:1409)
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:1407) Accelerated filer (cid:1409)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)Non-accelerated filer (cid:1407)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)Smaller reporting company (cid:1407)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes (cid:1407)
No (cid:1409)
As of June 30, 2016, 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 $365.4 million based on the price at which the shares were last sold for such date on The NASDAQ
Stock Market LLC.
As of February 28, 2017, 39,127,479 shares of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the 2017 Annual Meeting of Stockholders are incorporated by
reference into Part III of this Form 10-K.
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Tivity Health, Inc.
Form 10-K
Table of Contents
Part I
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
Mine Safety Disclosures
Part II
Part III
Part IV
Item 5.
Item 6.
Item 7.
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
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Item 8.
Changes in and Disagreements with Accountants on Accounting and
Item 9.
Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
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
Item 15.
Item 16.
Exhibits, Financial Statement Schedules
Form 10-K Summary
3
As used throughout this Annual Report on Form 10-K (this “Report”), unless the context otherwise indicates, the
terms "we," "us," "our," "Tivity Health," or the "Company" refer collectively to Tivity Health, Inc. and its wholly-
owned subsidiaries.
PART I
Item 1. Business
Overview
Tivity Health, Inc. was founded and incorporated in Delaware in 1981. Through our three programs,
SilverSneakers® senior fitness, Prime® fitness and WholeHealth LivingTM, we are focused on targeted
population health for those aged 50 and older. The SilverSneakers senior fitness program is offered to
members of Medicare Advantage, Medicare Supplement, and Group Retiree plans. We also offer Prime
fitness, a fitness facility access program, through commercial health plans, employers and insurance
exchanges. Our national network of fitness centers delivers both SilverSneakers and Prime fitness. Our fitness
networks encompass approximately 16,000 participating locations and more than 1,000 alternative locations
that provide classes outside of traditional fitness centers. We sell access to our WholeHealth Living network
primarily to commercial health plans. Our WholeHealth Living network includes over 88,000 complementary,
alternative, and physical medicine practitioners to serve individuals through health plans and employers who
seek health services such as physical therapy, occupational therapy, speech therapy, chiropractic care,
acupuncture, and more.
Effective July 31, 2016, we sold our total population health services ("TPHS") business to Sharecare,
Inc. ("Sharecare"). The TPHS business took a systematic approach to keeping healthy people healthy,
eliminating or reducing lifestyle risks and optimizing care for persistent or chronic conditions. The TPHS
business included our partnerships with Blue Zones, LLC, and Dr. Dean Ornish (the Blue Zones Project by
Healthways™ and Dr. Dean Ornish's Program for Reversing Heart Disease™, respectively), our joint venture
with Gallup, Inc. (“Gallup”), Navvis Healthcare, LLC (“Navvis”), MeYou Health, LLC (“MeYou Health”), and our
international operations. While Navvis and MeYou Health were part of our TPHS business, they were sold
separately to other buyers in November 2015 and June 2016, respectively. Results of operations for the TPHS
business have been classified as discontinued operations for all periods presented in the Consolidated
Financial Statements.
In January 2017, we rebranded and changed the name of the Company from Healthways, Inc. to Tivity
Health, Inc. to better align with our portfolio of fitness and health improvement programs. The Company is
headquartered at 701 Cool Springs Boulevard, Franklin, Tennessee 37067.
Customer Contracts
Our fees are generally billed per member per month ("PMPM"), upon member participation, or a
combination of both. For PMPM fees, we generally determine our contract fees by multiplying the contractually
negotiated PMPM rate by the number of members covered by our services during the month.
Our contracts with health plans generally range from three to five years. Some of our contracts allow
the customer to terminate early.
Backlog
Backlog represents the estimated average annualized revenue at target performance over the term of the
contract for new contracts that have not yet started. We do not consider backlog at December 31 to be a
meaningful predictor of our future revenues as a significant portion of our new revenues come from a
combination of expanding revenue from existing customers and new customers with contracts that are signed
and started on a non-calendar year basis. Annualized revenue in backlog as of December 31, 2016 and 2015,
excluding the TPHS business, was as follows:
(In thousands)
Annualized revenue in backlog
December 31, December 31,
2016
2015
$
3,800 $
3,700
4
Business Strategy
Beginning in October 2015, we engaged in a comprehensive review of the Company’s organization, our
business structure, costs, product offerings, and delivery. As a result of this review, effective as of July 31,
2016, we sold our TPHS business to Sharecare, a digital health company helping people manage all their
healthcare in one place.
In August 2016, we announced our "A-B-C" strategy designed to (A) add new members in our three
existing networks - SilverSneakers, Prime fitness and WholeHealth Living, (B) build engagement among current
members, and (C) collaborate with partners to add new products and services that will leverage the value of our
brand. In addition to the A-B-C strategy, we are focused on supporting the ability of our health plan customers to
meet the needs of their members as well as providing a valuable service to improve the health and well-being of
the consumers we serve through our networks and with our products.
We engage and support our members based on the needs and preferences of our customers. Within our
fitness networks, we have approximately 16,000 participating locations and more than 1,000 alternative locations
that provide classes outside of traditional fitness centers. More than 13,000 of these participating locations within
the national network deliver our proprietary SilverSneakers fitness program, and more than 10,000 of these
locations offer Prime fitness.
Segment and Major Customer Information
Excluding the TPHS business, during 2016, we had one operating and reportable segment. During
2016, Humana, Inc. ("Humana") and United Healthcare, Inc. (“United Healthcare”) each comprised more than
10%, and together comprised approximately 36%, of our revenues from continuing operations. Our primary
contract with Humana was renewed in 2015 and continues through 2020. Our primary contract with United
Healthcare continues through 2017. No other customer accounted for 10% or more of our revenues from
continuing operations in 2016. See Note 19 to Notes to Consolidated Financial Statements included in this
Report relating to revenues from external customers and customer concentration.
Competition
The healthcare industry is highly competitive, and the manner in which services are provided is subject
to continual change. Other entities, whose financial and marketing resources may exceed our resources, may
choose to initiate or expand programs in competition with our offerings.
We believe we have certain advantages over our competitors such as our proprietary class programming;
the brand recognition of programs such as SilverSneakers; the depth and breadth of our fitness center network
relationships; and the trusting connections with our members developed over 25 years. However, we cannot
assure you that we can compete effectively with other entities such as those noted above.
Industry Integration and Consolidation
Consolidation remains an important factor in all aspects of the healthcare industry 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 customers if they are acquired by other entities that already have or contract for
programs similar to ours or are not interested in our programs.
Governmental Regulation
Governmental regulation impacts us in a number of ways in addition to those regulatory risks presented
under Item 1A. "Risk Factors" below.
Health Reform
In recent years, Congress and certain state governments have passed a large number of laws and
regulations intended to result in major changes within the healthcare system. The Patient Protection and
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Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively,
the "ACA"), the most prominent of these efforts, changes how healthcare services are covered, delivered, and
reimbursed through, among other things, expanded health insurance coverage, reduced growth in Medicare
program spending and the establishment of programs that tie reimbursement to care quality and value.
However, there is substantial uncertainty regarding the ongoing effects of the ACA because of the results of
the 2016 federal elections, which could result in the repeal of the ACA or significant changes to the ACA, its
implementation or its interpretation. For example, President Donald Trump has signed an executive order that
directs agencies to minimize “economic and regulatory burdens” of the ACA, but it is unclear how this will be
implemented. It is difficult to predict whether, when or how the ACA will be changed, what alternative
provisions, if any, will be enacted, the timing of implementation of any alternative provisions, and the impact
of alternative provisions on providers and other healthcare industry participants.
The ACA contains provisions that have had, and will (if not revised or repealed) continue to have, an
impact on our customers, including commercial health plans and Medicare Advantage programs. The ACA has
decreased the number of uninsured individuals and expanded coverage through the expansion of public
programs and private sector health insurance. However, the ACA also may increase costs and/or reduce the
revenues of our customers or prospective customers. For example, the ACA 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, the ACA 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 must be at least 80% for individual and small group health
plans and 85% for large group coverage and Medicare Advantage plans, with policyholders receiving rebates
and, in the case of Medicare Advantage plans, the U.S. Department of Health & Human Services ("HHS")
receiving refunds if the actual loss ratios fall below these minimums. The ACA also reduces premium payments
to Medicare Advantage plans such that the managed care per capita payments paid by HHS to Medicare
Advantage plans are, on average, equal to those for traditional Medicare. While the ACA provides for bonuses to
Medicare Advantage plans that achieve service benchmarks and quality ratings, overall payments to Medicare
Advantage plans are significantly reduced under the ACA.
It is difficult to predict with any reasonable certainty the full impact of the ACA on the Company due to the
likelihood of repeal and significant changes to the law as a result of the 2016 federal elections, and other factors
such as the law's complexity, lack of implementing regulations or interpretive guidance, and remaining or new
court challenges.
Other Laws
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 those governing
Medicare Advantage plans and their marketing and the licensing and reimbursement requirements of federal,
state and local agencies. Certain of our services, including health service utilization management and certain
claims payment functions, require licensure by state government agencies. We are subject to a variety of legal
requirements in order to obtain and maintain such licenses.
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. Because we handle individually-identifiable health information on behalf of
covered entities, we are considered a "business associate" and are required to comply with most aspects of the
HIPAA privacy and security regulations.
Violations of HIPAA and its implementing regulations may result in criminal penalties and in civil
penalties of up to $55,010 per violation for a maximum civil penalty of $1,650,300 million in a calendar year for
violations of the same requirement. Beginning in 2017, these penalties will be updated annually based on
changes to the consumer price index. 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 individually-identifiable health information, we are subject to
contractual obligations and state and federal requirements that require us to notify our customers. These
6
requirements may also require us or our customers to notify affected individuals, regulatory agencies, and the
media of the data breach. In addition, non-permitted uses and disclosures of unsecured individually identifiable
health information are presumed to be breaches for which notice is required, unless it can be demonstrated
that there is a low probability the information has been compromised.
Federal law contains various prohibitions related to false statements and false claims, some of which
apply to private payors as well as federal programs. Our contracts with Medicare Advantage plans may subject
us to a number of obligations, including billing and reimbursement requirements, prohibitions on fraudulent and
abusive conduct and fraud and abuse training and screening obligations. 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. Liability under the federal False Claims Act arises when an
entity knowingly submits a false claim for reimbursement to the federal government. The federal False Claims
Act defines the term "knowingly" broadly. There are many other potential bases for liability under the federal
False Claims Act, including knowingly and improperly avoiding repayment of an overpayment received from the
government and the knowing failure to report and return an overpayment within 60 days of identifying the
overpayment. The submission of claims for services or items generated in violation of certain "fraud and abuse"
provisions of the Social Security Act, including the anti-kickback provisions, constitutes a false or fraudulent
claim under the federal False Claims Act. 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 federal self-
referral prohibition commonly known as the Stark Law, have thereby submitted false claims under the federal
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 federal False Claims Act or other fraud and abuse laws, including similar
state statutes, and it is not possible to predict the impact of such actions. Violations of applicable laws may
result in significant civil and criminal penalties. For example, violations of the federal False Claims Act may
result in penalties of three times the actual damages sustained by the government, plus mandatory civil
penalties of between $10,781 and $21,563 for each separate false claim. Beginning in 2017, most federal civil
penalties, including penalties under the federal False Claims Act, will be updated annually based on change to
the consumer price index.
Because of the international operations previously conducted as part of our TPHS business that we sold
to Sharecare in July 2016, we were subject to the U.S. Foreign Corrupt Practices Act (the "FCPA") and similar
anti-bribery laws of other countries in which we provided services prior to the sale. The FCPA and similar anti-
bribery laws generally prohibit companies and their intermediaries from making improper payments to government
officials or other third parties for the purpose of obtaining or retaining business or gaining any business advantage.
Failure to comply with the FCPA and similar legislation prior to the sale of our TPHS business could result in the
imposition of civil or criminal fines and penalties.
Employees
As of February 28, 2017, we had approximately 500 employees. Our employees are not subject to any
collective bargaining agreements. We believe we have good relationships with our employees.
Available Information
Our Internet address is www.tivityhealth.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 (the "Exchange Act"), as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the Securities and Exchange Commission (the "SEC"). The
public may read and copy any materials that we file with the SEC at the SEC's Public Reference Room at 100 F
Street NE, Washington DC 20549. The public may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy
and information statements, and other information regarding issuers that file electronically with the SEC at
www.sec.gov.
7
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 the 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 Report contain additional information concerning these
and other risks.
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 may continue to consolidate, and we cannot assure you that we will be able to retain health plan
customers, or continue to provide our products and services to such health plan customers on terms at least as
favorable to us as currently provided, if they are acquired by other health plans that already participate in
competing programs or are not interested in our programs. Further, consolidation among our customers,
particularly our health plan customers that are part of larger healthcare enterprises, could provide these
organizations with greater bargaining power, which may lead to further pressure on the prices for our products
and services. In addition, a reduction in the number of covered lives enrolled with our health plan customers or
in the payments we receive could adversely affect our results of operations. Our health plan customers are
subject to continuing competition and reduced reimbursement rates from governmental and private sources,
which could lead current or prospective customers to seek reduced fees or choose to reduce or delay the
purchase of our services. Finally, health plan customers could attempt to offer services themselves that compete
directly with our offerings or stop providing our offerings to their members.
Reductions in Medicare Advantage health plan reimbursement rates may negatively impact our business
and results of operations.
A significant portion of our revenue is indirectly derived from the monthly premium payments paid by HHS
to health plans, who are our customers, for services provided to Medicare Advantage beneficiaries. As a result,
our results of operations are, in part, dependent on government funding levels for Medicare Advantage programs.
Any changes that limit or reduce Medicare Advantage reimbursement levels, such as reductions in or limitations of
reimbursement amounts or rates under these programs, reductions in funding of these programs, expansion of
benefits without adequate funding, elimination of coverage for certain benefits, or elimination of coverage affecting
the services that we provide, could have a material adverse effect on our customers, and as a result, on our
business and results of operations.
We currently derive a significant percentage of our revenues from two customers.
For the year ended December 31, 2016, Humana and United Healthcare each comprised more than
10%, and together comprised approximately 36%, of our revenues from continuing operations. Our primary
contract with Humana was renewed in 2015 and continues through 2020. The term of our contract with United
Healthcare continues through 2017. The loss or restructuring of a contract with Humana, United Healthcare or
our other significant customers could have a material adverse effect on our business and results of operations.
Our business strategy relating to the development and introduction of new products and services
exposes us to risks such as limited customer acceptance and additional expenditures that may not
result in additional net revenue.
An important component of our business strategy is to focus on new products and services that enable
us to provide immediate value to our customers. Customer acceptance of these new products and services
cannot be predicted with certainty, and if we fail to execute properly on this strategy or to adapt this strategy as
market conditions evolve, our ability to grow revenue and our results of operations may be adversely affected.
If we fail to successfully implement our business strategy, our financial performance and our growth
could be materially and adversely affected.
8
Our future financial performance and success are dependent in large part upon our ability to implement
our business strategy successfully. Implementation of our strategy will require effective management of our
operational, financial and human resources and will place significant demands on those resources. See Item 1.
"Business – Business Strategy" for more information regarding our business strategy. There are risks involved
in pursuing our strategy, including the ability to hire or retain the personnel necessary to manage our strategy
effectively.
In addition to the risks set forth above, implementation of our business strategy could be affected by a
number of factors beyond our control, such as increased competition, legal developments, government
regulation, general economic conditions, increased operating costs or expenses, and changes in industry
trends. We may decide to alter or discontinue certain aspects of our business strategy at any time. If we are not
able to implement our business strategy successfully, our long-term growth and profitability may be adversely
affected. Even if we are able to implement some or all of the initiatives of our business strategy successfully,
our operating results may not improve to the extent we anticipate, or at all.
Our inability to renew and/or maintain contracts with our customers could adversely affect our
business and results of operations.
If our customers choose not to renew their contracts with us, our business and results of operations could
be materially adversely affected.
Changes in macroeconomic conditions may adversely affect our business.
Economic difficulties and other macroeconomic conditions could reduce the demand and/or the timing
of purchases for certain of our services from customers and potential customers. Loss of a significant
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, changes in 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, that the terms and conditions would be acceptable to us.
We may experience difficulties associated with the implementation and/or integration of new
businesses, services (including outsourced services), technologies, solutions, or products.
We may face difficulties, costs, and delays in effectively implementing and/or integrating acquired
businesses, services (including outsourced services), or technologies into our business. Implementing
internally-developed solutions and/or integrating newly acquired businesses, services (including outsourced
services), and technologies could be time-consuming and may strain our resources. Consequently, we may
not be successful in implementing and/or integrating these new businesses, services, or technologies and may
not achieve anticipated revenue and cost benefits.
The performance of our business and the level of our indebtedness could prevent us from meeting the
obligations under our credit agreement or the cash convertible senior notes or have an adverse effect on
our future financial condition, our ability to raise additional capital, or our ability to react to changes in the
economy or our industry.
On June 8, 2012, we entered into the Fifth Amended and Restated Revolving Credit and Term Loan
Agreement (as amended, the "Fifth Amended Credit Agreement"). On July 16, 2013, we completed the issuance
of $150.0 million aggregate principal amount of cash convertible senior notes due 2018 (the "Cash Convertible
Notes"). As of December 31, 2016, our long-term debt under these arrangements, including the current portion but
excluding the debt discount, was $223.5 million.
Our ability to service our indebtedness (including the debt outstanding under the Fifth Amended Credit
Agreement and the Cash Convertible Notes) 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.
The Fifth Amended Credit Agreement contains various financial covenants, restricts the payment of
dividends, and limits the amount of repurchases of our common stock. A breach of any of these covenants could
result in a default under the Fifth Amended Credit Agreement in which all amounts outstanding under the Fifth
9
Amended Credit Agreement may become immediately due and payable and all commitments under the Fifth
Amended Credit Agreement to extend further credit may be terminated. In addition, a payment default, including
an acceleration following an event of default, under the Fifth Amended Credit Agreement or under our indenture
for the Cash Convertible Notes could each trigger an event of default under the other debt instrument, which could
result in the principal of and the accrued and unpaid interest on such debt becoming due and payable.
Our indebtedness could adversely affect our future financial condition or our ability to react to changes in
the economy or industry by, among other things:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
increasing our vulnerability to a downturn in general economic conditions, loss of revenue and/or
profit margins in our business, or to increases in interest rates, particularly with respect to the
portion of our outstanding debt that is subject to variable interest rates;
potentially limiting our ability to obtain additional financing or to obtain such financing on
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
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.
The conditional cash conversion feature of the Cash Convertible Notes, if triggered, may adversely affect
our liquidity, financial condition and operating results.
In the event the Cash Conversion Derivative is triggered, holders of Cash Convertible Notes will be entitled
to convert the Cash Convertible Notes at any time during specified periods at their option. Although the Cash
Convertible Notes are not currently convertible, the Cash Convertible Notes will become convertible into cash
during any calendar quarter (and only during such calendar quarter) if the last reported sale price of our common
stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days
ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to
approximately $25.30 per share. The last reported sale price of our common stock as reported on Nasdaq
on March 1, 2017 was $28.95 per share. If one or more holders elect to convert their Cash Convertible Notes, we
would be required to pay cash to settle any such conversion, which could adversely affect our liquidity. In addition,
even if holders do not elect to convert their Cash Convertible Notes, we would be required under applicable
accounting rules to reclassify the outstanding principal of the Cash Convertible Notes that are convertible as a
current rather than long-term liability, which could result in a material reduction of our net working capital and
result in a material adverse effect on our financial condition and results of operations.
The accounting for the Cash Convertible Notes and related cash convertible notes hedge transactions
may result in volatility to our consolidated statements of comprehensive income (loss).
The Cash Conversion Derivative that is part of the Cash Convertible Notes is accounted for as a derivative
liability pursuant to Accounting Standards Codification (“ASC”) Topic 470, Debt, relating to derivative instruments
and hedging activities. In general, the initial valuation of the conversion option was bifurcated from the debt
component of the Cash Convertible Notes and is measured at fair value each reporting period. For each financial
statement period after issuance of the Cash Convertible Notes, a hedge gain (or loss) will be reported in our
consolidated statements of comprehensive income (loss) to the extent the valuation of the Cash Conversion
Derivative changes from the previous period. In connection with the issuance of the Cash Convertible Notes, we
entered into privately negotiated convertible note hedge transactions (the "Cash Convertible Notes Hedges"),
which are cash-settled, recorded and carried at fair value as a derivative asset and intended to offset the gain (or
loss) associated with changes to the valuation of the Cash Conversion Derivative. Although we do not expect there
to be a material net impact to our consolidated statements of comprehensive income (loss) as a result of our
issuing the Cash Convertible Notes and entering into the Cash Convertible Notes Hedges, we cannot assure you
these transactions will be completely offset, which may result in volatility to our consolidated statements of
comprehensive income (loss).
We are subject to counterparty risk with respect to the Cash Convertible Notes Hedges.
