HEALTHWAYS:AFINANCIALANALYSISANDRECOMMENDATIONSby

KatieAdcock

AthesissubmittedtothefacultyofTheUniversityofMississippiinpartialfulfillmentoftherequirementsoftheSallyMcDonnellBarksdale

HonorsCollege.

OxfordMay2016

Approvedby

______________________________________________________ Advisor:ProfessorVictoriaDickinson

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Table of Contents ABSTRACT 5

COMPANY AND INDUSTRY HISTORY 6

MAJOR HISTORICAL EVENTS 6 CHANGES IN CONSUMER TASTES AND PREFERENCES 6 HISTORY OF MARKETING/ADVERTISING CAMPAIGNS 7 WORKFORCE DIVERSITY 7

COMPANY OPERATIONS 7

CORE BUSINESS LINES 7 CONDUCT BUSINESS AND GENERATE REVENUE 8 MANUFACTURING FACILITIES AND CORPORATE HEADQUARTERS 8

THE VALUE CHAIN 8

SEGMENT 8 PRIMARY ACTIVITIES 8 SECONDARY ACTIVITIES 9

BUSINESS PROCESS DIAGRAM 10

WELL-BEING IMPROVEMENT SERVICES 10

BOARD OF DIRECTORS 10

BOARD OF DIRECTORS LIST 10 BOARD OF DIRECTORS OVERVIEW 14

STRATEGIC ANALYSES 15

MISSION STATEMENT 15 STRATEGY 15 NICHE MARKET 15 THREATS 15 GOALS 16 ASSESSING DEMAND FOR PRODUCTS 16 ASSESSING SUPPLY OF INPUTS 16 MAJOR COMPETITOR ANALYSES 16 GEOPOLITICAL RISKS 17

PORTER’S COMPETITIVE FORCES 17

RIVALRY AMONG EXISTING FIRMS 17 THREAT OF NEW ENTRANTS 17 DETERMINANTS OF BUYER POWER 18 THREAT OF SUBSTITUTE PRODUCTS 18

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DETERMINANTS OF SUPPLIER POWER 18

SWOT ANALYSIS 18

STRENGTHS 18 WEAKNESSES 19 OPPORTUNITIES 19 THREATS 19

FINANCIAL ANALYSIS 19

CORPORATE WELLNESS SERVICES INDUSTRY 19 ASSET COMPOSITION 20 SOURCE OF FINANCING 20 CASH FLOWS 21 LIFE CYCLE STAGE 21 LIQUIDITY 21 ANALYST FORECASTS 22 ANALYZING EPS TRENDS 22 INCENTIVES TO MANIPULATE EARNINGS 23 DETECTING EARNINGS MANIPULATION 23 ACCOUNT ANALYSIS 23 ACCOUNTS RECEIVABLE 24 ACCOUNTS RECEIVABLE TURNOVER 25 RECEIVABLES AND EARNINGS MANAGEMENT 26 PROPERTY, PLANT, AND EQUIPMENT 26 COST OF PROVIDING SERVICES 28 INTERCORPORATE INVESTMENTS 30 GROWTH 30 INCOME EFFECTS OF INTERCORPORATE INVESTMENTS 31 RESTRUCTURING CHARGES 32 FOREIGN CURRENCY 32 DIVIDENDS 33 SHARE REPURCHASES 33 STOCK SPLITS 34 PENSIONS 34 OPERATING AND NON-OPERATING ITEMS IN THE INCOME STATEMENT 34 OPERATING AND NON-OPERATING ITEMS IN THE BALANCE SHEET 34 2013 ROE DISAGGREGATION 39

MACROECONOMIC TRENDS 40

STOCK MARKET 40 CORPORATE PROFITS 40 INTEREST RATES 40 CHANGES IN GROSS DOMESTIC PRODUCT 40 LEVEL OF NEW BUSINESS STARTUPS 41

REVENUE RECOGNITION 42

CHANGES TO REVENUE RECOGNITION 42 INAPPROPRIATE REVENUE RECOGNITION 42

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ANALYSTS’ FORECASTS 44

MEETING EARNINGS TARGETS 44

EARNINGS MANAGEMENT 45

WHY MANAGERS USE EARNINGS MANAGEMENT 45 METHODS OF EARNINGS MANAGEMENT 45

EQUITY VALUATION 45

OPERATING LEASES 45 WACC 47

VALUATION MODELS 47

DISCOUNTED CASH FLOW MODEL 48 RESIDUAL OPERATING INCOME VALUATION MODEL 49

MANAGEMENT’S ASSERTIONS 50

AUDIT RISK 55

THE FRAUD TRIANGLE 55 AUDIT RISK: PROPERTY AND EQUIPMENT 55 AUDIT RISK: LONG-TERM DEBT 56

CORPORATE TAX 56

COUNTRY COMPARISONS 56 TAX CREDITS FOR CORPORATE WELLNESS INDUSTRY 56 RECOMMENDATION TO LEGALLY MINIMIZE WORLDWIDE TAX EXPENSE 57

ADVISORY RECOMMENDATIONS 57

HEALTHWAYS’ BALANCED SCORECARD 57 CUSTOMIZED TECHNOLOGICAL ADVANCEMENTS 58 CONTINUE WITH EXISTING OUTSOURCING AGREEMENTS 59 NEW ACQUISITIONS 59

WORKS CITED 61

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Abstract TheAccy420courseattheUniversityofMississippiservestoprovidestudentswhoareinboththePattersonSchoolofAccountancyandtheSallyMcDonnellBarksdaleHonorsCollegeanalternativerouteinwhichtowritetheirtheses.Thecourseusesresearchmethodsandfinancialstatementanalysistoallowstudentstoproduceanin-depth analysis on a company of their choosing. Both a written thesis and apresentation are aspects of the course. Through tenweekly chapter submissions,students compose their final thesis made up of general company information,industry and geographical analysis, strategy analysis, financial statement analysis,accountingquality,equityvaluation,auditandtaxrecommendations,andadvisoryrecommendations.ThroughouttheanalysisofHealthways,Inc.,afewmainissuesforthecompanyhavebecome evident. In Healthways’ 2013 Annual Report, the company lists goals inwhich it anticipates a more than 50 percent increase in revenue for the healthsystems, hospitals, and physicians market in 2014. They also expect mid-singledigitstolowdoubledigitsgrowthforitsthreecustomermarketsanda20percentgrowthrateforbusinesseswithlargeemployers.However,Healthwayshasshowndecreasing revenues, increasing costs of services, and increasing liabilities for thepast few years. Another issue that Healthways is facing is the large amount ofgoodwill shownon its financial statements.Healthways recorded$338,800,000 innetgoodwillforDecember31,2013.Goodwillfor2013madeup45percentoftotalassetsonthebalancesheet.Goodwillhasincreasedduetorecentacquisitions,butthecompanyhashadalargeamountofgoodwillforsometime.Thebalanceofnetgoodwill as ofDecember 31, 2008was $484,596,000. For this project, only years2009-2013werelookedintoforfinancialanalysis.Throughoutthiscourse,IhavelearnedmanynewskillsthatwillbehelpfultomeasI transition intomy future career. Research skills are themain skills that I havelearned from this class, and Ibelieve that theyare themost applicable.When thecoursebegan,Ihadneveractuallylookedatacompany’s10-Kreportsbefore.Now,through analysis, I can easily locate items on 10-Ks and find information in thefootnotesquickly. Indoing thisproject, Ihad to researchondifferentwebsite, forinstance Yahoo Finance, in order to find analysts’ estimates, stock prices, andindustry information.Financialanalysis isanotherskill that thecoursehas taughtme.Ihavelearnedhowtodoeverythingfromratiostovaluationmodels.Ihavealsolearned new skills in Microsoft Excel, which employers emphasize as necessaryskills.

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Company and Industry History Major Historical Events Beginning in the 1980s, corporations began to take greater control, and a shifttowardprivatizationofhealthcarecommencedascorporationsbeganto integratethehospitalsystemandentermanyhealth-care-relatedbusinessesandconsolidatecontrol. In 2010, President Barack Obama signed The Patient Protection andAffordable Care Act that would require all individuals to have health insurance(HealthCare.gov).With new healthcare reform possibilities, including the Affordable Care Act,Healthwayswillhavetolearntoadapttothepoliticalandeconomicchangesahead.Healthways will be prepared for the change, however, and will not have troubleadapting, especiallywithBenLeedle,PresidentandCEO, leading themanagementteam.Withover19yearsof leadershipexperienceatHealthways,Leedlehasseenthe company grow through difficult economic and political changes before,includingthemostrecenteconomicrecession. Changes in Consumer Tastes and Preferences Forover30years,Healthwayshasbeenattheforefrontofthehealthindustryandhealthcare transformation. The company that began with programs to supportdiabetes care has expanded through a multitude of programs, now servingapproximately 68million people across four continents. A global shift in thewaypeople think about work has been amajor cause of the growth. Businesses nowrealizehowconnectedhealthandthewellbeingofemployeesareto theirbottomlines.AccordingtoastudybytheMilkenInstitute,thecostofproductivitytotheU.S.economyduetostress-relatedconditionsfromworkis$1.1trillion.AstudyoutofHarvard University found that for every dollar a company spends on wellnessprograms, like the onesHealthways offers consumers, itmakes back $3.27 in theformoflowerhealthcosts(HuffingtonPost;Healthways2013AnnualReport).Becauseofthechangeinneedsandstrategiesbybusinesses,firms,andindividuals,Healthways offers a wide variety of programs. Gallup-Healthways Solution is thecollaboration between Gallup and Healthways to create the world’s mostcomprehensivesourceforwell-beingmeasurement.HealthwayshaspartneredwithDr.DeanOrnish, founderofnonprofitPreventiveMedicineResearch Institute andClinicalProfessorofMedicineattheUniversityofCalifornia,SanFrancisco,tocreateaprogramforreversingheartdisease.TheBluesZoneProjectisacommunitywell-being initiative that helps people transform their communities throughenvironmentalandpolicychanges(HuffingtonPost).

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History of Marketing/Advertising Campaigns Whilemarketingforwellnessprogramhasbeengainingpopularityinrecentyears,marketing for health andwell-being is not a recent occurrence. Campuswellnessprogramsgainedpopularityinthe1970sintheU.S.,andthefirstwasestablishedatthe University of Wisconsin. It was here that the Lifestyle AssessmentQuestionnaire,asurveythathelpsidentifylifestylefactorsthatneedimprovement,was created. In addition, Bill Hettler, a Health Services staff physician at theuniversity, and his colleagues organized the NationalWellness Institute at SevenPoints in1977,whichgrewtobecomethefirstnationalconferenceonwellness in1978. In the late 1970s, Nelson Rockefeller, former governor of New York,commissioned experts to examine health care policy and reform. The result wasDaedalus, a published issuewithwide circulation.Health andwellnessmarketinggainedmomentumintoday’smarketplacewithtobacco-freeadvertisingcampaigns(NationalWellnessInstitute). Workforce Diversity With only two women on the Board of Directors, Healthways doesn’t seem as diversified as it should be in the area of gender. Both the Chairman and CEO are male, allowing for very little gender workforce diversity in the top levels of management. However, Healthways has many people on the Board of Directors with different skills and experience, which contributes to the company’s overall diversity. For instance, DonatoTramuto, Chairman, is a leader in healthcare technologies; while, Mary JaneEngland, M.D., has vast experience in health education and health policy(Healthways2013AnnualReport). Company Operations Core Business Lines Founded and incorporated in Delaware in 1981, Healthways, Inc., providesspecialized, comprehensive solutions to help people improve their health andproductivity,thusreducingtheirhealth-relatedcosts.Inordertohelppeoplebettertheir well being, Healthways executes five essential elements: purpose, social,financial, community, and physical. Healthways, Inc., is guided by the philosophythathealthierpeoplecostlessandaremoreproductive,whichdrivesthecompanyto foster programs that are designed to help people adopt or maintain healthybehaviors,reducehealth-relatedriskfactors,andoptimizetheircarefor identifiedhealthconditions(10-K).

