Attached files
file | filename |
---|---|
EX-32 - EX-32, SECTION 906 CEO AND CFO CERTIFICATION - TIVITY HEALTH, INC. | ex-32_110909.htm |
EX-31.2 - EX-31.2, SECTION 302 CFO CERTIFICATION - TIVITY HEALTH, INC. | ex31-2_110909.htm |
EX-31.1 - EX-31.1, SECTION 302 CEO CERTIFICATION - TIVITY HEALTH, INC. | ex31-1_110909.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[X]
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the
Quarterly Period Ended September 30, 2009
or
[ ]
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the
transition period from _____ to _____
Commission
File Number 000-19364
HEALTHWAYS,
INC.
(Exact
Name of Registrant as Specified in its Charter)
Delaware
|
62-1117144
|
|
(State
or Other Jurisdiction of
|
(I.R.S.
Employer
|
|
Incorporation
or Organization)
|
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)
|
(Former
name, former address and former fiscal year, if changed since last
report)
|
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 x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes ¨ No ¨
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
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer x Accelerated
filer ¨
Non-accelerated
filer ¨
|
(Do
not check if a smaller reporting company)
|
Smaller
reporting company ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No x
As of
November 2, 2009 there were outstanding 33,799,238 shares of the Registrant’s
Common Stock, par value $.001 per share.
2
Healthways,
Inc.
Form
10-Q
Table
of Contents
Page
|
|||||
Part
I
|
|||||
4
|
|||||
21
|
|||||
39
|
|||||
39
|
|||||
Part
II
|
|||||
40
|
|||||
42
|
|||||
42
|
|||||
42
|
|||||
43
|
|||||
43
|
|||||
43
|
3
Part
I
Item
1.
|
Financial Statements
|
HEALTHWAYS,
INC.
CONSOLIDATED
BALANCE SHEETS
(In
thousands)
(Unaudited)
ASSETS
September
30,
|
December
31,
|
|||||||||||
2009
|
2008
|
|||||||||||
Current
assets:
|
||||||||||||
Cash
and cash equivalents
|
$
|
2,309
|
$
|
5,157
|
||||||||
Accounts
receivable, net
|
121,924
|
115,108
|
||||||||||
Prepaid
expenses
|
11,325
|
13,479
|
||||||||||
Other
current assets
|
5,618
|
3,810
|
||||||||||
Income
taxes receivable
|
8,415
|
—
|
||||||||||
Deferred
tax asset
|
26,404
|
30,488
|
||||||||||
Total
current assets
|
175,995
|
168,042
|
||||||||||
Property
and equipment:
|
||||||||||||
Leasehold
improvements
|
41,270
|
34,635
|
||||||||||
Computer
equipment and related software
|
148,212
|
138,369
|
||||||||||
Furniture
and office equipment
|
29,006
|
29,610
|
||||||||||
Capital
projects in process
|
32,577
|
17,462
|
||||||||||
251,065
|
220,076
|
|||||||||||
Less
accumulated depreciation
|
(132,841
|
)
|
(108,635
|
)
|
||||||||
118,224
|
111,441
|
|||||||||||
Other
assets
|
7,063
|
18,089
|
||||||||||
Customer
contracts, net
|
28,652
|
32,715
|
||||||||||
Other
intangible assets, net
|
66,563
|
68,207
|
||||||||||
Goodwill,
net
|
484,584
|
484,596
|
||||||||||
Total
assets
|
$
|
881,081
|
$
|
883,090
|
||||||||
See
accompanying notes to the consolidated financial
statements.
|
4
HEALTHWAYS,
INC.
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share and per share data)
(Unaudited)
LIABILITIES
AND STOCKHOLDERS’ EQUITY
September
30,
|
December
31,
|
||||||||
2009
|
2008
|
||||||||
Current
liabilities:
|
|||||||||
Accounts
payable
|
$
|
22,399
|
$
|
21,633
|
|||||
Accrued
salaries and benefits
|
65,168
|
33,161
|
|||||||
Accrued
liabilities
|
26,873
|
26,294
|
|||||||
Deferred
revenue
|
5,060
|
6,904
|
|||||||
Contract
billings in excess of earned revenue
|
75,099
|
71,406
|
|||||||
Income
taxes payable
|
—
|
8,034
|
|||||||
Current
portion of long-term debt
|
2,657
|
2,035
|
|||||||
Current
portion of long-term liabilities
|
4,371
|
4,609
|
|||||||
Total
current liabilities
|
201,627
|
174,076
|
|||||||
Long-term
debt
|
263,852
|
304,372
|
|||||||
Long-term
deferred tax liability
|
10,898
|
8,073
|
|||||||
Other
long-term liabilities
|
38,181
|
39,533
|
|||||||
Stockholders’
equity:
|
|||||||||
Preferred
stock
|
|||||||||
$.001
par value, 5,000,000 shares
|
|||||||||
authorized,
none outstanding
|
—
|
—
|
|||||||
Common
stock
|
|||||||||
$.001
par value, 120,000,000 shares authorized,
|
|||||||||
33,790,729
and 33,648,976 shares outstanding
|
34
|
34
|
|||||||
Additional
paid-in capital
|
220,060
|
213,461
|
|||||||
Retained
earnings
|
151,370
|
148,506
|
|||||||
Accumulated
other comprehensive loss
|
(4,941
|
)
|
(4,965
|
)
|
|||||
Total
stockholders’ equity
|
366,523
|
357,036
|
|||||||
Total
liabilities and stockholders’ equity
|
$
|
881,081
|
$
|
883,090
|
|||||
See
accompanying notes to the consolidated financial
statements.
|
5
HEALTHWAYS,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except earnings per share data)
(Unaudited)
Three
Months Ended
|
Nine
Months Ended
|
||||||||||||
September
30,
|
September
30,
|
||||||||||||
2009
|
2008
|
2009
|
2008
|
||||||||||
Revenues
|
$
|
181,642
|
$
|
187,448
|
$
|
542,214
|
$
|
561,432
|
|||||
Cost
of services (exclusive of depreciation and amortization of $8,517, $9,316,
$25,843, and $27,116, respectively, included below)
|
132,498
|
125,628
|
393,097
|
381,884
|
|||||||||
Selling,
general & administrative expenses
|
17,816
|
17,493
|
55,050
|
55,156
|
|||||||||
Depreciation
and amortization
|
11,956
|
12,949
|
36,155
|
37,813
|
|||||||||
Operating
income
|
19,372
|
31,378
|
57,912
|
86,579
|
|||||||||
Gain
on sale of investment
|
—
|
—
|
(2,581
|
)
|
—
|
||||||||
Interest
expense
|
3,888
|
5,366
|
12,091
|
15,529
|
|||||||||
Legal
settlement and related costs
|
—
|
—
|
39,956
|
—
|
|||||||||
Income
before income taxes
|
15,484
|
26,012
|
8,446
|
71,050
|
|||||||||
Income
tax expense
|
6,682
|
10,389
|
5,582
|
28,900
|
|||||||||
Net
income
|
$
|
8,802
|
$
|
15,623
|
$
|
2,864
|
$
|
42,150
|
|||||
Earnings
per share:
|
|||||||||||||
Basic
|
$
|
0.26
|
$
|
0.46
|
$
|
0.08
|
$
|
1.22
|
|||||
Diluted
|
$
|
0.26
|
$
|
0.45
|
$
|
0.08
|
$
|
1.17
|
|||||
Weighted
average common shares
|
|||||||||||||
and
equivalents:
|
|||||||||||||
Basic
|
33,745
|
33,599
|
33,701
|
34,474
|
|||||||||
Diluted
|
34,481
|
34,567
|
34,232
|
35,891
|
|||||||||
6
HEALTHWAYS,
INC.
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
For
the Nine Months Ended September 30, 2009
(In
thousands)
(Unaudited)
Accumulated
|
|||||||||||||||||||||||||
Additional
|
Other
|
||||||||||||||||||||||||
Preferred
|
Common
|
Paid-in
|
Retained
|
Comprehensive
|
|||||||||||||||||||||
Stock
|
Stock
|
Capital
|
Earnings
|
Income
(Loss)
|
Total
|
||||||||||||||||||||
Balance,
December 31, 2008
|
$—
|
$34
|
$213,461
|
$148,506
|
$(4,965
|
)
|
$357,036
|
||||||||||||||||||
Comprehensive
income:
|
|||||||||||||||||||||||||
Net
income
|
—
|
—
|
—
|
2,864
|
—
|
2,864
|
|||||||||||||||||||
Net
change in fair value of interest rate
|
|||||||||||||||||||||||||
swaps,
net of income taxes of $1,246
|
—
|
—
|
—
|
—
|
1,591
|
1,591
|
|||||||||||||||||||
Change
in fair value of investment, net of
|
|||||||||||||||||||||||||
income
tax benefit of $49
|
—
|
—
|
—
|
—
|
(71
|
)
|
(71
|
)
|
|||||||||||||||||
Sale
of investment, net of income taxes of $1,045
|
—
|
—
|
—
|
—
|
(1,536
|
)
|
(1,536
|
)
|
|||||||||||||||||
Foreign
currency translation adjustment
|
—
|
—
|
—
|
—
|
40
|
40
|
|||||||||||||||||||
Total
comprehensive income
|
2,888
|
||||||||||||||||||||||||
Exercise
of stock options
|
—
|
—
|
265
|
—
|
—
|
265
|
|||||||||||||||||||
Tax
effect of option exercises
|
—
|
—
|
(793
|
)
|
—
|
—
|
(793
|
)
|
|||||||||||||||||
Repurchase
of stock options
|
—
|
—
|
(736
|
)
|
—
|
—
|
(736
|
)
|
|||||||||||||||||
Share-based
employee compensation expense
|
—
|
—
|
7,863
|
—
|
—
|
7,863
|
|||||||||||||||||||
Balance,
September 30, 2009
|
$—
|
$34
|
$220,060
|
$151,370
|
$(4,941
|
)
|
$366,523
|
See
accompanying notes to the consolidated financial
statements.
|
7
HEALTHWAYS,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
Nine
Months Ended
September
30,
|
|||||||||
2009
|
2008
|
||||||||
Cash
flows from operating activities:
|
|||||||||
Net
income
|
$
|
2,864
|
$
|
42,150
|
|||||
Adjustments
to reconcile net income to net cash provided by
|
|||||||||
operating
activities, net of business acquisitions:
|
|||||||||
Depreciation
and amortization
|
36,155
|
37,813
|
|||||||
Amortization
of deferred loan costs
|
1,128
|
881
|
|||||||
Gain
on sale of investment
|
(2,581
|
)
|
—
|
||||||
Loss
on disposal of property and equipment
|
955
|
1,346
|
|||||||
Share-based
employee compensation expense
|
7,863
|
12,714
|
|||||||
Excess
tax benefits from share-based payment arrangements
|
(162
|
)
|
(3,487
|
)
|
|||||
Increase
in accounts receivable, net
|
(6,776
|
)
|
(19,049
|
)
|
|||||
(Increase)
decrease in other current assets
|
(5,490
|
)
|
1,926
|
||||||
Increase
in accounts payable
|
4,462
|
2,968
|
|||||||
Increase
in accrued salaries and benefits
|
31,965
|
15,640
|
|||||||
(Decrease)
increase in other current liabilities
|
(3,667
|
)
|
2,341
|
||||||
Deferred
income taxes
|
5,339
|
(7,727
|
)
|
||||||
Other
|
3,479
|
8,002
|
|||||||
Increase
in other assets
|
(454
|
)
|
(1,581
|
)
|
|||||
Payments
on other long-term liabilities
|
(2,935
|
)
|
(2,156
|
)
|
|||||
Net
cash flows provided by operating activities
|
72,145
|
91,781
|
|||||||
Cash
flows from investing activities:
|
|||||||||
Acquisition
of property and equipment
|
(35,638
|
)
|
(62,026
|
)
|
|||||
Sale
of investment
|
11,626
|
—
|
|||||||
Change
in restricted cash
|
(538
|
)
|
—
|
||||||
Other
|
(3,655
|
)
|
(4,543
|
)
|
|||||
Net
cash flows used in investing activities
|
(28,205
|
)
|
(66,569
|
)
|
|||||
Cash
flows from financing activities:
|
|||||||||
Proceeds
from issuance of long-term debt
|
283,900
|
87,287
|
|||||||
Payments
of long-term debt
|
(325,826
|
)
|
(42,965
|
)
|
|||||
Deferred
loan costs
|
(784
|
)
|
—
|
||||||
Exercise
of stock options
|
265
|
3,668
|
|||||||
Excess
tax benefits from share-based payment arrangements
|
162
|
3,487
|
|||||||
Repurchases
of common stock
|
—
|
(94,208
|
)
|
||||||
Repurchase
of stock options
|
(736
|
)
|
—
|
||||||
Change
in outstanding checks and other
|
(3,982
|
)
|
—
|
||||||
Net
cash flows used in financing activities
|
(47,001
|
)
|
(42,731
|
)
|
|||||
Effect
of exchange rate changes on cash
|
213
|
(76
|
)
|
||||||
Net
decrease in cash and cash equivalents
|
(2,848
|
)
|
(17,595
|
)
|
|||||
Cash
and cash equivalents, beginning of period
|
5,157
|
40,515
|
|||||||
Cash
and cash equivalents, end of period
|
$
|
2,309
|
$
|
22,920
|
See
accompanying notes to the consolidated financial
statements.
|
8
HEALTHWAYS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1)
|
Basis
of Presentation
|
Our
financial statements and accompanying notes are prepared in accordance with
accounting principles generally accepted in the United States of America (“U.S.