The counterparties to the Cash Convertible Notes Hedges (the "Counterparties") are financial institutions
10
or affiliates of financial institutions, and we will be subject to the risk that these Counterparties may default or
otherwise fail to perform, or may exercise certain rights to terminate their obligations, under the Cash
Convertible Notes Hedges. Our exposure to the credit risk of the Counterparties will not be secured by any
collateral. If one or more of the Counterparties to one or more of the Cash Convertible Notes Hedges becomes
subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim
equal to our exposure at the time under those transactions. Our exposure will depend on many factors but,
generally, the increase in our exposure will be correlated to the increase in the market price of our common
stock and in volatility of our common stock. In addition, upon a default or other failure to perform, or a termination
of obligations by one of the Counterparties we may suffer adverse tax consequences and dilution with respect to
our common stock. We can provide no assurances as to the financial stability or viability of any of the
Counterparties.
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, 2016, we had approximately $334.7 million and $29.0 million of goodwill
and intangible assets, respectively. We review goodwill and intangible assets not subject to amortization for
impairment on an annual basis (during the fourth quarter) or more frequently whenever events or circumstances
indicate that the carrying value may not be recoverable. 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.
A failure of our information systems could adversely affect our business.
Our ability to deliver our services depends on effectively using information technology.
We rely upon our information systems for operating and monitoring all major aspects of our business.
These systems and, therefore, our operations could be damaged or interrupted by natural disasters, power loss,
network failure, improper operation by our employees, data privacy or security breaches, computer viruses,
computer hacking, network penetration or other illegal intrusions or other unexpected events. Any disruption in
the operation of our information systems, regardless of the cause, could adversely impact our operations, which
may adversely affect our financial condition, results of operations and cash flows.
A cybersecurity incident could result in the loss of confidential data, give rise to remediation and other
expenses, expose us to liability under HIPAA, consumer protection laws, or common law theories,
subject us to litigation and federal and state governmental inquiries, damage our reputation, and
otherwise be disruptive to our business.
The nature of our business involves the receipt and storage of individually identifiable health
information about the participants in our programs. The secure maintenance of this confidential information is
critical to our business operations. To protect our information systems from attack, damage and unauthorized
use, we have implemented multiple layers of security, including technical safeguards, processes, and our
people. Our defenses are monitored and routinely tested internally and by external parties. Despite these
efforts, threats from malicious persons and groups, new vulnerabilities, and advanced attacks against
information systems create risk of cybersecurity incidents. There can be no assurance that we will not be
subject to cybersecurity incidents that bypass our security measures, result in loss of personal health
information or other data subject to privacy laws or disrupt our information systems or business. As a result,
cybersecurity and the continued development and enhancement of our controls, processes and practices
remain a priority for us. We may be required to expend significant additional resources in our efforts to modify
or enhance our protective measures against evolving threats or to investigate and remediate any cybersecurity
vulnerabilities. The occurrence of a breach in security of our systems or those of our third-party vendors and
other service providers could result in interruptions, delays, the loss, access, misappropriation, disclosure or
corruption of data, liability under privacy, security and consumer protection laws or litigation under these or
other laws, including common law theories, and subject us to federal and state governmental inquiries, any of
which could have a material adverse effect on our financial condition and results of operations and harm our
business reputation.
In order to be successful, we must attract, engage, retain and integrate key employees and have
adequate succession plans in place, and failure to do so could have an adverse effect on our ability to
11
manage our business.
Our success depends, in large part, on our ability to attract, engage, retain and integrate qualified
executives and other key employees throughout all areas of our business. Identifying, developing internally or
hiring externally, training and retaining highly-skilled managerial and other personnel are critical to our future, and
competition for experienced employees can be intense. Failure to successfully hire executives and key
employees or the loss of any executives and key employees could have a significant impact on our operations.
The loss of services of any key personnel, the inability to retain and attract qualified personnel in the future, or
delays in hiring may harm our business and results of operations. Further, changes in our management team
may be disruptive to our business, and any failure to successfully integrate key new hires could adversely affect
our business and results of operations.
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, including
executives with the required skills and experience to operate and grow our business, and staff personnel for the
day-to-day operations of our business. These challenges may require us to enhance wages and benefits to
recruit and retain qualified management and other professionals. Difficulties in attracting and retaining qualified
management and other professionals, or in controlling labor costs, could have a material adverse effect on our
profitability.
We are or may become a party to litigation that could potentially force us to pay significant damages
and/or harm our reputation.
We are subject to certain legal proceedings that arise in the ordinary course of business. These legal
proceedings and any other claims that we may face in the future, whether with or without merit, could result in
costly litigation, and divert the time, attention, and resources of our management. Although we currently
maintain various types of 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 results of operations. In addition, legal expenses associated with
the defense of these matters may be material to our results of operations in a particular financial reporting
period.
We could be adversely affected by violations of the FCPA and similar anti-bribery laws of other countries
in which we provided services prior to the sale of our TPHS business.
Because of the international operations that we previously conducted as part of our TPHS business that
we sold to Sharecare in July 2016, we could be adversely affected by violations of the FCPA and similar anti-
bribery laws of other countries in which we provided services prior to the sale. The FCPA and similar anti-
bribery laws generally prohibit companies and their intermediaries from making improper payments to
government officials or other third parties for the purpose of obtaining or retaining business or gaining any
business advantage. While our policies mandated compliance with these anti-bribery laws, we cannot provide
assurance that our internal control policies and procedures always protected us from reckless or criminal acts
committed by our employees, contractors or agents. Failure to comply with the FCPA and similar legislation
prior to the sale of our TPHS business could result in the imposition of civil or criminal fines and penalties and
could disrupt our business and adversely affect our results of operations, cash flows and financial condition.
Compliance with existing or newly adopted federal and state laws and regulations or new or revised
interpretations of such requirements could adversely affect our results of operations or may require us
to spend substantial amounts, and the failure to comply with applicable laws and regulations could
subject us to penalties or negatively impact our ability to provide services.
Our customers are subject to considerable state and federal government regulation, and a substantial
majority of our business involves providing services to Medicare Advantage beneficiaries. As a result, we are
subject directly to various federal laws and regulations, including the federal False Claims Act, billing and
reimbursement requirements and other provisions related to fraud and abuse. Further, our contracts with
Medicare Advantage plans require us to comply with a number of regulatory provisions and permit these
12
customers to perform compliance audits. 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. Further, we are required to comply with most requirements of the HIPAA privacy and
security laws and regulations and may be subject to criminal or civil penalties for violations of these regulations.
Certain of our services, including health utilization management and certain claims payment functions, require
licensure and may be regulated 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.
We continually monitor the extent to which federal and state legislation and regulations govern our
operations. New federal or state laws or regulations or new interpretations of existing requirements that affect our
operations could have a material adverse effect on our results of operations. If we are found to have violated
applicable laws, to have caused any of our customers to submit false claims or make false statements, or to have
failed to comply with our contractual compliance obligations, we could be required to restructure our operations,
be subject to contractual penalties, including termination of our customer agreements, and be subject to
significant civil and criminal penalties.
Healthcare reform efforts may result in a reduction to our revenues from government health programs
and private insurance companies or otherwise directly or indirectly impact our business.
The healthcare industry is subject to various political, regulatory, scientific, and technological influences.
Efforts at federal and state levels of government have resulted in laws and regulations intended to effect
significant change within the healthcare system. The ACA, the most prominent of these efforts, affects
coverage, delivery, and reimbursement of healthcare services. It has decreased the number of uninsured
individuals, but may increase the costs and/or reduce the revenues of our customers or prospective customers.
For example, the ACA eliminates pre-existing condition exclusions by commercial health plans, bans annual
benefit limits, mandates minimum MLRs for health plans, and provides for reductions in funding to Medicare
Advantage programs.
However, there is substantial uncertainty regarding the net effect and future impact of the ACA because of
the results of the 2016 federal elections, which will likely result in the repeal of the ACA or significant changes to
the ACA, its implementation and its interpretation. It is possible that the reforms imposed by the ACA or
uncertainty regarding its repeal or significant changes to the law will adversely affect the profitability of our
customers and cause our customers or prospective customers to reduce or delay the purchase of our services or
to demand reduced fees. Because of this uncertainty and many other variables, including the ACA 's complexity,
lack of implementing regulations or interpretive guidance and the outcome of court challenges, we are unable to
predict all of the ways in which the ACA could impact the Company. Furthermore, we could also be impacted by
future healthcare reform legislative and regulatory initiatives.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
We lease approximately 264,000 square feet of office space for our corporate headquarters in Franklin,
Tennessee, approximately 221,000 square feet of which is subleased, pursuant to an agreement that expires in
February 2023. We also lease approximately 92,000 square feet of office space in Chandler, Arizona (pursuant
to an agreement that expires in April 2020), and approximately 13,000 square feet of office space in Sterling,
Virginia.
Item 3. Legal Proceedings
We are subject to 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, some of which are expected to
be covered by insurance policies, will have a material adverse effect on our financial statements. As these
matters are subject to inherent uncertainties, our view of these matters may change in the future.
13
Item 4. Mine Safety Disclosures
Not applicable.
14
Executive Officers of the Registrant
The following table sets forth certain information regarding our executive officers as of March 6, 2017.
Executive officers of the Company serve at the pleasure of the Board.
Officer
Donato Tramuto
Age
60
Position
Chief Executive Officer of the Company since November 2015. Chief Executive
Officer and Chairman of the Board of Physicians Interactive Holdings from July
2013 to October 2015. Chief Executive Officer, Founder and Vice Chairman of
Physicians Interactive Holdings from October 2008 to July 2013. Chief
Executive Officer of i3 from 2004 to 2006. Chief Executive Officer and Co-
Founder of Constella Health Strategies from 1998 to 2003.
Glenn Hargreaves
50
Interim Chief Financial Officer since November 2016. Chief Accounting
Officer of the Company since July 2012 and Controller since January 2011.
Director of Tax of the Company from April 2005 until January 2011.
Mary Flipse
50
Chief Legal Officer since November 2015. General Counsel of the Company
from July 2012 to March 2016. Director, Corporate Counsel of the Company
from February 2012 to July 2012. Operations Counsel of the Company from
August 2011 until February 2012. Assistant General Counsel of King
Pharmaceuticals from May 2005 to July 2011.
15
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 on The NASDAQ Stock Market ("NASDAQ") under the symbol "TVTY".
The following table sets forth the high and low sales prices per share of our common stock as reported
by NASDAQ for the relevant periods.
Year ended December 31, 2016
First quarter
Second quarter
Third quarter
Fourth quarter
Year ended December 31, 2015
First quarter
Second quarter
Third quarter
Fourth quarter
$
$
High
Low
13.27 $
12.79
27.30
26.92
23.30 $
20.71
14.22
13.72
9.18
9.54
11.48
19.25
18.12
11.86
10.84
9.93
Performance Graph
The following graph compares the total stockholder return of $100 invested on December 31, 2011 in
(a) the Company, (b) the NASDAQ U.S. Stocks Benchmark index and (c) the NASDAQ Health Care Providers
index, assuming the reinvestment of all dividends.
The stock price performance shown on this graph is not necessarily indicative of future price
performance.
Notes:
A.
B.
C.
The lines represent annual index levels derived from compounded daily returns that include all
dividends.
The indexes are reweighted daily, using the market capitalization on the previous trading day.
If the annual interval, 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 December 31, 2011.
16
Unregistered Sales of Equity Securities
Pursuant to the Investment Agreement with CareFirst Holdings, LLC (“CareFirst”) (as described in Note
7 of the Notes to Consolidated Financial Statements included in this Report), CareFirst had an opportunity to
earn warrants based on achievement of certain quarterly thresholds for revenue. On April 8, 2016, we issued to
CareFirst warrants to purchase 22,895 shares of our common stock at an exercise price of $11.94 per share,
and on June 13, 2016, we issued to CareFirst warrants to purchase 17,008 shares of our common stock at an
exercise price of $12.97 per share. The issuance of these warrants was exempt from registration under Section
4(a)(2) of the Securities Act of 1933, as amended, because it was a transaction not involving a public offering.
In accordance with the terms of the Investment Agreement (as further discussed in Note 7 to Notes to
Consolidated Financial Statements in this Report), in September 2016, CareFirst exercised its right to convert
590,683 CareFirst warrants for a total of 218,162 shares of our common stock. In December 2016, CareFirst
exercised its right to convert 39,903 CareFirst Warrants for a total of 18,104 shares of our common stock. The
issuance of shares of our common stock as a result of the conversion of the CareFirst Warrants was exempt
from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, because it was a transaction
not involving a public offering.
Holders
At February 24, 2017, there were approximately 7,050 holders of our common stock, including 216
stockholders of record.
Dividends
We have never declared or paid a cash dividend on our common stock. We intend to retain any
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 will review our dividend policy from time to time and may declare
dividends at its discretion; however, our Fifth Amended Credit Agreement places restrictions on the payment of
dividends. For further discussion of the Fifth Amended Credit Agreement, see Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operation - Liquidity and Capital Resources."
Securities Authorized for Issuance Under Equity Compensation Plans
See Part III, Item 12. "Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters," for information regarding securities authorized for issuance under our equity compensation
plans, which is incorporated by reference herein.
Annual Report
A copy of the Tivity Health, Inc. Annual Report on Form 10-K for 2016 filed with the Securities and
Exchange Commission is available on the Company's website, www.tivityhealth.com. It is also available from
the Company (without exhibits) at no charge. These requests should be directed to Chip Wochomurka, Vice
President – Investor Relations, at the Company's corporate office.
17
Item 6. Selected Financial Data
The following table represents selected financial data. The table should be read in conjunction with Item
7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 8.
"Financial Statements and Supplementary Data" of this Report. As further discussed in Note 1 to Notes to
Consolidated Financial Statements included in this Report, our results from continuing operations do not include
the results of the TPHS business, which we sold effective July 31, 2016.
(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
Restructuring and related charges
Legal settlement charges
Operating income (loss)
Interest expense
Income (loss) before income taxes
Income tax expense (benefit)
Net income from continuing
operations
Loss from discontinued operations,
net of income tax benefit
Net income (loss)
Less: net income (loss) attributable to
non-controlling interest
Net income (loss) attributable to Tivity
Health, Inc.
$
Basic income (loss) per share
attributable to Tivity Health, Inc.:
Continuing operations
Discontinued operations
Net loss
Diluted income (loss) per share
attributable to Tivity Health, Inc.:
Continuing operations
Discontinued operations
Net loss (1)
$
$
$
$
Weighted average common shares
and equivalents:
Basic
Diluted
Selected Balance Sheet Data:
Total assets (2) (3)
2016
Year Ended December 31,
2015
2014
2013
2012
$
500,998 $
452,092 $
405,263 $ 359,434 $ 314,032
357,120
318,060
272,400
248,312 216,570
39,478
4,085
4,933
—
95,382 $
17,318
35,546
6,869
702
—
90,915 $
17,996
32,075
7,035
—
5,910
87,843 $
17,449
29,584
6,403
—
—
75,135 $
15,748
32,389
5,413
487
—
59,173
14,081
78,064
21,973
$
$
72,919
29,285
70,394 $
27,558
59,387 $
24,096
45,092
18,197
$
$
$
56,091
$
43,634
$
42,836
$
35,291 $
26,895
(184,706
)
(74,952 )
(48,397 )
(43,832 )
)
(18,871
$
(128,615
) $
(31,318
) $
(5,561
) $
(8,541 ) $
8,024
496
(371
)
—
—
—
(129,111
) $
(30,947
) $
(5,561
) $
(8,541 ) $
8,024
$
1.52
(5.01 )
(3.49 ) $
$
1.22
(2.08 )
(0.86 ) $
$
1.21
(1.37 )
(0.16 ) $
1.02 $
(1.27 )
(0.25 ) $
0.80
(0.56 )
0.24
$
1.47
(4.86 )
(3.39 ) $
$
1.18
(2.02 )
(0.84 ) $
$
1.18
(1.33 )
(0.15 ) $
1.00 $
(1.24 )
(0.24 ) $
0.79
(0.56 )
0.24
36,999
38,075
35,832
36,854
35,302
36,346
34,489
35,237
33,597
33,836
544,782
712,924
806,207
741,845 744,681
18
Long-term debt (3)
164,297
208,289
225,411
230,416 274,947
Includes assets held for sale within discontinued operations.
(1) Figures may not add due to rounding.
(2)
(3) Reflects the impact of the adoption of Accounting Standards Update (“ASU”) No. 2015-03, “Simplifying the
Presentation of Debt Issuance Costs” in fiscal 2016 related to balance sheet classification of debt issuance
costs, which was applied retrospectively to all periods presented.
19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Please read the following discussion and analysis of our financial condition and results of operations
together with our Consolidated Financial Statements and related notes included under Item 8 of this Report.
Overview
Tivity Health, Inc. was founded and incorporated in Delaware in 1981. Through our three programs,
SilverSneakers® senior fitness, Prime® fitness and WholeHealth LivingTM, we are focused on targeted
population health for those aged 50 and older. The SilverSneakers senior fitness program is offered to
members of Medicare Advantage, Medicare Supplement, and Group Retiree plans. We also offer Prime
fitness, a fitness facility access program, through commercial health plans, employers and insurance
exchanges. Our national network of fitness centers delivers both SilverSneakers and Prime fitness. Our fitness
networks encompass approximately 16,000 participating locations and more than 1,000 alternative locations
that provide classes outside of traditional fitness centers. We sell access to our WholeHealth Living network
primarily to commercial health plans. Our WholeHealth Living network includes over 88,000 complementary,
alternative, and physical medicine practitioners to serve individuals through health plans and employers who
seek health services such as physical therapy, occupational therapy, speech therapy, chiropractic care,
acupuncture and more.
Effective July 31, 2016, we sold our TPHS business to Sharecare. The TPHS business took a
systematic approach to keeping healthy people healthy, eliminating or reducing lifestyle risks and optimizing
care for persistent or chronic conditions. The TPHS business included our partnerships with Blue Zones, LLC
and Dr. Dean Ornish (the Blue Zones Project by Healthways™ and Dr. Dean Ornish's Program for Reversing
Heart Disease™, respectively), our joint venture with Gallup, Navvis, MeYou Health, and our international
operations. While Navvis and MeYou Health were part of our TPHS business, they were sold separately to
other buyers in November 2015 and June 2016, respectively. Results of operations for the TPHS business
have been classified as discontinued operations for all periods presented in the Consolidated Financial
Statements.
In January 2017, we rebranded and changed the name of the company from Healthways, Inc. to Tivity
Health, Inc. to better align with our portfolio of fitness and health improvement programs. The Company is
headquartered at 701 Cool Springs Boulevard, Franklin, Tennessee 37067.
Forward-Looking Statements
This Report contains forward-looking statements, which are based upon current knowledge,
assumptions, beliefs, estimates and expectations, involve a number of risks and uncertainties, and are subject to
the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements
include all statements that are not historical statements of fact and those regarding the intent, belief, or
expectations of the Company, including, without limitation, all statements regarding the Company's future
earnings and results of operations, and can be identified by the use of words like "may," "believe," "will," "can,"
"expect," "project," "estimate," "anticipate," "plan," or "continue" and similar expressions. Readers are cautioned
that any such forward-looking statements are not guarantees of future performance and involve significant risks
and uncertainties, and that actual results may vary from those in the forward-looking statements as a result of
various factors, including, but not limited to:
•
•
•
•
•
our ability to implement and realize the anticipated benefits of the sale of the TPHS business;
the effectiveness of management's strategies and decisions, including the decision to sell the TPHS
business and focus exclusively on the retained business;
the effectiveness of the ongoing reorganization of our business;
the risks associated with recent changes to our senior management team;
our ability to sign and implement new contracts for our solutions;
20
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
our ability to accurately forecast the costs required to successfully implement new contracts;
our ability to renew and/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;
our ability to effectively compete against other entities, whose financial, research, staff, and
marketing resources may exceed our resources;
our ability to accurately forecast our revenues, margins, earnings and net income, as well as any
potential charges that we may incur as a result of changes in our business and leadership;
the impact of the Patient Protection and Affordable Care Act, as amended by the Health Care and
Education Reconciliation Act of 2010 (the “ACA”), on our operations and/or the demand for our services;
our ability to anticipate change and respond to emerging trends for healthcare and the impact of the
same on demand for our services;
the risks associated with deriving a significant concentration of our revenues from a limited number of
customers;
our ability and/or the ability of our customers to enroll participants and to accurately forecast
their level of enrollment and participation in our programs in a manner and within the timeframe
anticipated by us;
the ability of our customers to maintain the number of covered lives enrolled in the plans during the terms
of our agreements;
our ability to service our debt, make principal and interest payments as those payments become due,
and remain in compliance with our debt covenants;
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;
the risks associated with the conditional cash conversion feature of the Cash Convertible Notes,
which, if triggered, may adversely affect our liquidity, financial condition and results of operations;
counterparty risk associated with the Cash Convertible Notes Hedges;
the risks associated with valuation of the Cash Convertible Notes Hedges and the Cash Conversion
Derivative, which may result in volatility to our consolidated statements of comprehensive income (loss) if
these transactions do not completely offset one another;
our ability to integrate new or acquired businesses, services, or technologies into our business and
to accurately forecast the related costs;
our ability to anticipate and respond to strategic changes, opportunities, and emerging trends in our
industry and/or business and to accurately forecast the related impact on our revenues and earnings;
the impact of any impairment of our goodwill, intangible assets, or other long-term assets;
our ability to develop new products;
our ability to obtain adequate financing to provide the capital that may be necessary to support our
operations;
21
•
•
•
•
•
•
the risks associated with data privacy or security breaches, computer hacking, network
penetration and other illegal intrusions of our information systems or those of third-party
vendors or other service providers, which may result in unauthorized access by third parties to
customer, employee or our information or patient health information and lead to enforcement
actions, fines and other litigation against us;
the impact of any new or proposed legislation, regulations and interpretations relating to Medicare or
Medicare Advantage;
the impact of future state and federal legislation and regulations applicable to our business,
including ACA, 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 or infectious disease outbreak;
the impact of legal proceedings involving us and/or our subsidiaries;
other risks detailed in this Report, including those set forth in Item 1A. "Risk Factors."