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Conduct Business and Generate Revenue Healthways gains revenue through contracts. Healthways’ contracts with healthplans and integrated healthcare systems generally range from three to five yearswithanumberofcomprehensivestrategicagreementsextendinguptotenyearsinlength.Contractswithself-insuredemployerstypicallyhavetwotofour-yearterms.Someofthecontractsallowthecustomertoterminateearly.Healthwayscurrentlyworkswithawiderangeofcustomers,includingover150publicandprivatehealthfundsacrosstheworld,1,200companies,andotherpublichealthorganizationsandgovernments(10-K). Manufacturing Facilities and Corporate Headquarters Healthways, Inc., World Headquarters is located in Franklin, TN. Other currentoperatinglocationsincludeBrazil,Australia,andFrance(Healthways.com). The Value Chain Segment Well-beingImprovementServices Primary Activities InboundlogisticsHealthwayshasanextensiveinnovationnetworkandpartnerswithleadingthinkersin healthcare and technology to create and advance solutions for consumers.Academic partnerships promote research and development and include Agelab,Johns Hopkins University, and Pro-change Behavior Systems, Inc. Wholly ownedsubsidiaries include MeYou Health, Navvis and Healthways, Ascentia Health CareSolutions, and The Ornish Spectrum. Strategic partnerships include Gallup-HealthwaysWell-Being Index, Blue Zones, andDaveRamsey’s FinancialWellness.Technology partnerships work to extend the reach of Healthways throughtechnologyandincludeHPandIsobar. OperationsHealthwaysconsistentlyprovidesdifferentprogramsandinnovationstocustomers.Theprogramsofferregularhealthandfitnessscreeningswithcholesterol,BMI,andfitnessmeasures and an annual health risk assessment completed by employees.Other programs consist of an online wellness portal that provides access topersonalized exercise programs, customized nutrition help, and stress and lifemanagementresources.

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OutboundlogisticsHealthwaysdeliverstheirservicesusingdifferentmethodsdesiredbytheindividualor business, including venue-based face-to-face interactions, print, phone, mobileand remote devices with unique applications, on-line, social networks, and anycombinationthathelpsandbenefitstheconsumer.MarketingandsalesHealthways differentiates itself from its competitors by emphasizing that itstechniques are based on science.Healthways has a large network of partnershipsandhasaward-winningprogramsdesignedtodrivethechangecustomerswanttosee. ServiceHealthwaysprovidescallcentersforcustomers(10-K, Healthways.com). Secondary Activities PurchasingHealthwaysusespartnerships for researchanddevelopment,aswellasextendingthereachofthecompanytocustomers.HumanresourcesmanagementHealthways provides employees with opportunities to improve their social,financial, and physical well-beings. Employees thrive in a casual work culture.Employees wear workout clothes to work, and they offer free fitness classes,financialeducation,walkingworkstations,andstressreductionclasses.Healthwaysgivesgenerouspaidtimeoffthatprovidesflexibility.TechnologicaldevelopmentHealthways works with Hewlett Packard to enhance a platform with greaterflexibility and timely innovation at a lower cost. It also partners with Isobar todeliveraunique, totaldigitalexperience forHealthways’Well-Being ImprovementSolutionthatdrivesengagementthroughonline,mobile,andsocialmediaplatforms.InfrastructureHealthways has support systems, including call centers, research, administrative,marketing,andmanagement(10-K,Healthways.com).

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Business Process Diagram Well-Being Improvement Services Healthways is part of the health industry, but its business segment is specificallywell-beingimprovementservices.

Board of Directors Donato Tramuto – Chairman A leader and pioneer in healthcare technologies, Donato Tramuto was namedChairmanoftheHealthways,Inc.,BoardofDirectorsinJune2014.Tramutoservesas the Chief ExecutiveOfficer and Chairman of Physicians Interactive, the leadingprovider of online and mobile clinical resources and solutions for healthcareprofessionals.Tramutohasbeenan innovator in thehealthcareworld forover30years, beginningwith his service as Executive Vice President of theHomeHealthCareBusinessUnitandCorporatePresidentofMarketing/HealthcareatCaremark.HethenwentontohelpfoundProtocare,Inc.,alargeproviderofdrugdevelopmentand disease management services, and he served as Chief Executive Officer andPresident of the Protocare Sciences Division and Corporate Officer of Protocarefrom1998to2003.HelaterservedasChiefExecutiveOfficerofi3,apartofIngenix,whichisasubsidiaryofUnitedHealthGroupIncorporated.Tramutowentontohelp

Inbound Logistics

• extensiveinnovationnetwork• partnerships

Operations

• healthandkitnessscreenings• annualhealthriskassessment• onlinewellnessportal-personalizedexerciseprograms,nutritionhelp,andstressmanagement

Outbound Logistics

• venue-based face-to-face, print, phone,mobile and remote deviceswith unique application, on-line,socialnetworks,andanycombination

Marketing and Sales

• emphasisonscience-based• award-winningprograms

Service • supportcenters

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found Physicians Interactive and has served as its Chief Executive Officer since2007, becoming Chairman in 2013 when the company was sold successfully.(Reuters) Ben R. Leedle, Jr. - President and Chief Executive Officer LeedlehasservedasDirectorofHealthwayssinceAugust2003,asChiefExecutiveOfficersinceSeptember2003,andasPresidentfromMay2002toOctober2008andApril 2011 to present. Previously, Leedle served as Chief Operating Officer ofHealthways from September 1999 toAugust 2003, ExecutiveVice President fromSeptember 1999 to May 2002, and as Senior Vice President of Operations fromSeptember 1997 to September 1999. Leedle has nearly 19 years of leadershipexperience at Healthways and has seen the company develop and grow throughdifferentsignificantperiods.Leedleaddsavastknowledgeandamultitudeofskillsthatdirectly correlatewith the company to theboardofdirectorsbecausehehasbeenamajorpartofHealthwaysforalmosttwodecades.(Reuters) J. Cris Bisgard, M.D., M.P.H. BisgardservedasDirectorofHealthServicesatDeltaAirLines, Inc., fromJanuary1994 to April 2001. Bisgard is a fellow of theAerospaceMedical Association, theAmerican College of Preventive Medicine, and the American College of PhysicalExecutives. He served as acting Deputy Assistant Secretary of Defense (HealthAffairs)from1981to1984.HethenretiredfromtheU.S.AirForcein1986.BisgardwentontoserveastheCorporateMedicalDirectoratPacificBell,GTECorporation,andARCO.Inall,Bisgardhasover30yearsofexperienceinthehealthcareindustryin both the public and private sectors and has obtained unique skills andqualifications.(Reuters) Mary Jane England, M.D. EnglandhasservedasaProfessorattheDepartmentofCommunityHealthSciencesattheBostonUniversitySchoolofPublicHealthsince2012andservedasadinterimChair from 2012 until November 2013. England served as Visiting Professor ofHealth Policy andManagement at BostonUniversity School of PublicHealth from2011 to 2012. She previously served as President of Regis College in Weston,Massachusetts from 2001 through 2011. From 1990 to 2001, she served asPresidentoftheWashingtonBusinessGrouponHealth,anon-profitthatrepresentstheinterestsoflargeemployersonnationalhealthpolicyissues.Priorto1990,herresume includes serving as Vice President of Prudential Insurance Co., a globalinsuranceprovider,AssociateDeanattheJohnF.KennedySchoolofGovernmentatHarvardUniversity,Commissionerof Social Services, andAssociateCommissionerofMentalHealthinMassachusetts.EnglandalsoservesontheboardofdirectorsofNSF International. Through her vast experience in health education and healthpolicy,Englandprovidesadistinctknowledgetotheboard.(Reuters)

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William D. Novelli Novelli has served as a Professor at the McDonough School of Business atGeorgetownUniversitysinceAugust2009.NovelliservesastheChairoftheBoardofDirectorsofCampaign forTobacco-FreeKids.From2001to2009,heservedastheChiefExecutiveOfficerofAARP,anonprofitorganizationthathelpspeopleoverage fifty improve their lives.Becauseofhis leadershipexperienceatAARPandaschairmanof the boardof directors of theCampaign forTobacco-FreeKids,whichhelps fight to reduce tobacco use, Novelli has the skills and the understanding ofhoworganizationscanpromotehealthylivingandwellness.(Reuters) Alison Taunton-Rigby, Ph.D. Taunton-Rigby served as the Chief Executive Officer of RiboNovix, Inc., a privatecompanydevelopinganti-infectives,from2003untilsheretiredin2010.Previously,sheservedastheChiefExecutiveOfficerofCMT,Inc.,aprivatelyheldmedicaldevicecompanyfrom2001to2003.From1995to2000,sheservedastheChiefExecutiveOfficerofAquilaBiopharmaceuticals,Inc.,abiotechnologycompany.From2004to2010, she served as a director on the board of Idera Pharmaceuticals, abiotechnologycompany.SheservesontheboardsofdirectorsofColumbiaFunds,amutual fundindustry,andAbtAssociates,aproviderofpublicpolicyandbusinessresearchandconsulting.Taunton-RigbyalsoservesontheBoardofTrusteesoftheBostonChildren’sHospital.Becauseofherexperiencewithdifferentbiotechnologycompanies and research and development, Taunton-Rigby has a grasp on thesciencebehindwellnessimprovement.(Reuters) John A. Wickens Wickens served as National Health Plan President of UnitedHealth Group, Inc., apublicly traded diversified health andwell-being company, from January 2004 toFebruary 2006 and South Division President from September 2001 to December2003.HebeganworkingwithUnitedHealthGroup in1995.Hecurrentlyservesasthe Vice Chair of U.S.A. Track & Field Foundation and Chair of UnitedHealthcareChildren’s Foundation.Wicken’s experience atUnitedHealthGroup for nearly twodecades helps provide insight into the healthcare industry and how othercompaniesaremanagingeconomicandpoliticalchallenges.Hisvariedpositionsondifferent boards also help add to his knowledge of wellness and health living.(Reuters) Kevin Wills Wills has served asManagingDirector andChief FinancialOfficer ofAlixPartners,LLP, a global business advisory firm, sinceMarch 2014. Previously, he served asExecutiveVicePresidentandChiefFinancialOfficerofSaks,Inc.,afashionretailer,from May 2007 to November 2013. Prior to that, he served as Executive VicePresidentofFinance/ChiefAccountingOfficerofSaks,Inc.,fromMay2005toApril

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2007, and as Executive Vice President of Operations for Parisian, Inc., a retailer,from February 2003 to April 2005.Wills was appointed Senior Vice President ofPlanningandAdministrationforSaksDepartmentStoreGroupinSeptember1999,SeniorVicePresidentofStrategicPlanninginSeptember1998,andVicePresidentofFinancial Reporting for Saks, Inc., in September 1997, when he joined Saks, Inc.Prior to that, he served as Vice President and Controller for Tennessee ValleyAuthority and as the Business Assurance Manager for Coopers and Lybrand(currently PricewaterhouseCoopers). Due to his unique experience in retail,Willshas a vastly different set of skills and experiences compared to the other boardmembers. The knowledge that Wills has gained gives Healthways an edge inplanningandadministration.(Reuters)Bradley S. Karro Arecentaddition to theboard,Karro is aPrincipalofHillcoteAdvisors, a firmhefounded in July 2008 that focuses on investing in and restructuring healthcarecompanies. Prior to that, he held senior executive positions in the healthcareindustry, including serving as Executive Vice President of Caremark Rx, aprescription benefit management company. Karro joined Medpartners (nowCaremarkRx)in1998andservedatthecompanythrough2007.Hewasresponsiblefor mergers, acquisitions, integration planning, information technology, andMedicare product development. Karrowas appointed as a chartermember of theGovernor’se-HealthAdvisoryCouncilinTennessee,andorganizationtocoordinateinitiativesleadingtowardstheadoptionofelectronicmedicalrecords.HepreviouslyservedontheboardofdirectorsofEmageonInc.,andcurrentlyservesontheboardofdirectorsofAngiotechPharmaceuticals,Inc.Karroaddsanewlevelofexperiencein healthcare to the board as the founder of a company that concentrates oninvestingandrestructuringhealthcarecompanies.(Morningstar) Paul H. Keckley, Ph.D. Keckley has served as the Managing Director of Navigant Center for HealthcareResearch and Policy Analysis since March 2014. In addition, he is an expert onhealth industry trends and U.S. health system reform and is the Editor of “TheKeckleyReport”,whichhebeganpublishing inSeptember2013.Keckleyhasover35 years of experience in the health industry and has served as an expertcommentatorfornationalmediacoverageofhealthcarereform,CEOoffourhealthcarecompaniesfundedbyprivateinvestors,aleaderinmanagementatVanderbiltMedicalCenter,andExecutiveDirectoroftheDeloitteCenterforHealthSolutionsinWashington,D.C.,apositionheheldform2006to2013.Keckleycurrentlyservesonthe boards of directors of the Ohio State University Medical Center, HealthcareFinancialManagementLeadershipCouncil,WesternGovernorsUniversityAdvisoryBoard, and LipscombUniversity College of Pharmacy.He is also amember of theHealth Executive Network and advisor to the Bipartisan Policy Center. As a newmember to Healthways’ Board of Directors, Keckley has the expertise to makeHealthwaysmore competitive than ever before, both politically and economically.