GAAP”). In our opinion, the accompanying consolidated financial
statements of Healthways, Inc. and its wholly-owned subsidiaries reflect all
adjustments consisting of normal, recurring accruals necessary for a fair
presentation. We have reclassified certain items in prior periods to
conform to current classifications.
We have
omitted certain financial information that is normally included in financial
statements prepared in accordance with U.S. GAAP but that is not required for
interim reporting purposes. You should read the accompanying consolidated
financial statements in conjunction with the financial statements and notes
thereto included in our Annual Report on Form 10-K for the fiscal year ended
August 31, 2008. In August 2008, our Board of Directors approved a
change in our fiscal year-end from August 31 to December 31. Accordingly, our
current fiscal year began on January 1, 2009 following a four-month transition
period ending December 31, 2008.
(2)
|
Recently
Issued Accounting Standards
|
In April
2009, the Financial Accounting Standards Board (“FASB”) issued authoritative
guidance requiring disclosures about fair value of financial instruments in both
interim reporting periods of publicly traded companies as well as in annual
financial statements, beginning with interim reporting periods ending after June
15, 2009. The implementation of this guidance resulted in increased
disclosures in our interim periods but did not have an impact on our financial
position or results of operations.
In May
2009, the FASB issued guidance which establishes accounting and disclosure
requirements for subsequent events. The guidance defines subsequent
events as events that occur after the balance sheet date but before the
financial statements are issued for public entities. It requires
companies to disclose the date through which they have evaluated subsequent
events and to designate subsequent events as either recognized or
non-recognized. The new guidance is effective for interim or annual
periods ending after June 15, 2009. The implementation of this
guidance resulted in increased disclosures but did not have an impact on our
financial position or results of operations.
In June
2009, the FASB approved the FASB Accounting Standards Codification (the
“Codification”). Effective July 1, 2009, the Codification is the
single source of authoritative nongovernmental U.S. GAAP, superseding existing
FASB, American Institute of Certified Public Accountants (“AICPA”), Emerging
Issues Task Force (“EITF”), and related accounting literature. The
Codification reorganizes the thousands of U.S. GAAP pronouncements into
approximately 90 accounting topics and displays them using a consistent
structure. Also included is relevant Securities and Exchange
Commission guidance organized using the same topical structure in separate
sections.
(3)
|
Share-Based
Compensation
|
We have
several shareholder-approved stock incentive plans for employees and directors.
We currently have three types of share-based awards outstanding under these
plans: stock options, restricted stock, and restricted stock units. We believe
that such awards align the interests of our employees and directors with those
of our stockholders.
9
For the
three and nine months ended September 30, 2009, we recognized share-based
compensation costs of $2.5 million and $7.9 million,
respectively. For the three and nine months ended September 30, 2008,
we recognized share-based compensation costs of $4.3 million and $12.7 million,
respectively.
A summary
of our stock options as of September 30, 2009 and changes during the nine months
then ended is presented below:
Weighted-
|
||||||||||||
Average
|
||||||||||||
Weighted-
|
Remaining
|
Aggregate
|
||||||||||
Shares
|
Average
|
Contractual
|
Intrinsic
|
|||||||||
Options
|
(000s)
|
Exercise
Price
|
Term
(years)
|
Value
($000s)
|
||||||||
Outstanding
at January 1, 2009
|
4,124
|
$
|
20.20
|
|||||||||
Granted
|
1,153
|
11.69
|
||||||||||
Exercised
|
(51
|
)
|
5.09
|
|||||||||
Forfeited
or expired
|
(181
|
)
|
21.62
|
|||||||||
Outstanding
at September 30, 2009
|
5,045
|
18.36
|
4.96
|
$14,705
|
||||||||
Exercisable
at September 30, 2009
|
3,472
|
19.43
|
3.50
|
9,249
|
The weighted-average grant-date fair value of options granted during the three and nine months ended September 30, 2009 was $7.31 and $6.71, respectively.
The
following table shows a summary of our restricted stock and restricted stock
units (“nonvested shares”) as of September 30, 2009
as well as activity during the nine months then ended:
Weighted- | ||||||||
Average | ||||||||
Shares
|
Grant Date | |||||||
Nonvested
Shares
|
(000s)
|
Fair Value | ||||||
Nonvested
at January 1, 2009
|
501
|
$
|
41.01
|
|||||
Granted
|
666
|
11.09
|
||||||
Vested
|
(87
|
)
|
44.02
|
|||||
Forfeited
|
(58
|
)
|
24.02
|
|||||
Nonvested
at September 30, 2009
|
1,022
|
22.23
|
(4)
|
Income
Taxes
|
Our
effective tax rate increased to 43.2% for the three months ended September 30,
2009 compared to 39.9% for the three months ended September 30, 2008, primarily
due to an increase during the three months ended September 30, 2009 in certain
expenses for which we do not receive a tax benefit related to international
operations and to our participation in
the ongoing healthcare reform process.
Our
effective tax rate increased to 66.1% for the nine months ended September 30,
2009 compared to 40.7% for the nine months ended September 30,
2008. The increase in the effective rate for the nine months
ended September 30, 2009 was primarily due to the relatively small base of
pretax income for the nine months ended September 30, 2009 in relation to
certain unrecognized tax benefits and non-deductible expenses.
10
We file
income tax returns in the U.S. Federal jurisdiction and in various state and
foreign jurisdictions. During 2009, the Internal Revenue Service
completed an audit of our 2005 and 2006 tax years, the resolution of which did
not result in a material adjustment to our financial statements.
(5)
|
Derivative
Investments and Hedging Activities
|
We use
derivative instruments to manage risks related to interest rates and foreign
currencies. We record all derivatives at estimated fair value as
either assets or liabilities on the balance sheet and recognize the unrealized
gains and losses in either the balance sheet or statement of operations,
depending on whether the derivative is designated as a hedging
instrument. As permitted under our master netting arrangements,
beginning September 30, 2009, the fair value amounts of our derivative
instruments are presented on a net basis by counterparty in the consolidated
balance sheet.
Interest
Rate
We
currently maintain nine interest rate swap agreements to reduce our exposure to
interest rate fluctuations on our floating rate debt commitments (see Note 7 for
further information). These interest rate swap agreements effectively
modify our exposure to interest rate risk by converting a portion of our
floating rate debt to fixed obligations with interest rates ranging from 3.375%
to 4.995%, thus reducing the impact of interest rate changes on future interest
expense. Under these agreements, we receive a variable rate of
interest based on LIBOR, and we pay a fixed rate of interest plus a spread of
0.875% to 1.750% on revolving advances and a spread of 1.50% on term loan
borrowings. We have designated these interest rate swap agreements as
qualifying cash flow hedges.
Foreign
Currency
We enter
into foreign currency options and/or forward contracts in order to minimize our
earnings exposure to fluctuations in foreign currency exchange
rates. Our foreign currency exchange contracts do not qualify for
hedge accounting treatment under U.S. GAAP. We routinely monitor our
foreign currency exposures to maximize the overall effectiveness of our foreign
currency hedge positions. We do not execute transactions or hold
derivative financial instruments for trading or other purposes.
The
estimated gross fair values of derivative instruments at September 30, 2009,
excluding the impact of netting derivative assets and liabilities when a legally
enforceable master netting agreement exists, were as follows:
11
(In
$000s)
|
Foreign
currency exchange contracts
|
Interest
rate swap agreements
|
|||||
Assets:
|
|||||||
Derivatives
not designated as hedging instruments:
|
|||||||
Other
current assets
|
$1,259
|
$—
|
|||||
Derivatives
designated as hedging instruments:
|
|||||||
Other
assets
|
—
|
—
|
|||||
Total
assets
|
$1,259
|
$—
|
|||||
Liabilities:
|
|||||||
Derivatives
not designated as hedging instruments:
|
|||||||
Accrued
liabilities
|
$1,333
|
$—
|
|||||
|
|||||||
Derivatives
designated as hedging instruments:
|
|||||||
Accrued
liabilities
|
—
|
845
|
|||||
Other
long-term liabilities
|
—
|
7,609
|
|||||
Total
liabilities
|
$1,333
|
$8,454
|
|||||
See also
Note 6.
Cash Flow
Hedges
Derivative instruments that are designated and qualify as cash flow
hedges are recorded at estimated fair value in the balance sheet, with the
effective portion of the gains and losses being reported in other comprehensive
income (“OCI”) or loss. These gains and losses are reclassified into
earnings in the same period during which the hedged transaction affects earnings
or the period in which all or a portion of the hedge becomes
ineffective. As of September 30, 2009, we expect to reclassify $5.6
million of net losses on interest rate swap agreements from accumulated OCI to
interest expense within the next 12 months due to the scheduled payment of
interest associated with floating rate
debt.
As of
September 30, 2009, we are a party to the following interest rate swap
agreements for which we receive a variable rate of interest based on LIBOR and
for which we pay the following fixed rates of interest plus a spread of 0.875%
to 1.750% on revolving advances and a spread of 1.50% on term loan
borrowings:
Swap
#
|
Original
Notional
Amount
(in $000s)
|
Fixed
Interest
Rate
|
Termination
Date
|
||||||||||
1
|
$184,000
|
4.995
|
%
|
March
31, 2010
|
(1)
|
||||||||
2
|
46,000
|
4.995
|
%
|
March
31, 2010
|
(2)
|
||||||||
3
|
40,000
|
3.987
|
%
|
December
31, 2009
|
|||||||||
4
|
40,000
|
3.433
|
%
|
December
30, 2011
|
|||||||||
5
|
50,000
|
3.688
|
%
|
December
30, 2011
|
|||||||||
6
|
40,000
|
3.855
|
%
|
December
30, 2011
|
(3)
|
||||||||
7
|
30,000
|
3.760
|
%
|
March
30, 2011
|
(4)
|
||||||||
8
|
57,500
|
3.385
|
%
|
December
31, 2013
|
(5)
|
||||||||
9
|
57,500
|
3.375
|
%
|
December
31, 2013
|
(6)
|
12
(1)
The principal value of this swap agreement amortizes over a 39-month
period. During the three months ended September 30, 2009, the
|
notional
amount of this swap was $56
million.
|
(2) The
principal value of this swap agreement amortizes over a 39-month
period. During the three months ended September 30, 2009, the
notional amount of this swap was $14 million.
(3)
This swap agreement became effective October 1, 2009.
(4)
This swap agreement becomes effective January 2, 2010.
(5)
This swap agreement becomes effective January 1, 2012. The principal
value of this swap agreement will amortize over a 24-month period.
(6)
This swap agreement becomes effective January 3, 2012. The
principal value of this swap agreement will amortize over a 24-month
period.
We
currently meet the hedge accounting criteria under U.S. GAAP in accounting
for these interest rate swap agreements.