We undertake no obligation to update or revise any such forward-looking statements.
Critical Accounting Policies
We describe our significant accounting policies in Note 1 to the Consolidated Financial Statements. We
prepare the Consolidated Financial Statements in conformity with generally accepted accounting principles in the
United States ("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.
Following the sale of the TPHS business, 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 recognize revenue as services are performed when persuasive evidence of an arrangement exists,
collectability is reasonably assured, and amounts are fixed or determinable.
Our fees are generally billed per member per month ("PMPM"), upon member participation, or a
combination of both. For PMPM fees, we generally determine our contract fees by multiplying the contractually
negotiated PMPM rate by the number of members eligible for or receiving our services during the month. Some
of our contracts, predominantly within the now-disposed TPHS business, were performance-based and placed
a portion of our fees at risk based on achieving certain performance metrics, cost savings, and/or clinical
outcomes improvements.
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. Fees for participation 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; and (2) we recognize performance-based revenue 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.
We are currently evaluating the impact that the adoption of ASU No. 2014-09, (as discussed under
“Recent Relevant Accounting Standards” below) will have on our revenue recognition policies and procedures,
22
financial position, result of operations, cash flows, financial disclosures and control framework.
Impairment of Intangible Assets and Goodwill
We review goodwill for impairment at the reporting unit level (operating segment or one level below an
operating segment) 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. Following the sale
of the TPHS business, a single reporting unit remains.
We may elect to perform a qualitative assessment to determine whether it is more likely than not that the
fair value of a reporting unit is less than its carrying value. If we conclude during the qualitative assessment that
this is the case or if we elect not to perform a qualitative assessment, we perform a quantitative review as
described below.
During a quantitative review of goodwill, we estimate the fair value of a reporting unit using a
combination of a discounted cash flow model and a market-based approach, and in the event we were to have
multiple reporting units, we reconcile the aggregate fair value of our reporting units to our consolidated market
capitalization. Estimating fair value 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, as
well as relevant comparable company earnings multiples for the market-based approach. Changes in these
estimates and assumptions could materially affect the estimate of fair value and potential goodwill impairment
for each reporting unit.
If we determine that the carrying value of goodwill is impaired based upon an impairment review, we
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 upon a sale of the unit as a whole in an orderly
transaction between market participants at the measurement date.
Except for a tradename that has an indefinite life and is not subject to amortization, we amortize
identifiable intangible assets over their estimated useful lives using the straight-line method. 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. 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. We estimated the fair value of our indefinite-lived intangible asset, a tradename,
using a present value technique, which requires management's estimate of future revenues attributable to this
tradename, estimation of the long-term growth rate and royalty rate for this revenue, 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 tradename.
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 evaluating tax positions and 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.
Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that
are expected to be realized. When we determine that it is more likely than not that we will be able to realize our
deferred tax assets in the future, an adjustment to the deferred tax asset is made and reflected in income. This
determination will be made by considering various factors, including the reversal and timing of existing temporary
differences, tax planning strategies and estimates of future taxable income exclusive of the reversal of temporary
differences.
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.
23
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 consolidated financial position, results of operations, and cash flows.
Share-Based Compensation
We measure and recognize compensation expense for all share-based payment awards over the
required vesting period based on estimated fair values at the date of grant. Determining the fair value of stock
options at the grant date 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. These assumptions and judgments are further described in Note
13 to the Consolidated Financial Statements.
24
Executive Overview of Results
The key financial results for the year ended December 31, 2016 are:
• Revenues from continuing operations of $501.0 million, up 10.8% from $452.1 million for 2015;
• Net income from continuing operations of $56.1 million, up 28.5% from $43.6 million for 2015;
• Restructuring charges of $4.9 million; and
•
Loss from discontinued operations, net of income tax benefit, of $184.7 million compared to
$75.0 million for 2015.
Results of Operations
The following table sets forth the components of the consolidated statements of operations for the years
ended December 31, 2016, 2015, and 2014 expressed as a percentage of revenues for continuing operations.
Revenues
Cost of services (exclusive of depreciation and
amortization included below)
Selling, general and administrative expenses
Depreciation and amortization
Restructuring and related charges
Legal settlement charges
Operating income (1)
Interest expense
Income before income taxes (1)
Income tax expense
Year Ended December 31,
2015
2014
2016
100.0 %
100.0%
100.0%
71.3 %
7.9 %
0.8 %
1.0 %
— %
19.0 %
3.5 %
15.6 %
4.4 %
70.4%
7.9%
1.5%
0.2%
—%
20.1%
4.0%
16.1%
6.5%
67.2%
7.9%
1.7%
—%
1.5%
21.7%
4.3%
17.4%
6.8%
Net income from continuing operations (1)
Loss from discontinued operations, net of income tax
benefit
Net loss
Net income (loss) attributable to non-controlling interest
Net loss attributable to Tivity Health, Inc. (1)
11.2 %
9.7%
10.6%
(36.9
)%
(25.7 )%
0.1 %
(25.8 )%
(16.6
)%
(6.9)%
(0.1)%
(6.8)%
(11.9
)%
(1.4)%
—%
(1.4)%
(1)
Figures may not add due to rounding.
Revenues
Revenues from continuing operations for 2016 increased $48.9 million, or 10.8%, over 2015, primarily as a
result of the following: an increase of $49.0 million due to both a net increase in the number of members eligible
to participate in our fitness solutions as well as a net increase in the average participation per member in such
solutions, an increase of $5.4 million due to contracts with new customers or expanded contracts with existing
customers, and a decrease of $5.5 million due to contract terminations.
Revenues from continuing operations for 2015 increased $46.8 million, or 11.6%, over 2014, primarily as a
result of the following: an increase of $61.1 million due to both a net increase in the number of members eligible
to participate in our fitness solutions as well as a net increase in the average participation per member in such
solutions, an increase of $7.5 million due to contracts with new customers or expanded contracts with existing
customers, and a decrease of $21.7 million due to contract terminations.
25
Cost of Services
Cost of services from continuing operations (excluding depreciation and amortization) as a percentage of
revenues did not materially change from 2015 (70.4%) to 2016 (71.3%). Overall, this slight increase is primarily
attributable to an increase in short-term incentive compensation due to the Company’s financial performance
against established targets.
Cost of services from continuing operations (excluding depreciation and amortization) as a percentage of
revenues increased from 67.2% for 2014 to 70.4% for 2015 primarily due to a change in the mix of customer
contracts, with a greater number of contracts containing a somewhat fixed revenue structure, while the related
contract costs remained variable.
Selling, General and Administrative Expenses
Selling, general and administrative expenses from continuing operations as a percentage of revenues
remained consistent at 7.9% for 2016, 2015, and 2014.
Depreciation and Amortization
Depreciation and amortization expense from continuing operations decreased $2.8 million from 2015 to
2016, primarily due to a decrease in the amount of depreciable assets.
Depreciation and amortization expense from continuing operations remained relatively consistent for
2015 compared to 2014.
Restructuring and Related Charges
During 2016, we incurred restructuring charges from continuing operations of $4.9 million, primarily in
connection with the reorganization of our corporate support infrastructure (the “2016 Restructuring Plan”), which
we began implementing in the third quarter of 2016. We expect to incur a total of approximately $6.0 million in
restructuring charges related to the 2016 Restructuring Plan, with the majority incurred in 2016 and the
remainder expected to be incurred in the first quarter of 2017 and to consist of severance and other employee-
related costs. The 2016 Restructuring Plan is expected to create cost savings beginning in 2017, with total
annualized savings of approximately $15.0 million to $16.0 million, approximately half of which we expect to be
reinvested into business initiatives during 2017 intended to drive increased growth in 2018.
During 2015, we incurred restructuring charges from continuing operations of $0.7 million in connection
with our reorganization and cost rationalization plan (the “2015 Restructuring Plan”), which primarily consisted of
one-time termination benefits.
We did not incur any restructuring charges from continuing operations in 2014.
Legal Settlement Charges
During 2014, we incurred legal settlement charges from continuing operations of $5.9 million in
connection with the Company's settlement of two legal matters.
Interest Expense
Interest expense from continuing operations remained relatively consistent for 2016, 2015 and 2014.
Income Tax Expense
For the year ended December 31, 2016, we had an effective income tax rate from continuing
operations of 28.1%, compared to an effective income tax rate of 40.2% for the year ended December 31,
2015, primarily due to an income tax benefit of $9.6 million recognized during 2016 related to the reversal of a
domestic deferred tax asset valuation allowance initially recorded in the fourth quarter of 2015.
26
Our effective income tax rate from continuing operations remained relatively consistent from 2014 to
2015.
Liquidity and Capital Resources
Overview
As of December 31, 2016, we had a working capital deficit of $74.3 million, including outstanding
aggregate borrowings under our credit facility of $44.8 million due by December 31, 2017. As of February 28,
2017, we had cash of $20.1 million, and, based upon the pro-forma calculations of compliance with the
restrictive covenants under our credit agreement, we anticipate the ability to borrow under the revolving credit
facility up to a maximum of $125.0 million through June 8, 2017 and up to a maximum of $79.7 million for the
period beginning on June 9, 2017 and ending on June 8, 2018. We believe our cash on hand, cash flows from
operations and available borrowings are sufficient to fund our operations, debt payments and capital
expenditures for the next twelve months and the foreseeable future.
Cash Flows Provided by Operating Activities
Operating activities during 2016 provided cash of $37.9 million compared to $61.0 million during 2015.
The decrease in operating cash flow resulted primarily from the following:
•
•
•
a decrease in cash collections on accounts receivable;
payments associated with the sale of the TPHS business, including consulting and transaction fees and
certain employee-related payments; and
increased payments related to restructuring activities, such as severance and lease costs.
These decreases were partially offset by an increase in operating cash flows related to legal settlement payments
in 2015 that did not recur in 2016.
Operating activities during 2015 provided cash of $61.0 million compared to $52.1 million during 2014.
The increase in operating cash flows resulted primarily from the following:
•
•
a decrease in day sales outstanding in accounts receivable from 58 days at December 31, 2014 to 53
days at December 31, 2015; and
the timing of several significant vendor payments.
Cash Flows Used in Investing Activities
Investing activities during 2016 used $38.9 million in cash, as compared to $37.4 million during 2015,
which was primarily due to decreased capital expenditures in 2016 associated with our technology platform,
offset by payments made to Sharecare related to the sale of the TPHS business.
Investing activities during 2015 used $37.4 million in cash, as compared to $51.2 million during 2014,
which, in each case, primarily consisted of capital expenditures associated with our technology platform.
Cash Flows Provided By/Used in Financing Activities
Financing activities during 2016 provided $1.0 million in cash, while financing activities during 2015 used
$21.9 million in cash. This change is primarily due to a decrease in net payments under the Fifth Amended
Credit Agreement during 2016 and increased proceeds from the exercise of stock options.
Financing activities during 2015 used $21.9 million in cash, as compared to $0.2 million during 2014,
primarily due to an increase in net payments under the Fifth Amended Credit Agreement during 2015 and the
change in our cash overdraft position.
Credit Facility
For a detailed description of the Fifth Amended Credit Agreement, refer to Note 7 of the Notes to
Consolidated Financial Statements in this Report. The Fifth Amended Credit Agreement contains financial
covenants that require us to maintain specified ratios or levels at December 31, 2016 of (1) a maximum total
27
funded debt to EBITDA of 3.50 and (2) a minimum total fixed charge coverage of 1.50. We were in compliance
with all of the financial covenant requirements of the Fifth Amended Credit Agreement as of December 31, 2016.
Cash Convertible Senior Notes
For a detailed description of the Cash Convertible Notes, Cash Convertible Notes Hedges, Cash
Conversion Derivative, and Warrants (as such terms are defined in Note 7 of the Notes to Consolidated
Financial Statements) entered into in July 2013, refer to Note 7 of the Notes to Consolidated Financial
Statements included in this Report. Aside from the initial premium paid, we will not be required to make any
cash payments under the Cash Convertible Notes Hedges and could be entitled to receive an amount of cash
from the option counterparties generally equal to the amount by which the market price per share of common
stock exceeds the strike price of the Cash Convertible Note Hedges during the relevant valuation period. The
strike price under the Cash Convertible Notes Hedges is initially equal to the conversion price of the Cash
Convertible Notes. Although the Cash Convertible Notes are not currently convertible, the Cash Convertible
Notes will become convertible into cash during any calendar quarter (and only during such calendar quarter) if
the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during
a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar
quarter is greater than or equal to approximately $25.30 per share. The last reported sale price of our common
stock as reported on Nasdaq on March 1, 2017 was $28.95 per share.
The estimated fair value based on the last traded price of the Cash Convertible Note at December 31,
2016 was $187.7 million (as discussed in Note 9 of the Notes to Consolidated Financial Statements included in
this Report). Additionally, if the market price per share of our common stock exceeds the strike price of the
Warrants on any warrant exercise date, we will be obligated to issue to the option counterparties a number of
shares based on the amount by which the then-current market price per share of our common stock exceeds
the then-effective strike price of each Warrant. We will not receive any additional proceeds if the Warrants are
exercised.
CareFirst Convertible Note
For a description of the CareFirst Convertible Note and CareFirst Warrants, refer to Note 7 of the
Notes to Consolidated Financial Statements included in this Report.
General
We believe that cash flows from operating activities, our available cash, and our anticipated available
credit under the Fifth Amended Credit Agreement will continue to enable us to meet our contractual obligations
and fund our current operations and debt payments for at least the next 12 months. 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 securities to provide the funding for these increased growth opportunities. We may also issue
debt or equity securities in connection with future acquisitions or strategic alliances. We cannot assure you that
we would be able to issue additional debt or equity securities on terms that would be acceptable to us.
Any material commitments for capital expenditures are included in the "Contractual Obligations" table
below.
28
Contractual Obligations
The following schedule summarizes our contractual cash obligations as of December 31, 2016:
Payments due by year ended December 31,
(in thousands)
Deferred compensation plan payments (1) $
Long-term debt and related interest (2)
Operating lease obligations (3)
Capital lease obligations (4)
Severance and related obligations
Other contractual cash obligations (5)
Total Contractual Cash Obligations
$
2017
2018-2019
148 $
179,794
10,763
56
3,539
—
194,300 $
6,023 $
49,213
5,699
95
4,942
3,623
69,595 $
2020-
2021
2022 and
After
Total
203 $
—
3,858
—
—
—
4,061 $
1,239 $
7,613
— 229,007
21,283
151
8,481
3,623
2,202 $ 270,158
963
—
—
—
(1) Consists of payments under a non-qualified deferred compensation plan and long-term incentive cash awards.
(2) Consists of scheduled principal payments and estimated interest payments on outstanding borrowings under
the Fifth Amended Credit Agreement. Also includes payments in respect of the Cash Convertible Notes and
payments of cash interest thereon. The Cash Convertible Notes will mature on July 1, 2018, unless earlier
repurchased or converted into cash in accordance with their terms prior to such date (see Note 7 of the Notes
to Consolidated Financial Statements included in this Report). Total estimated interest payments included in the
table above are $4.4 million for 2017 and $1.1 million for 2018 and 2019 combined.
(3) Excludes cash receipts from sublease contracts of $4.6 million, $11.2 million, $11.4 million, and $6.7
million, respectively.
(4) Consists of scheduled principal payments on capital lease obligations. Estimated interest payments are
zero.
(5) Other contractual cash obligations primarily include payments related to a joint venture with Gallup that was
transferred to Sharecare but for which we agreed to be responsible for two-thirds of the remaining payment
obligations in respect of the purchase price to be paid in connection with Sharecare's acquisition of additional
membership interest in the joint venture.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as of December 31, 2016.
Recent Relevant Accounting Standards
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, which creates
Accounting Standards Codification ("ASC") Topic 606, "Revenue from Contracts with Customers" ("ASC Topic
606") and supersedes ASC Topic 605, "Revenue Recognition." The provisions of ASC Topic 606 provide for a
single comprehensive principles-based standard for the recognition of revenue across all industries and expanded
disclosure about the nature, amount, timing and uncertainty of revenue, as well as certain additional quantitative
and qualitative disclosures. The standard is effective for annual periods beginning after December 15, 2017,
including interim periods within those years. The guidance permits the use of either a retrospective or cumulative
effect transition method. We have not yet selected a transition method. We are currently conducting analysis to
quantify the adoption impact of the provisions of the new standard and evaluating our current contracts and
revenue streams. The FASB has issued, and may issue in the future, interpretive guidance which may cause our
evaluation to change. We believe we are following an appropriate timeline to allow for proper recognition,
presentation and disclosure upon adoption effective the beginning of fiscal year 2018.
In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements – Going
Concern: Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern," which requires
management to evaluate whether there is substantial doubt about the entity's ability to continue as a going
concern and, if so, provide certain footnote disclosures. This ASU is effective for annual periods ending after
29
December 15, 2016, including interim reporting periods thereafter. This ASU was adopted in the fourth quarter of
2016 and did not have an impact on our financial statements or footnote disclosures.
In April 2015, the FASB issued ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance
Costs," which requires that debt issuance costs related to a recognized debt liability be presented in the balance
sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts.
This ASU was adopted in the first quarter of 2016 and has been applied on a retrospective basis to all periods
presented. The adoption of this standard resulted in debt issuance costs being presented as a direct deduction
from the carrying amount of the related debt liability and totaled $2.3 million and $4.1 million as of December 31,
2016 and December 31, 2015, respectively.
In November 2015, the FASB issued ASU No. 2015-17, "Income Taxes: Balance Sheet Classification of
Deferred Taxes" ("ASU 2015-17"), which simplifies the presentation of deferred income taxes by eliminating the
separate classification of deferred income tax liabilities and assets into current and noncurrent amounts in the
consolidated balance sheet. The amendments in ASU 2015-17 require that all deferred tax liabilities and assets be
classified as noncurrent in the consolidated balance sheet. This ASU was adopted in the first quarter of 2016 and
is presented prospectively.
In February 2016, the FASB issued ASU No. 2016-02, "Leases" ("ASU 2016-02"), which requires that
lessees recognize assets and liabilities for leases with lease terms greater than twelve months in the statement of
financial position. ASU 2016-02 also requires improved disclosures to help users of financial statements better
understand the amount, timing and uncertainty of cash flows arising from leases. The update is effective for fiscal
years beginning after December 15, 2018, including interim reporting periods within those years. We are currently
evaluating the impact the adoption of ASU 2016-02 will have on our financial position, results of operations and
cash flows.
In March 2016, the FASB Issued ASU No. 2016-09, "Compensation-Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"), which we adopted on January 1,
2017. ASU 2016-09 requires all income tax effects of share-based awards to be recognized in the income
statement, which were previously presented as a component of shareholders’ equity, on a prospective basis. In
addition, any excess tax benefits that were not previously recognized because the related tax deduction had not
reduced current taxes payable are to be recorded on a modified retrospective basis through a cumulative-effect
adjustment to retained earnings as of the beginning of the period of adoption, which resulted in an increase of $6.5
million to our retained earnings as of January 1, 2017. Regarding the statement of cash flows, the standard (a)
requires the presentation of excess tax benefits as an operating activity rather than as a financing activity and (b)
that cash paid by the Company when directly withholding shares for tax withholding purposes be classified as a
financing activity on a retrospective basis. The standard also allows for an accounting policy election to estimate
the number of awards that are expected to vest or to account for forfeitures when they occur. We elected to
account for forfeitures as they occur, which did not result in a material cumulative effect adjustment to our retained
earnings as of January 1, 2017. Finally, the standard no longer allows windfall tax benefits to be included in the
assumed proceeds when applying the treasury stock method for computing diluted earnings per share (“EPS”),
which will result in share-based awards having a more dilutive effect on EPS.
In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows" (Topic 230) ("ASU 2016-
15"). ASU 2016-15 addresses how certain cash receipts and cash payments are presented and classified in the
statement of cash flows. ASU 2016-15 is effective in the first quarter of 2018, with early adoption permitted, and is
to be applied using a retrospective approach. We are currently evaluating the potential effects of adopting the
provisions of ASU 2016-15.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other”, which simplifies
the subsequent measurement of goodwill by eliminating step two from the goodwill impairment test. ASU No.
2017-04 is effective for annual and interim impairment tests in fiscal years beginning after December 15, 2019 and
is required to be applied prospectively. Early adoption is allowed for annual goodwill impairment tests performed
on testing dates after January 1, 2017. We have not yet determined the effect of the standard on our consolidated
financial statements and related disclosures.