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Asanexpert inhealthindustrytrendsandhealthreform,Keckleyisaspecialist inthe industry and has the media attention to shed more light on wellnessimprovement.(Morningstar) Conan J. Laughlin LaughlinservesastheFounder,PortfolioManager,andManagingMemberofNorthTideCapital,aBoston-basedinvestmentfirmlaunchedinSeptember2011withover$1billion inassetsandadedicated focusonhealthcare.Laughlinhas covered thehealthcare industryasanequityresearchanalystsince1995.From2005-2011,hewasaportfoliomanagerandsub-advisortoMillenniumManagementLLC,amulti-billion dollar investment firm inNewYork. Prior to that, hewas a senior analystcoveringthehealthcaresectorintheAssetManagementgroupatAmericanExpressin Boston. Prior to 2002, he spent seven years as a sell-side analyst at MorganStanleyDeanWitter,SGCowen,andDeutscheBankAlex.Brown.Laughlin,anotherrecentadditiontotheboardin2014,addsknowledgeofthehealthcaresectorfromthe view of an equity research analyst and can help Healthways in the area ofeconomicfactors.(Morningstar) Board of Directors Overview The current Board of Directors for Healthways, Inc., is incredibly diverse in thedifferentbackgroundsandskillsetsacquiredbyitsmembers.Everymemberoftheboard brings a unique knowledge and expertise from their many years ofexperience.With his expertise in healthcare technologies and innovation, DonatoTramuto leads the board as Chairman. With nearly two decades of leadershipexperiencewithinHealthways,BenLeedleisabletogiveadistinctinsightintothegrowthofthecompany.BisgardhasuniquequalificationsfromhistimeservingasDeputy Assistant Secretary of Defense (Health Affairs); however, Mary Englandspecializesinhealtheducationandhealthpolicy.WilliamNovelliunderstandshowother organizations promote wellness; still, Alison Taunton-Rigby providesknowledge into the science behind thewellness. JohnWickens has experience tohelp manage economic and political challenges; whereas, KevinWills has uniqueexperiencesinretailandtheknowledgetoexecuteandplan.Thenewestadditionstotheboardbringinnewcapabilitiesanddifferentwaystopromotehealthyliving.BradleyKarrocanapplytheknowledgehegainedfromfoundingHillcoteAdvisorstofocusoninvestingandrestructuringhealthcarecompanies.Withhisexpertiseinhealthindustrytrendsandhealthreformandthemediaattentionhe’sgainedfromhealthcare reform, Paul Keckley can make Healthways more competitive. ConanLaughlin addsnew information tohealthcare from theviewof anequity researchanalyst.Whileeachboardmemberaddsavastamountofknowledgeonthehealthindustry,theBoardofDirectorscouldusesomeonewithmoreexpertiseinthefieldsofhealthand wellness and the science behind it. For instance, an expert with moreknowledgeoftheeffectsthatwilloccurfromtheimplementationoftheseprograms

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would be a great source of information.Healthways partnerswith JohnsHopkinsUniversity,sogettingsomeonewithspecialistknowledgeandresearchskillswouldbeagreatadditiontoHealthways’BoardofDirectors.Strategic Analyses Mission Statement Dedicatedtocreatingahealthierworldonepersonata time,Healthwaysusesthescienceofbehavior change toproduceandmeasurepositive change inwell-beingfor customers, which include employers, integrated health systems, hospitals,physicians, health plans, communities and government entities. Healthwaysprovideshighlyspecificandpersonalizedsupportforeachindividualandtheirteamof experts to optimize each participant’s health and productivity and to reducehealth-relatedcosts(10-K). Strategy Healthwaysstrategyreflectsitsmissiontoenhancethewell-beingofitscustomers,and, as a result, reduce overall health-related costs and improve employeeproductivity. Healthways’ solutions are designed to improve health by helpingcustomersto:

Adoptormaintainhealthybehaviors;

Reducehealth-relatedriskfactors;and

Optimizecareforidentifiedhealthconditions.

Thecompany’sstrategyincludestheongoingexpansionofitsvaluepropositionthathealthierpeopleperformbetterandcostlessthroughtotalpopulationmanagementcapabilities.Healthwayscontinuestoenhanceitswell-beingsolutionstoextenditsreachandeffectivenessandtomeettheincreasingdemandforwell-beingservices(10-K).

Niche market Healthwayshasafocused,ornichemarket,strategy.Theyrepresentasubsetofthehealthcaremarket,orthewellnesssegment,andtheirfocusisonspecificproductsandprograms.Thepricesaredependentonspecificneedsofeachcustomer.Threats Healthwaysfacesexternalthreatstoitsoperations,suchaspoliticalpolicychanges,economic conditions, and increased competition. As the wellness and health

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industriescontinuetogrow,newentrantstothemarketwillrequireHealthwaystodifferentiate itself further from its competitors. Additional health solutions,increasedhealthassessments,andnewtechnologyareallaspectsthatwillneedtobeimplementedforHealthwaystoovercomethethreats.Duringtimesofeconomicdistress,businesseswillbelesslikelytoexpandtheirwellnessprograms,ultimatelyleading todecreased revenue forHealthways. Political policy changes could affecthowHealthwaysdoesbusinessinthefuture.

Goals Healthwaysexpectsgrowthinrevenueandprofitabilityfor2014comparedto2013in all core customer markets: health systems, hospitals and physicians, largeemployers, commercialhealthplans,MedicareAdvantageplans,and international.Thecompanyanticipatesamorethan50percentincreaseinrevenueforthehealthsystems,hospitalsandphysiciansmarket.Theyalsoanticipatedirectbusinesswithlargeemployerswillgrowat least20percentandwill increaseasapercentageofoverallrevenuemix.Healthwaysgoalsfor2014furtherincludespercentagegrowthin themid-singledigits to lowdoubledigits for its threeother customermarkets,including continuingprofitable growthwithineachof the countrieswhere it doesbusinessoutsideoftheU.S.(Healthways2013AnnualReport).

Assessing Demand for Products Because Healthways’ customers are companies and hospitals, demand forHealthways’ services is tied to their clients’ own success. Companies would putmoneytowardsraisingrevenuesinsteadofspendingmoneyonwellnessprograms,eventhoughtheprogramswouldsavethecompanymoneyinthelongrun.Assessing Supply of Inputs AsnewtechnologicaladvancescontinuetobedevelopedatHealthways,productionwill increase. For instance, Healthways, along with Gallup, has developed theworld’s most comprehensive well-being measurement system, which will allowHealthwaystoassesstheneedsofitscustomersbetterthaneverbefore.Major Competitor Analyses Thehealthcareindustryishighlycompetitiveandsubjecttochangeinhowservicesareprovided.BecauseofHealthways’depthofwell-beingimprovementservices,thecompany has an advantage on competitors. Healthways provides strategicrelationships, information technology, data integration capabilities, andcomprehensivetrainingtechniques.SomeofHealthways’majorcompetitorsincludePacific Health Care Organization, Inc.; National Health Partners; PhyHealth Corp;WellnessCenterUSA,Inc.;CarbonGreen,Inc.

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Pacific Health Care Organization, Inc. provides specialty workers compensation-managed services. It is involved in managing and administering health careorganizationsandmedicalprovidernetworks.NationHealthPartnersisanationalhealthcaremembershiporganizationthatcreatesandsellsmembershipprograms.Itsprogramsprovideanalternativetopeoplewhoseektoreducehealthcarecostsnotcoveredbyinsurance(YahooFinance). Geopolitical Risks Because Healthways serves clients around the globe, it needs to take intoconsiderationcertaingeopoliticalrisksthatcouldaffectoperationsandthebottomline.Germanyhasariseinanti-EUpoliticalparties,whichhindersthegovernment’sabilitytopassmuchneededreforms.Weakincumbentsinsomecountriescouldalsoprove tobegeopolitical risks forHealthways’ operations.Brazil’sPresidentDilmaRousseffwasreelectedonOctober26,2014,toasecondfour-yearterm.However,herwinwith51.6percentofthevoteistheclosestinBrazilianelectoralhistory.Sheis now tasked with leading a divided country, while trying to change anunderperformingeconomy.Inflationisup,thecountryisinarecession,andpublicspendinghasgonetoofar(Time). Porter’s Competitive Forces Rivalry Among Existing Firms Whilethereareanumberofcompetitorswithinthehealthcareindustry,especiallyinNashville, Tennessee,Healthways focuses onwellness andhealth improvementmakes them unique within their industry as a smaller segment. Even the closestcompetitors do not come close to Healthways’ revenue per year. As the industrycontinues to grow, Healthways will grow as well, following increased need forwellness programs increases in businesses andhospitals. As a companybased onscience, Healthways has differentiated itself from its competitors and hasincreasinglygainednewpartnerships,whichallowsthemtoofferuniqueproductsandprograms.Threat of New Entrants The rate of growth of the healthcare industry could prove threatening toHealthways’ business efforts; however, because the company is part of the nichemarket,itcouldbeshieldedfromtheintensityofthegrowth.