Gains and
losses representing either hedge ineffectiveness or hedge components excluded
from the assessment of effectiveness are recognized in current
earnings. The following table shows the effect of our cash flow
hedges on the consolidated statement of operations (or when applicable, the
consolidated balance sheet) during the three and nine months ended September 30,
2009:
Three
Months Ended September 30, 2009
|
Nine
Months Ended September 30, 2009
|
|||||||||||
Derivatives
in
Cash
Flow Hedging Relationships
|
Amount
of Gain (Loss) Recognized in OCI on Derivatives (Effective
Portion)
|
Location
of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective
Portion)
|
Amount
of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective
Portion)
|
Amount
of Gain (Loss) Recognized in OCI on Derivatives (Effective
Portion)
|
Location
of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective
Portion)
|
Amount
of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective
Portion)
|
||||||
Interest
rate swap agreements, gross of tax effect
|
$(2,603)
|
Interest
expense
|
$(1,818)
|
$(2,167)
|
Interest
expense
|
$(5,005)
|
During
the three and nine months ended September 30, 2009, there were no gains or
losses on cash flow hedges recognized in income resulting from hedge
ineffectiveness.
Derivative Instruments Not
Designated as Hedging Instruments
Our
foreign currency exchange contracts require current period mark-to-market
accounting, with any change in fair value being recorded each period in the
statement of operations in selling, general and administrative
expenses. As of September 30, 2009, we had the following outstanding
net foreign currency forward contracts that were entered into to hedge
forecasted foreign net income (loss) and intercompany debt.
Notional
|
||||||
Foreign
Currency
|
Amount
(000s)
|
|||||
Euro
|
€231
|
|||||
British
Pound Sterling
|
£107
|
|||||
Australian
Dollar
|
AUD
925
|
These
forward contracts did not have a material effect on our consolidated statement
of operations during the three and nine months ended September 30,
2009.
13
Fair
Value Measurements
|
We
account for certain assets and liabilities at fair value. Fair value
is defined as the price that would be received upon sale of an asset or paid
upon transfer of a liability in an orderly transaction between market
participants at the measurement date, assuming the transaction occurs in the
principal or most advantageous market for that asset or liability.
Fair
Value Hierarchy
The
hierarchy below lists three levels of fair value based on the extent to which
inputs used in measuring fair value are observable in the market. We
categorize each of our fair value measurements in one of these three levels
based on the lowest level input that is significant to the fair value
measurement in its entirety. These levels are:
Level 1: Quoted
prices in active markets for identical assets or liabilities;
|
||
Level 2: Quoted
prices for similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active; and
model-based valuation techniques in which all significant assumptions are
observable in the market or can be corroborated by observable market data
for substantially the full term of the assets or liabilities;
and
|
||
Level 3: Unobservable
inputs that are supported by little or no market activity and typically
reflect management’s estimates of assumptions that market participants
would use in pricing the asset or liability.
|
Assets
and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents our assets
and liabilities measured at fair value on a recurring basis at September 30,
2009, all of which are classified as Level 2 in the fair value
hierarchy:
Gross
Fair Value –
Level
2
|
Netting
(1)
|
Net
Fair Value
|
||||||||||
Assets:
|
||||||||||||
Foreign
currency exchange contracts
|
$
|
1,259
|
$
|
(1,259
|
)
|
$
|
—
|
|||||
Interest
rate swap agreements
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||
Liabilities:
|
||||||||||||
Foreign
currency exchange contracts
|
$
|
1,333
|
$
|
(1,259
|
)
|
$
|
74
|
|||||
Interest
rate swap agreements
|
$
|
8,454
|
$
|
—
|
$
|
8,454
|
(1)
This column reflects the impact of netting derivative assets and liabilities by
counterparty when a legally enforceable master netting agreement exists.
14
The fair
values of forward foreign currency exchange contracts are valued using broker
quotations of similar assets or liabilities in active markets. The
fair values of interest rate swap agreements are primarily determined based on
the present value of future cash flows using internal models and third-party
pricing services with observable inputs, including interest rates, yield curves
and applicable credit spreads.
Fair
Value of Other Financial Instruments
In
addition to foreign currency exchange contracts and interest rate swap
agreements, the estimated fair values of which are disclosed above, the
estimated fair value of each class of financial instruments at September 30,
2009 was as follows:
|
·
|
Cash
and cash equivalents – The carrying amount of $2.3 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 Third
Amended Credit Agreement is based on the average of the prices set by the
issuing bank given current market conditions and is not necessarily
indicative of the amount we could realize in a current market exchange.
The estimated fair value and carrying amount of outstanding borrowings
under the Third Amended Credit Agreement at September 30, 2009 are $242.8
million and $261.5 million,
respectively.
|
(7)
|
Long-Term
Debt
|
On
December 1, 2006, we entered into a Third Amended and Restated Revolving Credit
and Term Loan Agreement (the “Third Amended Credit Agreement”). The
Third Amended Credit Agreement provides us with a $400.0 million revolving
credit facility, including a swingline sub facility of $10.0 million and a $75.0
million sub facility for letters of credit, a $200.0 million term loan facility,
and an uncommitted incremental accordion facility of $200.0
million.
Revolving
advances under the Third Amended Credit Agreement generally bear interest,
at our option, at 1) LIBOR plus a spread of 0.875% to 1.750% or 2) the greater
of the federal funds rate plus 0.5%, or the prime rate, plus a spread of 0.000%
to 0.250%. Term loan borrowings bear interest, at our option, at
1) LIBOR plus 1.50% or 2) the greater of the federal funds rate plus 0.5%, or
the prime rate. See Note 5 for a description of our interest rate
swap agreements. The Third Amended Credit Agreement also provides for
a fee ranging between 0.150% and 0.300% of unused commitments. The
Third Amended Credit Agreement is secured by guarantees from most of the
Company’s domestic subsidiaries and by security interests in substantially all
of the Company’s and such subsidiaries’ assets.
We are
required to repay outstanding revolving loans on the revolving commitment
termination date, which is December 1, 2011. We are required to repay term loans
in quarterly principal installments aggregating $0.5 million each, which
commenced on March 31, 2007, and the entire unpaid principal balance of the
term loans is due and payable at maturity on December 1, 2013.
15
The Third
Amended Credit Agreement contains various financial covenants, which require us
to maintain, as defined, ratios or levels of 1) total funded debt to EBITDA, 2)
fixed charge coverage, and 3) net worth. In connection with a legal
settlement (see Note 9), in March 2009 we entered into a sixth amendment to the
Third Amended Credit Agreement to expressly exclude up to $40 million of
expenses attributable to this settlement from the calculation of earnings before
interest, taxes, depreciation and amortization, or EBITDA, for purposes of
covenant calculations. The Third Amended Credit Agreement also
restricts the payment of dividends and limits the amount of repurchases of the
Company’s common stock. As of September 30, 2009, we were in
compliance with all of the covenant requirements of the Third Amended Credit
Agreement.
As
described in Note 5 above, as of September 30, 2009, we are currently a party to
nine interest rate swap agreements for which we receive a variable rate of
interest based on LIBOR and for which we pay a fixed rate of interest plus a
spread of 0.875% to 1.750% on revolving advances and a spread of 1.50% on term
loan borrowings.
(8)
|
Restructuring
and Related Charges
|
In 2008,
we began a restructuring of the Company primarily focused on streamlining
management and better positioning the Company to deliver fully integrated
solutions, which was largely completed by the end of calendar
2008. Through September 30, 2009, we had incurred cumulative net
charges of approximately $9.1 million. These restructuring charges
primarily consisted of severance costs, net of equity forfeitures, and costs
associated with capacity consolidation. For the four months ended
December 31, 2008, these charges were presented in a separate line on the
consolidated statement of operations.
During
the three and nine months ended September 30, 2009, we recorded net
restructuring credits of ($0.1) million and ($1.2) million, respectively, which
are included in cost of services and selling, general, and administrative
expenses. We do not expect to incur significant additional costs or
adjustments related to this restructuring.
The
change in accrued restructuring and related charges during the nine months ended
September 30, 2009 was as follows:
(In
000s)
|
|||||||||
Accrued
restructuring and related charges at January 1, 2009
|
$
|
10,460
|
|||||||
Additions
|
191
|
||||||||
Payments
|
(7,619
|
)
|
|||||||
Adjustments
(1)
|
(1,209
|
)
|
|||||||
Accrued
restructuring and related charges at September 30, 2009
|
$
|
1,823
|
|||||||
(1)
Adjustments for the nine months ended September 30, 2009 resulted from
actual severance amounts differing from initial estimates due to employees
who were expected to be terminated but were instead transitioned to new
roles, as well as a favorable adjustment to lease termination costs due to
unanticipated demand for certain unused office space.
|
16
(9)
|
Commitments
and Contingencies
|
Former Employee
Action
In June
1994, a former employee whom we dismissed in February 1994 filed a “whistle
blower” action on behalf of the United States government. Subsequent to
its review of this case, the federal government determined not to intervene in
the litigation. The employee sued Healthways, Inc. and our wholly-owned
subsidiary, American Healthways Services, Inc. (“AHSI”), as well as certain
named and unnamed medical directors and one named client hospital, West Paces
Medical Center (“WPMC”), and other unnamed client hospitals.
Healthways,
Inc. was subsequently dismissed as a defendant. In addition, WPMC settled
claims filed against it as part of a larger settlement agreement that WPMC’s
parent organization, HCA Inc., reached within the United States
government. The plaintiff dismissed his claims against the medical
directors with prejudice, and on February 7, 2007 the court granted the
plaintiff’s motion and dismissed all claims against all named medical
directors.
Effective
as of April 1, 2009, the Company and AHSI entered into a settlement agreement
with the United States of America, acting through the United States Department
of Justice and on behalf of the Department of Health and Human Services
(collectively, the “United States”), and the former employee in connection with
the settlement of the lawsuit. Pursuant to the settlement agreement, we
paid $28 million to the United States in settlement of the litigation.
Additionally, we paid an additional $12 million for other costs and fees related
to the settlement, including the estimated legal costs and expenses of the
plaintiff’s attorneys. As a result of the settlement, the court has
dismissed the lawsuit with prejudice.
In a
related matter, we have settled the arbitration claim filed against us by WPMC
and the arbitration counter-claim we filed against WPMC in February 2006, both
of which sought indemnification for certain costs and expenses incurred in
connection with the qui tam case. The arbitration has been dismissed with
prejudice.
Securities Class Action
Litigation
Beginning
on June 5, 2008, Healthways and certain of its present and former officers
and/or directors were named as defendants in two putative securities class
actions filed in the U.S. District Court for the Middle District of Tennessee,
Nashville Division. On August 8, 2008, the court ordered the consolidation of
the two related cases, appointed lead plaintiff and lead plaintiff’s counsel,
and granted lead plaintiff leave to file a consolidated amended
complaint.
The
amended complaint, filed on September 22, 2008, alleges that the Company and the
individual defendants violated Sections 10(b) of the Securities Exchange Act of
1934 (the “Act”) and that the individual defendants violated Section 20(a) of
the Act as “control persons” of Healthways. The amended complaint further
alleges that certain of the individual defendants also violated Section 20A of
the Act based on their stock sales. The plaintiff purports to bring these
claims for unspecified monetary damages on behalf of a class of investors who
purchased Healthways stock between July 5, 2007 and August 25,
2008.
17
In
support of these claims, the lead plaintiff alleges generally that, during the
proposed class period, the Company made misleading statements and omitted
material information regarding (1) the purported loss or restructuring of
certain contracts with customers, (2) the Company’s participation in the
Medicare Health Support (“MHS”) pilot program for the Centers for Medicare &
Medicaid Services, and (3) the Company’s guidance for fiscal year 2008.
The defendants filed a motion to dismiss the amended complaint on November 13,
2008. On March 9, 2009, the Court denied the defendants’ motion to
dismiss. The parties have exchanged discovery requests, and the
discovery phase of the lawsuit is presently underway.
Shareholder Derivative
Lawsuits
Also, on
June 27, 2008 and July 24, 2008, respectively, two shareholders filed putative
derivative actions purportedly on behalf of Healthways in the Chancery Court for
the State of Tennessee, Twentieth Judicial District, Davidson County, against
certain directors and officers of the Company. These actions are based
upon substantially the same facts alleged in the securities class action
litigation described above. The plaintiffs are seeking to recover damages
in an unspecified amount and equitable and/or injunctive
relief.