30
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We are subject to market risk related to interest rate changes, primarily as a result of the Fifth Amended
Credit Agreement. Borrowings under the Fifth Amended Credit Agreement generally bear interest at variable
rates based on a margin or spread in excess of either (1) one-month, two-month, three-month or six-month (or
with the approval of affected lenders, nine-month or twelve-month) LIBOR or (2) the greatest of (a) the SunTrust
Bank prime lending rate, (b) the federal funds rate plus 0.50% and (c) one-month LIBOR plus 1.00% (the "Base
Rate"), as selected by the Company. The LIBOR margin varies between 1.75% and 3.00%, and the Base Rate
margin varies between 0.75% and 2.00%, depending on our leverage ratio.
We estimate that a one-point interest rate change in our floating rate debt would have resulted in a change
in interest expense of approximately $0.6 million for the year ended December 31, 2016.
31
Item 8. Financial Statements and Supplementary Data
To the Board of Directors and Stockholders of Tivity Health, Inc.
Report of Independent Registered Public Accounting Firm
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of
operations, comprehensive (income) loss, changes in stockholders’ equity, and cash flows present fairly, in all
material respects, the financial position of Tivity Health, Inc. and its subsidiaries at December 31, 2016 and
December 31, 2015, and the results of their operations and their cash flows for each of the three years in the
period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States
of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company's management is responsible for these financial statements, for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in Management's Annual Report on Internal Control over Financial Reporting appearing under
Item 9A. Our responsibility is to express opinions on these financial statements and on the Company's internal
control over financial reporting based on our integrated 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 audits to obtain reasonable assurance about whether the financial statements are free of
material misstatement and whether effective internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable
basis for our opinions.
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 (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) 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 (iii) 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.
/s/ PricewaterhouseCoopers LLP
Nashville, Tennessee
March 6, 2017
32
TIVITY HEALTH, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
December 31,
2016
December 31,
2015
Current assets:
Cash and cash equivalents
Accounts receivable, net
Prepaid expenses
Other current assets
Income taxes receivable
Deferred tax asset
Current assets held for sale within discontinued operations
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
Cash convertible notes hedges
Long-term deferred tax asset
Intangible assets, net
Goodwill, net
Long-term assets held for sale within discontinued operations
1,602 $
50,424
3,409
2,250
426
—
—
58,111
10,144
23,024
8,670
2,079
43,917
(35,586)
8,331
6,688
48,361
59,562
29,049
334,680
—
233
50,608
7,662
2,508
257
7,717
65,802
134,787
10,009
21,832
10,136
1,089
43,066
(33,470)
9,596
509
12,632
—
29,526
336,974
188,900
Total assets
$
544,782 $
712,924
See accompanying notes to the Consolidated Financial Statements.
33
TIVITY HEALTH, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
LIABILITIES AND STOCKHOLDERS’ EQUITY
December 31,
2016
December 31,
2015
Current liabilities:
Accounts payable
Accrued salaries and benefits
Accrued liabilities
Other current liabilities
Current portion of long-term debt
Current portion of long-term liabilities
Current liabilities held for sale within discontinued operations
Total current liabilities
$
Long-term debt
Long-term deferred tax liability
Cash conversion derivative
Other long-term liabilities
Stockholders' equity:
26,029 $
18,686
33,623
397
46,046
7,582
—
132,363
164,297
—
48,361
10,463
21,184
7,240
28,384
226
23,308
6,204
75,644
162,190
208,289
23,617
12,632
25,606
Preferred stock $.001 par value, 5,000,000 shares authorized,
none outstanding
Common stock $.001 par value, 120,000,000 shares authorized,
38,933,580 and 36,079,446 shares outstanding
Additional paid-in capital
(Accumulated deficit) retained earnings
Treasury stock, at cost, 2,254,953 shares in treasury
Accumulated other comprehensive loss
Total stockholders' equity
—
—
39
341,270
(119,327 )
(28,182 )
(4,502 )
189,298
36
303,687
9,288
(28,182 )
(4,239 )
280,590
Total liabilities and stockholders' equity
$
544,782 $
712,924
See accompanying notes to the Consolidated Financial Statements.
34
TIVITY HEALTH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except earnings per share data)
Revenues
Cost of services (exclusive of depreciation and
amortization of $3,468, $5,440,
and $4,974, respectively, included below)
Selling, general and administrative expenses
Depreciation and amortization
Restructuring and related charges
Legal settlement charges
Operating income
Interest expense
Income before income taxes
Income tax expense
Year Ended December 31,
2015
2016
2014
$
500,998 $
452,092 $
405,263
357,120
39,478
4,085
4,933
—
318,060
35,546
6,869
702
—
95,382
17,318
90,915
17,996
78,064
21,973
72,919
29,285
272,400
32,075
7,035
—
5,910
87,843
17,449
70,394
27,558
Net income from continuing operations
Loss from discontinued operations, net of
income tax benefit
Net loss
Less: net income (loss) attributable to non-
controlling interest
$
56,091
$
43,634
$
42,836
(184,706
)
(128,615 ) $
(74,952 )
(31,318 ) $
(48,397
)
(5,561 )
$
496
(371
)
—
Net loss attributable to Tivity Health, Inc.
$
(129,111 ) $
(30,947 ) $
(5,561 )
Earnings (loss) per share attributable to Tivity
Health, Inc. - basic:
Continuing operations
Discontinued operations
Net loss
Earnings (loss) per share attributable to Tivity
Health, Inc. – diluted:
Continuing operations
Discontinued operations
Net loss
Comprehensive loss
Weighted average common shares and
equivalents:
Basic
Diluted
$
$
$
$
$
$
$
1.52
$
(5.01 ) $
(3.49 ) $
1.22
$
(2.08 ) $
(0.86 ) $
1.47
$
(4.86 ) $
(3.39 ) $
1.18
$
(2.02 ) $
(0.84 ) $
1.21
(1.37 )
(0.16 )
1.18
(1.33 )
(0.15 )
(128,878 ) $
(33,509 ) $
(7,202 )
36,999
38,075
35,832
36,854
35,302
36,346
See accompanying notes to the Consolidated Financial Statements.
35
TIVITY HEALTH, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Net loss
Other comprehensive income (loss), net of tax
Net change in fair value of interest rate swaps, net of income
tax of $157, $1, and $44, respectively
Year Ended December 31,
2016
2015
2014
$
(128,615) $
(31,318) $
(5,561 )
239
103
171
Foreign currency translation adjustment
Total other comprehensive loss, net of tax
Comprehensive loss
(502
)
(263) $
)
(2,294
(2,191) $
(128,878) $
(33,509) $
(1,812
)
(1,641 )
(7,202 )
$
$
See accompanying notes to the Consolidated Financial Statements.
36
TIVITY HEALTH, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
Preferred
Stock
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
(Accumulated
Deficit)
Treasury
Stock
Accumulated Other
Comprehensive
Income (Loss)
Total
Balance,
December 31, 2013
$
Comprehensive loss
Exercise of stock
options
Tax effect of stock
options and restricted
stock units
Share-based employee
compensation expense
Issuance of CareFirst
Warrants
Balance,
December 31, 2014
$
Comprehensive loss
Exercise of stock
options
Repurchase of common
stock
Tax effect of stock
options and restricted
stock units
Share-based employee
compensation expense
Issuance of CareFirst
Warrants
Proceeds from non-
controlling interest
Balance,
December 31, 2015
$
Comprehensive loss
Exercise of stock
options
Tax effect of stock
options and restricted
stock units
Share-based employee
compensation expense
Issuance of CareFirst
Warrants
Conversion of CareFirst
note
Settlement of non-
controlling interest
— $
—
—
—
—
—
— $
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
48,000
(28,182 ) $
(407 ) $
302,690
35
$
—
—
—
—
—
283,244
$
—
(5,561 )
2,851
—
(3,737 )
8,349
1,639
—
—
—
—
—
—
—
—
(1,641 )
(7,202 )
—
2,851
—
(3,737 )
—
—
8,349
1,639
35
$
$
292,346
42,439 $ (28,182 ) $
(2,048 ) $
304,590
—
1
—
—
—
—
—
—
(31,318 )
2,466
—
—
(1,833 )
(5,617 )
10,469
2,408
1,615
—
—
—
—
—
—
—
—
—
—
—
(2,191 )
(33,509 )
—
2,467
—
(1,833 )
—
(5,617 )
—
10,469
—
—
2,408
1,615
36
$
303,687
$
9,288 $ (28,182 ) $
(4,239 ) $
280,590
—
2
—
—
—
1
—
—
(128,615 )
10,000
—
(8,947 )
17,538
192
19,999
(1,199
)
—
—
—
—
—
—
—
—
—
—
—
—
(263 )
(128,878 )
—
10,002
—
(8,947 )
—
17,538
—
192
—
20,000
—
)
(1,199
Balance,
December 31, 2016
$
— $
39
$
341,270
$
(119,327
) $ (28,182 ) $
(4,502 ) $
189,298
See accompanying notes to the Consolidated Financial Statements.
37
TIVITY HEALTH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net income from continuing operations
Net loss from discontinued operations
Adjustments to reconcile net income (loss) to net cash
provided by operating activities, net of business
acquisitions:
Depreciation and amortization
Amortization of deferred loan costs
Amortization of debt discount
Share-based employee compensation expense
Loss on sale of MeYou Health
Loss on sale of TPHS business
Gain on sale of Navvis business
Equity in (income) loss from joint ventures
Deferred income taxes
Excess tax benefits from share-based payment
arrangements
Decrease (increase) in accounts receivable, net
Decrease in other current assets
(Decrease) increase in accounts payable
(Decrease) increase in accrued salaries and benefits
(Decrease) increase in other current liabilities
Other
Net cash flows provided by operating activities
Cash flows from investing activities:
Acquisition of property and equipment
Investment in joint ventures
Proceeds from sale of MeYou Health
Proceeds from sale of Navvis
Payments related to sale of TPHS business
Other
Net cash flows used in investing activities
Year Ended December 31,
2015
2016
2014
$
56,091
(184,706 )
$
43,634 $
(74,952)
42,836
(48,397 )
31,292
2,209
7,564
17,538
5,325
192,034
—
(271 )
(75,942 )
—
8,330
2,819
(3,376 )
(8,755 )
(4,825 )
(7,425 )
$
37,902
49,855
2,520
7,148
10,469
—
—
(1,873)
20,229
(5,916)
—
16,971
2,796
5,248
(4,345)
(11,764)
940
60,960 $
53,378
1,855
6,757
8,349
—
—
—
—
(6,972 )
(525 )
(38,130 )
1,589
(9,343 )
3,165
26,990
10,546
52,098
(14,474 )
(1,298 )
5,156
—
(27,469 )
(787 )
(38,872 )
$
$
(34,730) $
(5,881)
—
4,369
—
(1,121)
(37,363) $
(42,991 )
(7,050 )
—
—
—
(1,164 )
(51,205 )
$
$
$
Cash flows from financing activities:
Proceeds from issuance of long-term debt
Payments of long-term debt
Excess tax benefits from share-based payment
arrangements
Exercise of stock options
Repurchase of common stock
Deferred loan costs
Proceeds from non-controlling interest
Change in cash overdraft and other
Net cash flows provided by (used in) financing activities $
515,666
(527,115 )
572,981
(597,837)
467,126
(481,515 )
—
10,002
—
(424 )
—
2,834
963
$
—
2,467
(1,833)
(892)
1,615
1,648
(21,851) $
525
2,851
—
(391 )
—
11,227
(177 )
Effect of exchange rate changes on cash
$
(261 )
$
(1,641) $
(1,535 )
Less: net (decrease) increase in discontinued operations
cash and cash equivalents
$
(1,637 )
$
388 $
(347 )
38
Net increase (decrease) in cash and cash equivalents
$
1,369
$
(283) $
(472 )
Cash and cash equivalents, beginning of period
233
516
Cash and cash equivalents, end of period
$
1,602
$
233 $
988
516
Supplemental disclosure of cash flow information:
Cash paid during the period for interest
Cash paid during the period for income taxes
Noncash Activities:
Issuance of CareFirst Warrants
Assets acquired through capital lease obligation
Conversion of CareFirst Convertible Note
$
$
$
$
$
7,474
1,458
$
$
8,303 $
262 $
9,503
2,399
192
—
20,000
$
$
$
2,408 $
898 $
— $
1,639
6,702
—
See accompanying notes to the Consolidated Financial Statements.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2016, 2015, and 2014
1.
Summary of Significant Accounting Policies
Tivity Health, Inc. was founded and incorporated in Delaware in 1981. Through our three programs,
SilverSneakers® senior fitness, Prime® fitness and WholeHealth LivingTM, we are focused on targeted
population health for those aged 50 and older. In January 2017, we rebranded and changed the name of the
Company from Healthways, Inc. to Tivity Health, Inc. to better align with our portfolio of fitness and health
improvement programs.
Our results from continuing operations do not include the results of the total population health services
("TPHS") business, which we sold effective July 31, 2016. The TPHS business included our partnerships with
Blue Zones, LLC and Dr. Dean Ornish (the Blue Zones Project by Healthways™ and Dr. Dean Ornish's
Program for Reversing Heart Disease™, respectively), our joint venture with Gallup, Inc. (“Gallup”), Navvis
Healthcare, LLC (“Navvis”), MeYou Health, LLC (“MeYou Health”), and our international operations, including
our joint venture with SulAmérica. While Navvis and MeYou Health were part of our TPHS business, they
were sold separately to other buyers in November 2015 and June 2016, respectively. Results of operations for
the TPHS business have been classified as discontinued operations for all periods presented in the
accompanying Consolidated Financial Statements.
On March 11, 2015, we formed a joint venture with SulAmérica, one of the largest independent insurers
in Brazil, to sell total population health services to the Brazilian market. With its contribution, SulAmérica
acquired a 49% interest in the joint venture, Healthways Brasil Servicos de Consultoria LTDA ("Healthways
Brazil"). We determined that our interest in Healthways Brazil represented a controlling financial interest and,
therefore, prior to selling the TPHS business, consolidated the financial statements of Healthways Brazil and
presented a non-controlling interest for the portion owned by SulAmérica. The net assets and results of
operations of Healthways Brazil are included within discontinued operations in the accompanying Consolidated
Financial Statements.
We have reclassified certain items in prior periods to conform to current classifications. As used
throughout these notes to the Consolidated Financial Statements, unless the context otherwise indicates, the
terms "we," "us," "our," or the "Company" refer collectively to Tivity Health, Inc. and its wholly-owned subsidiaries.
a. Principles of Consolidation – See discussion above regarding the TPHS business, including a non-
controlling interest. We have eliminated all intercompany profits, transactions and balances.
b. Cash and Cash Equivalents - Cash and cash equivalents primarily include cash on deposit.
c. Accounts Receivable, net - Accounts receivable includes billed and unbilled amounts. Billed
receivables represent fees that are contractually due for services performed, net of contractual allowances
(reflected as a reduction of revenue) and allowances for doubtful accounts (reflected as selling, general and
administrative expenses). These combined allowances totaled $0.7 million at both December 31, 2016 and
December 31, 2015. Unbilled receivables primarily represent fees recognized for monthly member utilization of
fitness facilities under our SilverSneakers fitness solution, billed one month in arrears. Historically, we have
experienced minimal instances of customer non-payment and therefore consider our accounts receivable to be
collectible; however, we provide reserves, when appropriate, for doubtful accounts and for contractual
allowances (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,
2016, 2015, and 2014 was $3.6 million, $6.3 million, and $6.5 million, respectively, including depreciation of
assets recorded under capital leases.
e. Other Assets - Other assets consist primarily of an adjustable convertible equity right (see Note
3).
40
f. Intangible Assets - Intangible assets subject to amortization include customer contracts, acquired
technology, and distributor and provider networks, which we amortized on a straight-line basis over estimated
useful lives ranging from three to ten years. All intangible assets subject to amortization were fully amortized at
December 31, 2016.
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. If we determine that the
carrying value of 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.
Intangible assets not subject to amortization at December 31, 2016 and 2015 consist of a trade name
of $29.0 million. 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. See Note 5 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 for impairment at the reporting unit level (operating segment or one level below an
operating segment) on an annual basis (during the fourth quarter the fiscal year) or more frequently whenever
events or circumstances indicate that the carrying value may not be recoverable. Following the sale of the TPHS
business effective July 31, 2016, a single reporting unit remains.
We may elect to perform a qualitative assessment to determine whether it is more likely than not that the
fair value of the reporting unit is less than its carrying value. If we conclude during the qualitative assessment that
this is the case or if we elect not to perform a qualitative assessment, we perform a quantitative review as
described below.
During a quantitative review of goodwill, we estimate the fair value of a reporting unit using a combination
of a discounted cash flow model and a market-based approach, and in the event we were to have multiple
reporting units, we reconcile the aggregate fair value of our reporting units to our consolidated market
capitalization. Estimating fair value 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, as well as relevant
comparable company earnings multiples for the market-based approach. Changes in these estimates and
assumptions could materially affect the estimate of fair value and potential goodwill impairment for a reporting unit.
If we determine that the carrying value of goodwill is impaired, we 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 upon a sale of the unit as a whole in an orderly transaction between market participants at the
measurement date.
h. Accounts Payable - Accounts payable consists of short-term trade obligations and includes cash
overdrafts attributable to disbursements not yet cleared by the bank.
i. Income Taxes - We file a consolidated federal income tax return that includes all of our wholly-owned
subsidiaries. U.S. GAAP generally require 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.
Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that
are expected to be realized. When we determine that it is more likely than not that we will be able to realize our
deferred tax assets in the future, an adjustment to the deferred tax asset is made and reflected in income.
j. Revenue Recognition - We recognize revenue as services are performed when persuasive evidence
of an arrangement exists, collectability is reasonably assured, and amounts are fixed or determinable.
41
Our fees are generally billed per member per month ("PMPM"), upon member participation, or a
combination of both. For PMPM fees, we generally determine our contract fees by multiplying the contractually
negotiated PMPM rate by the number of members eligible for or receiving our services during the month. Some of
our contracts, predominantly within the now disposed TPHS business, were performance-based and placed a
portion of our fees at risk based on achieving certain performance metrics, cost savings, and/or clinical outcomes
improvements.
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. Fees for participation 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; and (2) we recognize performance-based revenue 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.
We are currently evaluating the impact that the adoption of ASU No. 2014-09 (as discussed under "Recent
Relevant Accounting Standards" below) will have on our revenue recognition policies and procedures, financial
position, results of operations, cash flows, financial disclosures, and control framework.
k. Earnings (Loss) Per Share – We calculate basic earnings (loss) per share using weighted average
common shares outstanding during the period. We calculate diluted earnings (loss) per share using weighted
average common shares outstanding during the period plus the effect of all dilutive potential common shares
outstanding during the period unless the impact would be anti-dilutive. See Note 15 for a reconciliation of basic
and diluted earnings (loss) per share.
l. Share-Based Compensation – We recognize all share-based payments to employees in the
consolidated statements of operations over the required vesting period based on estimated fair values at the date
of grant. See Note 13 for further information on share-based compensation.
m. Derivative Instruments and Hedging Activities – We use derivative instruments to manage risks related to
interest expense and the cash convertible senior notes (as discussed in Note 7). We account for derivatives in
accordance with Financial Accounting Standards Board ("FASB") Accounting Standard Codification ("ASC") Topic
815, which establishes accounting and reporting standards requiring that certain derivative instruments be recorded
on the balance sheet as either an asset or liability measured at fair value. Additionally, changes in the derivative's
fair value will be recognized currently in earnings unless specific hedge accounting criteria are met. As permitted
under our master netting arrangements, the fair value amounts of our interest rate swaps are presented on a net
basis by counterparty in the consolidated balance sheets. See Note 10 for further information on derivative
instruments and hedging activities.
n. Management Estimates – In preparing our consolidated financial statements in conformity with U.S.
GAAP, 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.
2.
Recent Relevant Accounting Standards
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update
("ASU") No. 2014-09, which creates Accounting Standards Codification ("ASC") Topic 606, "Revenue from
Contracts with Customers" ("ASC Topic 606") and supersedes ASC Topic 605, "Revenue Recognition." The
provisions of ASC Topic 606 provide for a single comprehensive principles-based standard for the recognition of
revenue across all industries and expanded disclosure about the nature, amount, timing and uncertainty of
revenue, as well as certain additional quantitative and qualitative disclosures. The standard is effective for annual
periods beginning after December 15, 2017, including interim periods within those years. The guidance permits
the use of either a retrospective or cumulative effect transition method. We have not yet selected a transition
method. We are currently conducting analysis to quantify the adoption impact of the provisions of the new
standard and evaluating our current contracts and revenue streams. The FASB has issued, and may issue in the
42
future, interpretive guidance which may cause our evaluation to change. We believe we are following an
appropriate timeline to allow for proper recognition, presentation and disclosure upon adoption effective the
beginning of fiscal year 2018.
In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements – Going
Concern: Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern," which requires
management to evaluate whether there is substantial doubt about the entity's ability to continue as a going
concern and, if so, provide certain footnote disclosures. This ASU is effective for annual periods ending after
December 15, 2016, including interim reporting periods thereafter. This ASU was adopted in the fourth quarter of
2016 and did not have an impact on our financial statements or footnote disclosures.