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Determinants of Buyer Power Asmore companies and businesses realize that implementingwellness programssavesmoneyinthelongrun,thedemandforHealthways’serviceswillcontinuetorise. Threat of Substitute Products Because Healthways is a large, independent global provider of well-beingimprovement solutions, the quality of the services is greater than that of itscompetitors.As such, theprices reflect that quality, so competitorswho canofferlowerpriceswouldbeathreattoHealthways’efforts.Determinants of Supplier Power AsHealthways continues to gainmore partnerships, the companywill be able tocreatemoreprogramstosatisfybuyers’specificneeds.SWOT Analysis

Strengths Healthways’mainstrengthisinitspurposeandmission.Thedemandforwellnessprogramsissteadilyincreasing,andpeopleresonatewithwhatHealthwaysistryingto accomplish. With Ben Leedle’s extensive experience with the company,

Strengths• Mission•  Increaseddemand• Experiencedleaders

Weaknesses• Complexstructure

Opportunities• Locations• Growth• Smallsegment

Threats• Newentrants• Politicalpolicies

SWOT

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Healthways has strong leadership to take them through economic and politicalchanges.Weaknesses Healthways has a complex structure due to itsmany partnerships and programs,which could undermine its effectiveness for some customers. In order to besuccessful,Healthwaysmustmaintainrelationshipswithinthehealthcareindustry.Opportunities Healthways has many opportunities, especially with the growth of healthcare inNashville,Tennessee.Theyarepositionedwellforthegrowthinthemarketastheyofferuniqueservicestoasmallsegmentoftheindustry. Threats Thethreatsincludeanincreaseincompetitionasthehealthcareindustrycontinuesto grow. Also, political policies could bring changes to howHealthways conductsbusinessandcoulddecreaserevenues.Financial Analysis Corporate Wellness Services Industry The CorporateWellness Service Industry has experienced rapid growth over thepast five years. The industry has revenues of $7.4 billion, with profits of $393.2million and an annual growth rate in recent years of 5.6 percent. The industry isexpectedtogrowatarateof8.8percentannuallyto$11.3billionforthenextfiveyearsuntil2019.Accordingtoa2012-13studybyWillis,fiftypercentofbusinessesreported that they plan to expand their wellness programs, which will help toincrease the industry’s revenues in the near future. Also, wellness programs arebecomingakeydifferentiatorforemployeerecruitment,causingmorebusinessestopurchasetheprogramstoincreaseemployeeretentionrates(IBISWorld).Healthwayshasamorepositiveperformancewithintheindustrycomparedtosomeof its competitors. While Healthways’ EPS is -0.25 for 2013, National HealthPartners,Inc.,hasanEPSof-0.42.Healthwayshasacurrentratioof1.47,andNHPRhasacurrentratioof0.27.However,comparedtoPacificHealthCareOrganization,Inc.,whichhasanEPSof2.38andacurrentratioof6.68,Healthwaysneedsmorecurrent assets and a higher net income to match more positively performingcompetitors(IBISWorld,YahooFinance).

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Asset Composition Healthways’currentassets,asreportedontheconsolidatedbalancesheet, includecashandcashequivalents,netaccountsreceivable,prepaidexpenses,othercurrentassets, income taxes receivable,anddeferred taxasset fora totalof$119,222,000current assets. Accounts receivable has the highest total of $89,484,000 and isseventy-fivepercentofcurrentassets.Long-termassetson thebalancesheet includepropertyandequipment, leaseholdimprovements, computer equipment and related software, furniture and officeequipment,capitalprojectsinprocess,otherassets,intangibleassets,andgoodwill.Long-termassetsconstitute$629,789,000oftotalassetsor84.1percent.Thevalueof Healthways’ total assets is $749,011,000. Each asset on the balance sheet ismeasured at fair value. The values are therefore sensitive to changes in theoperatingenvironment,suchasinterestrates.Because long-term assets make up the bulk of Healthways’ balance sheet, thecompany has less liquidity andwill not be able to easily pay off debts presently.Financial statements fromDec.31,2012, record long-termassetsat$606,459,000or81.1percentoftotalassets.Currentassetswererecordedat$141,809,000.Theresultsfromthecomparisonsbetweenbothyearsoffinancialstatementsshowsthatlong-term assets continue tomake up a larger amount of total assets, decreasingliquidityandfinancialflexibilityandmakingHealthwaysriskierovertime.Healthways’ intangibleassetshaveanetvalueof$79,162,000andmakeupabout10.5 percent of total assets. The intangible assets subject to amortization atDecember 31, 2013, include customer contracts, acquired technology, patents,distributor and provider networks, perpetual license to survey-based data, andother. Customer contracts comprise the bulk of the intangible assetswith a grosscarryingamountof$59,574,000.Net goodwillmakes up 45.2 percent of total assetswith $338,800,000. In August2011, Healthways acquired Navvis & Company, a firm that provides counsel andmanagement services to healthcare systems. In April 2012, Healthways acquiredAscentiaHealthCareSolutions,afirmthatsupportspopulationhealthmanagement,patient programs, and enhancement programs. Both purchases, along with animpairment loss from the lossof a long-termcontractwithCIGNA, contributed tothenetgoodwillasofDecember31,2013.(201310-K)Source of Financing Healthways’ balance sheet includes current liabilities consisting of accountspayable,accruedsalariesandbenefits,accruedliabilities,deferredrevenue,contractbillingsinexcessofearnedrevenue,currentportionoflong-termdebt,andcurrentportion of long-term liabilities. Current liabilities total $124,416,000. Accounts

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payable has the largest total with $33,125,000 or 26.6 percent of total currentliabilities.Long-term liabilities include long-term debt, long-term deferred tax liability, andotherlong-termliabilities.Long-termdebtmakesupthelargesttotalofallliabilitieswith $237,582,000 or 53.2 percent. The value of long-term liabilities is$321,905,000.Thevalueoftotalliabilitiesis$446,321,000.Becauselong-termliabilitiesmakeup72.1percentoftotal liabilities,solvencyandfinancial flexibility decrease further. Since solvency and financial flexibility aredecreasingduetoboththeamountoflong-termliabilitiesandtheamountoflong-termassets,Healthwaysisbecomingriskierovertime.Stockholders’ equity includescommonstock ($.001parvalue,120,000,000sharesauthorized, 35,107,303 and 33,924464 shares outstanding), additional paid-incapital,retainedearnings,treasurystock(atcost,2,254,953sharesintreasury,andaccumulated other comprehensive income. Total stockholders’ equity equals$302,690,000. Total liabilities and stockholders’ equity equals $$749,011,000.(201310-K)Cash Flows Netcashflowsfromoperatingactivitiesequal$71,528,000.Netcashflowsusedininvestingactivitiesequalanegative$49,893,000.Netcashflowsusedbyfinancingactivitiesareanegative$19,896,000(10-K).Life Cycle Stage Healthwaysispresentlyinthematurelifecyclestageoftheindustry.Netcashflowsfrom operating activities are positive, yet net cash flows from investing andfinancing arenegative. Theonce rapid growth ratehasnowbegun to slowdown,makingthelifecyclecurveappearflatter.Atthispoint,newcompetitorswillenterthemarketas lateentrants.Healthwayswillneedtostress itsuniqueprogramsinordertoseparateitself fromotherwellnesscompanies.AslongasHealthwayscandifferentiateitselffromitscompetitorsandkeepanaboveaveragegrowthrate,thecompany’sfutureperformancewillbepositive(10-K).Liquidity Healthways’ cash and cash equivalentsmake up only 0.34 percent of total assets.However, accounts receivablesmakeup11.9percentof totalassets.TheaccountsreceivablesprimarilyrepresentthefeesthatarecontractuallyduefromHealthwaysproviding services. In order to gain sufficient cash flow, Healthways could issueequity;however,itwouldincreasedilutedsharesandwouldcauseEPStodecreasefurther.Stockpriceswouldalsodecrease.Borrowingwouldincreaseinterestratesandincreasethealreadylargeportionofdebt(10-K).

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Current Assets Ratio

CurrentAssets CurrentLiabilities CurrentAssetsRatio119,222,000 124,416,000 0.96The lowcurrentasset ratiomeans that current liabilitiesoutweighcurrentassets.Healthwaysdoesnothaveapositiveworkingcapital,meaningthecompanydoesn’thaveenoughcurrentassetstocovercurrentdebt.

Debt-to-Equity Ratio TotalDebt TotalEquity Debt-to-EquityRatio446,321,000 302,690,000 1.47

Times Interest Earned OperatingIncome InterestExpense TimesInterestEarned1,902,000 16,079,000 0.12Interest expense is incredibly high. Healthways is not able to cover its interestexpense with operating income. Management or creditors do not desire this lowratio,andthemarginofsafetyinmakingfixedinterestpaymentsislow.

Earnings Per Share NetIncome NumberofCommonShares

OutstandingEarningsPerShare

AsofDecember31,2013(8,541,000) 34,489,000 (0.25)

AsofDecember31,20128,024,000 33,597,000 0.24Analyst Forecasts Accordingtoanalysts,earningspershareareexpectedtobe0.4persharein2015,0.66persharein2016and0.97persharein2017.Earningsareexpectedtogrow47.04 percent in 2015, 65.24 percent in 2016, and 47.87 percent in 2017 beforedroppingtoverylittlegrowthin2018(YahooFinance).Analyzing EPS Trends Fromcomparisonsbetweenthefinancialstatements,thenumerator,ornetincome,is the factor that changes most drastically through the years, causing the EPS tovary. As of December 31, 2012, net income was positive. However, in 2013, netincomewasnegative,resulting inanegativeEPS.Thepositivenet incomein2012canbeexplainedbytheoperating incomeaccountonthestatementofoperations.Operating income for2012was$28,895,000. In2013,operating incomewasonly$1,902,000.Thelowamountofoperatingincomein2013causednetincomeforthe

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year tobenegative. Inorder tohavea loweroperating income, revenues in2013were$13,885,000lowerandcostofservicesandotherexpenseswere$14,881,000higher(201310-K).Incentives to Manipulate Earnings Healthways’managementdoesnothavealotofincentivestomanipulateearnings.As one of the largest companies in the corporate wellness industry, Healthwayswould not need to manipulate earnings to compete against other companies.According to Yahoo Finance, the analysts’ estimates are similar to the actualfinancialdata,soinfluencewouldnotbeabigconcern.AlthoughHealthways’stockhas increasingly grown over the past year, it has remained constant at around$22.28pershareforsometimeandisontrackwiththeone-yeartargetestimateof$22.50pershare(YahooFinance).Detecting Earnings Manipulation Overall, Healthways financial data seems consistent and unrestricted by earningsmanipulation from management. Revenues have gradually been decreasing fromyear-to-year.Costofserviceshavegrownsteadilysince2010andareatacompanyhigh of $547,387,000. However, looking at Healthways accounts receivableinformationonecoulddetectearningsmanipulationfromtheconstantfluctuationsthe account presents. Accounts receivable decreased in 2010 before steadilygrowing until 2012. In 2013, a sharp decrease from $108,337,000 in 2012 to$89,484,000in2013seemsdisproportionatetotheslightdecreaseinrevenues(10-K).Account Analysis Healthways’ billed receivables primarily represent fees that are contractually dueforprovidingservices,netof contractualadjustmentsandallowances fordoubtfulaccounts. Unbilled receivables represent fees for services based on estimatedutilization of fitness facilities, which are billed the following month, andperformance-based fees that are billed when performance metrics are met andreconciledwiththecustomer(10-K).Healthways’property,plant,andequipmentaccountiscarriedatcostandincludesexpenditures that increasevalueorextenduseful lives.Depreciation isrecognizedusingthestraight-linemethodoverusefullivesofthreetosevenyearsforcomputersoftware and hardware and four to seven years for furniture and other officeequipment. Leasehold improvements are depreciated over the shorter of theestimatedlifeoftheassetorlifeofthelease,ortwotofifteenyears(10-K).

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Accounts Receivable In 2009, the net accounts receivable account was $100,833,000. In 2010, theaccount decreased to $89,108,000, and then increased in 2011 to $97,459,000. Itrose again in 2012 to $108,337,000. However, the account decreased in 2013 to$89,484,000(10-K).

Thehighestvalueinthenetaccountsreceivableaccountoccurredin2012,andtheincrease can be attributed to a higher operating income than in other yearswith$28,895,000, compared to just $1,902,000 in 2013 and a loss of $129,114,000 in2011inoperatingincome(10-K).Individingreceivablesbytotalassetstoaccountforgeneralgrowthovertime,thecompany slowed in growth from 2009 with 11.43 percent to 2010 with 10.34percent. It then increased in 2011 to 13.75 percent and again in 2012 to 14.48percent.However,generalgrowthdecreasedin2013downto11.95percent.

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120,000

2009 2010 2011 2012 2013

Accounts Receivable (In Thousands)

Accounts Receivable

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Revenueshavebeendecreasingslowlysince2010;however,theyear-over-yearratehas remained a constant 0.98 for the past two years. Receivables have beenfluctuatingbetween increases in2011and2012anddecreases in2010and2013(10-K).