On August
13, 2008, the Court consolidated these two lawsuits and appointed lead
counsel. On October 3, 2008, the Court ordered that the consolidated
action be stayed until the motion to dismiss in the securities class action had
been resolved by the District Court. By stipulation of the parties, the
plaintiffs filed their consolidated complaint on May 9, 2009. On June
19, 2009, the defendants filed a motion to dismiss the consolidated
complaint. The Court granted the defendants’ motion to dismiss on
October 14, 2009.
ERISA
Lawsuits
Additionally,
on July 31, 2008, a purported class action alleging violations of the Employee
Retirement Income Security Act (“ERISA”) was filed in the U.S. District Court
for the Middle District of Tennessee, Nashville Division against Healthways,
Inc. and certain of its directors and officers alleging breaches of fiduciary
duties to participants in the Company’s 401(k) plan. The central
allegation is that Company stock was an imprudent investment option for the
401(k) plan.
The
complaint was amended on September 29, 2008. The named defendants are: the
Company, the Board of Directors, certain officers, and members of the Investment
Committee charged with administering the 401(k) plan. The amended
complaint alleges that the defendants violated ERISA by failing to remove the
Company stock fund from the 401(k) plan when it allegedly became an imprudent
investment, by failing to disclose adequately the risks and results of the
MHS pilot program to 401(k) plan participants, and by failing to seek
independent advice as to whether to continue to permit the plan to hold Company
stock. It further alleges that the Company and its directors should
have been more closely monitoring the Investment Committee and other plan
fiduciaries. The amended complaint seeks damages in an
undisclosed amount and other equitable relief. The defendants filed
a motion to dismiss on October 29, 2008. On January 28, 2009,
the Court granted the defendants’ motion to dismiss the plaintiff’s claims for
breach of the duty to disclose with regard to any non-public information and
information beyond the specific disclosure requirements of ERISA and denied
Defendants’ motion to dismiss as to the remainder of the plaintiff’s
claims. A period of discovery ensued.
18
On May
12, 2009, the plaintiff filed a motion for class certification. After
the plaintiff did not appear for his scheduled deposition, the Court issued an
Order on July 10, 2009 warning the plaintiff that his failure to participate in
the lawsuit could result in sanctions, including but not limited to
dismissal. After the plaintiff’s failure to participate continued, on
July 23, 2009, the defendants filed a motion to dismiss for failure to prosecute
the action. On August 6, 2009, the parties filed a stipulation of
dismissal with prejudice as to the named plaintiff but otherwise without
prejudice, and the Court entered an Order to that effect on the same
date. No subsequent lawsuits have been filed alleging these same
claims.
Outlook
We are
also subject to other claims and suits that arise from time to time in the
ordinary course of our business. We do not believe that any of the legal
proceedings pending against us as of the date of this report will have a
material adverse effect on our liquidity or financial condition. We may
settle claims, sustain judgments or incur expenses relating to legal proceedings
in a particular fiscal quarter which may adversely affect our results of
operations. As these matters are subject to inherent uncertainties, our
view of these matters may change in the future.
(10)
|
Sale
of Investment
|
In
January 2009, a private company in which we held preferred stock (recorded in
“other assets”) was acquired by a third party. As part of this sale,
we received two payments totaling $11.6 million in January and February 2009 and
recorded a gain of $2.6 million during the first quarter of 2009.
(11)
|
Comprehensive
Income
|
Comprehensive
income, net of income taxes, was $8.4 million and $14.9 million for the three
months ended September 30, 2009 and 2008, respectively, and $2.9 million and
$42.6 million for the nine months ended September 30, 2009 and 2008,
respectively.
(12)
|
Earnings
Per Share
|
The
following is a reconciliation of the numerator and denominator of basic and
diluted earnings per share for the three and nine months ended September 30,
2009 and 2008:
19
(In
000s, except per share data)
|
Three
Months Ended
September
30,
|
Nine
Months Ended
September 30,
|
||||||||||||
2009
|
2008
|
|
2009
|
2008
|
||||||||||
Numerator:
|
||||||||||||||
Net
income - numerator for basic earnings per share
|
$
|
8,802
|
$
|
15,623
|
$
|
2,864
|
$
|
42,150
|
||||||
Denominator:
|
||||||||||||||
Shares
used for basic earnings per share
|
33,745
|
33,599
|
33,701
|
34,474
|
||||||||||
Effect
of dilutive securities outstanding:
|
||||||||||||||
Non-qualified
stock options
|
389
|
809
|
281
|
1,267
|
||||||||||
Restricted
stock units
|
347
|
159
|
250
|
150
|
||||||||||
Shares
used for diluted earnings per share
|
34,481
|
34,567
|
34,232
|
35,891
|
||||||||||
Earnings
per share:
|
||||||||||||||
Basic
|
$
|
0.26
|
$
|
0.46
|
$
|
0.08
|
$
|
1.22
|
||||||
Diluted
|
$
|
0.26
|
$
|
0.45
|
$
|
0.08
|
$
|
1.17
|
||||||
Dilutive
securities outstanding not included in the computation of earnings per
share because their effect is antidilutive:
|
||||||||||||||
Non-qualified
stock options
|
3,354
|
2,688
|
3,633
|
1,724
|
||||||||||
Restricted
stock units
|
104
|
204
|
195
|
132
|
(13)
|
Subsequent
Events
|
On
October 14, 2009, we acquired HealthHonors®, a company that specializes in
behavior change science and optimized use of incentives, for $14.7 million in
cash in addition to a multi-year earn-out arrangement.
We have
evaluated subsequent events through November 9, 2009, the date of issuance of
the financial statements.
20
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
|
Overview
Founded
in 1981, Healthways, Inc. provides specialized, comprehensive solutions to help
people improve physical, emotional and social well-being, reducing both direct
healthcare costs and the costs associated with the loss of health-related
employee productivity.
We
provide highly specific and personalized interventions for each individual in a
population, irrespective of health status, age or payor. Our
evidence-based health, prevention and well-being services are made available to
consumers via phone, direct mail, the Internet, face-to-face consultations and
venue-based interactions.
In North
America, our customers include health plans, governments, employers and
hospitals in all 50 states, the District of Columbia and Puerto Rico. We also
provide health improvement programs and services in Germany, Brazil and
Australia. We operate care enhancement and coaching centers worldwide
staffed with licensed health professionals. Our fitness center
network encompasses more than 15,000 U.S. locations. We also maintain
an extensive network of over 37,000 complementary and alternative medicine and
chiropractic practitioners, which offers convenient access to the significant
number of individuals who seek health services outside of the traditional health
care system.
Our
guiding philosophy and approach to market is predicated on the fundamental
belief that healthier people cost less and are more productive. As
described more fully below, our programs are designed to help keep healthy
individuals healthy, mitigate and delay the progression to disease associated
with family or lifestyle risk factors, and promote the best possible health
habits for those who are already affected by health conditions or
disease.
First,
our programs are designed to help keep healthy people healthy by:
|
·
|
fostering
wellness and disease prevention through total population screening, health
risk assessments and supportive interventions;
and
|
|
·
|
providing
access to health improvement programs, such as fitness, weight management,
complementary and alternative medicine and smoking
cessation.
|
Our
prevention programs focus on education, physical fitness, health coaching,
behavior change techniques and support, and evidence-based interventions to
drive adherence to proven standards of care, medication regimens and physicians’
plans of care. We believe this approach optimizes the health status
of member populations and reduces the short- and long-term direct healthcare
costs for participants, including costs associated with the loss of
health-related employee productivity.
Second,
our programs are designed to drive healthy behaviors and mitigate lifestyle risk
by:
|
·
|
promoting
the reduction of lifestyle behaviors that lead to poor health or chronic
conditions; and
|
|
·
|
providing
educational materials and personal interactions with highly trained nurses
and other healthcare professionals to create and sustain healthier
behaviors for those individuals at-risk or in the early stages of chronic
conditions.
|
21
We enable
health plans and employers to engage everyone in their covered populations
through specific interventions that are sensitive to each individual’s health
risks and needs. Our products are designed to motivate people to make positive
lifestyle changes and accomplish individual goals, such as increasing physical
activity for seniors through the Healthways SilverSneakers® fitness program or
overcoming nicotine addiction through the QuitNet® on-line smoking cessation
community.
Finally,
our programs are designed to optimize care for those with existing conditions or
disease by:
|
·
|
incorporating
the latest, evidence-based clinical guidelines into interventions to
optimize patient health outcomes;
|
|
·
|
developing
care support plans and motivating members to set attainable goals for
themselves;
|
|
·
|
providing
local market resources to address acute episodic
interventions;
|
|
·
|
coordinating
members’ care with their healthcare providers;
and
|
|
·
|
providing
software licensing and management consulting in support of health and care
support services.
|
We
provide programs for people with chronic diseases or persistent conditions,
including: diabetes, coronary artery disease, heart failure, asthma, chronic
obstructive pulmonary disease, end-stage renal disease, cancer, chronic kidney
disease, depression, high-risk obesity, metabolic syndrome, acid-related stomach
disorders, atrial fibrillation, decubitus ulcer, fibromyalgia, hepatitis C,
inflammatory bowel disease, irritable bowel syndrome, low-back pain,
osteoarthritis, osteoporosis and urinary incontinence. We also provide high-risk
care management for members at risk for hospitalization due to complex
conditions. We believe creating real and sustainable behavior change generates
measurable, long-term cost savings.
We
recognize that each individual plays a variety of roles in his or her pursuit of
health, often simultaneously. By providing the full spectrum of
services to meet each individual’s needs, we believe our interventions can be
delivered at scale and in a manner that reflects those unique needs over
time.
Forward-Looking
Statements
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements, which are based upon current expectations
and involve a number of risks and uncertainties. Forward-looking statements
include all statements that do not relate solely to historical or current facts,
and can be identified by the use of words like “may,” “believe,” “will,”
“expect,” “project,” “estimate,” “anticipate,” “plan,” or
“continue.” In order for us to use the “safe harbor” provisions
of the Private Securities Litigation Reform Act of 1995, we caution you that the
following important factors, among others, may affect these forward-looking
statements. Consequently, actual operations and results may differ materially
from those expressed in the forward-looking statements. The important factors
include but are not limited to:
|
·
|
our
ability to sign and implement new contracts for our
solutions;
|
|
·
|
our
ability to accurately forecast performance and the timing of revenue
recognition under the terms of our customer contracts ahead of data
collection and reconciliation in order to provide forward-looking
guidance;
|
|
·
|
the
impact of national healthcare reform proposals and the potential impact of
healthcare reform legislation, if enacted, on our operations and/or the
demand for our services;
|
|
·
|
the
impact of any new or
proposed legislation, regulations and interpretations relating to
the Medicare Prescription Drug, Improvement, and Modernization Act of
2003, including the potential expansion to Phase II for Medicare Health
Support programs and any legislative or regulatory changes with respect to
Medicare Advantage;
|
22
|
·
|
our
ability to reach mutual agreement with the Centers for Medicare &
Medicaid Services (“CMS”) with respect to results under Phase I of
Medicare Health Support;
|
|
·
|
our
ability to anticipate the rate of market acceptance of our solutions in
potential international markets;
|
|
·
|
our
ability to accurately forecast the costs necessary to implement our
strategy of establishing a presence in international
markets;
|
|
·
|
the
risks associated with foreign currency exchange rate fluctuations and our
ability to hedge against such
fluctuations;
|
|
·
|
the
risks associated with a significant concentration of our revenues with
a limited number of customers;
|
|
·
|
our
ability to effect cost savings and clinical outcomes improvements under
our contracts and reach mutual agreement with customers with respect to
cost savings, or to effect such savings and improvements within
the time frames contemplated by
us;
|
|
·
|
our
ability to achieve estimated annualized revenue in backlog in the manner
and within the timeframe we expect, which is based on certain estimates
regarding the implementation of our
services;
|
|
·
|
our
ability and/or the ability of our customers to enroll participants in our
programs in a manner and within the timeframe anticipated by
us;
|
|
·
|
the
ability of our customers to provide timely and accurate data that is
essential to the operation and measurement of our performance under the
terms of our contracts;
|
|
·
|
our
ability to favorably resolve contract billing and interpretation
issues with our customers;
|
|
·
|
our
ability to service our debt and make principal and interest payments as
those payments become due;
|
|
·
|
the
risks associated with changes in macroeconomic conditions, which may
reduce the demand and/or the timing of purchases for our services from
customers or potential customers, reduce the number of covered lives of
our existing customers, restrict our ability to obtain additional
financing, or impact the availability of credit under our Third Amended
Credit Agreement;
|
|
·
|
counterparty
risk associated with our interest rate swap agreements and foreign
currency exchange contracts;
|
|
·
|
our
ability to integrate acquired businesses or technologies into our
business;
|
|
·
|
the
impact of any impairment of our goodwill or other intangible
assets;
|
|
·
|
our
ability to develop new products and deliver outcomes on those
products;
|
|
·
|
our
ability to implement our new integrated data and technology solutions
platform within the timeframe and cost estimates that we
expect;
|
|
·
|
our
ability to retain existing customers and to renew or maintain contracts
with our customers under existing terms or restructure these
contracts on terms that would not have a material negative impact on
our results of operations;
|
|
·
|
our ability
to obtain adequate financing to provide the capital that may be
necessary to support our operations and to support or guarantee our
performance under new contracts;
|
|
·
|
unusual
and unforeseen patterns of healthcare utilization by individuals with
diabetes, cardiac, respiratory and/or other diseases or conditions for
which we provide services;
|
|
·
|
the
ability of our customers to maintain the number of covered lives enrolled
in the plans during the terms of
our agreements;
|
|
·
|
the
impact of litigation involving us and/or our
subsidiaries;
|
|
·
|
the
impact of future state, federal, and international healthcare and other
applicable legislation and regulations on our ability to deliver
our services and on the financial health of our customers and their
willingness to purchase our
services;
|
23
|
·
|
current
geopolitical turmoil, the continuing threat of domestic or international
terrorism, and the potential emergence of a health pandemic;
and
|
|
·
|
other
risks detailed in our Annual Report on Form 10-K for the fiscal year ended
August 31, 2008 and other filings with the Securities and Exchange
Commission.