In April 2015, the FASB issued ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance
Costs," which requires that debt issuance costs related to a recognized debt liability be presented in the balance
sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts.
This ASU was adopted in the first quarter of 2016 and has been applied on a retrospective basis to all periods
presented. The adoption of this standard resulted in debt issuance costs being presented as a direct deduction
from the carrying amount of the related debt liability and totaled $2.3 million and $4.1 million as of December 31,
2016 and December 31, 2015, respectively.
In November 2015, the FASB issued ASU No. 2015-17, "Income Taxes: Balance Sheet Classification of
Deferred Taxes" ("ASU 2015-17"), which simplifies the presentation of deferred income taxes by eliminating the
separate classification of deferred income tax liabilities and assets into current and noncurrent amounts in the
consolidated balance sheet. The amendments in ASU 2015-17 require that all deferred tax liabilities and assets be
classified as noncurrent in the consolidated balance sheet. This ASU was adopted in the first quarter of 2016 and
is presented prospectively.
In February 2016, the FASB issued ASU No. 2016-02, "Leases" ("ASU 2016-02"), which requires that
lessees recognize assets and liabilities for leases with lease terms greater than twelve months in the statement of
financial position. ASU 2016-02 also requires improved disclosures to help users of financial statements better
understand the amount, timing and uncertainty of cash flows arising from leases. The update is effective for fiscal
years beginning after December 15, 2018, including interim reporting periods within those years. We are currently
evaluating the impact the adoption of ASU 2016-02 will have on our financial position, results of operations and
cash flows.
In March 2016, the FASB Issued ASU No. 2016-09, "Compensation-Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"), which we adopted on January 1,
2017. ASU 2016-09 requires all income tax effects of share-based awards to be recognized in the income
statement, which were previously presented as a component of shareholders’ equity, on a prospective basis. In
addition, any excess tax benefits that were not previously recognized because the related tax deduction had not
reduced current taxes payable are to be recorded on a modified retrospective basis through a cumulative-effect
adjustment to retained earnings as of the beginning of the period of adoption, which will result in an increase of
$6.5 million to our retained earnings as of January 1, 2017. Regarding the statement of cash flows, the standard
requires the presentation of excess tax benefits as an operating activity rather than as a financing activity and that
cash paid by the Company when directly withholding shares for tax withholding purposes be classified as a
financing activity on a retrospective basis. The standard also allows for an accounting policy election to estimate
the number of awards that are expected to vest or to account for forfeitures when they occur. We elected to
account for forfeitures as they occur, which did not result in a material cumulative effect adjustment to our retained
earnings as of January 1, 2017. Finally, the standard no longer allows windfall tax benefits to be included in the
assumed proceeds when applying the treasury stock method for computing diluted earnings per share (“EPS”),
which will result in share-based awards having a more dilutive effect on EPS.
In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows" (Topic 230) ("ASU 2016-
15"). ASU No. 2016-15 addresses how certain cash receipts and cash payments are presented and classified in
the statement of cash flows. ASU 2016-15 is effective in the first quarter of 2018, with early adoption permitted,
and is to be applied using a retrospective approach. The company is currently evaluating the potential effects of
adopting the provisions of ASU 2016-15.
43
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other”, which simplifies
the subsequent measurement of goodwill by eliminating step two from the goodwill impairment test. ASU No.
2017-04 is effective for annual and interim impairment tests in fiscal years beginning after December 15, 2019 and
is required to be applied prospectively. Early adoption is allowed for annual goodwill impairment tests performed
on testing dates after January 1, 2017. We have not yet determined the effect of the standard on our consolidated
financial statements and related disclosures.
3.
Discontinued Operations
On July 27, 2016, we entered into a Membership Interest Purchase Agreement (the "Purchase
Agreement") with Sharecare, Inc. ("Sharecare"), and Healthways SC, LLC ("Healthways SC"), a newly formed
Delaware limited liability company and wholly owned subsidiary of the Company, pursuant to which Sharecare
acquired the TPHS business, which closed effective July 31, 2016 ("Closing").
At Closing, Sharecare delivered to the Company an Adjustable Convertible Equity Right (the "ACER") with
an initial face value of $30.0 million, which will be convertible into shares of common stock of Sharecare 24 months
after the Closing, at an initial conversion price of $249.87 per share, subject to customary adjustment for stock
splits, stock dividends and other reorganizations of Sharecare. Additionally, pursuant to the Purchase Agreement,
we paid Sharecare $25.0 million in cash at the Closing to fund projected losses of the TPHS business during the
year following the Closing (the "Transition Year"). Pursuant to Sharecare's acquisition of the TPHS business, our
ownership interest in the joint venture with Gallup was transferred to Sharecare. We agreed with Sharecare to be
responsible for two-thirds of the remaining payment obligations in respect of the purchase price to be paid in
connection with Sharecare's acquisition of additional membership interest in the joint venture. This obligation is
currently expected to result in aggregate payments by us of approximately $4.2 million, payable in five equal
quarterly installments that began in the fourth quarter of the 2016 calendar year and end in the fourth quarter of the
2017 calendar year. As of December 31, 2016, this obligation totaled $3.3 million and was included in accrued
liabilities.
The Purchase Agreement provided for post-closing adjustments based on (i) net working capital (which is
expected to result in an increase in the face amount of the ACER due to a net working capital surplus, as further
discussed below), (ii) negative cash flows of the TPHS business during the Transition Year in excess of $25.0
million (which may result in a reduction in the face amount of the ACER up to a maximum reduction of $20.0
million), and (iii) any successful claims for indemnification by Sharecare (which may result in a reduction in the face
amount of the ACER, unless the Company elects, in its sole discretion, to satisfy any such successful claims with
cash payments).
We recorded the ACER net of the $20.0 million face value maximum negative cash flow adjustment, or
$10.0 million face value, at its estimated fair value of $2.7 million as of the Closing. We have classified this amount
as an equity receivable included in other assets. We will record the $20.0 million face value contingent portion of
the ACER at its estimated fair value as of the date the contingency is resolved, expected to be approximately 12
months from Closing. As of December 31, 2016, we recorded an estimate of the net working capital adjustment (a
surplus), which resulted in an estimated fair value of the ACER of $5.7 million. The working capital
adjustment is subject to the review process set forth in the Purchase Agreement.
The terms of the Purchase Agreement also impacted other existing contractual commitments, including the
elimination of the minimum fee requirements under our technology services outsourcing agreement with HP
Enterprise Services, LLC (“HP”).
Effective July 31, 2016, in connection with the Closing, the Company and CareFirst Holdings, LLC
("CareFirst"), agreed to terminate the Investment Agreement between them (see Note 7). Also in connection with
the Closing, all of the Commercial Agreements (defined in Note 7) between the Company and CareFirst relating to
the TPHS business were transferred to Healthways SC that, effective at the Closing, became a wholly-owned
subsidiary of Sharecare. As a result, CareFirst no longer has the opportunity to earn CareFirst Warrants in respect
of the periods following the Closing. The Convertible Note, the Registration Rights Agreement and the CareFirst
Warrants previously issued to CareFirst were not affected by the termination of the Investment Agreement.
44
The following table presents the aggregate carrying amounts of the major classes of assets and liabilities
related to the disposition of the TPHS business:
(In thousands)
Cash and cash equivalents
Accounts receivable, net
Prepaid expenses
Other current assets
Income taxes receivable
Deferred tax asset
Property and equipment, net
Other assets
IIntangible assets, net
Total assets
Accounts payable
Accrued salaries and benefits
Accrued liabilities
Deferred revenue
Contract billings in excess of earned revenue
Total liabilities
December 31,
2015
1,637
57,587
2,545
2,722
819
492
146,404
10,705
31,791
254,702
19,851
14,380
21,690
6,931
12,792
75,644
$
$
$
$
The following table presents financial results of the TPHS business included in “loss from discontinued
operations" for the years ended December 31, 2016, 2015, and 2014.
$
(In thousands)
Revenues
Cost of services
Selling, general & administrative expenses
Depreciation and amortization
Restructuring and related charges
Legal settlement charges
Equity in income (loss) from joint ventures
Pretax loss on discontinued operations
Pretax gain on sale of Navvis business
Pretax loss on sale of MeYou Health business
Pretax loss on sale of TPHS business
Total pretax loss on discontinued operations
Income tax benefit
Loss from discontinued operations, net of income tax
benefit
$
Year Ended December 31,
2015
2016
2014
$
151,780
173,302
18,594
27,207
8,626
—
243
(75,706 )
—
(4,826 )
(202,095 )
(282,627 )
(97,921 )
318,506
317,849
32,928
42,986
14,395
—
(20,229)
(109,881)
1,873
—
—
(108,008)
$ 336,920
325,243
33,434
46,343
—
11,805
(637 )
(80,542 )
—
—
—
(80,542 )
(32,145 )
(33,056)
(184,706 ) $
(74,952) $
(48,397 )
The depreciation, amortization and significant operating and investing non-cash items of the discontinued
operations were as follows:
(In thousands)
Year Ended December 31,
2015
2016
2014
Depreciation and amortization on discontinued operations $
Capital expenditures on discontinued operations
Assets acquired through capital lease obligations
Share-based compensation on discontinued operations
27,207 $
10,258
—
10,144
42,986 $
29,984
898
3,404
46,343
38,669
6,321
3,359
45
4.
Goodwill
The change in carrying amount of goodwill during the years ended December 31, 2016, 2015, and 2014
is shown below:
(In thousands)
Balance, December 31, 2013
Other adjustments
Balance, December 31, 2014
Navvis sale
Balance, December 31, 2015
MeYou Health sale
Balance, December 31, 2016
$
$
338,800
—
338,800
(1,826 )
336,974
(2,294 )
334,680
On November 1, 2015, we sold Navvis, a provider of healthcare consulting and advisory services, for
$4.4 million in cash, which resulted in a gain of $1.9 million.
In June 2016, we sold the assets of MeYou Health, a wholly-owned subsidiary of the Company that was
engaged in the business of developing and delivering certain digital health applications, for $5.5 million in cash
and additional contingent consideration up to $1.5 million, which resulted in a loss of $4.8 million. This loss is
included in loss from discontinued operations in our consolidated statement of comprehensive income (loss) for
the year ended December 31, 2016.
No goodwill was allocated to the disposal group in connection with the sale of the TPHS business.
As of December 31, 2016 and December 31, 2015, the gross amount of goodwill totaled $517.0 million
and $519.3 million, respectively, and we had accumulated impairment losses of $182.4 million.
5.
Intangible Assets
Intangible assets subject to amortization at December 31, 2016 consisted of the following.
(In thousands)
Gross
Carrying
Amount
Accumulated
Amortization
Net
Acquired technology
Distributor and provider networks
Total
$
$
6,422 $
8,709
15,131 $
(6,422 )
(8,709 )
(15,131 ) $
—
—
—
Intangible assets subject to amortization at December 31, 2015 consisted of the following:
(In thousands)
Gross
Carrying
Amount
Accumulated
Amortization
Net
Acquired technology
Distributor and provider networks
Total
$
$
6,422 $
8,709
15,131 $
(6,422 )
(8,232 )
(14,654 ) $
—
477
477
As all intangible assets subject to amortization were fully amortized as of December 31, 2016, no
amortization expense is expected over the next five years and thereafter. Total amortization expense for the years
ended December 31, 2016, 2015, and 2014 was $0.5 million for each of these years.
Intangible assets not subject to amortization at December 31, 2016 and 2015 consist of a tradename of
$29.0 million.
46
Intangible assets related to the disposition of the TPHS business include the following:
(In thousands)
Gross
Carrying
Amount
Accumulated
Amortization
Net
Customer contracts
Acquired technology
Patents
Perpetual license to survey-based data
Other
Total
$
$
12,170 $
12,126
24,832
32,000
530
81,658 $
(12,044) $
(11,525)
(19,121)
(6,695)
(482)
(49,867) $
126
601
5,711
25,305
48
31,791
6.
Income Taxes
Income tax expense is comprised of the following:
(In thousands)
Current taxes
Federal
State
Deferred taxes
Federal
State
Total
Year Ended December 31,
2016
2015
2014
$
(426)
311
$
457 $
670
483
263
18,910
3,178
23,342
4,816
22,936
3,876
$
21,973
$
29,285
$
27,558
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 sets forth the significant components of our net deferred tax asset and liability as of December 31,
2016 and 2015:
(In thousands)
Deferred tax asset:
Accruals and reserves
Deferred compensation
Share-based payments
Net operating loss carryforwards
Capital loss carryforwards
Cash conversion derivative and cash convertible notes
hedge, respectively
Basis difference on joint ventures
Other assets
Valuation allowance
Deferred tax liability:
Property and equipment
Intangible assets
Cash convertible notes hedge and cash conversion
derivative, respectively
Other liabilities
Net deferred tax asset (liability)
47
December 31,
2016
December 31,
2015
$
$
$
$
4,085 $
4,344
5,818
68,271
11,861
4,592
1,621
4,297
104,889
(15,176 )
89,713 $
(2,386 ) $
(21,520 )
(4,592 )
(1,653 )
(30,151 )
$
59,562
9,809
6,010
8,344
30,545
—
9,539
6,466
3,933
74,646
(13,594 )
61,052
(49,645 )
(17,666 )
(9,539 )
(102 )
(76,952 )
(15,900 )
Net current deferred tax asset
Net long-term deferred tax asset (liability)
$
$
— $
59,562
59,562
$
7,717
(23,617 )
(15,900 )
At December 31, 2016, we provided valuation allowances for $3.3 million of deferred tax assets
associated with our international net operating loss carryforwards and $11.9 million for deferred tax assets
related to capital loss carryforwards incurred in the sale of the TPHS business. As a result, we recorded a total
increase in our valuation allowance of $1.6 million for the year ended December 31, 2016. Of the change in
valuation allowance for 2016, $9.6 million of income tax benefit was allocated to continuing operations that
related to the reversal of a valuation allowance on domestic deferred tax assets initially recorded at December
31, 2015. We believe that the projected core earnings of the remaining business will be sufficient to utilize the
net operating losses within the expiration period. The $11.2 million offsetting increase in valuation allowance
for 2016 related to international net operating loss and capital loss carryforwards and was allocated to
discontinued operations. Our valuation allowance as of December 31, 2016 is $15.2 million.
At December 31, 2016, we had international net operating loss carryforwards totaling approximately $12.8
million with an indefinite carryforward period, approximately $177.6 million of federal net operating loss
carryforwards, approximately $207.2 million of state net operating loss carryforwards expiring between 2017 and
2036, and approximately $30.0 million of capital loss carryforwards expiring in 2021. Of the federal loss
carryforwards, $6.9 million originating from acquired entities is subject to an annual limitation under Internal
Revenue Code Section 382 and expire in 2021, if not utilized. The remainder of the federal net operating loss
carryforwards will expire between 2035 and 2036.
Pursuant to ASC Topic 718-740, “Stock Compensation”, we are tracking in a separate memo account
the portion of our cumulative net operating losses attributable to excess tax deductions from share-based
payment awards, which totaled $16.5 million and $4.0 million at December 31, 2016 and December 31, 2015,
respectively. The tax benefits related to these amounts were not included in our gross or net deferred tax assets
and were not recorded to additional paid-in capital since the related tax deduction would not have reduced cash
taxes payable. Upon the adoption of ASU 2016-09 on January 1, 2017, these previously unrecognized excess
tax benefits will be recorded as a cumulative-effect adjustment to retained earnings as of January 1, 2017. For
2014, 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 a tax effect of $157,000, $1,000, and $44,000 in 2016, 2015 and 2014, respectively,
related to our interest rate swap agreements to stockholders' equity as a component of accumulated other
comprehensive income (loss).
After the sale of the TPHS business, we determined that the undistributed earnings of the Company’s
remaining foreign subsidiaries were not permanently reinvested. As a result, we recorded a $1.6 million deferred
tax liability on $13.9 million of undistributed earnings at December 31, 2016. At December 31, 2015, the
undistributed earnings were considered to be indefinitely reinvested, and no U.S. federal or state income taxes
were recorded thereon.
The difference between income tax expense computed using the statutory federal income tax rate and
the effective rate is as follows:
48
(In thousands)
Year Ended December 31,
2015
2014
2016
Statutory federal income tax
State income taxes, less federal income tax benefit
Permanent items
Change in valuation allowance
Prior year tax adjustments
State income tax credits
Income tax expense
$
$
27,321 $
3,801
954
(9,615)
(444)
(44)
$
21,973
25,522 $
3,488
167
—
108
—
$
29,285
24,638
3,334
230
—
6
(650)
27,558
Uncertain Tax Positions
As of December 31, 2016, we had no unrecognized tax benefits that would affect our effective tax rate.
Our policy is to include interest and penalties related to unrecognized tax benefits in income tax expense.
During 2015, we included an immaterial amount of net interest related to uncertain tax positions as a
component of income tax expense. During 2016 and 2014, there were no interest and penalties related to
unrecognized tax benefits recorded as income tax expense.
The aggregate changes in the balance of unrecognized tax benefits, exclusive of interest, were as
follows:
(In thousands)
Unrecognized tax benefits at December 31, 2014
Decreases based upon settlements with taxing authorities
Unrecognized tax benefits at December 31, 2015
Increases (decreases) in 2016
Unrecognized tax benefits at December 31, 2016
$
$
$
253
(253 )
—
—
—
We file income tax returns in the U.S. Federal jurisdiction and in various state and foreign jurisdictions. Our
2014 federal income tax return is currently under IRS examination. Tax years remaining subject to examination in
the U.S. Federal jurisdiction include 2013 to present.
7.
Long-Term Debt
The Company's long-term debt, net of unamortized deferred loan costs, consists of the following at
December 31, 2016 and 2015:
(In thousands)
Cash Convertible Notes, net of unamortized discount
CareFirst Convertible Note
Fifth Amended Credit Agreement:
Term Loan
Revolver
Capital lease obligations and other
Less: deferred loan costs
Less: current portion
Credit Facility
December 31, 2016 December 31, 2015
130,296
$
20,000
137,859 $
—
60,000
13,500
1,270
212,629
(2,286 )
210,343
(46,046 )
164,297 $
80,000
—
5,374
235,670
(4,073)
231,597
(23,308)
208,289
$
On June 8, 2012, we entered into the Fifth Amended and Restated Revolving Credit and Term Loan
Agreement (as amended, the "Fifth Amended Credit Agreement"). As amended in August 2016 and further
described below, the Fifth Amended Credit Agreement provides us with a $125 million revolving credit facility that
includes a swingline sub facility of $20 million and a $75 million sub facility for letters of credit. The Fifth Amended
49
Credit Agreement also provides a $200 million term loan facility, $60 million of which remained outstanding at
December 31, 2016, and an uncommitted incremental accordion facility of $100 million.
Borrowings under the Fifth Amended Credit Agreement generally bear interest at variable rates based on a
margin or spread in excess of either (1) the one-month, two-month, three-month or six-month rate (or with the
approval of affected lenders, nine-month or twelve-month rate) for Eurodollar deposits ("LIBOR", which may not be
less than zero), or (2) the greatest of (a) the SunTrust Bank prime lending rate, (b) the federal funds rate plus
0.50% and (c) one-month LIBOR plus 1.00% (the "Base Rate"), as selected by the Company. The LIBOR margin
varies between 1.75% and 3.00%, and the Base Rate margin varies between 0.75% and 2.00%, depending on our
leverage ratio. The Fifth Amended Credit Agreement also provides for an annual fee ranging between 0.30% and
0.50% of the unused commitments under the revolving credit facility. Extensions of credit under the Fifth Amended
Credit Agreement are secured by guarantees from all of the Company's active domestic subsidiaries and by
security interests in substantially all of the Company's and such subsidiaries' assets.
On August 4, 2016, we entered into the Eighth Amendment to the Fifth Amended Credit Agreement (the
"Eighth Amendment"). The Eighth Amendment (1) extends the expiration date of the Company's revolving credit
facility and the maturity date of the Company's term loan facility under the Fifth Amended Credit Agreement from
June 8, 2017 to June 8, 2018 (the "Extended Maturity Date") and (2) amends the definition of "Consolidated
EBITDA" to include an add-back for certain non-cash gains and losses and to take into account certain financial
consequences of the sale by the Company of its TPHS business to Sharecare pursuant to the terms of the
Purchase Agreement. The Eighth Amendment contemplates that some lenders might not agree to the Extended
Maturity Date and preserved June 8, 2017 as the non-extended maturity date (the "Non-Extended Maturity Date")
for such lenders. Lenders holding $45.3 million of the revolving commitments and $25.4 million of outstanding term
loans as of August 4, 2016 did not consent to the Extended Maturity Date. On the Non-Extended Maturity Date, the
revolving commitments of non-consenting revolving lenders will terminate and any outstanding term loans and
revolving loans owed to non-consenting lenders must be paid in full. The outstanding revolving loans under the
revolving credit facility held by consenting lenders must be paid in full on June 8, 2018. We are required to repay
term loans in quarterly principal installments aggregating 2.500% of the original aggregate principal amount of the
term loans ($5.0 million) during each of the remaining quarters prior to maturity on June 8, 2018, at which time the
entire unpaid principal balance of the term loans held by consenting lenders is due and payable.