Year-Over-Year Change Years Receivables Revenues2013/2012 0.83 0.982012/2011 1.09 0.982011/2010 1.11 0.962010/2009 0.83 1.00Accounts Receivable Turnover BecauseHealthwayshas an accounts receivable turnover ratio of 7.41, thehigherratiomeans that the company collected its average receivables 7.41 times duringtheyear,orever1.6months.ItcreateshigherefficiencybecauseHealthwaysisabletocollectcashfromcustomersmoreoftenduringtheyear.

Accounts Receivable Turnover Years AccountsReceivableTurnover2013 7.412012 6.252011 7.072010 8.082009 7.11

2009 2010 2011 2012 2013Growth 11.433 10.34 13.75 14.48 11.95

0246810121416

Percents

Years

Growth (Receivables/Total Assets)

Growth

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The collection period average steadily increased from2010 to 2012, so customerpaymentswere slowing, leading to reduced future sales.While sales continued todecrease from 2010 to 2013, the collection period for 2013 decreased to 49.24insteadofincreasingasinpreviousyears.

Accounts Receivable Collection Period Years AverageSalesperday CollectionPeriod2013 $1,817,219 49.242012 $1,855,260 58.392011 $1,887,027 51.652010 $1,973,515 45.152009 $1,965,551 51.30Receivables and Earnings Management Because sales are not increasing each year and sales are not inflated, channelstuffing seems highly unlikely. While accounts receivables are decreasing, it’sordinary to see in times of economic trouble, such as a recession. However, thesharp decrease from 2012 to 2013 could suggest some earnings management insellingreceivables.Property, Plant, and Equipment Healthways’ property, plant, and equipment account is made up of leaseholdimprovements, computer equipment and related software, furniture and officeequipment, and capital projects in process. Healthways’ property, plant, andequipment for2013was$375,964,000withanaccumulateddepreciationexpenseof ($217,766,000), making net property plant and equipment $158,198,000. In2012, PPE was $343,932,000 with ($187,438,000) in accumulated depreciation,bringing net PPE to $156,494. For 2011, PPE equaled $325,489,000 withaccumulateddepreciationof ($183,301,000), givinganetPPEof $142,188,000. In2010, PPE was 285,184,000 with ($154,528,000) in accumulated depreciation,totaling $130,656,000 in net PPE. In 2009, PPE equaled $258,205,000 with($134,046,000) in accumulated depreciation, totaling $124,159,000 in net PPE.Healthways’ property, plant, and equipment increased each year, along with anincreaseinaccumulateddepreciationeachyear.OverallnetPPEincreasedeachyearaswell(10-K).

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Fixed Asset Turnover Ratio Years FixedAssetTurnoverRatio2013 4.192012 4.332011 4.842010 5.512009 5.78Healthways’fixedassetturnoverratehasdecreasedeachyear.In2009,theratewas5.78x. In2010,theratedroppedto5.51x,andtheratedecreasedagainin2011to4.84x. In 2012, the ratewas 4.33x, and the rate continued its decline to 4.19x in2013.ThesteadydecreaseinthefixedassetturnoverratemeansthatHealthwaysisnotmanagingtheirfixedassetsefficiently.

Average Age of PPE Years AverageAgeofPPE2013 4.132012 3.622011 3.672010 2.932009 2.72Healthways’averageageofPPE increaseduntil2012whentheaveragedecreasedfrom3.67to3.62.From2009to2012,theincreaseinaverageageindicatesthatthecompanyislettingtheirassetbasedeteriorate.However,theaverageageincreasedin2013to4.13,thehighestsince2009.

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170,000

2009 2010 2011 2012 2013

Net Property, Plant, and Equipment (In Thousands)

Net Property, Plant, and Equipment

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Average Remaining Useful Life of the Assets

Years AverageRemainingUsefulLifeoftheAssets2013 7.122012 6.652011 6.512010 5.412009 5.24Depreciation,asstatedunderaccountanalysis,isrecognizedusingthestraight-linemethod over useful lives of three to seven years for computer software andhardware and four to seven years for furniture and other office equipment.Leasehold improvements aredepreciatedover the shorter of the estimated life oftheassetorthelifeofthelease,whichrangesfromtwoto15years.Cost of Providing Services Healthwayscostofprovidingservicesasapercentageofrevenuesincreasedin2013to 82.5 percent compared to 78.8 percent in 2012. The reasons for this increasewere the impact of two terminated contracts and an increase in support costs.However, the increase in cost of services was slightly offset by decreases inhealthcare benefit costs related to a decrease in claims for 2013 and continuedeconomiesofscalegainedinfitnesssolutions.Thecostofservicesasapercentageofrevenuesincreasedin2012to78.8percentcompared to 74.2 percent in 2011. The increase was primarily due to the wind-downofacontractandotherprogramterminationswiththreesmallerhealthplancustomers, which carried lower than average cost of services as percentages ofrevenues.Also,increasedcostsrelatedtotheimplementationofnewcontractsandthelaunchofnewbusinessandanexpandedandextendedcontractcontributedtotheincrease.Theincreasewaspartiallyoffsetbydecreasesincostofservicesfromanincreaseinperformance-basedrevenues,costsassociatedwithanewcontractin2011 for which Healthways wasn’t able to recognize revenue until 2012, andefficienciesfromcostmanagementinitiatives.Costofservicesasapercentageofrevenuesfor2011increasedto74.2percentfrom68.5percentin2010.Theincreasewasduetocostsassociatedwithnewcontracts,anincreaseinimplementationexpenses,nincreasedportionofrevenuegeneratedby fitness solutions, changes in contract structure of certain incentive-basedwellness programs, and costs associated with an initiative to promote memberparticipation.Cost of services as a percentage of revenues for 2010 decreased to 68.5 percentfrom72.9percentin2009.Thedecreasewasduetoadecreaseinthelevelofshort-

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termincentivecompensation,adecreaseinsalariesandbenefitsexpense,andcostsavingsrelatedtocertainoperationalefficiencies.Healthways’ cost of services in 2009was $522,999,000. In 2010, cost of servicesdecreased to $493,713,000. Since then, the cost of services account has beensteadily increasing with $510,724,000 in 2011, $533,880,000 in 2012, and$547,387,000in2013(10-K).

Selling,general,andadministrativeexpensesasapercentageofrevenuesremainedconsistent at 9.2 percent for 2013 compared to 9.0 percent in 2012. Expensesdecreased in 2012 to 9.0 percent relative to 2011 with 9.4 percent due to costreductionsfromarestructuringofHealthwaysin2011.Expensesalsodecreasedto9.4percentin2011comparedto10.1percentin2010.Thedecreasefrom2010to2011wasduetoadecreaseinthelevelof long-termperformance-basedincentivecompensationandcostsavingsrealizedduring2011 fromrestructuring.Expensesfor2009were10.0percent,soverylittlechangefrom2010.

460,000470,000480,000490,000500,000510,000520,000530,000540,000550,000560,000

2009 2010 2011 2012 2013

Cost of Services (In Thousands)

Cost of Services

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Intercorporate Investments Consolidation has been an important factor in the healthcare industry. WhileHealthwaysbelievesthatthesizeofitsmembershipbaseprovidestheeconomiesofscale tocompete inaconsolidatingmarket, thecompanycannotbesure that theycaneffectivelycompetewithcompaniesformedasaresultofindustryconsolidationorretainexistinghealthplan,integratedhealthcaresystem,oremployercustomersiftheyareacquiredbyotherentitieswhichalreadyhaveprogramssimilartotheirs.The Patient Protection and Affordable Care Act requires the U.S. Department ofHealth andHuman Services to establish aMedicare Shared Savings Program thatpromotescoordinationandconsolidationthroughAccountableCareOrganizations.Because of these and other changes, Healthways expects an increase inconsolidationinthehealthcareindustry(Healthcare.gov).According to financial statements, Healthways has eliminated all intercompanyprofits,transactions,andbalances.Growth WhileHealthwaysdoesgroworganicallybyacquiringnewcustomersandgrowingwithin the healthcare industry, the company also grows through acquisitions.Business acquisitions, net of cash acquired, and equity investments totaled

8.4

8.6

8.8

9

9.2

9.4

9.6

9.8

10

10.2

2009 2010 2011 2012 2013

Percentages

Years

Selling, General, and Administrative Expenses

Selling, General, and Administrative Expenses

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$830,000 in 2013, $4,693,000 in 2012, $23,523,000 in 2011, $0 in 2010, and$19,486,000in2009.In October 2009, Healthcare acquired HealthHonors, a behavioral economicscompany that specializes in behavior change science and optimized use ofincentives, for a net cash payment of $14.5 million and a multi-year earn-outarrangementwithanacquisitiondatefairvalueof$3,000,000.On August 31, 2011, Healthways acquired Navvis, a firm that provides strategiccounselandchangemanagementservicestohealthcaresystems,forapproximately$23.7millionincashand$3.3millionincommonstock.In April 2012, Healthways acquired Ascentia Health Care Solutions, a firm thatsupports and promotes health management, patients centered programs, payerstrategies, and physician practice enhancement programs, for $5,500,000 in cashand14,409unregisteredsharesofcommonstock(10-K).

Income Effects of Intercorporate Investments In2011,Healthwaysrecordedagoodwillimpairmentlossof$182.4million,anditistheonlygoodwill impairment loss inHealthways’ financial statements.Due to thenon-recurring nature of the goodwill impairment, it should not be included inforecasts.Healthwaysdoesnotreportinterestrevenue,unrealizedholdinggainsorlosses,orrealizedholdinggainsorlossesonitsfinancialstatements,andtherefore,shouldnotbeincludedinforecasts(10-K;YahooFinance).

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2009 2010 2011 2012 2013

Business Acquisitions, net of cash acquired, and Equity Investments Cash Flow

(In Thousands)

Business Acquisitions, net of cash acquired, and Equity Investments Cash Flow

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Restructuring Charges Healthwayshadrestructuringandrelatedchargesin2010,2011,and2012.In2010,restructuringchargeswere$10,258,000. In2011, thechargeswere$9,036,000. In2012, the restructuring charges were $1,773,000. Healthways did not have anyrestructuringchargesin2013.InNovember2010,Healthwaysbeganrestructuring,whichwas largelycompletedin2010. It focusedon aligning resourceswith current andemergingmarkets andconsolidating operating capacity. In November 2011, restructuring began, whichwas largely completed in 2011. It concentrated on aligning Healthways’ capacityrequirements and organizational structure following CIGNA’s decision to wind-downitscontractbeginningin2012.In2012restructuringbeganinDecemberandwas largely completed in 2012. It focused on capacity realignment. ThroughDecember 31, 2012, Healthways had incurred cumulative net cash and non-cashchargesofapproximately$1.8millionrelatedtothisrestructuring,whichconsistedofone-timeterminationbenefits(10-K).Although restructuring charges for 2010 and 2011 were high and reflect pastproblems, the low restructuring charge in2012and zero restructuring charges in2013showthatnoongoingissuespersist.