|
We
undertake no obligation to update or revise any such forward-looking
statements.
Customer
Contracts
Contract
Terms
We
generally determine our contract fees by multiplying a contractually negotiated
rate per member per month (“PMPM”) by the number of members covered by our
services during the month. We typically set the PMPM rates during contract
negotiations with customers based on the value we expect our programs to create
and a sharing of that value between the customer and the Company. In
addition, some of our services, such as the SilverSneakers fitness program, are
billed on a fee for service basis.
Our
contracts with health plans generally range from three to five years with
provisions for subsequent renewal; contracts with self-insured employers, either
directly or through their health plans or pharmacy benefit manager, typically
have one to three-year terms. Some of our contracts allow the customer to
terminate early.
Some of
our contracts provide that a portion (up to 100%) of our fees may be refundable
to the customer (“performance-based”) if our programs do not achieve, when
compared to a baseline year, a targeted percentage reduction in the customer’s
healthcare costs and selected clinical and/or other criteria that focus on
improving the health of the members. Approximately 4% of revenues recorded
during the nine months ended September 30, 2009 were performance-based and were
subject to final reconciliation as of September 30, 2009. We
anticipate that this percentage will fluctuate due to the level of
performance-based fees in new contracts and the timing and amount of revenue
recognition associated with performance-based fees. Some contracts
also provide opportunities for us to receive incentive bonuses in excess of the
contractual PMPM rate if we exceed contractual performance targets.
Technology
Our
customer contracts require sophisticated analytical, data management, Internet
and computer-telephony solutions based on state-of-the-art technology. These
solutions help us deliver our services to large populations within our customer
base. Our predictive modeling capabilities allow us to identify and stratify
those participants who are most at risk for an adverse health event. We
incorporate behavior-change science with consumer-friendly interactions such as
face-to-face, telephonic, print materials and web portals to facilitate consumer
preferences for engagement and convenience. We use sophisticated data analytical
and reporting solutions to validate the impact of our programs on clinical and
financial outcomes. We continue to invest heavily in technology and are
continually expanding and improving our proprietary clinical, data management,
and reporting systems to continue to meet the information management
requirements of our services. The behavior change techniques
incorporated in our technology identify an individual’s readiness to change and
provide personalized support through appropriate messaging and convenient venues
to motivate and sustain healthy behaviors.
24
Contract
Revenues
Our
contract revenues depend on the contractual terms we establish and maintain with
customers to provide our services to their members. Some of our contracts allow
the customer to terminate early. Restructurings of contracts and
possible terminations at, or prior to, renewal could have a material negative
impact on our results of operations and financial condition.
Approximately
20% and 19% of our revenues for the three and nine months ended September 30,
2009, respectively, were derived from one customer. The loss of this customer or
any other large customer or a reduction in the profitability of a contract with
any large customer could have a material negative impact on our results of
operations, cash flows, and financial condition.
Domestic
Commercial Available and Billed Lives
The
number of domestic commercial available and billed lives as of September 30,
2009 and 2008 were as follows:
September
30,
|
September
30,
|
|||||||||
2009
|
2008
|
|||||||||
Available
lives(1)
|
196,100,000
|
192,500,000
|
||||||||
Billed
lives
|
35,900,000
|
31,700,000
|
(1)
Estimated based on the Atlantic Information Services, Inc. (AIS) Directory of
Health Plans and publicly available information.
Business
Strategy
The World
Health Organization defines health as “…not only the absence of infirmity and
disease, but also a state of physical, mental, and social
well-being.”
Our
business strategy reflects our passion to enhance health and well-being, and as
a result, reduce overall costs and improve productivity. Our programs
are designed to:
|
·
|
keep
healthy individuals healthy;
|
|
·
|
mitigate
and slow the progression of disease associated with family or lifestyle
risk factors; and
|
|
·
|
promote
the best possible health for those who are already affected by existing
health conditions or disease.
|
Through
our solutions, we work to optimize the health and well-being of entire
populations, one person at a time, domestically and internationally, thereby
creating value by reducing overall costs and improving productivity for
individuals, families, health plans, governments and employers.
We
believe it is critical to impact an entire population’s underlying health status
and well-being in a long-term, cost effective way. Believing that
what gets measured gets acted upon, in January 2008, we entered into an
exclusive, 25-year relationship with Gallup to provide a national, daily pulse
of individual and collective well-being. The Gallup-Healthways
Well-Being IndexTM is a
unique partnership in well-being measurement and research that is based on
surveys of 1,000 Americans every day, seven days a week. Under the
agreement, Gallup evaluates and reports on the well-being of individuals by
state, congressional district, and community, as well as by non-geographic
segments. We perform similar services for companies, families and
individuals.
25
To
improve measurements like the Well-Being Index and thus enhance health and
well-being within their respective populations, our current and prospective
customers require solutions that focus on the underlying drivers of healthcare
demand, address worsening health status, reverse or slow unsustainable cost
trends, foster healthy behaviors, mitigate health risks, and manage chronic
conditions. Our strategy is to deliver programs that engage
individuals and help them enhance their health status and well-being regardless
of their starting point. We believe we can achieve health and
well-being improvements in a population and generate significant cost savings
and increases in productivity by providing effective programs that support the
individual throughout his or her health journey.
We are
adding and enhancing solutions to extend our reach and effectiveness and to meet
increasing demand for integrated solutions. The flexibility of our
programs allows customers to provide those services they deem appropriate for
their organizations. Customers may select from certain single program
options up to a total-population approach, in which all members of a customer’s
population are eligible to receive benefits.
We plan
to leverage our scalable, state-of-the-art call centers, medical information
content, behavior change processes and techniques, strategic relationships,
health provider networks, fitness center relationships, and proprietary
technologies and techniques in order to continue to gain a competitive advantage
in delivering our services. We anticipate we will continue to
enhance, expand and further integrate capabilities, pursue opportunities in
domestic government and international markets, and enhance our information
technology support. We may add some of these new capabilities and
technologies through internal development, strategic alliances with other
entities and/or through selective acquisitions or investments.
Critical
Accounting Policies
We
describe our accounting policies in Note 1 of the Notes to the Consolidated
Financial Statements included in our Annual Report on Form 10-K for the fiscal
year ended August 31, 2008. We prepare the consolidated financial
statements in conformity with U.S. GAAP, which requires us to make estimates and
judgments that affect the reported amounts of assets and liabilities and related
disclosures at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results may differ
from those estimates.
We
believe the following accounting policies are the most critical in understanding
the estimates and judgments that are involved in preparing our financial
statements and the uncertainties that could impact our results of operations,
financial condition and cash flows.
Revenue
Recognition
We
generally determine our contract fees by multiplying a contractually negotiated
rate per member per month (“PMPM”) by the number of members covered by our
services during the month. We typically set the PMPM rates during
contract negotiations with customers based on the value we expect our programs
to create and a sharing of that value between the customer and the
Company. In addition, some of our services, such as the
SilverSneakers fitness program, are billed on a fee for service
basis.
26
Our
contracts with health plans generally range from three to five years with
provisions for subsequent renewal; contracts with self-insured employers, either
directly or through their health plans or pharmacy benefit manager,
typically have one to three-year terms. Some of our contracts allow
the customer to terminate early.
Some of
our contracts provide that a portion (up to 100%) of our fees may be refundable
to the customer (“performance-based”) if our programs do not achieve, when
compared to a baseline year, a targeted percentage reduction in the customer’s
healthcare costs and selected clinical and/or other criteria that focus on
improving the health of the members. Approximately 4% of revenues
recorded during the nine months ended September 30, 2009 were performance-based
and were subject to final reconciliation as of September 30, 2009. We
anticipate that this percentage will fluctuate due to the level of
performance-based fees in new contracts and the timing and amount of revenue
recognition associated with performance-based fees. Some contracts
also provide opportunities for us to receive incentive bonuses in excess of the
contractual PMPM rate if we exceed contractual performance targets.
We
generally bill our customers each month for the entire amount of the fees
contractually due for the prior month’s enrollment, which typically includes the
amount, if any, that is performance-based and may be subject to refund should we
not meet performance targets. Deferred revenues arise from contracts
which permit upfront billing and collection of fees covering the entire
contractual service period, generally 12 months. Contractually, we
cannot bill for any incentive bonus until after contract settlement. Fees for
service are typically billed in the month after the services are
provided.
We
recognize revenue as follows: 1) we recognize the fixed portion of PMPM fees and
fees for service as revenue during the period we perform our services; 2) we
recognize the performance-based portion of the monthly fees based on
the most recent assessment of our performance, which represents the amount that
the customer would legally be obligated to pay if the contract were terminated
as of the latest balance sheet date; and 3) we recognize additional
incentive bonuses based on the most recent assessment of our performance,
to the extent we consider such amounts collectible.
We assess
our level of performance for our contracts based on medical claims and other
data that the customer is contractually required to supply. A minimum of four to
six months’ data is typically required for us to measure performance. In
assessing our performance, we may include estimates such as medical claims
incurred but not reported and a medical cost trend compared to a baseline year.
In addition, we may also provide contractual allowances for billing adjustments
(such as data reconciliation differences) as appropriate.
27
In 2005,
we began participating in two Medicare Health Support pilots, which concluded in
January 2008 and July 2008, respectively. Substantially all of the
fees under these pilots were performance-based. Our original
cooperative agreements required that, by the end of the third year, we achieve a
cumulative net savings (total savings for the intervention population as
compared to the control group less fees received from CMS) of
5.0%. Under an amendment to our agreement for our stand-alone
Medicare Health Support pilot in Maryland and the District of Columbia, we began
serving a “refresh population” of approximately 4,500 beneficiaries on August 1,
2006, which was measured as a separate cohort for two years, by the end of which
the program was required to achieve a 2.5% cumulative net savings when compared
to a new control cohort. In April 2008, we signed an amendment to our
Medicare Health Support protocol with CMS, which changed the financial
performance target for both the initial and the refresh populations to budget
neutrality. In late April 2009, we received the final reconciliation
report from CMS’ independent financial reconciliation
contractor. Based upon this final reconciliation report as well as
our performance over the term of the pilots, we have recognized $9.5 million of
cumulative performance-based fees related to these pilots. At
September 30, 2009, approximately $57.8 million of performance-based fees
related to these pilots was recorded in contract billings in excess of earned
revenue, $50.3 million of which related to fees collected, and the remaining
$7.5 million of which related to fees billed but not collected due to CMS
withholding payment of these fees. We submitted our objections to the
final reconciliation report and are involved in ongoing discussions with CMS
regarding certain issues related to the reconciliation but have not yet reached
a final resolution at this time.