The impact of the Eighth Amendment on the maturity of our debt is reflected in our balance sheet. As of
December 31, 2016, availability under the revolving credit facility totaled $103.8 million. Based upon the pro-forma
calculations of compliance with the restrictive covenants under our credit agreement, we anticipate the ability to
borrow under the revolving credit facility up to a maximum of $125.0 million through June 8, 2017 and up to a
maximum of $79.7 million for the period beginning on June 9, 2017 and ending on June 8, 2018.
The Fifth Amended Credit Agreement contains financial covenants that require us to maintain, as defined,
specified ratios or levels of (1) total funded debt to EBITDA and (2) fixed charge coverage. The Fifth Amended
Credit Agreement contains various other affirmative and negative covenants that are typical for financings of this
type. Among other things, the Fifth Amended Credit Agreement limits repurchases of our common stock and the
amount of dividends that we can pay to holders of our common stock.
1.50% Cash Convertible Senior Notes Due 2018
On July 16, 2013, we completed the issuance of $150.0 million aggregate principal amount of cash
convertible senior notes due 2018 (the "Cash Convertible Notes"), which bear interest at a rate of 1.50% per year,
payable semiannually in arrears on January 1 and July 1 of each year, beginning on January 1, 2014. The Cash
Convertible Notes will mature on July 1, 2018, unless earlier repurchased or converted into cash in accordance with
their terms prior to such date. At the option of the holders, the Cash Convertible Notes are convertible into cash
based on the conversion rate set forth below only upon occurrence of certain triggering events as defined in the
Indenture dated as of July 8, 2013 by and between the Company and U.S. Bank National Association, none of
which had occurred as of December 31, 2016. Accordingly, we have classified the Cash Convertible Notes as long-
term debt at December 31, 2016 and December 31, 2015. The Cash Convertible Notes are not convertible into our
common stock or any other securities under any circumstances. The initial cash conversion rate is approximately
51.38 shares of our common stock per $1,000 principal amount of Cash Convertible Notes (equivalent to an initial
conversion price of approximately $19.46 per share of common stock). The Cash Convertible Notes are our senior
unsecured obligations and rank senior in right of payment to any of our indebtedness that is expressly subordinated
in right of payment to the Cash Convertible Notes. As a result of this transaction, we recognized deferred loan costs
50
of approximately $3.9 million, which are being amortized over the term of the Cash Convertible Notes using the
effective interest method.
Although the Cash Convertible Notes are not currently convertible, the Cash Convertible Notes will become
convertible into cash during any calendar quarter (and only during such calendar quarter) if the last reported sale
price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30
consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater
than or equal to approximately $25.30 per share. Even if holders do not elect to convert their Cash Convertible
Notes, we would be required under applicable accounting rules to reclassify the outstanding principal of the Cash
Convertible Notes that are convertible as a current rather than long-term liability.
The cash conversion feature of the Cash Convertible Notes (the "Cash Conversion Derivative") requires
bifurcation from the Cash Convertible Notes in accordance with FASB ASC Topic 815, "Derivatives and Hedging"
("ASC Topic 815"), and is recorded in other long-term liabilities as a derivative liability and carried at fair value. The
fair value of the Cash Conversion Derivative at the time of issuance of the Cash Convertible Notes was $36.8
million, which was recorded as a debt discount for purposes of accounting for the debt component of the Cash
Convertible Notes. The debt discount is being amortized over the term of the Cash Convertible Notes using the
effective interest method. For the year ended December 31, 2016, we recorded $7.6 million of interest expense
related to the amortization of the debt discount based upon an effective interest rate of 5.7%. The net carrying
amount of the Cash Convertible Notes at December 31, 2016 and December 31, 2015 was $137.9 million and
$130.3 million, respectively, net of the unamortized discount of $12.1 million and $19.7 million, respectively.
In connection with the issuance of the Cash Convertible Notes, we entered into privately negotiated
convertible note hedge transactions (the "Cash Convertible Notes Hedges"), which are cash-settled and are
intended to reduce our exposure to potential cash payments that we would be required to make if holders elect to
convert the Cash Convertible Notes at a time when our stock price exceeds the conversion price. The initial cost of
the Cash Convertible Notes Hedges was $36.8 million. The Cash Convertible Notes Hedges are recorded in other
assets as a derivative asset under ASC Topic 815 and are carried at fair value. See Note 10 for additional
information regarding the Cash Convertible Notes Hedges and the Cash Conversion Derivative and their fair values
as of December 31, 2016.
In July 2013, we also sold separate privately negotiated warrants (the "Warrants") initially relating, in the
aggregate, to a notional number of shares of our common stock underlying the Cash Convertible Notes Hedges.
The Warrants have an initial strike price of approximately $25.95 per share, which effectively increases the
conversion price of the Cash Convertible Notes to a 60% premium to our stock price on July 1, 2013. The Warrants
will be net share settled by issuing a number of shares of our common stock per Warrant corresponding to the
excess of the market price per share of our common stock (as measured on each warrant exercise date under the
terms of the Warrants) over the applicable strike price of the Warrants. The Warrants meet the definition of
derivatives under the guidance in ASC Topic 815; however, because these instruments have been determined to
be indexed to our own stock and meet the criteria for equity classification under ASC Topic 815, the Warrants have
been accounted for as an adjustment to our additional paid-in-capital.
If the market value per share of our common stock exceeds the strike price of the Warrants, the Warrants
will have a dilutive effect on net income per share, and the "treasury stock" method will be used in calculating the
dilutive effect on earnings per share.
CareFirst Convertible Note
On October 1, 2013, we entered into an Investment Agreement (the "Investment Agreement") with
CareFirst Holdings, LLC ("CareFirst"), which was in addition to certain commercial agreements between us and
CareFirst relating to, among other things, disease management and care coordination services (the "Commercial
Agreements"). Pursuant to the Investment Agreement, we issued to CareFirst a convertible subordinated
promissory note in the aggregate original principal amount of $20 million (the "CareFirst Convertible Note") for a
purchase price of $20 million. The CareFirst Convertible Note bore interest at a rate of 4.75% per year, payable
quarterly in arrears on March 31, June 30, September 30, and December 31 of each calendar year, beginning on
December 31, 2013. The CareFirst Convertible Note could be prepaid only under limited circumstances and upon
the terms and conditions specified therein. If the CareFirst Convertible Note had not been fully converted or
redeemed in accordance with its terms, it would have matured on October 1, 2019. The CareFirst Convertible Note
was subordinate in right of payment to the prior payment in full of (a) all of our indebtedness under the Fifth
51
Amended Credit Agreement (as defined below) and (b) any other of our senior debt, which currently includes only
the Cash Convertible Notes.
The CareFirst Convertible Note was convertible into shares of our common stock at the conversion rate
determined by dividing (a) the sum of the portion of the principal to be converted and accrued and unpaid interest
with respect to such principal by (b) the conversion price equal to $22.41 per share of our common stock. The
conversion price was subject to adjustment for stock splits, stock dividends, recapitalizations, reorganizations,
reclassifications and similar events. In October 2016, CareFirst elected to convert the full amount of the CareFirst
Convertible Note into 892,458 shares of our common stock with a conversion price equal to $22.41 per share.
CareFirst had an opportunity to earn warrants to purchase shares of our common stock ("CareFirst
Warrants") based on achievement of certain quarterly thresholds (the "Revenue Thresholds") for revenue
derived from both the Commercial Agreements and from new business to us from third parties as a result of an
introduction or referral to us by CareFirst (collectively, the "Quarterly Revenue"). If the Quarterly Revenue was
greater than or equal to the applicable Revenue Threshold for any quarter ending on or prior to September 30,
2017, then we would issue to CareFirst a certain number of warrants exercisable for the number of shares of
our common stock ("CareFirst Warrant Shares") determined in accordance with the terms of the Investment
Agreement unless (i) CareFirst elected to receive a cash payment in accordance with the terms of the
Investment Agreement or (ii) there was a change of control. The aggregate number of CareFirst Warrant
Shares in any single 12-month period beginning on October 1, 2013 could not exceed 400,000, and the
aggregate number of CareFirst Warrant Shares issuable pursuant to the Investment Agreement could not
exceed 1,600,000.
Also on October 1, 2013, in connection with the execution of the Investment Agreement, we entered into a
Registration Rights Agreement (the "Registration Rights Agreement") with CareFirst, pursuant to which we agreed
to use commercially reasonable efforts to cause any registration statement covering an underwritten offering of our
common stock for our own account or for the account of any holder of our common stock (other than a registration
statement on Form S-4 or Form S-8 or any successor thereto) to include those registrable common shares that any
holder of such registrable common shares has requested to be registered.
Effective July 31, 2016, in connection with the consummation of the sale of the TPHS business (as
discussed in Note 3), the Investment Agreement was terminated, and all of the Commercial Agreements between
the Company and CareFirst relating to the TPHS business were transferred to an entity that, effective at the
Closing, became a wholly-owned subsidiary of Sharecare, the buyer of the TPHS business. As a result, CareFirst
no longer has the opportunity to earn the CareFirst Warrants in respect of the periods following the Closing. The
Convertible Note, the Registration Rights Agreement and the CareFirst Warrants previously issued to CareFirst
were not affected by the termination of the Investment Agreement. As of July 31, 2016, we had issued
630,586 CareFirst Warrants at a weighted average exercise price of $15.61, 39,903 of which were issued in
2016. In September 2016, CareFirst exercised its right to convert 590,683 CareFirst Warrants for a total of 218,162
shares of our common stock in accordance with the terms of the Investment Agreement. In December 2016,
CareFirst exercised its right to convert the remaining 39,903 CareFirst Warrants for a total of 18,104 shares of our
common stock in accordance with the terms of the Investment Agreement.
The following table summarizes the minimum annual principal payments and repayments of the
revolving advances under the Fifth Amended Credit Agreement and the Cash Convertible Notes for each of
the next five years and thereafter:
(In thousands)
Year ending December 31,
2017
2018
2019
2020
2021
2022 and thereafter
Total
52
$
$
44,831
178,669
—
—
—
—
223,500
8. Commitments and Contingencies
Summary
We are subject to 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, some of which are expected to
be covered by insurance policies, will have a material adverse effect on our financial statements. As these
matters are subject to inherent uncertainties, our view of these matters may change in the future.
Contractual Commitments
In October 2012, we entered into a joint venture agreement with Gallup (the "Gallup Joint Venture") that
required us to make payments over a five year period beginning January 2013. Pursuant to Sharecare's acquisition
of the TPHS business, our ownership interest in the Gallup Joint Venture was transferred to Sharecare. We agreed
with Sharecare to be responsible for two-thirds of the remaining payment obligations in respect of the purchase
price to be paid in connection with Sharecare's acquisition of additional membership interest in the joint venture.
This obligation is currently expected to result in aggregate payments by us of approximately $4.2 million, payable in
five equal quarterly installments that began in the fourth quarter of the 2016 calendar year and end in the fourth
quarter of 2017. As of December 31, 2016, this obligation totaled $3.3 million and was included in accrued
liabilities. The financial impact of the strategic relationship with Gallup and the Gallup Joint Venture are reflected in
discontinued operations for all periods presented as each of these are a part of the TPHS business that we sold.
In May 2011, we entered into a ten-year applications and technology services outsourcing agreement with
HP that contained minimum fee requirements. As a result of the sale of the TPHS business, the minimum fee
requirements under our technology services outsourcing agreement with HP were eliminated.
9. 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 Non-Recurring Basis
Based on our estimate of fair value prior to the disposition of the TPHS business, we determined in 2015
that the present value of our remaining contractual cash obligations in the Gallup Joint Venture exceeded the
estimated fair value, resulting in the recognition of a liability associated with the forward option to acquire additional
membership interest (the "Gallup Derivative"). Prior to July 31, 2016 and the sale of the TPHS business, the Gallup
53
Derivative was recorded as a derivative liability in accordance with FASB ASC Topic 815 and was carried at fair
value. Upon the sale of the TPHS business, we remain obligated to Sharecare for two-thirds of the remaining
payment obligations in respect of the purchase price to be paid in connection with Sharecare’s acquisition of
additional membership interest in the Gallup Joint Venture as discussed in Note 8 above. These payment
obligations are recorded as a liability at December 31, 2016 but not as a derivative; since the Gallup Joint Venture
was transferred to Sharecare, the Gallup Derivative was written off to discontinued operations.
Further, we measure certain assets at fair value on a nonrecurring basis in the fourth quarter of the year,
including the following:
•
reporting units measured at fair value as part of a goodwill impairment test; and
•
indefinite-lived intangible assets measured at fair value for impairment assessment.
Each of these assets above is classified as Level 3 within the fair value hierarchy.
During the fourth quarter of 2016, we reviewed goodwill for impairment at the reporting unit level
(operating segment or one level below an operating segment). Following the sale of the TPHS business effective
July 31, 2016, a single reporting unit remains. 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. We elected to perform a qualitative assessment to determine whether it was more likely than not that the
fair value of the reporting unit was less than its carrying value. Based on our qualitative assessment, we
determined that the carrying value of goodwill was not impaired.
Also during the fourth quarter of 2016, we estimated the fair value of our indefinite-lived intangible asset, a
tradename, using a present value technique, which required management's estimate of future revenues attributable
to this tradename, estimation of the long-term growth rate and royalty rate for this revenue, 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 tradename. We determined that the carrying value of the tradename was not impaired based
upon the impairment review.
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, 2016 and December 31, 2015:
(In thousands)
December 31, 2016
Assets:
Cash Convertible Notes Hedges
Liabilities:
Cash Conversion Derivative
Level 3
Gross Fair
Value
Netting (1)
Net Fair
Value
48,361
48,361
—
48,361
48,361
48,361
—
48,361
(In thousands)
December 31, 2015
Assets:
Foreign currency exchange contracts $
Cash Convertible Notes Hedges
Liabilities:
Foreign currency exchange contracts $
Interest rate swap agreements
Cash Conversion Derivative
Gallup Derivative
Level 2
Level 3
Gross Fair
Value
Netting (1)
Net Fair
Value
284 $
—
48 $
397
—
—
— $
12,632
284 $
12,632
— $
—
12,632
6,339
48 $
397
12,632
6,339
(26) $
—
(26 ) $
—
—
—
258
12,632
22
397
12,632
6,339
54
(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 were valued using broker quotations of
similar assets or liabilities in active markets. The fair values of interest rate swap agreements were 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 fair values of the
Cash Convertible Notes Hedges and the Cash Conversion Derivative are measured using Level 3 inputs because
these instruments are not actively traded. The Cash Convertible Notes Hedges and the Cash Conversion
Derivative are valued using an option pricing model that uses observable and unobservable market data for
inputs, such as expected time to maturity of the derivative instruments, the risk-free interest rate, the expected
volatility of our common stock and other factors. The Cash Convertible Notes Hedges and the Cash Conversion
Derivative were designed such that changes in their fair values would offset one another, with minimal impact to
the consolidated statements of comprehensive income (loss). Therefore, the sensitivity of changes in the
unobservable inputs to the option pricing model for such instruments is mitigated.
The following table presents our financial instruments measured at fair value on a recurring basis using
unobservable inputs (Level 3):
(In thousands)
Cash Convertible Notes Hedges
Cash Conversion Derivative
Gallup Derivative
Balance at
December 31,
2015
Purchases
of Level 3
Instruments
Settlements
of Level 3
Instruments
Gains (Losses)
Included in
Earnings
Balance at
December 31,
2016
$
$
12,632 $
(12,632 )
(6,339 ) $
— $
—
— $
— $
—
6,339 $
35,729 $
(35,729)
— $
48,361
(48,361)
—
The gains and losses included in earnings noted above represent the change in the fair value of these
financial instruments and are recorded each period in the consolidated statements of comprehensive income
(loss). The gains and losses on the Cash Convertible Notes Hedges and Cash Conversion Derivative are
recorded as selling, general and administrative expenses.
Fair Value of Other Financial Instruments
In addition to the interest rate swap agreements, the Cash Convertible Notes Hedges and the Cash
Conversion Derivative, the estimated fair values of which are disclosed above, the estimated fair value of each
class of financial instruments at December 31, 2016 was as follows:
Cash and cash equivalents – The carrying amount of $1.6 million approximates fair value because of
the short maturity of those instruments (less than three months).
Long-term debt – The estimated fair value of outstanding borrowings under the Fifth Amended Credit
Agreement, which includes a revolving credit facility and a term loan facility (see Note 7), and the Cash
Convertible Notes are determined based on the fair value hierarchy as discussed above. The revolving credit
facility and the term loan facility are not actively traded and therefore are classified as Level 2 valuations based
on the market for similar instruments. The estimated fair value 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 Fifth
Amended Credit Agreement at December 31, 2016 are $73.5 million and $73.5 million, respectively.
The Cash Convertible Notes are actively traded and therefore are classified as Level 1 valuations. The
estimated fair value at December 31, 2016 was $187.7 million, which is based on the most recent trading price
of the Cash Convertible Notes as of December 31, 2016, and the par value was $150.0 million. The carrying
amount of the Cash Convertible Notes at December 31, 2016 was $137.9 million, which is net of the debt
discount discussed in Note 7.
10. Derivative Instruments and Hedging Activities
We use derivative instruments to manage risks related to interest (through December 30, 2016), the Cash
55
Convertible Notes, and, prior to the sale of the TPHS business, foreign currencies and the fair value of the Gallup
Derivative. We account for derivatives in accordance with ASC Topic 815, which establishes accounting and
reporting standards requiring that certain derivative instruments be recorded on the balance sheet as either an
asset or liability measured at fair value. Additionally, changes in the derivative's fair value will be recognized
currently in earnings unless specific hedge accounting criteria are met. As permitted under our master netting
arrangements, the fair value amounts of our prior interest rate swaps and foreign currency options and/or forward
contracts are presented on a net basis by counterparty in the consolidated balance sheets.
Derivative Instruments Designated as Hedging Instruments
Cash Flow Hedges
Derivative instruments that are designated and qualify as cash flow hedges are recorded at estimated fair
value in the consolidated balance sheets, with the effective portion of the gains and losses being reported in
accumulated other comprehensive income or loss ("accumulated OCI"). Cash flow hedges for all periods
presented consist solely of interest rate swap agreements, which effectively modified our exposure to interest rate
risk by converting a portion of our floating rate debt to fixed rate obligations, thus reducing the impact of interest
rate changes on future interest expense. Under these agreements, we received a variable rate of interest based
on LIBOR (as defined in Note 7), and we paid a fixed rate of interest with an interest rate of 1.480% plus a spread
(see Note 7). We maintained an interest rate swap agreement that had a termination date of December 30, 2016,
and as of December 31, 2016, we maintained no other interest rate swap agreements. Gains and losses on
interest rate swap agreements were reclassified to interest expense in the same period during which the hedged
transaction affected earnings or the period in which all or a portion of the hedge became ineffective.
The following table shows the effect of our cash flow hedges on the consolidated balance sheets
during the years ended December 31, 2016 and 2015:
(In thousands)
Derivatives in Cash Flow Hedging Relationships
Loss related to effective portion of derivatives recognized in accumulated OCI,
gross of tax effect
Loss related to effective portion of derivatives reclassified from accumulated
OCI to interest expense, gross of tax effect
For the Year Ended
December 31,
2016
December 31,
2015
110
(507)
253
(354 )
Gains and losses representing either hedge ineffectiveness or hedge components excluded from the
assessment of effectiveness are recognized in current earnings. During the years ended December 31, 2016 and
2015, there were no gains or losses on cash flow hedges recognized in our consolidated statements of
comprehensive income (loss) resulting from hedge ineffectiveness.
Derivative Instruments Not Designated as Hedging Instruments
Our Cash Conversion Derivative, Cash Convertible Notes Hedges and, prior to July 31, 2016, Gallup
Derivative and foreign currency options and/or forward contracts, do not qualify for hedge accounting treatment
under U.S. GAAP and are measured at fair value, with gains and losses recognized immediately in the
consolidated statements of comprehensive income (loss). Other than the Gallup Derivative described in Note 9,
these derivative instruments not designated as hedging instruments did not have a material impact on our
consolidated statements of comprehensive income (loss) for the years ended December 31, 2016 and 2015.
The Cash Conversion Derivative is accounted for as a derivative liability and carried at fair value. In order
to offset the risk associated with the Cash Conversion Derivative, we entered into Cash Convertible Notes
Hedges which are cash-settled and are intended to reduce our exposure to potential cash payments that we
would be required to make if holders elect to convert the Cash Convertible Notes at a time when our stock price
exceeds the conversion price. The Cash Convertible Notes Hedges are accounted for as a derivative asset and
carried at fair value.
Prior to July 31, 2016 and the sale of the TPHS business, the Gallup Derivative was accounted for as a
derivative liability and carried at fair value.
56
The gains and losses resulting from a change in fair values of the Cash Conversion Derivative and the
Cash Convertible Notes Hedges are reported in the consolidated statements of comprehensive income (loss).
The settlement on the Gallup Derivative has been recorded as a part of discontinued operations.