Foreign Currency Healthwaysentersintoforeigncurrencyoptionsandforwardcontractsinordertominimizetheirearningsexposuretofluctuationinforeigncurrencyexchangerates.AsaresultofHealthwaysinvestmentininternationalinitiatives,thecompanyhasa

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Restructuring Charges (In Thousands)

Restructuring Charges

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foreigncurrencyexchangeraterisk.Becauseasignificantportionoftheserisksareeconomically hedged with currency options, forward contracts, and internationalinitiativesarenotyetmaterialtotheresultsofoperations,atenpercentchangeinforeign currency exchange rates would not have a material impact on results ofoperations.Healthways’ foreign currency exchange contracts do not qualify for hedgeaccounting treatment under GAAP. The company routinely monitors foreigncurrency exposures tomaximize the overall effectiveness of the foreign currencyhedge positions. Healthways’ financial records show no foreign currencytransactions,onlytranslations.Healthwaysrecordedaforeigncurrencytranslationadjustmentlossof$755,000in2013.Itrecordedaforeigncurrencytranslationadjustmentof$80,000in2012,andanadjustmentlossof$70,000in2011.Anadjustmentof$656,000wasrecordedin2010(10-K).Dividends Healthways “has never declared or paid a cash dividend on common stock. Thecompanyintendstoretainanyearningstofinancethegrowthanddevelopmentofthebusinessanddoesnotexpecttodeclareorpayanycashdividendinthefuture.”TheFifthAmendedCreditAgreementslimitsandrestrictsthepaymentofdividends.Healthways entered into the Fifth Amended Credit Agreement on Jun 8, 2012. Itprovides thecompanywitha$200millionrevolvingcredit facility thatexpiresonJune8,2017.Itsalsoprovidesa$200milliontermloanfacilitythatmaturesonJune8,2017,$110millionofwhichremainedoutstandingatDecember31,2013,andanuncommittedincrementalaccordionfacilityof$200million(10-K2013).WhileHealthwaysdoesnothavedividendstoshowastrongfutureperformancetoitsshareholders,thecompanybelievesthatitsreinvestmentstrategieswill,throughstockpriceappreciation, lead togreater returns for investors. Investorshope thatthe reinvestment of earnings for expansion and new projects will yield greaterreturnsviarisingstockprice.Share Repurchases Healthways’ financialstatementsshownosignsofsharerepurchasing.From2012to 2013, the number of shares outstanding increased and the earnings per sharedecreased. Both are opposite effects from what would happen from sharerepurchasing. From 2011 to 2012, the number of shares outstanding againincreased,buttheearningspersharesharplyincreasedduetoanimpairmentlossin2011.From2010to2011,thenumberofsharesoutstandingdiddecrease;however,thelossonearningspersharewasdrasticduetotheimpairmentloss.Thenumberof shares outstanding increased from 2009 to 2010, and the earnings per shareincreasedduetoarestructuringchargein2010.(10-K)

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Stock Splits Healthwayshasnohistoryofstocksplitsinrecentyears(10-K;YahooFinance).Pensions Healthways does not have defined benefit plans, but instead, offers a definedcontributionplanor401k.Healthways’401kRetirementSavingsPlanisavailabletoall employees. Employees can contribute up to a certain percentage of their basecompensation as defined by the plan. Healthways’ matching of contributions issubject to vesting requirements. Contributions from the companyunder the401kplantotaled$3.1millionin2013,$2.9millionin2012,and$3.5millionin2011.Employeescansaveup to75percentof theirbasesalariesup to the IRS-imposedlimit.Healthways thenmatches employee contributions at 52 cents per dollar forthefirstsixpercenttheydefer.AportionispaidinHealthwaysstock,andthematchisappliedannually.Employeesarealways100percentvestedintheircontributions,butHealthways’matchisalonger-termincentive(10-K;Healthways.com).Healthways’401kplacestheinvestmentriskonitsemployees.Healthways’recordsdo not list a pension expense, so comparing annual pension expenses with theannualcontributionsbythecompanyisnotrealistic.Operating and Non-operating Items in the Income Statement Revenues Costofservices Selling,generalandadministrativeexpenses Depreciationandamortization Impairmentloss Restructuringandrelatedcharges OperatingIncomeInterestexpenseIncome(loss)beforeincometaxesIncometaxexpenseNetIncomeOperating and Non-operating Items in the Balance Sheet CashandcashequivalentsAccountsReceivable,netPrepaidexpensesOthercurrentassetsIncometaxesreceivableDeferredtaxassets

35

LeaseholdimprovementsComputerequipmentandrelatedsoftwareFurnitureandofficeequipmentCapitalprojectsinprocessOtherassetsIntangibleassets,netGoodwillAccountsPayableAccruedsalariesandbenefitsAccruedliabilitiesDeferredrevenueContractbillsinexcessofearnedrevenueCurrentportionoflong-termdebtCurrentportionoflong-termliabilitiesLong-termdebtLon-termdeferredtaxliabilityOtherlong-termliabilities

Statutory Rate (In Thousands)

Year Incometaxexpense(benefit)

Income(loss)beforeincometaxes

StatutoryRate

2013 (5,636) (14,177) 39.75%2012 6,722 14,746 45.59%2011 (15,386) (142,307) 10.81%2010 30,445 77,775 39.14%2009 10,137 20,511 49.42%

Net Operating Profit After Tax (In Thousands)

Year NOPBT Taxonoperatingprofit NOPAT2013 (14,177) 12,027 (26,204)2012 14,746 (290.4) 15,0362011 (142,307) 20,663 (162,970)2010 77,775 36,111 41,6642009 20,511 16,424 4,087

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Net Operating Assets

(In Thousands) BalanceSheetOperatingItems 2013 2012 2011 2010 2009Operating Assets Accountsreceivable,net

89,4849,2286,8571,4029,66737,463290,39222,88125,22853,62979,162338,800964,19333,12520,15732,0654,49617,41133,32051,003191,577$772,616

108,3379,7277,2275,9208,83940,679267,90223,55211,79921,04290,228338,695933,94726,34324,90939,2345,64314,79336,05326,602173,577$760,370

97,45911,4171,4126,06510,31441,622239,73226,32417,81110,79792,997335,392891,34222,57835,61728,6399,27313,15426,96431,351167,576$723,766

89,10812,5773,0648,69511,27240,662207,07727,32810,11714,73394,255469,265988,15322,55539,15731,5325,93118,81423,05039,140180,179$807,974

100,83310,4334,9456,45224,19740,609166,44828,09623,05211,49871,704496,446984,71329,17158,21225,0044,63970,44014,61742,615244,698$740,015

PrepaidexpensesOthercurrentassetsIncometaxesreceivableDeferredtaxassetLeaseholdimprovementsComputerequipmentandrelatedsoftwareFurnitureandofficeequipmentCapitalprojectsinprocessOtherassetsIntangibleassets,netGoodwillTotaloperatingassetsOperating Liabilities AccountsPayableAccruedsalariesandbenefitsAccruedliabilitiesDeferredrevenueContractbillingsinexcessofearnedrevenueLong-termdeferredtaxliabilityOtherlong-termliabilitiesTotaloperatingliabilitiesNet operating assets (NOA)

37

Operating Return Year RNOA 2013 (0.03) -3percent2012 0.02 2percent2011 (0.23) -23percent2010 0.05 5percent2009 0.01 1percentOperating Returns (RNOA) was higher for those years with higher NOPAT. NetoperatingassetsforallfiveyearsdidnotfluctuateenoughtocausebigdifferencesinRNOA,sothedifferencescamefromNOPAT.

Return on Equity (In Thousands)

Year NetIncome Avg.stockholders’equity ROE2013 (8,541) 290,755.50 (2.94)%2012 8,024 272,268.50 2.95%2011 (157,693) 348,278.50 (45.28)%2010 47,330 404,059 11.71%2009 10,374 365,805.50 2.84%TheROEwashigherforthoseyearswithhighernetincomes.YearswithnetincomelosseshadlowerROEpercentages.

680,000

700,000

720,000

740,000

760,000

780,000

800,000

820,000

2009 2010 2011 2012 2013

Net Operating Assets (In Thousands)

NOA

38

Net Operating Profit Margin

(In Thousands)Year NOPAT Revenues NOPM2013 (26,204) 663,285 (3.95)%2012 15,036 677,170 2.22%2011 (162,970) 688,765 (23.66)%2010 41,664 720,333 5.78%2009 4,087 717,426 0.57%

Net Operating Asset Turnover (In Thousands)

Year Revenues AverageNOA NOAT2013 663,285 766,493 0.872012 677,170 742,068 0.912011 688,765 765,870 0.902010 720,333 773,994.50 0.932009 717,426 737,832.50 0.97

39

ROE(2.94)%

Operatingreturn

RNOA

NOPM(3.00)%

GPM17.47%

OEM0.9915

NOAT0.87

ART6.7159

LTOAT0.8082

APT18.4095

NOWCT0.8654

Nonoperatingreturn

Appendix

2013 ROE Disaggregation

40

Macroeconomic Trends Stock Market According to stock information on the Nasdaq stock exchange, the market iscurrentlydown0.42percent.However,thelevelofthestockmarkethasremainedrelativelyconstant.Themarkethasclimbedoutoftherecentrecession,yetitisnotthriving.Healthwaysstockhasalsogrownataconstantratesincethebeginningofthe year. It shifts between $18 and $21. Currently, Healthways’ stock is up 2.59percent at $20.21. Healthways’ stock is up compared to other companies in thehealth caremanagement industry. Themarket remains constant, so the economyremains constant, allowing Healthways to slowly grow in its industry (YahooFinance).Corporate Profits CompanieswithstrongcorporateprofitsseeariseinGDPgrowthassalesincreaseandjobgrowthrises.BecauseHealthwaysispartofthecorporatewellnessindustry,corporate profits are a big determinant in getting customers for the company. Ascorporateprofitsincrease,businesseshavemoremoneytospendonthehealthandwell being of their employees. Healthways has shown through its programs thatcompanies will save money in the long run by employing Healthways’ services,addingtoitscustomers’corporateprofits.Interest Rates Thefederalfundsratehasremainedrelativelyconstantwithnomajorincreasesordecreasesinrecentyears.Therateiscurrentlyat12percent.Becausetheratehashadnomajorfluctuations,banksandotherlendershavebeenabletolendmoneyatconstant rates, allowing borrowers to be more confident when taking out loans.Businesses are able to grow and expand. Because of the constant rate, morecompanieswillbeable toborrowmoney. In turn,morecompanieswillbeable tousethismoneytohelpexpandandgrowtheirbusiness,andonewaytodothisistoinvestinthewelfareofemployeesthroughthehealthprogramsHealthwaysoffers.As a company, Healthways will also be more confident in borrowing money toexpandandkeepupwithincreasedcompetitioniftheneedarises(NewYorkFed).Changes in Gross Domestic Product By looking at the gross domestic product for different countries, it is easy toestimate how the countries are doing in regards to economic health. The grossdomestic product for the United States in 2013 was $16,768,100 million.Healthways also has current operations in Brazil, France, and Australia. Brazil’s2013GDPwas$2,245,673million.Francehad$2,806,428millioninGDP.Australia’s2013 GDP was $1,560,372 million. All of the countries where Healthways has