If data
is insufficient or incomplete to measure performance, or interim performance
measures indicate that we are not meeting performance targets, we do not
recognize performance-based fees subject to refund as revenues but instead
record them in a current liability account entitled “contract billings in excess
of earned revenue.” Only in the event we do not meet performance
levels by the end of the measurement period, typically one year, are we
contractually obligated to refund some or all of the performance-based fees. We
would only reverse revenues that we had already recognized if performance to
date in the measurement period, previously above targeted levels, subsequently
dropped below targeted levels. Historically, any such adjustments have been
immaterial to our financial condition and results of operations.
During
the settlement process under a contract, which generally occurs six to eight
months after the end of a contract year, we settle any performance-based fees
and reconcile healthcare claims and clinical data. As of September 30, 2009,
performance-based fees that have not yet been settled with our customers but
that have been recognized as revenue in the current and prior years totaled
$54.0 million, all of which was based on actual data received from our
customers. Data reconciliation differences, for which we provide contractual
allowances until we reach agreement with respect to identified issues, can arise
between the customer and us due to customer data deficiencies, omissions, and/or
data discrepancies.
Performance-related
adjustments (including any amounts recorded as revenue that were ultimately
refunded), changes in estimates, data reconciliation differences, or adjustments
to incentive bonuses may cause us to recognize or reverse revenue in a current
fiscal year that pertains to services provided during a prior fiscal
year. During the nine months ended September 30, 2009, we recognized
a net increase in revenue of approximately $6.6 million that related to services
provided prior to January 1, 2009.
28
Impairment
of Intangible Assets and Goodwill
We review
goodwill for impairment on an annual basis (during the fourth quarter of our
fiscal year) or more frequently whenever events or circumstances indicate that
the carrying value may not be recoverable.
We
completed our annual goodwill impairment test as of June 30, 2009 and concluded
that no impairment of goodwill exists. Due to the recent change in
our fiscal year-end from August 31 to December 31, the date of our annual
impairment test will be changing to October 31 beginning on October 31,
2009.
We
estimate the fair value of each reporting unit using a discounted cash flow
model and reconcile the aggregate fair value of our reporting units to our
consolidated market capitalization. The discounted cash flow model
requires significant judgments, including management’s estimate of future cash
flows, which is dependent on internal forecasts, estimation of the long-term
growth rate for our business, the useful life over which cash flows will occur,
and determination of our weighted average cost of capital. Changes in
these estimates and assumptions could materially affect the estimate of fair
value and goodwill impairment for each reporting unit.
If we
determined that the carrying value of goodwill was impaired based upon an
impairment review, we would calculate any impairment using a fair-value-based
goodwill impairment test as required by accounting literature. The
fair value of a reporting unit is the price that would be received to sell the
unit as a whole in an orderly transaction between market participants at the
measurement date.
Except
for a trade name which has an indefinite life and is not subject to
amortization, we amortize identifiable intangible assets, such as acquired
technologies and customer contracts, using the straight-line method over their
estimated useful lives. We assess the potential impairment of
intangible assets subject to amortization whenever events or changes in
circumstances indicate that the carrying values may not be
recoverable.
We review
intangible assets not subject to amortization on an annual basis or more
frequently whenever events or circumstances indicate that the assets might be
impaired. We estimate the fair value of the trade name using a
present value technique, which requires management’s estimate of future revenues
attributable to this trade name, estimation of the long-term growth rate for
these revenues, and determination of our weighted average cost of
capital. Changes in these estimates and assumptions could materially
affect the estimate of fair value for the trade name.
If we
determine that the carrying value of other identifiable intangible assets may
not be recoverable, we calculate any impairment using an estimate of
the asset’s fair value based on the estimated price that would be received to
sell the asset in an orderly transaction between market
participants.
Future
events could cause us to conclude that impairment indicators exist and that
goodwill and/or other intangible assets associated with our acquired
businesses are impaired. Any resulting impairment loss could have a material
adverse impact on our financial condition and results of
operations.
29
Income
Taxes
The
objectives of accounting for income taxes are to recognize the amount of taxes
payable or refundable for the current year and deferred tax liabilities and
assets for the future tax consequences of events that have been recognized in an
entity’s financial statements or tax returns. Accounting for income
taxes requires significant judgment in determining income tax provisions,
including determination of deferred tax assets, deferred tax liabilities, and
any valuation allowances that might be required against deferred tax assets, and
in evaluating tax positions.
We
recognize the tax benefit from an uncertain tax position only if it is more
likely than not that the tax position will be sustained on examination by the
taxing authorities, based on the technical merits of the position. The tax
benefits recognized in the financial statements from such a position should be
measured based on the largest benefit that has a greater than 50% likelihood of
being realized upon ultimate settlement. Accounting literature also
provides guidance on derecognition of income tax assets and liabilities,
classification of current and deferred income tax assets and liabilities,
accounting for interest and penalties associated with tax positions, and income
tax disclosures. Judgment is required in assessing the future tax
consequences of events that have been recognized in our financial statements or
tax returns. Variations in the actual outcome of these future tax consequences
could materially impact our financial position, results of operations, or cash
flows.
Share-Based
Compensation
We
measure and recognize compensation expense for all share-based payment awards
based on estimated fair values at the date of grant. Determining the
fair value of share-based awards at the grant date 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.
30
Results
of Operations
The
following table shows the components of the statements of operations for the
three and nine months ended September 30, 2009 and 2008 expressed as a
percentage of revenues.
Three
Months Ended
|
Nine
Months Ended
|
||||||||||||||||
September
30,
|
September
30,
|
||||||||||||||||
2009
|
2008
|
2009
|
2008
|
||||||||||||||
Revenues
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
|||||||||
Cost
of services (exclusive of depreciation
|
|||||||||||||||||
and
amortization included below)
|
72.9
|
%
|
67.0
|
%
|
72.5
|
%
|
68.0
|
%
|
|||||||||
Selling,
general and administrative expenses
|
9.8
|
%
|
9.3
|
%
|
10.2
|
%
|
9.8
|
%
|
|||||||||
Depreciation
and amortization
|
6.6
|
%
|
6.9
|
%
|
6.7
|
%
|
6.7
|
%
|
|||||||||
Operating
income (1)
|
10.7
|
%
|
16.7
|
%
|
10.7
|
%
|
15.4
|
%
|
|||||||||
Gain
on sale of investment
|
—
|
—
|
(0.5
|
)%
|
—
|
||||||||||||
Interest
expense
|
2.1
|
%
|
2.9
|
%
|
2.2
|
%
|
2.8
|
%
|
|||||||||
Legal
settlement and related costs
|
—
|
—
|
7.4
|
%
|
—
|
||||||||||||
Income
before income taxes (1)
|
8.5
|
%
|
13.9
|
%
|
1.6
|
%
|
12.7
|
%
|
|||||||||
Income
tax expense
|
3.7
|
%
|
5.5
|
%
|
1.0
|
%
|
5.1
|
%
|
|||||||||
Net
income (1)
|
4.8
|
%
|
8.3
|
%
|
0.5
|
%
|
7.5
|
%
|
(1)
Figures may not add due to rounding.
Revenues
Revenues
for the three months ended September 30, 2009 decreased $5.8 million, or 3.1%,
compared to the three months ended September 30, 2008, primarily due to the
following:
|
·
|
contract
restructurings and terminations with certain customers;
and
|
|
·
|
decreased
revenues related to one of the Medicare Health Support pilots, which ended
in July 2008 and for which we recognized $2.2 million of revenue during
the three months ended September 30, 2008 based on performance
data.
|
These
decreases were somewhat offset by increases in revenues primarily due to the
following:
|
·
|
increased
revenues from fitness center programs, primarily due to an increase in
participation in these programs as well as in the number of members
eligible for them;
|
|
·
|
increased
performance-based revenues due to our ability to measure and achieve
performance targets on certain contracts during the three months ended
September 30, 2009; and
|
|
·
|
the
commencement of contracts with new
customers.
|
31
Revenues
for the nine months ended September 30, 2009 decreased $19.2 million, or 3.4%,
compared to the nine months ended September 30, 2008, primarily due to the
following:
·
|
contract
restructurings and terminations with certain customers;
and
|
|
·
|
decreased
revenues related to one of the Medicare Health Support pilots, which ended
in July 2008 and for which we recognized $7.5 million of revenue during
the nine months ended September 30, 2008 based on performance
data.
|
These
decreases were somewhat offset by increases in revenues primarily due to the
following:
|
·
|
increased
revenues from fitness center programs, primarily due to an increase in
participation in these programs as well as in the number of members
eligible for them;
|
|
·
|
increased
performance-based revenues due to our ability to measure and achieve
performance targets on certain contracts during the nine months
ended September 30, 2009;
|
|
·
|
the
commencement of contracts with new customers;
and
|
|
·
|
growth
in the number of self-insured employer lives under existing customer
contracts.
|
Cost
of Services
Cost of
services (excluding depreciation and amortization) as a percentage of revenues
increased to 72.9% for the three months ended September 30, 2009 compared to
67.0% for the three months ended September 30, 2008, primarily due to the
following:
|
·
|
an
increased portion of our revenue generated by fitness center programs,
which typically have a higher cost of services as a percentage of revenue
than our other programs;
|
|
·
|
the
addition of certain participating locations to our fitness center network
that have a higher cost of services as a percentage of
revenue;
|
|
·
|
contract
restructurings and volume incentives with certain customers that resulted
in either decreased revenues or lower per member fees without a
proportional corresponding decrease in
costs;
|
|
·
|
an
increase in the level of employee bonus provision based on the Company’s
year-to-date financial performance against established internal targets
during these periods; and
|
|
·
|
costs
related to our new integrated data and technology solutions
platform.
|
These
increases were somewhat offset by the following decreases in cost of services as
a percentage of revenues:
|
·
|
a
decrease in salaries and benefits expense, primarily due to a
restructuring of the Company that was largely completed during the fourth
quarter of calendar 2008 and a decrease in health insurance costs related
to changes in employee medical plan design in calendar 2009, which
included a number of wellness initiatives aimed at improving employee
health;
|
|
·
|
cost
savings related to certain cost management initiatives;
and
|
|
·
|
a
decrease in stock-based compensation costs, primarily due to the Company’s
repurchase of certain employee stock options in December
2008.
|
Cost of
services (excluding depreciation and amortization) as a percentage of revenues
increased to 72.5% for the nine months ended September 30, 2009 compared to
68.0% for the nine months ended September 30, 2008, primarily due to the
following:
32
|
·
|
an
increased portion of our revenue generated by fitness center programs,
which typically have a higher cost of services as a percentage of revenue
than our other programs;
|
|
·
|
the
addition of certain participating locations to our fitness center network
that have a higher cost of services as a percentage of
revenue;
|
|
·
|
contract
restructurings and volume incentives with certain customers that resulted
in either decreased revenues or lower per member fees without a
proportional corresponding decrease in costs;
and
|
|
·
|
an
increase in the level of employee bonus provision based on the Company’s
year-to-date financial performance against established internal targets
during these periods.
|
These
increases were somewhat offset by the following decreases in cost of services as
a percentage of revenues:
|
·
|
a
decrease in salaries and benefits expense, primarily due to a
restructuring of the Company that was largely completed during the fourth
quarter of calendar 2008 and a decrease in health insurance costs related
to changes in employee medical plan design in calendar 2009, which
included a number of wellness initiatives aimed at improving employee
health;
|
|
·
|
cost
savings related to certain cost management initiatives;
and
|
|
·
|
a
decrease in stock-based compensation costs, primarily due to the Company’s
repurchase of certain employee stock options in December
2008.
|
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses as a percentage of revenues increased to
9.8% for the three months ended September 30, 2009 compared to 9.3% for the
three months ended September 30, 2008, primarily due to the
following:
|
·
|
a
net increase in salaries and benefits expense, primarily due to the recent
Company restructuring, which included an increased focus on research and
development activities, resulting in an increase in personnel dedicated to
these activities that more than offset the reduction in headcount
resulting from this restructuring and other workforce
reductions;
|
|
·
|
an
increase in the level of employee bonus provision based on the Company’s
year-to-date financial performance against established internal targets
during these periods; and
|
|
·
|
costs
associated with positioning our brand and solutions in conjunction with
ongoing healthcare reform
proposals.
|
These
increases were partially offset by a decrease in professional consulting fees
related to product innovation initiatives in 2008.