(In thousands)
Cash Convertible Notes Hedges:
Net unrealized (loss) gain
Cash Conversion Derivative:
Net unrealized gain (loss)
Gallup Derivative:
Net gain (loss)
Year Ended December 31,
2016
2015
Statements of Comprehensive
Income (Loss) Classification
$
$
35,729 $
(35,393 ) Selling, general and administrative expense
(35,729 ) $
35,393 Selling, general and administrative expense
4,823
(7,325 )
Loss from discontinued operations
Prior to the sale of the TPHS business, we also entered 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 required current period mark-to-market accounting, with any change in fair
value being recorded each period in the consolidated statements of comprehensive income (loss) in selling,
general and administrative expenses. We do not execute transactions or hold derivative financial instruments for
trading or other purposes.
Financial Instruments
The estimated gross fair values of derivative instruments at December 31, 2016 and December 31,
2015, excluding the impact of netting derivative assets and liabilities when a legally enforceable master netting
agreement exists, were as follows:
December 31,
2016
Cash
Convertible
Notes Hedges
and Cash
Conversion
Derivative
December 31, 2015
Foreign
Currency
exchange
contracts
Interest rate
swap
agreements
Cash
Convertible
Notes Hedges
and Cash
Conversion
Derivative
Gallup
Derivative
$
$
$
$
— $
48,361
48,361 $
284 $
—
284 $
— $
—
— $
— $
12,632
12,632 $
—
—
—
— $
48,361
—
48,361 $
48 $
—
—
48 $
— $
—
— $
12,632
3,323
3,016
397
397 $
—
12,632 $
—
6,339
(In thousands)
Assets:
Derivatives not designated as
hedging instruments:
Other current assets
Other assets
Total assets
Liabilities:
Derivatives not designated as
hedging instruments:
Accrued liabilities
Other long-term liabilities
Derivatives designated as hedging
instruments:
Accrued liabilities
Total liabilities
See also Note 9 for more information on fair value measurements.
11. Other Long-Term Liabilities
Other long-term liabilities consist primarily of the Cash Conversion Derivative (see Notes 9 and 10),
accrued severance and restructuring liabilities, deferred rent (see Note 12), and a deferred compensation
plan.
57
We have a non-qualified deferred compensation plan under which certain employees may defer a
portion of their salaries and receive a Company matching contribution plus a discretionary contribution based on
the Company's performance against targets. Company contributions vest equally over four years. 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 beginning of the plan year.
As of December 31, 2016 and 2015, other long-term liabilities included vested amounts under the non-
qualified deferred compensation plan of $1.6 million and $4.4 million, respectively, net of the current portions of
$5.9 million and $4.1 million, respectively. For the next five years ending December 31, 2021 we must make
estimated plan payments of $5.9 million, $0.1 million, $37,000, $0.2 million, and $10,000, respectively.
12. Leases
We maintain operating lease agreements principally for our office spaces. We lease approximately
264,000 square feet of office space for our corporate headquarters in Franklin, Tennessee, approximately
221,000 square feet of which is subleased. This lease commenced in March 2008 and expires in February 2023.
We also lease approximately 92,000 square feet of office space in Chandler, Arizona, and approximately 13,000
square feet of office space in Sterling, Virginia. The Chandler, Arizona lease began in April 2009 and expires in
April 2020.
Our corporate office lease agreement in Tennessee 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 $4.3 million to $6.6 million per year over the term of the lease. The landlord provided a tenant
improvement allowance equal to approximately $10.7 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, 2016, 2015, and 2014, rent expense under lease agreements was approximately $4.2
million, $3.7 million, and $2.0 million, respectively. Our capital lease obligations 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 cash receipts from
subleases of $33.9 million, under all capital leases and non-cancelable operating leases for each of the next
five years and thereafter:
(In thousands)
Year ending December 31,
2017
2018
2019
2020
2021
2022 and thereafter
Total minimum lease payments
Less amount representing interest
Present value of minimum lease payments
Less current portion
13. Share-Based Compensation
Capital
Leases
Operating
Leases
5,699
5,336
5,427
2,999
859
963
21,283
95 $
56
—
—
—
—
151 $
—
151
95
56
$
$
$
We have several stockholder-approved stock incentive plans for our employees and directors. During
the year ended December 31, 2016, we had four types of share-based awards outstanding under these plans:
stock options, restricted stock units, restricted stock and market stock units. We believe that our share-based
awards align the interests of our employees and directors with those of our stockholders.
58
We grant options under these plans at market value on the date of grant. The options generally vest
over four years based on service conditions and expire ten years from the date of grant. Restricted stock units
and restricted stock awards generally vest over three or four years. Market stock units granted during the years
ended December 31, 2016 and December 31, 2015 have a multi-year performance period ending in 2019 and
2018, respectively, and will vest at the end of the applicable three-year performance period based on total
shareholder return.
We recognize share-based compensation expense for options, restricted stock units, and restricted
stock awards on a straight-line basis over the vesting period. We recognize share-based compensation expense
for the market stock units if the requisite service period is rendered, even if the market condition is never
satisfied. All awards generally provide for accelerated vesting upon a change in control or normal or early
retirement (as defined in the applicable stock incentive plan). At December 31, 2016, we had reserved
approximately 1.1 million shares for future equity grants under our stock incentive plan.
Following are certain amounts recognized in the consolidated statements of operations for share-based
compensation arrangements for the years ended December 31, 2016, 2015 and 2014. We did not capitalize any
share-based compensation costs during these periods.
(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
Share-based compensation included in discontinued
operations(1)
Total income tax benefit recognized
Year Ended
December 31, December 31, December 31,
2015 (2)
2016
2014
$
17.5 $
1.2
5.9
0.3
10.1
2.9
10.5 $
0.9
6.0
0.2
3.4
2.8
8.3
1.0
3.9
—
3.4
2.0
(1)
(2)
Includes the acceleration of vesting of all unvested stock options, market stock units and restricted stock units
held by two former senior executives as of the Closing who had accepted employment with Sharecare.
Includes the acceleration of vesting in May 2015 of all unexercisable stock options and unvested time-based
restricted stock units held by our former president and chief executive officer at the time of the termination of
his employment.
As of December 31, 2016, there was $11.1 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 1.7 years.
In connection with the sale of the TPHS business, we modified approximately 92,000 options, 396,000
restricted stock units, and 75,000 market stock units by accelerating the vesting dates to July 31, 2016 (the date
on which the sale of the TPHS business was consummated) for approximately 100 employees of the TPHS
business. This resulted in share-based compensation expense of $7.4 million, all of which is included in
discontinued operations.
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. No stock options were granted during the years ended December 31, 2016 or 2015.
The following table sets forth the weighted average grant-date fair values of options and the weighted
59
average assumptions we used to develop the fair value estimates under each of the option valuation models for
the year ended December 31, 2014:
Weighted average grant-date fair value of options per share
$
9.05
Year Ended
December 31, 2014
Assumptions:
Expected volatility
Expected dividends
Expected term (in years)
Risk-free rate
54.6 %
—
4.7
2.4%
A summary of option activity as of December 31, 2016 and the changes during the year then ended is
presented below:
Options
Outstanding at January 1, 2016
Granted
Exercised
Forfeited
Expired
Outstanding at December 31, 2016
Exercisable at December 31, 2016
Shares
(In thousands)
Weighted
Average
Exercise
Price
Per Share
13.34
—
11.77
13.65
21.27
14.02
13.95
2,121 $
—
(955 )
(40 )
(102 )
1,024 $
899 $
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic Value
(In thousands)
4.7 $
4.4 $
9,972
8,930
The total intrinsic value, which represents the difference between the market price of the underlying
common stock and the option's exercise price, of options exercised during the years ended December 31, 2016,
2015 and 2014 was $10.2 million, $5.3 million, and $1.1 million, respectively.
Cash received from option exercises under all share-based payment arrangements during 2016 was $10.0
million. No actual tax benefit was realized during 2016 for the tax deductions from option exercises. We issue new
shares of common stock upon exercise of stock options or vesting of restricted stock units and market stock units.
Nonvested Shares
The fair value of restricted stock and restricted stock units 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 restricted
stock and restricted stock units granted during the years ended December 31, 2016, 2015 and 2014 was $12.37,
$11.97, and $16.72, respectively. The fair value of market stock units is determined based on the closing bid
price of the Company's common stock on the grant date, except that the Monte Carlo simulation valuation model
is used to determine the fair value of market stock units with a market condition. The weighted average grant-
date fair value of all market stock units granted during the years ended December 31, 2016 and 2015 was $10.67
and $6.53, respectively. No market stock units were granted during 2014. The weighted average grant-date fair
value of performance-based stock units granted during the year ended December 31, 2014 was $14.77. No
performance-based stock units were granted during 2015 or 2016, and there are no performance-based stock
units outstanding as of December 31, 2016.
The two tables below set forth a summary of our nonvested shares as of December 31, 2016 as well as
activity during the year then ended. The total grant-date fair value of shares vested during the years ended
December 31, 2016, 2015 and 2014 was $13.9 million, $5.2 million, and $2.5 million, respectively.
The following table shows a summary of our restricted stock and restricted stock units as of December
60
31, 2016, as well as activity during the year then ended:
Nonvested at January 1, 2016
Granted
Vested
Forfeited
Nonvested at December 31, 2016
Restricted Stock and
Restricted Stock Units
Shares
(In thousands)
Weighted-
Average
Grant Date
Fair Value
1,618 $
967
(1,036 )
(610 )
939 $
12.35
12.37
11.89
11.95
13.11
The following table shows a summary of our market stock units as of December 31, 2016, as well as
activity during the year then ended:
Nonvested at January 1, 2016
Granted
Vested
Forfeited
Nonvested at December 31, 2016
14. Share Repurchases
Market Stock Units
Shares
(In thousands)
Weighted-
Average
Grant Date
Fair Value
474 $
328
(221 )
(175 )
406 $
6.53
10.67
7.30
8.15
8.75
In accordance with the terms of a Separation and Release Agreement entered into with our former
President and Chief Executive Officer, Ben R. Leedle, Jr., whose employment was terminated on May 15, 2015
(the "Separation Date"), Mr. Leedle elected to net exercise (net of the applicable exercise price and tax
withholding) on the Separation Date certain performance awards granted to Mr. Leedle in the form of options to
purchase 434,436 shares of common stock of the Company at an exercise price of $9.96 per share. The
Company repurchased from Mr. Leedle 106,408 shares of common stock resulting from this net exercise at
$17.23 per share, which was the per share purchase price equal to the closing price of the common stock on
the Separation Date as reported on The NASDAQ Global Select Market.
15. Earnings (Loss) Per Share
The following is a reconciliation of the numerator and denominator of basic and diluted earnings (loss) per
share for the years ended December 31, 2016, 2015, and 2014:
(In thousands except per share data)
Numerator:
Net income from continuing operations attributable to Tivity Health,
Year Ended December 31,
2016
2015
2014
Inc. - numerator for earnings per share
$
56,091 $
43,634 $
42,836
Net loss from discontinued operations attributable to Tivity Health,
Inc. - numerator for loss per share
Net loss attributable to Tivity Health, Inc. - numerator for loss per
(185,202
)
(74,581)
(48,397 )
share
$
(129,111
)
(30,947
)
)
(5,561
Denominator:
Shares used for basic income (loss) per share
Effect of dilutive stock options and restricted stock units
outstanding:
Non-qualified stock options
Restricted stock units
Performance stock units
61
36,999
35,832
35,302
344
538
—
568
364
25
706
313
21
Market stock units
CareFirst Warrants
Shares used for diluted income (loss) per share
194
—
38,075
10
55
36,854
—
4
36,346
Earnings (loss) per share attributable to Tivity Health, Inc. - basic:
$
Continuing operations
$
Discontinued operations
$
Net loss
1.52
$
(5.01) $
(3.49) $
1.22
$
(2.08) $
(0.86) $
1.21
(1.37 )
(0.16 )
Earnings (loss) per share attributable to Tivity Health, Inc. - diluted:
$
Continuing operations
$
Discontinued operations
$
Net loss
1.47 $
(4.86) $
(3.39) $
1.18 $
(2.02) $
(0.84) $
1.18
(1.33 )
(0.15 )
Dilutive securities outstanding not included in the computation of
earnings (loss) per share because their effect is anti-dilutive:
Non-qualified stock options
Restricted stock units
Performance stock units
Market stock units
Warrants related to Cash Convertible Notes
CareFirst Convertible Note
CareFirst Warrants
16. Accumulated OCI
708
333
—
6
7,707
—
—
903
220
—
2
7,707
892
263
1,357
97
1
—
7,707
892
83
The following tables summarize the changes in accumulated OCI, net of tax, for the years ended
December 31, 2016 and 2015:
(In thousands)
$
Accumulated OCI, net of tax, as of January 1, 2016
Other comprehensive income (loss) before reclassifications, net of tax
Amounts reclassified from accumulated OCI, net of tax
Net increase (decrease) in other comprehensive income (loss), net of
tax
Accumulated OCI, net of tax, as of December 31, 2016
$
Net
Change in
Fair Value
of Interest
Rate
Swaps
Foreign
Currency
Translation
Adjustments Total
(4,000) $
(502)
—
(4,239 )
(569 )
306
(239 ) $
(67 )
306
239
— $
(502
)
(4,502) $
(263
)
(4,502)
(In thousands)
$
Accumulated OCI, net of tax, as of January 1, 2015
Other comprehensive income (loss) before reclassifications, net of tax
Amounts reclassified from accumulated OCI, net of tax
Net increase (decrease) in other comprehensive income (loss), net of
tax
Accumulated OCI, net of tax, as of December 31, 2015
$
Net
Change in
Fair Value
of Interest
Rate
Swaps
Foreign
Currency
Translation
Adjustments
Total
(342 ) $
(111 )
214
103
(239 ) $
(1,706 ) $
(2,294 )
—
(2,048 )
(2,405 )
214
(2,294 )
(4,000 ) $
(2,191 )
(4,239 )
62
The following table provides details about reclassifications out of accumulated OCI for the years
ended December 31, 2016 and 2015:
(In thousands)
Interest rate swaps
Twelve Months Ended
December 31,
2016
2015
$
$
507 $
(201 )
306 $
354
(140 )
214
Statement of Comprehensive Income
(Loss) Classification
Interest expense
Income tax benefit
Net of tax
See Note 10 for further discussion of our interest rate swaps.
17. Restructuring and Related Charges
In the third quarter of 2015, we began developing our reorganization and cost rationalization plan (the
"2015 Restructuring Plan") that the Company committed to in October 2015, which was intended to improve
efficiency and deliver greater value to our customers and stakeholders. Completion of the 2015 Restructuring
Plan occurred with the completion of the sale of the TPHS business. We incurred a total of approximately $24
million in restructuring charges related to the 2015 Restructuring Plan, substantially all of which resulted in cash
expenditures.
The following table shows the costs incurred for the years ended December 31, 2016 and 2015 directly
related to our 2015 Restructuring Plan and other restructuring costs:
(In thousands)
Restructuring charges
Payments
Non-cash charges (2)
Accrued restructuring and related charges
liability as of December 31, 2015
Restructuring charges
Cash payments
Non-cash charges (2)
Adjustments (3)
Accrued restructuring and related charges
liability as of December 31, 2016
Severance
and Other
Employee-
Related Costs
8,836 $
$
(825 )
(918 )
Consulting
and Other
Costs (1)
Asset
5,074 $
(2,174 )
—
Retirements
1,187 $
—
(1,187 )
$
7,093 $
4,599
(7,414 )
67
(103 )
2,900 $
4,130
(6,967 )
—
—
$
4,242 $
63 $
— $
—
—
—
—
— $
Total
15,097
(2,999 )
(2,105 )
9,993
8,729
(14,381 )
67
(103 )
4,305
(1) Consulting and other costs primarily consist of third-party consulting charges incurred in connection with the
2015 Restructuring Plan. Consulting and other costs also include approximately $0.2 million and $0.4 million of
lease termination costs in 2016 and 2015, respectively.
(2) Non-cash charges consist primarily of share-based compensation costs as well as asset retirements.
(3) Adjustments resulted primarily from actual employee tax and benefit amounts differing from previous estimates.
In the third quarter of 2016, we began the reorganization of our corporate support infrastructure (the "2016
Restructuring Plan"), which is intended to deliver greater value to our customers and stakeholders. We expect to
incur a total of approximately $6.0 million in restructuring charges related to the 2016 Restructuring Plan, $4.9
million of which was incurred by the end of the fourth quarter of 2016, with the remainder expected to be incurred in
the first quarter of 2017 and to consist of severance and other employee-related costs.
The following table shows the costs incurred for the year ended December 31, 2016 directly related to our
63
2016 Restructuring Plan and other restructuring costs:
(In thousands)
Restructuring charges
Payments
Non-cash charges (2)
Accrued restructuring and related charges
liability as of December 31, 2016
Severance
and Other
Employee-
Related Costs
4,697 $
$
(559 )
(287 )
Consulting
and Other
Costs (1)
236 $
(188 )
—
Total
4,933
(747 )
(287 )
$
3,851 $
48 $
3,899
(1) Consulting and other costs consist of third-party consulting charges incurred in connection with the 2016
Restructuring Plan.
(2) Non-cash charges consist of share-based compensation costs.
18. Employee Benefits
We have a 401(k) Retirement Savings Plan (the "401(k) Plan") available to substantially all of our
employees. Employees can contribute up to a certain percentage of their base compensation as defined in the
401(k) Plan. The Company matching contributions are subject to vesting requirements. Company contributions
under the 401(k) Plan totaled $2.2 million, $3.3 million and $3.3 million for the years ended December 31, 2016,
2015 and 2014, respectively.
19. Segment Disclosures and Concentrations of Risk
Excluding the TPHS business, during 2016, we had one operating and reportable segment, Network
Solutions. Therefore, all required segment information can be found in the Consolidated Financial Statements.
Long-lived assets and revenue from external customers attributable to our operations in the United States
accounted for 100% of our consolidated long-lived assets and revenues as of and for the years ended December
31, 2016 and December 31, 2015.
During 2016, we had two customers that each accounted for 10% or more of our revenues from
continuing operations and individually comprised approximately 20.4% and 15.2% of our revenues for 2016. No
other customer accounted for 10% or more of our revenues in 2016. In addition, at December 31, 2016, one
customer accounted for approximately 28% of our accounts receivable, net.
During 2015, we had three customers that each accounted for 10% or more of our revenues and
individually comprised approximately 23%, 13%, and 10% of our revenues from continuing operations for 2015.
No other customer accounted for 10% or more of our revenues from continuing operations in 2015.
20. Quarterly Financial Information (unaudited)
(In thousands, except per share data)
Year Ended December 31, 2016
First
Second
Third
Fourth (3)
Revenues
Gross margin
Income before income taxes
Net income from continuing operations
attributable to Tivity Health, Inc.
Net income (loss) from discontinued operations
$
$
$
$
126,012 $
33,105 $
19,208 $
19,208 $
125,003 $
34,590 $
19,962 $
125,049 $ 124,933
38,304
20,972
34,562 $
17,925 $
19,962 $
4,799 $
12,125
attributable to Tivity Health, Inc.
$
Net income (loss) attributable to Tivity Health, Inc. $
(33,417 ) $
(14,209 ) $
(195,558 ) $
(175,596 ) $
48,995 $
53,794 $
(5,225 )
6,900
64
Earnings (loss) per share attributable to Tivity
Health, Inc. – basic:
Continuing operations (1)
Discontinued operations (1)
Net income (loss) (1) (2)
Earnings (loss) per share attributable to Tivity
Health, Inc. – diluted:
Continuing operations (1)
Discontinued operations (1)
Net income (loss) (1) (2)
(In thousands, except per share data)
Year Ended December 31, 2015
Revenues
Gross margin
Income before income taxes
Net income from continuing operations
attributable to Tivity Health, Inc.
$
$
$
$
$
$
$
$
$
$
Net loss from discontinued operations attributable
0.53 $
(0.93 ) $
(0.39 ) $
0.55 $
(5.41 ) $
(4.85 ) $
0.13 $
1.32 $
1.45 $
0.31
(0.14 )
0.18
0.52 $
(0.91 ) $
(0.39 ) $
0.54 $
(5.25 ) $
(4.72 ) $
0.12 $
1.28 $
1.40 $
0.30
(0.13 )
0.17
First
Second
Third
Fourth
111,649 $
30,146 $
17,775 $
113,425 $
34,711 $
17,698 $
113,536 $ 113,482
30,748
16,063
33,078 $
21,383 $
10,680 $
10,756 $
12,960 $
9,238
to Tivity Health, Inc.
$
Net income (loss) attributable to Tivity Health, Inc. $
(13,593 ) $
(2,913 ) $
(10,336 ) $
420 $
(21,986) $
(9,026) $
(28,666 )
(19,428 )
Earnings (loss) per share attributable to Tivity
Health, Inc. – basic:
Continuing operations (1)
Discontinued operations (1)
Net income (loss) (1) (2)
Earnings (loss) per share attributable to Tivity
Health, Inc. – diluted:
Continuing operations (1)
Discontinued operations (1)
Net income (loss) (1) (2)
$
$
$
$
$
$
0.30 $
(0.38 ) $
(0.08 ) $
0.30 $
(0.29 ) $
0.01 $
0.36 $
(0.61) $
(0.25) $
0.26
(0.79 )
(0.54 )
0.29 $
(0.37 ) $
(0.08 ) $
0.29 $
(0.28 ) $
0.01 $
0.35 $
(0.60) $
(0.25) $
0.25
(0.78 )
(0.53 )
(1) We calculated earnings per share for each of the quarters based on the weighted average number of shares
and dilutive securities outstanding for each period. Accordingly, the sum of the quarters may not necessarily be
equal to the full year income per share.