41

currentoperationsareallinthetop15ofGDPrankingsfor2013,andthecountrieswhere Healthways has active business development are also doing welleconomically.TheUnitedStatesrankednumberone,followedbyFranceatnumberfive, Brazil at number seven, and Australia at number twelve. According to thisinformation, all of the countries have high gross domestic products and healthyeconomies. Because of this, businesses in all of the countries have increasedrevenues, and therefore, can afford to spend more on health care and corporatewellnessprogramsofferedbyHealthways(TheWorldBank).Level of New Business Startups Healthcarestartupshaveboomedoverthelastfewyearswithventurefundingdealsgrowing some 200 percent between 2010 and 2014. Health reforms, an agingpopulation demanding more and better care, and new technology are allcontributorstotheboom.StartupHealthdubbedlastyear“TheYearDigitalHealthBroke Out.” Funding in healthcare had a 125 percent increase with $165 billioninvestedinnewhealthcareventures.(Fortune-“HealthCareStartupsareBooming”).Many of the new healthcare startups are smaller businesses. A small business isdefinedashavingfewerthan500employees.Almost28millionsmallbusinessesarelocatedintheUS,andover50percentoftheworkingpopulationworksinasmallbusiness.Smallbusinesseshavegeneratedover65percentofthenetnewjobssince1995, and approximately 543,000 new businesses get started each month. Smallbusinesses generally hire more employees than large corporations, so smallbusinesses contribute to trying to decrease the unemployment rate (Forbes- “16SurprisingStatisticsAboutSmallBusinesses”).According to a recent NY Times article, an unprecedented number of startupcompaniesarevaluedat$1billionormoretoday.Ayearfromnowthatnumberisprojected to increase tomore than100 startups.David S.Rose, CEOofGust, saysthatventurecapitalinvestorsfundedabout1,500startupslastyear,makingfundingfor early-stage startupsmore available than ever. The cost of entry for a startuptoday is at an all-time low, allowing entrepreneurs to easily and affordably begintheircompanies.Communication,mobileplatforms,andlocation-basedservicesareall increasing with the ever-growing popularity of social media, allowingentrepreneurs to build a brand and grow a business at a low cost andwith highinteractivity. Large corporations that are having trouble innovating and growingwith recent changes routinelybuy startups fornew technologyandproducts.ThepercentofBabyBoomerswhostartbusinesseshasgrownfrom14.3percentin1996to23.4percentlastyear.Overall,theentrepreneurerameansthatmoreandmorepeople will take advantage of the opportunity to create new business startups(Forbes-“ANewEraforEntrepreneursandStartupsHasBegun”).For Healthways, the macroeconomic trend of new business startups means agrowing economy to thrive in, but the company will have to face increasedcompetition,especiallyinthehealthcareandcorporatewellnessindustries.Asmore

42

companiesseektobetterhealthcareforemployees,Healthcarewillseeanincreaseinrevenues.However,costswillalsoincrease.Astheeconomygrowsfromstartups,Healthwayswillneedtoexpandwithnewtechnologyandprogramstokeepupwithgrowingtrends.Revenue Recognition Changes to Revenue Recognition According to Dusty Stallings, CPA and a member of PwC’s national professionalservicesgroup,somecompaniesplantousethefullretrospectivemethodunderthenew revenue recognition policy, which requires public entities to restate twocomparativeyearspriortotheimplementationdateonDec.15,2016.Itwouldgiveinvestors a full understanding of trends with the new policy. The first step toimplementation is creating a teamandaplan.A structureneeds tobe inplace toanalyze the change and implement it. The next step is making sure everyoneunderstands thenew standard. Comparingnoteswithpeers in industry groups isonewaytogoaboutit.TheAICPAisupdatingvariousindustryauditandaccountingguidestoreflectthechanges,soitwillbeagoodresourceforthosewithquestions.Another step is analyzing contracts and revenue streams. Companieswill have toconsider systems, training, and education implications. Most importantly,companieswillneedtoplannowinordertomovequicklytoaddresschangesoncethepolicyisinplace(JournalofAccountancy).Inappropriate Revenue Recognition Healthwaysdoesnotparticipateinchannelstuffing.Thecompanyhasnoinventorylisted on financial statements, so sending goods to distributors and stuffing thechannelwouldnotbesomethingHealthwayswouldneedtodo.Havingnoinventorywouldalsomakeitdifficulttoparticipateinbartertransactions,unlessHealthwayswasexchangingservices.Eventhen,Healthwayswouldhavetobegivenservicesinexchange because itwould not accept inventory as ameans of exchange. Bill andhold transactions would also be difficult for Healthways because the business isbasedonservices,notondeliveryofgoods.Also,Healthwaysisnota“go-between”company,soreportingatgrosswhentheyshouldbereportingatnetwouldbemoredifficultforthemthanacompanylikePriceline.

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Healthways’salesfiguresconstantlyfluctuatewithincreasesin2010and2012anddecreasesin2011and2013.Thelargestincreaseinsalesgrowthwasfrom2009to2010with0.0297.Thelargestdecreasewasfrom2010to2011with0.0479.

Healthways’ grossmargin indexwasonly greater thanone in2010,meaning thatthe company’s grossmarginsdeteriorated andmanagement ismotivated to show

2009 2010 2011 2012 2013SGI 0.9744 1.0041 0.9562 0.9832 0.9795

0.93

0.94

0.95

0.96

0.97

0.98

0.99

1

1.01

Sales Growth Index

SGI

2009 2010 2011 2012 2013GMI 0.837 1.1656 0.7856 0.8048 0.8088

0

0.2

0.4

0.6

0.8

1

1.2

1.4

Gross Margin Index

GMI

44

betternumbers.Thisledtothelargedecreasein2011andtheconsistencyin2012and2013.

Healthways’SGAIwaslessthanonein2011and2012,whichmeansthatsaleswereincreasingfasterthanexpenses.Oneexplanationfortheincreaseinrevenuecouldbe earningsmanipulation, meaningmanagement overstated revenues to increaseearnings.Analysts’ Forecasts Meeting Earnings Targets Healthwayshasbeenconstantlymeetinganalysts’ forecasts.However,Healthwayscanmisstheestimatesforsomeforecastednumbers.Reportsforthethirdquarterin 2014 showed that Healthways met profit expectations but missed revenueforecasts.Thecompanyreportednetincomeof$2millionandaprofitof5centspershare, instead of the estimated 8 cents per share. Recently, Healthways has alsobeenmeeting forecasted estimates. For fourth quarter 2014, financial statements,HealthwaysreportedanEPSof$0.07andadjustedEPSof$0.25,meetinganalysts’forecasts(YahooFinance).

2009 2010 2011 2012 2013SGAI 1.029 1.014 0.9311 0.9551 1.0262

0.88

0.9

0.92

0.94

0.96

0.98

1

1.02

1.04

Selling, General, and Administrative Expense Index

SGAI

45

Earnings Management Why Managers Use Earnings Management Becausemanagerswanttomaintainearnings,theymayattempttosmoothearningsoutofconcernfortheirjobs.ArecentarticleinFraudMagazinetoldastoryaboutacompany trying to find a chief accountant to hire. Each interviewee was givenfinancial informationandasked,“Whatarethenetearnings?”Everycandidatebutonecomputedthenetearnings,butnoneofthemgotthejob.Thecandidatewhogotthepositionansweredthequestionbyreplying,“Whatdoyouwantthenetearningstobe?”(FraudMagazine).Thestorymakestheargumentthatmanagersparticipate inearningsmanagementin order to keep their jobs secure.Having smooth earnings showshowmanagerscanmaintainearningswithoutmajor fluctuations.Whencurrentearningsare lowandfutureearningsareexpectedtobebetter,managersshifttheearningsfromthefuture to the present. For example, Healthways’ managers could expect futureearningstobebetterduetoanincreaseinrevenuesoradecreaseincostsfromtheapplicationof new technologies or newprograms, costing customersmore.Whencurrent earnings are good and future earnings are expected to be low,managersshiftearningsfromthepresenttothefuture.Forexample,Healthwaysfuturecostscould decrease due to costs associated with buying new technology or the non-collectionofreceivables.Theearningsmanagementactsasasafetyformanagers.Methods of Earnings Management Earnings management involves selecting GAAP methods with concern forappearanceratherthanreality.Italsoincludessubtletechniques,suchaschangingreportedearningsthrough“performancetiming.”Onewaytomaintainearningsandincrease sales is touseoptimistic estimatesof collectability tooverstateearnings.Anotherwaytomanipulatereceivablesistounderstatetheallowancefordoubtfulaccountstodecreaseexpensesandincreaseearnings.Anotherwaytouseearningsmanagement is to use optimistic estimates of the life and salvage value ofdepreciable assets, reducing depreciation expense. Healthways has a largedepreciation expense, so increasing or decreasing depreciation expense wouldcausemanagerstomanipulatealargeaccount. Equity Valuation Operating Leases Comparing theadjustedcomputations to theunadjustednumbers, thereare somekeydifferences.TheNOAThasdecreasedby0.9.AndtheFLEVhasincreasedfrom0.9394 to 1.2157. Other numbers have shown very little differences. RNOA has

46

decreaseslightlyfrom0.15%to0.13%.TheNOPMhasremainedconstantthroughthe adjustment with 0.17%. Managers prefer to structure lease contracts asoperating rather than as capital leases because the asset and liability are notreported on the balance sheet and there is not depreciation or interest expenserecorded,makingincomehigher.

Discount Rate N Amount0 -1,2311 1,1992 66 1,265

=IRR(values,guess)2.62%

Present Value of the Operating Lease Payments

Year OperatingLeasePayment DiscountFactor0.0262

PresentValue

1 13,198 0.9745 12,8612 11,781 0.9496 11,1873 10,764 0.9253 9,9604 10,198 0.9017 9,1965 10,707 0.8787 9,408Thereafter 10,707 2.5892 27,723 $80,335

Adjusted Computations (In Thousands)

Unadjusted Adjustment 2013AdjustedNOA 772,616 +80,335 $852,951NNO 252,160 +80,335 $332,495NOPAT (26,204) +8,926

(13,198)(30,476)

RNOA (3.00)%NOPM (3.95)%NOAT 0.78FLEV 1.2157

47

WACC IncomputingWACC,a sixpercentequity spreadwasusedbecauseof thesignsofgrowththatHealthwaysandthecorporatewellnessindustryhaveshownforfutureperiods.

Computing Cost of Equity Risk-freeRate 2.5%Beta -0.17EquitySpread 6%Costofequity 1.48%Cost of debt $16,079/[(251,922,000+290,335,000)/2] 5.93%After-taxcostofdebt5.93%x(1-39.75%) 3.57%Equity Weight 302,690,000/(302,690,000+251,922,000) 54.58%DebtWeight1-0.5458 45.42%WACC [54.58%*1.48%]+[45.42%*3.57%] 2.43%Valuation Models Whenusingthediscountedcashflowmodelandresidualoperatingincomemodel,aterminalgrowthrateofonepercentwasused,alongwithaforecastedgrowthrateof6%duetoHealthways’signsoffuturegrowth,aswellas,signsoffuturegrowthinthecorporatewellnessindustry.TheDCFmodelisthewidelyacceptedmodel.Cashflowsareunaffectedbyaccrualaccounting,andFCFFisintuitive.Ontheotherhand,ROPI focusesonvaluedrivers andusesbothbalance sheet and incomestatementdata.

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Discounted Cash Flow (DCF) Model ThediscountedcashflowmodelshowsthatthevalueofHealthways’stockislowerthantheactualsellingprice.

Discounted Cash Flow Model

Reported Forecasted Terminal Period

2013 2014 2015 2016 2017 (InThousands) SalesGrowth -2.05% 6% 6% 6% 6% 1% 1 2 3 4 FCFF 21,635 22,933 24,309 25,314 27,314 27,587PVofHorizonFCFF 22,389 23,169 23,977 24,813 Cum.PVofhorizonFCFF

$94,348

PVofterminalFCFF 1,929,161Totalfirmvalue $2,023,509LessNNO 252,160Firmsequityvalue $1,771,349Sharesoutstanding 33,924,000Stockvaluepershare $0.05Tradingpriceat5/2/2013

$13.83

49

Residual Operating Income (ROPI) Valuation Model The Residual Operating Income Valuation Model shows that the valuation ofHealthways’stockislowerthantheactualsellingprice.Residual Operating Income Model

Reported Forecasted Terminal Period

2013 2014 2015 2016 2017 (InThousands) SalesGrowth -2.05% 6% 6% 6% 6% 1%NOPM (3.95)%NOAT 0.78Sales 663,285 703,082 745,267 789,983 837,382 845,756NOPAT (26,204) (27,772) (29,438) (31,204) (33,077) (33,407)NOA 852,951 901,387 955,471 1,012,799 1,073,567 1,084,303 1 2 3 4 RequiredReturn

20,727 21,904 23,218 24,611 26,088

ROPI (48,499) (51,342) (54,422) (57,688) (59,495)PVofHorizonROPI

(47,348) (50,124) (53,131) (56,391) (58,084)

Cum.PVofhorizonROPI

(265,078)

PVofterminalROPI

(4,061,818)

Totalfirmvalue (4,326,896)LessNNO 252,160Firmequityvalue

(4,579,056)

Sharesoutstanding

33,924,000

Stockvaluepershare

$0.13

Tradingpriceat5/2/2013

$13.83

50

Management’s Assertions

Balance Sheet Accounts

Existence or Occurrence

Completeness Rights and Obligations

Valuation or Allocation

Presentation and Disclosure

Cash and cash equivalents

Thecashandcashequivalentsaccountmustbecheckedbyoutsidesources,forexamplethebank,toverifyexistence.