Selling,
general and administrative expenses as a percentage of revenues increased to
10.2% for the nine months ended September 30, 2009 compared to 9.8% for the nine
months ended September 30, 2008, primarily due to the following:
|
·
|
a
net increase in salaries and benefits expense, primarily due to severance
costs and the recent Company restructuring, which included an increased
focus on research and development activities, resulting in an increase in
personnel dedicated to these activities that more than offset the
reduction in headcount resulting from this restructuring and other
workforce reductions; and
|
33
|
·
|
an
increase in the level of employee bonus provision based on the Company’s
year-to-date financial performance against established internal targets
during these periods.
|
These
increases were partially offset by a decrease in professional consulting fees
related to product innovation initiatives in 2008.
Depreciation
and Amortization
Depreciation
and amortization expense decreased $1.0 million, or 7.7%, for the three months
ended September 30, 2009 compared to the three months ended September 30, 2008
and $1.7 million, or 4.4%, for the nine months ended September 30, 2009 compared
to the nine months ended September 30, 2008, primarily due to the
following:
|
·
|
a
decrease in amortization expense related to certain intangible assets that
became fully amortized in September
2008;
|
|
·
|
a
decrease in depreciation expense related to retirements of fixed assets as
part of the Company restructuring in December 2008 (see Note 8);
and
|
|
·
|
a
decrease in depreciation expense related to certain computer hardware that
became fully depreciated during
2009.
|
These
decreases were somewhat offset by increased depreciation expense resulting from
capital expenditures related to computer software.
Gain
on Sale of Investment
In
January 2009, a private company in which we held preferred stock was acquired by
a third party. As part of this sale, we received two payments
totaling $11.6 million in January and February 2009 and recorded a gain of $2.6
million during the first quarter of 2009.
Interest
Expense
Interest expense for the
three and nine months ended September 30, 2009 decreased $1.5 million and $3.4
million, respectively, compared to the three and nine months ended September 30,
2008, primarily as a result of a decrease in
floating interest rates on outstanding borrowings under the Third
Amended Credit Agreement during the three and nine months ended September 30,
2009 compared to the three and nine months ended September 30,
2008.
34
Legal
Settlement and Related Costs
In March
2009, our Board of Directors approved a settlement of a qui tam lawsuit filed in
1994 on behalf of the United States government related to the Company’s former
Diabetes Treatment Center of America business. As a result of the
settlement, which was effective as of April 1, 2009, we incurred a charge of
approximately $40 million, including a $28 million payment to the United States
government and payment of approximately $12 million for other costs and fees
related to the settlement, including the estimated legal costs and expenses of
the plaintiff’s attorneys.
Income
Tax Expense
Our
effective tax rate increased to 43.2% for the three months ended September 30,
2009 compared to 39.9% for the three months ended September 30, 2008, primarily
due to an increase during the three months ended September 30, 2009 in certain
expenses for which we do not receive a tax benefit related to international
operations and to our participation in
the ongoing healthcare reform process.
Our
effective tax rate increased to 66.1% for the nine months ended September 30,
2009 compared to 40.7% for the nine months ended September 30,
2008. The increase in the effective rate for the nine months
ended September 30, 2009 was primarily due to the relatively small base of
pretax income for the nine months ended September 30, 2009 in relation to
certain unrecognized tax benefits and non-deductible expenses.
Outlook
We
anticipate that revenues for the remainder of fiscal 2009 will likely decrease
compared to the same period in 2008 primarily due to contract restructurings and
terminations with certain customers, which will likely more than offset
increases in revenue from higher fitness center participation and from new or
existing customers.
Cost of
services and selling, general and administrative expenses as a percentage of
revenues for the remainder of fiscal 2009 will likely decrease compared to the
same period in 2008 due to the completion of a tender offer in December 2008,
which resulted in significant additional stock-based compensation expense for
the three months ended December 31, 2008. We expect that this
decrease in cost of services and selling, general and administrative expenses as
a percentage of revenues will be somewhat offset by increases due to certain
costs that cannot be reduced in the same proportion and/or timeframe as the
anticipated decrease in revenues discussed above, implementation costs
associated with new contracts expected to begin in 2010, and the net cost impact
of our acquisition of HealthHonors in October 2009. In addition, we
anticipate that a larger proportion of our revenues for the remainder of 2009
when compared to the same period in 2008 will come from wellness and prevention
products, which generally carry a higher cost of services as a percentage of
revenue.
As
discussed in “Liquidity and Capital Resources” below, a significant portion of
our long-term debt is subject to fixed interest rate swap agreements; however,
we cannot predict the potential for changes in interest rates, which would
impact our variable rate debt, especially in light of current economic
conditions that have created uncertainty and credit constraints in the
markets. We anticipate that our effective tax rate for the remainder
of calendar 2009 will increase compared to the same period in 2008 primarily due
to the change from a pretax loss for the three months ended December 31, 2008 to
an expected pretax profit for the three months ended December 31,
2009.
35
Liquidity and Capital
Resources
Operating
activities for the nine months ended September 30, 2009 generated cash of $72.1
million compared to $91.8 million for the nine months ended September 30,
2008. The decrease in operating cash flow is primarily due to the
following:
|
·
|
payments
during the nine months ended September 30, 2009 related to the
aforementioned legal settlement and related costs and
fees;
|
|
·
|
a
decrease in cash collections on accounts receivable for the nine months
ended September 30, 2009 compared to the nine months ended September 30,
2008, primarily as a result of the decrease in revenues in
2009;
|
|
·
|
payments
during the nine months ended September 30, 2009 related to a restructuring
of the Company that was largely completed during the fourth quarter of
calendar 2008, which primarily consisted of severance costs and costs
associated with capacity consolidation;
and
|
|
·
|
a
higher amount of lease incentives received during the nine months ended
September 30, 2008 compared to the nine months ended September 30, 2009,
primarily related to our new corporate headquarters in
2008.
|
These
decreases were partially offset by an increase in operating cash flow during the
nine months ended September 30, 2009 compared to the nine months ended September
30, 2008, primarily due to the following:
|
·
|
a
decrease in income tax payments primarily related to higher estimated
payments in 2008; and
|
|
·
|
a
decrease in interest payments, primarily as a result of a decrease in
floating interest rates on outstanding borrowings under the Third Amended
Credit Agreement.
|
Investing
activities during the nine months ended September 30, 2009 used $28.2 million in
cash, which primarily consisted of costs associated with software development
and purchases of property and equipment associated with relocating one of our
regional offices, offset by proceeds from the sale of an investment, described
above.
Financing
activities during the nine
months ended September 30, 2009 used $47.0 million in cash, primarily due to net
payments on borrowings under the Third Amended Credit Agreement.
On
December 1, 2006, we entered into the Third Amended Credit Agreement. The Third
Amended Credit Agreement provides us with a $400.0 million revolving credit
facility, including a swingline sub facility of $10.0 million and a $75.0
million sub facility for letters of credit, a $200.0 million term loan facility,
and an uncommitted incremental accordion facility of $200.0
million. As of September 30, 2009, availability under our revolving
credit facility and swingline sub facility totaled $133.8 million.
Revolving
advances under the Third Amended Credit Agreement generally bear interest, at
our option, at 1) LIBOR plus a spread of 0.875% to 1.750% or 2) the greater of
the federal funds rate plus 0.5%, or the prime rate, plus a spread of 0.000% to
0.250%. Term loan borrowings bear interest, at our option, at 1) LIBOR plus
1.50% or 2) the greater of the federal funds rate plus 0.5%, or the prime rate.
The Third Amended Credit Agreement also provides for a fee ranging between
0.150% and 0.300% of unused commitments. The Third Amended Credit Agreement is
secured by guarantees from most of the Company’s domestic subsidiaries and by
security interests in substantially all of the Company’s and such subsidiaries’
assets.
36
We are
required to repay outstanding revolving loans on the revolving commitment
termination date, which is December 1, 2011. We are required to repay term loans
in quarterly principal installments aggregating $0.5 million each, which
commenced on March 31, 2007, and the entire unpaid principal balance of the
term loans is due and payable at maturity on December 1, 2013.
The Third
Amended Credit Agreement contains various financial covenants, which require us
to maintain, as defined, ratios or levels of 1) total funded debt to EBITDA, 2)
fixed charge coverage, and 3) net worth. In connection with the
aforementioned legal settlement, in March 2009 we entered into a sixth amendment
to the Third Amended Credit Agreement to expressly exclude up to $40 million of
expenses attributable to this settlement from the calculation of earnings before
interest, taxes, depreciation and amortization, or EBITDA, for purposes of
covenant calculations. The Third Amended Credit Agreement also
restricts the payment of dividends and limits the amount of repurchases of the
Company’s common stock. As of September 30, 2009, we were in
compliance with all of the covenant requirements of the Third Amended Credit
Agreement.
As of
September 30, 2009, we are a party to the following interest rate swap
agreements for which we receive a variable rate of interest based on LIBOR and
for which we pay the following fixed rates of interest plus a spread of 0.875%
to 1.750% on revolving advances and a spread of 1.50% on term loan
borrowings:
Swap
#
|
Original
Notional
Amount
(in $000s)
|
Fixed
Interest
Rate
|
Termination
Date
|
||||||||||
1
|
$184,000
|
4.995
|
%
|
March
31, 2010
|
(1)
|
||||||||
2
|
46,000
|
4.995
|
%
|
March
31, 2010
|
(2)
|
||||||||
3
|
40,000
|
3.987
|
%
|
December
31, 2009
|
|||||||||
4
|
40,000
|
3.433
|
%
|
December
30, 2011
|
|||||||||
5
|
50,000
|
3.688
|
%
|
December
30, 2011
|
|||||||||
6
|
40,000
|
3.855
|
%
|
December
30, 2011
|
(3)
|
||||||||
7
|
30,000
|
3.760
|
%
|
March
30, 2011
|
(4)
|
||||||||
8
|
57,500
|
3.385
|
%
|
December
31, 2013
|
(5)
|
||||||||
9
|
57,500
|
3.375
|
%
|
December
31, 2013
|
(6)
|
(1) The
principal value of this swap agreement amortizes over a 39-month
period. During the three months ended September 30, 2009, the
notional amount of this swap was $56 million.
(2) The
principal value of this swap agreement amortizes over a 39-month
period. During the three months ended September 30, 2009, the
notional amount of this swap was $14 million.
(3)
This swap agreement became effective October 1, 2009.
(4)
This swap agreement becomes effective January 2, 2010.
(5)
This swap agreement becomes effective January 1, 2012. The principal
value of this swap agreement will amortize over a 24-month period.
(6)
This swap agreement becomes effective January 3, 2012. The
principal value of this swap agreement will amortize over a 24-month
period.
We
currently meet the hedge accounting criteria under U.S. GAAP in accounting for
these interest rate swap agreements.
37
We
believe that cash flows from operating activities, our available cash, and our
expected available credit under the Third Amended Credit Agreement will continue
to enable us to meet our contractual obligations and to fund our current
operations for the foreseeable future. However, if our
operations
require significant additional financing resources, such as capital expenditures
for technology improvements, additional call centers and/or letters of credit or
other forms of financial assurance to guarantee our performance under the terms
of new contracts, or if we are required to refund performance-based fees
pursuant to contract terms, or if there is an adverse resolution to certain
outstanding litigation, we may need to raise additional capital by expanding our
existing credit facility and/or issuing debt or equity. If we face a limited
ability to arrange such financing, it may restrict our ability to effectively
operate our business. Current economic conditions, including turmoil
and uncertainty in the financial services industry, have created constraints on
liquidity and the ability to obtain credit in the markets. Should
the credit markets not improve, we
cannot assure you that we would be able to secure additional financing if needed
and, if such funds were available, whether the terms or conditions would be
acceptable to us.