(2) Figures may not add due to rounding.
(3) Net income from continuing operations for the fourth quarter of 2016 includes the impact of a $2.2 million out of
period adjustment to decrease depreciation expense included in continuing operations (with a corresponding
increase to depreciation expense included in discontinued operations) related to the correction of our previous
allocation of 2016 depreciation expense between continuing and discontinued operations based on having
completed our asset separation analysis. The previous interim periods in 2016 were not materially misstated, nor
is the correction material to the interim results for the fourth quarter of 2016.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company's principal executive officer and principal financial officer have reviewed and evaluated
65
the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-
15(e) promulgated under the Exchange Act) as of December 31, 2016. Based on that evaluation, the principal
executive officer and principal financial officer have concluded that the Company's disclosure controls and
procedures are effective. They are designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in the SEC's rules and forms and to ensure that information required
to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated
and communicated to the Company's management, including the principal executive officer and principal
financial officer, to allow timely decisions regarding required disclosure.
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 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, 2016 based on criteria established in Internal Control — Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the
"COSO framework"), and believes that the COSO framework is a suitable framework for such an evaluation.
Based on this assessment, management has concluded that the Company's internal control over financial
reporting was effective as of December 31, 2016.
PricewaterhouseCoopers, the independent registered public accounting firm that audited the Company's
Consolidated Financial Statements for the year ended December 31, 2016, has issued an attestation report on
the Company's internal control over financial reporting, which is included in this Report.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company's internal controls over financial reporting during the
quarter ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
Item 9B. Other Information
Not applicable.
66
Item 10. Directors, Executive Officers and Corporate Governance
PART III
Information concerning our directors, director nomination procedures, audit committee, audit committee
financial experts, code of ethics, and compliance with Section 16(a) of the Exchange Act will be included under
the headings "Election of Directors," "Code of Conduct," "Corporate Governance," and "Section 16(a) Beneficial
Reporting Compliance" in our Proxy Statement for the 2017 Annual Meeting of Stockholders to be held on May
25, 2017 and is incorporated herein by reference.
Pursuant to General Instruction G(3) of Form 10-K, information concerning our executive officers is
included in Part I of this Report, under the caption "Executive Officers of the Registrant."
Item 11. Executive Compensation
Information required by this item will be included under the headings "Executive Compensation" and
"Director Compensation" in our Proxy Statement for the 2017 Annual Meeting of Stockholders to be held on
May 25, 2017 and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Information required by this item will be included under the headings "Security Ownership of Certain
Beneficial Owners and Management" in our Proxy Statement for the 2017 Annual Meeting of Stockholders to be
held on May 25, 2017 and is incorporated herein by reference.
Equity Compensation Plan Information
The following table summarizes, as of December 31, 2016, certain information concerning the
Company's equity compensation plans under which equity securities of the Company are currently authorized
for issuance.
Number of Shares
to be Issued Upon
Exercise of
Outstanding
Options, Warrants
and Rights,
in thousands(1)
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and
Rights(2)
Number of Shares
Remaining Available for
Future Issuance Under
Equity Compensation
Plans
(Excluding Shares
Reflected
in First Column),
in thousands
2,369
$14.02
—
2,369
—
$14.02
1,070
—
1,070
Plan Category
Equity compensation plans approved by
stockholders
Equity compensation plans not
approved by stockholders
Total
(1)
(2)
Represents 1,024,000 stock options, 939,000 restricted stock units and shares of restricted stock, and
406,000 market stock units.
The weighted average exercise price does not take into account the shares issuable upon vesting of
outstanding unvested restricted stock units and market stock units, which have no exercise price.
The weighted average remaining contractual term of the outstanding stock options is 4.7 years.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information required by this item will be included under the heading "Corporate Governance" in our Proxy
Statement for the 2017 Annual Meeting of Stockholders to be held on May 25, 2017 and is incorporated herein by
reference.
67
Item 14. Principal Accounting Fees and Services
Information required by this item will be included under the heading "Ratification of Independent
Registered Public Accounting Firm" in our Proxy Statement for the 2017 Annual Meeting of Stockholders to
be held on May 25, 2017 and is incorporated herein by reference.
68
Item 15. Exhibits, Financial Statement Schedules
(a)
The following documents are filed as part of this Report:
PART IV
1.
The financial statements filed as part of this Report are included in Part II, Item 8 of this Report.
We have omitted all Financial Statement Schedules because they are not required under the instructions
2.
to the applicable accounting regulations of the SEC or the information to be set forth therein is included in the
financial statements or in the notes thereto.
3.
2.1
3.1
3.2
3.3
3.4
4.1
4.2
4.3
10.1
10.2
10.3
10.4
Exhibits
Membership Purchase Agreement dated July 27, 2016 by and among Sharecare, Inc., Healthways
SC, LLC and Healthways, Inc. [incorporated by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K dated August 2, 2016, File No. 000-19364]
Restated Certificate of Incorporation, as amended [incorporated by reference to Exhibit 3.1 to
Form 10-Q of the Company's fiscal quarter ended February 29, 2008, File No. 000-19364]
Certificate of Amendment to Restated Certificate of Incorporation, as amended, dated as of
October 10, 2013 [incorporated by reference to Exhibit 3.2 to Form 10-Q of the Company's fiscal
quarter ended September 30, 2013, File No. 000-19364]
Certificate of Amendment to Restated Certificate of Incorporation, as amended, dated as of
January 4, 2017 [incorporated by reference to Exhibit 3.1 to the Company's Current Report on
Form 8-K dated January 10, 2017, File No. 000-19364]
Second Amended and Restated Bylaws of Tivity Health, Inc. [incorporated by reference to Exhibit
3.2 to the Company's Current Report on Form 8-K dated January 10, 2017, File No. 000-19364]
Article IV of the Company's Restated Certificate of Incorporation (included in Exhibit 3.1)
Indenture dated as of July 8, 2013 between the Company and U.S. Bank National Association
[incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated
July 8, 2013, File No. 000-19364]
Form of 1.50% Cash Convertible Senior Note due 2018 (included in Exhibit 4.2)
Office Lease dated as of May 4, 2006 between the Company and Highwoods/Tennessee Holdings,
L.P. [incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated
May 5, 2006, File No. 000-19364]
Fifth Amended and Restated Revolving Credit and Term Loan Agreement dated June 8, 2012
between the Company and SunTrust Bank as Administrative Agent, JPMorgan Chase Bank, N.A.as
Documentation Agent, and U.S. Bank National Association and Fifth Third Bank as Co-Syndication
Agents [incorporated by reference to Exhibit 10.1 to Company's Current Report on Form 8-K dated
June 11, 2012, File No. 000-19364]
First Amendment to Fifth Amended and Restated Revolving Credit and Term Loan Agreement
dated February 5, 2013 between the Company and SunTrust Bank as Administrative Agent
[incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated
February 7, 2013, File No. 000-19364]
Second Amendment to Fifth Amended and Restated Revolving Credit and Term Loan Agreement
dated March 15, 2013 between the Company and SunTrust Bank as Administrative Agent
[incorporated by reference to Exhibit 10.2 to Form 10-Q of the Company's fiscal quarter ended
March 31, 2013, File No. 000-19364]
69
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
Third Amendment to Fifth Amended and Restated Revolving Credit and Term Loan Agreement and
First Amendment to Second Amended and Restated Subsidiary Guarantee Agreement [incorporated
by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated July 1, 2013, File
No. 000-19364]
Fourth Amendment to Fifth Amended and Restated Revolving Credit and Term Loan Agreement
dated April 14, 2014 between the Company and SunTrust Bank as Administrative Agent
[incorporated by reference to Exhibit 10.1 to Form 10-Q of the Company's fiscal quarter ended
June 30, 2014, File No. 000-19364]
Fifth Amendment to Fifth Amended and Restated Revolving Credit and Term Loan Agreement
dated December 29, 2014 between the Company and SunTrust Bank as Administrative Agent
[incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated
December 30, 2014, File No. 000-19364]
Sixth Amendment to Fifth Amended and Restated Revolving Credit and Term Loan Agreement
[incorporated by reference to Exhibit 10.1 to Form 10-Q of the Company's fiscal quarter ended
June 30, 2015, File No. 000-19364]
Seventh Amendment to Fifth Amended and Restated Revolving Credit and Term Loan Agreement
[incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated
October 29, 2015, File No. 000-19364]
Eighth Amendment to Fifth Amended and Restated Revolving Credit and Term Loan Agreement
[incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated
August 4, 2016, File No. 000-19364]
Call Option Transaction Confirmation dated as of July 1, 2013 between the Company and
JPMorgan Chase Bank, National Association, London Branch [incorporated by reference to Exhibit
10.1 to the Company's Current Report on Form 8-K dated July 8, 2013, File No. 000-19364]
Amendment to Call Option Transaction Confirmation dated as of July 11, 2013 between the
Company and JPMorgan Chase Bank, National Association, London Branch [incorporated by
reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated July 16, 2013, File
No. 000-19364]
Call Option Transaction Confirmation dated as of July 1, 2013 between the Company and
Morgan Stanley & Co. International plc [incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K dated July 8, 2013, File No. 000-19364]
Amendment to Call Option Transaction Confirmation dated as of July 11, 2013 between the
Company and Morgan Stanley & Co. Internal plc [incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K dated July 16, 2013, File No. 000-19364]
Base Warrants Confirmation dated as of July 1, 2013 between the Company and JPMorgan Chase
Bank, National Association, London Branch [incorporated by reference to Exhibit 10.3 to the
Company's Current Report on Form 8-K dated July 8, 2013, File No. 000-19364]
Additional Warrants Confirmation dated as of July 11, 2013 between the Company and JPMorgan
Chase Bank, National Association, London Branch [incorporated by reference to Exhibit 10.3 to the
Company's Current Report on Form 8-K dated July 16, 2013, File No. 000-19364]
Base Warrants Confirmation dated as of July 1, 2013 between the Company and Morgan Stanley &
Co. International plc [incorporated by reference to Exhibit 10.4 to the Company's Current Report on
Form 8-K dated July 8, 2013, File No. 000-19364]
Additional Warrants Confirmation dated as of July 11, 2013 between the Company and Morgan
Stanley & Co. International plc [incorporated by reference to Exhibit 10.4 to the Company's
Current Report on Form 8-K dated July 16, 2013, File No. 000-19364]
70
Management Contracts and Compensatory Plans
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
Employment Agreement, dated October 27, 2015, between Healthways, Inc. and Sidney Stolz
Amended and Restated Corporate and Subsidiary Capital Accumulation Plan [incorporated by
reference to Exhibit 10.25 to Form 10-K of the Company's fiscal year ended December 31, 2015, File
No. 000-19364]
Amended and Restated Employment Agreement dated December 21, 2012 between the Company
and Ben R. Leedle, Jr. [incorporated by reference to Exhibit 10.5 to Form 10-K of the Company's
fiscal year ended December 31, 2012, File No. 000-19364]
Separation and Release Agreement, dated May 15, 2015, between Healthways, Inc. and Ben R.
Leedle, Jr. [incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form
8-K dated May 18, 2015, File No. 000-19364]
Employment Agreement dated January 1, 2012 between the Company and Peter Choueiri
[incorporated by reference to Exhibit 10.1 to Form 10-Q of the Company's fiscal quarter ended March
31, 2012, File No. 000-19364]
Amendment to Employment Agreement dated September 2, 2014 between the Company and Peter
Choueiri [incorporated by reference to Exhibit 10.3 to Form 10-Q of the Company's fiscal quarter
ended September 30, 2014, File No. 000-19364]
Employment Agreement dated July 29, 2012 between the Company and Glenn Hargreaves
[incorporated by reference to Exhibit 10.1 to Form 10-Q of the Company's fiscal quarter ended June
30, 2012, File No. 000-19364]
Employment Agreement dated July 29, 2012 between the Company and Mary Flipse
[incorporated by reference to Exhibit 10.2 to Form 10-Q of the Company's fiscal quarter ended
June 30, 2012, File No. 000-19364]
Employment Agreement dated August 8, 2016 between the Company and Robert E. Dries
[incorporated by reference to Exhibit 10.1 to Form 10-Q of the Company's fiscal quarter ended
September 30, 2016, File No. 000-19364]
Separation Agreement and General Release dated October 31, 2016 between the Company and
Robert E. Dries [incorporated by reference to Exhibit 10.2 to Form 10-Q of the Company's fiscal
quarter ended September 30, 2016, File No. 000-19364]
Separation and General Release Agreement dated July 27, 2016 between the Company and
Alfred Lumsdaine [incorporated by reference to Exhibit 10.3 to Form 10-Q of the Company's fiscal
quarter ended September 30, 2016, File No. 000-19364]
Amendment to Separation and General Release Agreement dated October 10, 2016 between
the Company and Alfred Lumsdaine [incorporated by reference to Exhibit 10.4 to Form 10-Q of
the Company's fiscal quarter ended September 30, 2016, File No. 000-19364]
Amendment to Separation and General Release Agreement dated October 16, 2016 between
the Company and Alfred Lumsdaine [incorporated by reference to Exhibit 10.5 to Form 10-Q of
the Company's fiscal quarter ended September 30, 2016, File No. 000-19364]
2014 Stock Incentive Plan [incorporated by reference to Exhibit 99.1 to the Company's
Registration Statement on Form S-8 dated June 25, 2014, Registration No. 333-197025]
2007 Stock Incentive Plan, as amended [incorporated by reference to Exhibit 10.16 to Form 10-K of
the Company's fiscal year ended December 31, 2012, File No. 000-19364]
10.34
Form of Non-Qualified Stock Option Agreement under the Company's 2007 Stock Incentive Plan
71
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
10.46
10.47
10.48
[incorporated by reference to Exhibit 10.24 to Form 10-K of the Company's fiscal year ended
August 31, 2007, File No. 000-19364]
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, File No. 000-19364]
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, File No. 000-19364]
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, File No. 000-19364]
Form of Non-Qualified Stock Option Agreement 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
March 31, 2012, File No. 000-19364]
Form of Restricted Stock Unit Award Agreement 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
March 31, 2012, File No. 000-19364]
Form of Non-Qualified Stock Option Agreement under the Company's 2007 Stock Incentive Plan
[incorporated by reference to Exhibit 10.28 to Form 10-K of the Company's fiscal year ended
December 31, 2012, File No. 000-19364]
Form of Restricted Stock Unit Award Agreement under the Company's 2007 Stock Incentive Plan
[incorporated by reference to Exhibit 10.29 to Form 10-K of the Company's fiscal year ended
December 31, 2012, File No. 000-19364]
Form of Non-Qualified Stock Option Award Agreement (for Executive Officers) under the
Company's 2014 Stock Incentive Plan [incorporated by reference to Exhibit 10.4 to Form 10-Q of
the Company's fiscal quarter ended June 30, 2014, File No. 000-19364]
Form of Restricted Stock Unit Award Agreement (for Executive Officers) under the Company's
2014 Stock Incentive Plan [incorporated by reference to Exhibit 10.5 to Form 10-Q of the
Company's fiscal quarter ended June 30, 2014, File No. 000-19364]
Form of Non-Qualified Stock Option Award Agreement (for Directors) under the Company's 2014
Stock Incentive Plan [incorporated by reference to Exhibit 10.8 to Form 10-Q of the Company's
fiscal quarter ended June 30, 2014, File No. 000-19364]
Form of Restricted Stock Unit Award Agreement (for Directors) under the Company's 2014 Stock
Incentive Plan [incorporated by reference to Exhibit 10.9 to Form 10-Q of the Company's fiscal
quarter ended June 30, 2014, File No. 000-19364]
Form of Restricted Stock Unit Award Agreement (for Executive Officers) for November 1, 2016
under the Company's Amended and Restated 2014 Stock Incentive Plan
Form of Restricted Stock Unit Award Agreement (for Directors) under the Company's Amended and
Restated 2014 Stock Incentive Plan [incorporated by reference to Exhibit 10.2 to Form 10-Q of the
Company's fiscal quarter ended June 30, 2015, File No. 000-19364]
Form of Restricted Stock Unit Award Agreement (for Directors) under the Company's Amended and
Restated 2014 Stock Incentive Plan [incorporated by reference to Exhibit 10.3 to Form 10-Q of the
Company's fiscal quarter ended June 30, 2016, File No. 000-19364]
10.49
Form of Restricted Stock Unit Award Agreement (for Executive Officers) 1-Year Cliff Vesting
72
10.50
10.51
10.52
10.53
10.54
10.55
10.56
10.57
10.58
10.59
10.60
21
23.1
31.1
31.2
32
under the Company's Amended and Restated 2014 Stock Incentive Plan [incorporated by
reference to Exhibit 10.3 to Form 10-Q of the Company's fiscal quarter ended June 30, 2015, File
No. 000-19364]
Tivity Health, Inc. Amended and Restated 2014 Stock Incentive Plan [incorporated by reference to
Exhibit 99.1 to the Company's Registration Statement on Form S-8 dated May 19, 2015,
Registration No. 333-204313]
Form of Restricted Stock Unit Award Agreement (for Executive Officers) for July 1, 2015 under
the Company's Amended and Restated 2014 Stock Incentive Plan [incorporated by reference to
Exhibit 10.1 to Form 10-Q of the Company's fiscal quarter ended September 30, 2015, File No.
000-19364]
Employment Agreement, dated August 3, 2015, between Healthways, Inc. and Donato Tramuto
[incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated
August 7, 2015, File No. 000-19364]
Form of Restricted Stock Unit Award Agreement for Mr. Tramuto [incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K dated August 7, 2015, File No. 000-
19364]
Form of Market Stock Unit Award Agreement for Mr. Tramuto [incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K dated August 7, 2015, File No.
000-19364]
Form of Market Stock Unit Award Agreement for September 24, 2015 [incorporated by reference
to Exhibit 10.1 to the Company's Current Report on Form 8-K dated September 28, 2015, File
No. 000-19364]
Revised Form of Market Stock Unit Award Agreement for September 24, 2015 [incorporated by
reference to Exhibit 10.70 to Form 10-K of the Company's fiscal year ended December 31, 2015, File
No. 000-19364]
Form of Market Stock Unit Award Agreement for March 31, 2016 [incorporated by reference to
Exhibit 10.1 to Form 10-Q of the Company's fiscal quarter ended March 31, 2016, File No. 000-
19364]
Form of Restricted Stock Unit Award Agreement (for Executive Officers and Other Senior Officers)
for September 24, 2015 [incorporated by reference to Exhibit 10.2 to the Company's Current Report
on Form 8-K dated September 28, 2015, File No. 000-19364]
Revised Form of Restricted Stock Unit Award Agreement (for Executive Officers and Other
Senior Officers) for September 24, 2015 [incorporated by reference to Exhibit 10.73 to
Form 10-K of the Company's fiscal year ended December 31, 2015, File No. 000-19364]
Form of Director Indemnification Agreement [incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K dated June 2, 2016, File No. 000-19364]
Subsidiary List
Consent of PricewaterhouseCoopers LLP
Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 made by Donato Tramuto,
Chief Executive Officer
Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 made by Glenn Hargreaves,
Interim 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 Donato Tramuto, Chief Executive Officer, and Glenn
73
Hargreaves, Interim Chief Financial Officer
(b) Exhibits
Refer to Item 15(a)(3) above.
(c) Not applicable
74
Item 16. Form 10-K Summary
None.
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 6, 2017
TIVITY HEALTH, INC.
By:
/s/ Donato Tramuto
Donato Tramuto
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
Date
/s/ Donato Tramuto
Donato Tramuto
Officer)
March 6, 2017
Chief Executive Officer and Director (Principal Executive
/s/ Glenn Hargreaves
Glenn Hargreaves
/s/ Kevin G. Wills
Kevin G. Wills
Interim Chief Financial Officer and Chief Accounting
Officer (Principal Financial and Accounting Officer)
March 6, 2017
Chairman of the Board and Director
March 6, 2017
/s/ Mary Jane England, M.D.
Mary Jane England, M.D.
Director
/s/ Archelle Georgiou, M.D.
Archelle Georgiou, M.D.
Director
/s/ Robert Greczyn
Robert Greczyn
/s/ Peter Hudson, M.D.
Peter Hudson, M.D.
/s/ Bradley S. Karro
Bradley S. Karro
/s/ Paul H. Keckley
Paul H. Keckley
/s/ Conan J. Laughlin
Conan J. Laughlin
/s/ Lee A. Shapiro
Lee A. Shapiro
Director
Director
Director
Director
Director
Director
75
March 6, 2017
March 6, 2017
March 6, 2017
March 6, 2017
March 6, 2017
March 6, 2017
March 6, 2017
March 6, 2017