If
contract development accelerates or acquisition opportunities arise, we may need
to issue additional debt or equity to provide the funding for these increased
growth opportunities. We may also issue equity in connection with future
acquisitions or strategic alliances. We cannot assure you that we would be able
to issue additional debt or equity on terms that would be acceptable to
us.
Recently
Issued Accounting Standards
In April
2009, the FASB issued authoritative guidance requiring disclosures about fair
value of financial instruments in both interim reporting periods of publicly
traded companies as well as in annual financial statements, beginning with
interim reporting periods ending after June 15, 2009. The
implementation of this guidance resulted in increased disclosures in our interim
periods but did not have an impact on our financial position or results of
operations.
In May
2009, the FASB issued guidance which establishes accounting and disclosure
requirements for subsequent events. The guidance defines subsequent
events as events that occur after the balance sheet date but before the
financial statements are issued for public entities. It requires
companies to disclose the date through which they have evaluated subsequent
events and to designate subsequent events as either recognized or
non-recognized. The new guidance is effective for interim or annual
periods ending after June 15, 2009. The implementation of this
guidance resulted in increased disclosures but did not have an impact on our
financial position or results of operations.
In June
2009, the FASB approved the FASB Accounting Standards Codification (the
“Codification”). Effective July 1, 2009, the Codification is the
single source of authoritative nongovernmental U.S. GAAP, superseding existing
FASB, American Institute of Certified Public Accountants (“AICPA”), Emerging
Issues Task Force (“EITF”), and related accounting literature. The
Codification reorganizes the thousands of U.S. GAAP pronouncements into
approximately 90 accounting topics and displays them using a consistent
structure. Also included is relevant Securities and Exchange
Commission guidance organized using the same topical structure in separate
sections.
38
Item
3.
|
Quantitative and Qualitative Disclosures About
Market Risk
|
We are
subject to market risk related to interest rate changes, primarily as a result
of the Third Amended Credit Agreement, which bears interest based on floating
rates. Revolving advances under the Third Amended Credit
Agreement generally bear interest, at our option, at 1) LIBOR plus a spread
of 0.875% to 1.750% or 2) the greater of the federal funds rate plus 0.5%, or
the prime rate, plus a spread of 0.000% to 0.250%. Term loan borrowings bear
interest, at our option, at 1) LIBOR plus 1.50% or 2) the greater of the federal
funds rate plus 0.5%, or the prime rate.
In order
to manage our interest rate exposure under the Third Amended Credit Agreement,
we have entered into nine interest rate swap agreements effectively converting a
portion of our floating rate debt to fixed obligations with interest rates
ranging from 3.375% to 4.995%.
A
one-point interest rate change would have resulted in interest expense
fluctuating approximately $0.8 million for the nine months ended September 30,
2009.
As a
result of our investment in international initiatives, as of September 30, 2009
we are also exposed to foreign currency exchange rate risks. Because a
significant portion of these risks is economically hedged with currency options
and/or forwards contracts and because our international initiatives are not yet
material to our consolidated results of operations, a 10% change in foreign
currency exchange rates would not have had a material impact on our results of
operations or financial position for the nine months ended September 30,
2009. We do not execute transactions or hold derivative financial
instruments for trading purposes.
Item
4.
|
Controls and Procedures
|
Evaluation
of Disclosure Controls and Procedures
Our chief
executive officer and chief financial officer have reviewed and evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934
(the “Exchange Act”)) as of September 30, 2009. Based on that
evaluation, the chief executive officer and chief financial officer have
concluded that our disclosure controls and procedures are
effective. They are designed to ensure that information required to
be disclosed in the reports that the Company files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specific in the Commission’s rules and forms and to ensure that information
required to be disclosed in the reports that the Company files or submits under
the Exchange Act is accumulated and communicated to management, including our
chief executive officer and chief financial officer, to allow timely decision
regarding required disclosure.
Changes
in Internal Control over Financial Reporting
There
have been no changes in our internal controls over financial reporting during
the three months ended September 30, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
39
Part
II
Item
1.
|
Legal Proceedings
|
Former Employee
Action
In June
1994, a former employee whom we dismissed in February 1994 filed a “whistle
blower” action on behalf of the United States government. Subsequent to
its review of this case, the federal government determined not to intervene in
the litigation. The employee sued Healthways, Inc. and our wholly-owned
subsidiary, American Healthways Services, Inc. (“AHSI”), as well as certain
named and unnamed medical directors and one named client hospital, West Paces
Medical Center (“WPMC”), and other unnamed client hospitals.
Healthways,
Inc. was subsequently dismissed as a defendant. In addition, WPMC settled
claims filed against it as part of a larger settlement agreement that WPMC’s
parent organization, HCA Inc., reached within the United States
government. The plaintiff dismissed his claims against the medical
directors with prejudice, and on February 7, 2007 the court granted the
plaintiff’s motion and dismissed all claims against all named medical
directors.
Effective
as of April 1, 2009, the Company and AHSI entered into a settlement agreement
with the United States of America, acting through the United States Department
of Justice and on behalf of the Department of Health and Human Services
(collectively, the “United States”), and the former employee in connection with
the settlement of the lawsuit. Pursuant to the settlement agreement, we
paid $28 million to the United States in settlement of the litigation.
Additionally, we paid an additional $12 million for other costs and fees related
to the settlement, including the estimated legal costs and expenses of the
plaintiff’s attorneys. As a result of the settlement, the court has
dismissed the lawsuit with prejudice.
In a
related matter, we have settled the arbitration claim filed against us by WPMC
and the arbitration counter-claim we filed against WPMC in February 2006, both
of which sought indemnification for certain costs and expenses incurred in
connection with the qui tam case. The arbitration has been dismissed with
prejudice.
Securities Class Action
Litigation
Beginning
on June 5, 2008, Healthways and certain of its present and former officers
and/or directors were named as defendants in two putative securities class
actions filed in the U.S. District Court for the Middle District of Tennessee,
Nashville Division. On August 8, 2008, the court ordered the consolidation of
the two related cases, appointed lead plaintiff and lead plaintiff’s counsel,
and granted lead plaintiff leave to file a consolidated amended
complaint.
The
amended complaint, filed on September 22, 2008, alleges that the Company and the
individual defendants violated Sections 10(b) of the Securities Exchange Act of
1934 (the “Act”) and that the individual defendants violated Section 20(a) of
the Act as “control persons” of Healthways. The amended complaint further
alleges that certain of the individual defendants also violated Section 20A of
the Act based on their stock sales. The plaintiff purports to bring these
claims for unspecified monetary damages on behalf of a class of investors who
purchased Healthways stock between July 5, 2007 and August 25,
2008.
40
In
support of these claims, the lead plaintiff alleges generally that, during the
proposed class period, the Company made misleading statements and omitted
material information regarding (1) the purported loss or restructuring of
certain contracts with customers, (2) the Company’s participation in the
Medicare Health Support (“MHS”) pilot program for the Centers for Medicare &
Medicaid Services, and (3) the Company’s guidance for fiscal year 2008.
The defendants filed a motion to dismiss the amended complaint on November 13,
2008. On March 9, 2009, the Court denied the defendants’ motion to
dismiss. The parties have exchanged discovery requests, and the
discovery phase of the lawsuit is presently underway.
Shareholder Derivative
Lawsuits
Also, on
June 27, 2008 and July 24, 2008, respectively, two shareholders filed putative
derivative actions purportedly on behalf of Healthways in the Chancery Court for
the State of Tennessee, Twentieth Judicial District, Davidson County, against
certain directors and officers of the Company. These actions are based
upon substantially the same facts alleged in the securities class action
litigation described above. The plaintiffs are seeking to recover damages
in an unspecified amount and equitable and/or injunctive
relief.
On August
13, 2008, the Court consolidated these two lawsuits and appointed lead
counsel. On October 3, 2008, the Court ordered that the consolidated
action be stayed until the motion to dismiss in the securities class action had
been resolved by the District Court. By stipulation of the parties, the
plaintiffs filed their consolidated complaint on May 9, 2009. On June
19, 2009, the defendants filed a motion to dismiss the consolidated
complaint. The Court granted the defendants’ motion to dismiss on
October 14, 2009.
ERISA
Lawsuits
Additionally,
on July 31, 2008, a purported class action alleging violations of the Employee
Retirement Income Security Act (“ERISA”) was filed in the U.S. District Court
for the Middle District of Tennessee, Nashville Division against Healthways,
Inc. and certain of its directors and officers alleging breaches of fiduciary
duties to participants in the Company’s 401(k) plan. The central
allegation is that Company stock was an imprudent investment option for the
401(k) plan.
The
complaint was amended on September 29, 2008. The named defendants are: the
Company, the Board of Directors, certain officers, and members of the Investment
Committee charged with administering the 401(k) plan. The amended
complaint alleges that the defendants violated ERISA by failing to remove the
Company stock fund from the 401(k) plan when it allegedly became an imprudent
investment, by failing to disclose adequately the risks and results of the
MHS pilot program to 401(k) plan participants, and by failing to seek
independent advice as to whether to continue to permit the plan to hold Company
stock. It further alleges that the Company and its directors should
have been more closely monitoring the Investment Committee and other plan
fiduciaries. The amended complaint seeks damages in an
undisclosed amount and other equitable relief. The defendants filed
a motion to dismiss on October 29, 2008. On January 28, 2009,
the Court granted the defendants’ motion to dismiss the plaintiff’s claims for
breach of the duty to disclose with regard to any non-public information and
information beyond the specific disclosure requirements of ERISA and denied
Defendants’ motion to dismiss as to the remainder of the plaintiff’s
claims. A period of discovery ensued.
41
On May
12, 2009, the plaintiff filed a motion for class certification. After
the plaintiff did not appear for his scheduled deposition, the Court issued an
Order on July 10, 2009 warning the plaintiff that his failure to participate in
the lawsuit could result in sanctions, including but not limited to
dismissal. After the plaintiff’s failure to participate continued, on
July 23, 2009, the defendants filed a motion to dismiss for failure to prosecute
the action. On August 6, 2009, the parties filed a stipulation of
dismissal with prejudice as to the named plaintiff but otherwise without
prejudice, and the Court entered an Order to that effect on the same
date. No subsequent lawsuits have been filed alleging these same
claims.
Outlook
We are
also subject to other claims and suits that arise from time to time in the
ordinary course of our business. We do not believe that any of the legal
proceedings pending against us as of the date of this report will have a
material adverse effect on our liquidity or financial condition. We may
settle claims, sustain judgments or incur expenses relating to legal proceedings
in a particular fiscal quarter which may adversely affect our results of
operations. As these matters are subject to inherent uncertainties, our
view of these matters may change in the future.
Item
1A.
|
Risk Factors
|
In addition to the other information
set forth in this report, you should carefully consider the risks and
uncertainties previously reported under the caption “Part I — Item 1A.
Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended August
31, 2008, the occurrence of which could materially and adversely affect our
business, prospects, financial condition and operating results. The risks
previously reported and described in the Annual Report on Form 10-K for the
fiscal year ended August 31, 2008 and in this report are not the only risks
facing our business. Additional risks and uncertainties not currently known to
us or those we currently deem to be immaterial may also materially and adversely
affect our business operations.
There
have been no material changes to our risk factors previously disclosed in our
Annual Report on Form 10-K for the fiscal year ended August 31, 2008, except as
set forth in our Quarterly Report on Form 10-Q for the quarter ended June 30,
2009.
Item
2.
|
Unregistered Sales of Equity Securities and Use of
Proceeds
|
Not
Applicable.
|
Item
3.
|
Defaults Upon Senior Securities
|
Not
Applicable.
|
42
Item
4.
|
Submission of Matters to a Vote of Security
Holders
|
Not
Applicable.
|
Item
5.
|
Other Information
|
Not
Applicable.
|
Item
6.
|
|
(a)
|
Exhibits
|
43
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
Healthways,
Inc.
|
||||
(Registrant)
|
||||
Date
|
November
9, 2009
|
By
|
/s/
Mary A. Chaput
|
|
Mary
A. Chaput
|
||||
Chief
Financial Officer
|
||||
(Principal
Financial Officer)
|
||||
Date
|
November
9, 2009
|
By
|
/s/
Alfred Lumsdaine
|
|
Alfred
Lumsdaine
|
||||
Chief
Accounting Officer
|
||||
(Principal
Accounting Officer)
|
44