Allcashandcashequivalentshavebeenappropriatelyrecorded.

Thecompanyhasarighttouseitscashandcashequivalents.

Thebankreconciliationmustmatchthecashaccountonthebookbalance.

Allcashandcashequivalentshavebeenproperlyclassified,andthenotesproperlydetailwhichitemsareincludedincashequivalents.

Accounts Receivable, net

Theaccountsreceivableexist,andaconfirmationrequestissenttocustomerswhoeitheradmitordisputethattheyoweabalancetothecompany.

Theaccountsreceivablemaybeincompleteifthecompanyhasnotrecordedsales.Tracingcashinflowstosalescancheckcompleteness.

Theaccountsreceivablebelongtothecompanyunlessthereisafactoringarrangement,whichcanbefoundbylookingatcashreceiptsforfactorpayments.

Theaccountsreceivablebalancemustberecordedcorrectly,alongwiththereductionforaccountsthatwillbeuncollectible.

Theaccountisdisclosedadequatelynetofcontractualadjustmentsandallowancesfordoubtfulaccounts.

Prepaid expenses Auditorscanconfirmtheprepaidexpensewiththeothercompanyinvolved

Theprepaidexpenseaccountshouldcontainallandonlyprepaidaccounts.

Thecompanyhasarighttocurrentprepaidassetsbecausethecostshavealreadybeen

Theaccountshouldonlycontainamountsthatwillbeexpensedinthe

Allprepaidexpensesshouldbeproperlydisclosedinthecurrentassetsectionofthebalancesheet

51

inthetransaction. paidforbutnotusedup.

currentyearandshouldbereducedasexpires.

netofexpiredcosts.

Balance Sheet Accounts

Existence or Occurrence

Completeness Rights and Obligations

Valuation or Allocation

Presentation and Disclosure

Deferred tax asset Deferredtaxassetscanbemeasuredbylookingatpreviousyearsfinancialstatements.

Deferredtaxassetsshouldincludeaccrualsandreserves,deferredcompensation,share-basedpayments,netoperatinglosscarryforwards,cashconversionderivative,etc.

Thecompanyhasaobligationtorecordontheincomestatementinordertoreducethetaxlateron.

Deferredtaxassetsshouldreflectthenettaxeffectsoftemporarydifferencesbetweenthecarryingamountsofassetsusedforfinancialreportingandamountsusedforincometaxpurposes.

Deferredtaxassetsshouldbeappropriatelystatedonthebalancesheet,andnotesshouldreflectthecarryingamountsoftheassetsusedforfinancialreportingpurposes.

Property and equipment

Propertyandequipmentshouldbephysicallyaccountedfortomakesurethattheyalignwithbalancesheetaccounts.

Theaccountshouldlistthenetvaluesofallleaseholdimprovements,computerequipmentandrelatedsoftware,furnitureandofficeequipment,andcapitalprojectsinprocess.

Thecompanyisentitledtoallpropertyandequipment,includingleaseholdimprovements,computerequipmentandrelatedsoftware,furnitureandofficeequipment,andcapital

Depreciationonpropertyandequipmentisrecognizedusingthestraight-linemethodoverusefullivesofthreetosevenyearsforfurnitureandotherofficeequipment.Leaseholdimprovementsare

Allpropertyandequipmentaccountsshouldbeadequatelydisclosedlessaccumulateddepreciation.Thenotesshoulddiscussmethodsofdepreciationforeachaccountunderpropertyandequipment.

52

projectsinprocess,tocarryoutnecessarydailyoperations.

depreciatedovertheshorterofestimatedlifeoftheassetorthelifeofthelease.

Balance Sheet Accounts

Existence or Occurrence

Completeness Rights and Obligations

Valuation or Allocation

Presentation and Disclosure

Intangible assets, net

Intangibleassetsexistthroughdocumentationandoutsidesourcescanhelpwithproofoftheexistenceofsuchintangibleassets,forexamplethepatentoffice.

Theintangibleassetsaccountshouldincludecustomercontracts,acquiredtechnology,patents,distributorandprovidernetworks,aperpetuallicense,andotherintangibleassets.

Thecompanyhasarighttouseandrecordallintangibleassets.

Itemsareamortizedonastraight-linebasisoverestimatedusefullivesrangingfromtwoto25years.

Intangibleassetsshouldbelistedproperlynetofamortization.Thenotesshouldincludealistofallassetsthatfallundertheintangibleassetsaccount,alongwithmethodsforamortization.

Goodwill, net Goodwillexistsandisrecognizedfortheexcessofthepurchasepriceoverthefairvalueoftangibleandidentifiableintangiblenetassetsofbusinessesthe

Goodwilliscompletebasedonappropriatefactorsinvolvedinthediscountedcashflowmodelandmarket-basedapproachindeterminingthecorrectfairvalue

Thecompanyhastherightandobligationtorecordandmeasuregoodwillonbusinessesthattheyacquire.

Thecompanyestimatesthefairvalueofeachreportingunitusingacombinationofadiscountedcashflowmodelandamarket-basedapproachand

Goodwillshouldbeestimatedatthefairvalueofeachreportingunitonthebalancesheetandshouldbereviewedforimpairments.

53

companyacquires. amounttoreport. reconcilestheaggregatefairvalueofthereportingunitstotheconsolidatedmarketcapitalization.

Balance Sheet Accounts

Existence or Occurrence

Completeness Rights and Obligations

Valuation or Allocation

Presentation and Disclosure

Accounts payable Theuseofsecondarysources,suchastheotherbusinessorcustomerinvolvedinthetransaction,shouldbeusedtovalidatetheaccountspayableaccountonthebooks.

Theaccountspayableaccountshouldbelinkedtopurchasesmadebythecompanyoverthecourseofdoingbusinessinordertocheckthecompletenessoftheaccount.

Thecompanyhasanobligationtopayoffanyaccountspayable.

Accountspayableshouldberecordedconsistentlyatgrossornetamounts.

Theaccountspayableaccountshouldbedisclosedasanobligationinthecurrentliabilitiessectionofthebalancesheet.

Accrued liabilities Confirmingwithoutsidesourcescanchecktheexistenceofaccruedliabilitiesandtheratesatwhichtheyareaccrued.

Accruedliabilitiesshouldincludeallexpensesthatthecompanyhasincurredbuthasnotyetpaid.

Thecompanyhasanobligationtopayforanyandallaccruedliabilitieswithintherequireddateorperiod.

Accruedliabilitiesshouldbepresentedaccordingtotheappropriaterate.

Accruedliabilitiesshouldbepresentedappropriatelyinthecurrentliabilitysection,andnotesshoulddisclosewhatliabilitiesarepartsoftheaccount.

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Current portion of long-term debt

Secondarysources,likecreditors,shouldbeusedtovalidateamountsandrates.

Theaccountshouldincludeallportionsofdebtduewithintheperiod.

Thecompanyhasanobligationtopayoffanyandallcurrentportionsofdebtplusinterest.

Thecurrentportionoflong-termdebtshouldbedebtowedwithinthecurrentperiod.

Thecurrentportionoflong-termdebtshouldbedisclosedproperlyunderthecurrentliabilitiessection.Notesshouldincludeallinformationoninterestrates.

Balance Sheet Accounts

Existence or Occurrence

Completeness Rights and Obligations

Valuation or Allocation

Presentation and Disclosure

Long-term debt Secondarysources,likecreditors,shouldbeusedtovalidateamountsandrates.

Theaccountshouldincludeallportionsofdebtnotduewithinthecurrentperiod.

Thecompanyhasanobligationtopayoffanyandalllong-termdebtplusinterest.

Long-termdebtshouldbedebtowednotwithinthecurrentperiod.

Thelong-termdebtaccountshouldbedisclosedproperlyunderthelong-termliabilitiessectionofthebalancesheet.Notesshouldincludeallinformationoninterestrates.

55

Audit Risk The Fraud Triangle The fraud triangle is made up of three factors: pressure, rationalization, andopportunity.Managerswho commit fraud are usually under pressure either frompersonaleventsorfromworkcompensationthatmotivatesthemtocommitfraud.Uppermanagement employeesoftenhave a relatively low salarywith thebulkoftheircompensationcomingfrombonusestiedtohowwell thecompanyperforms.Fraudtakesplacewhentheopportunitytocommitfraudispresent.Weakinternalcontrols, no separation of duties, indifferent management, and ineffectivemonitoringofmanagementarejustsomeofthedifferentopportunitiespresentforfraud. In order to commit fraud, managers must rationalize their actions. Onecommon rationalization is that the employee is “just borrowing themoney.” Thefraudusuallystartsoffsmallbutescalatesuntiltheemployeeisunabletopaybackthemoney.Anotherrationalizationisthattheemployee“deservestheextramoney.”Theemployeethinksthatheorsheisunderpaidfortheamountofhoursputinandrationalizes the committing of fraud as something he or she deserves (YahooFinance).Audit Risk: Property and Equipment The property and equipment account is made up of leasehold improvements,computer equipment and related software, furniture and office equipment, andcapital projects in process. The entire account totals $375,964,000 beforeaccumulated depreciation, or 50 percent of all assets. With accumulateddepreciation of $217,766,000, the property and equipment account totals$158,198,000 and makes up 21 percent of total assets. Because property andequipmentisalarge,economicallysignificantaccountonHealthways’balancesheet,anymisstatementswillbematerial(10-K).Managersunderpressure toperformwell couldcommit fraudunder thepropertyand equipment account by changing residual values anduseful lives.One test theauditor can perform to check the property and equipment account is to obtain asummaryanalysisofchanges inpropertyownedandreconcileto ledgers.Anothertestwouldbetomakeaphysicalinspectionofallmajoracquisitionsofpropertyandequipment.Aninternalcontrolinplacetohelpcomforttheexternalauditorwouldbe limited access to assets and records in ensuring that ledgers and journals aremaintained inaccounting.Another internalcontrolwouldbesegregationofdutiesassubsidiary ledgerscanbemaintainedtokeeptrackofdepreciationandcurrentvaluesofpropertyandequipment.

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Audit Risk: Long-Term Debt Thelong-termdebtaccounttotals$237,582,000or58percentofallliabilitiesonthebalance sheet. Because of the high percentage, long-term debt is amajor balancesheet account, and any misstatements would be material. Pressure fromperformance couldmakemanagers commit fraudwhen the opportunity arose bychanginglong-termdebttoinfluencethedebt-to-equityratio.Inordertochangethecompany’s leverage. One test that could be used by auditors is to recompute allratios,forinstancethedebt-to-equityratio,andcomparetopreviousyearsfinancialstatements.Another test thatcouldbeused is the tracingof transactions to locatethe source of the debt and any previous payments. One internal control that theauditor should take into account is segregationof duties. Itwould ensure that nooneemployeewouldhavecompletecontrolovertherecordingandauthorizationofthe debt. Another internal control would be authorization of activities. It wouldallowforaformalapprovalsystemforalldebt(10-K).Corporate Tax Country Comparisons ComparedtotheUnitedStates,thecorporatetaxratesintheothercountrieswhereHealthwayshasoperationsarerelativelysimilar.Allofthetaxratesarebetween30and 40 percent with Australia at the lower end with 30 percent and the UnitedStatesattheupperendwith40percent(GlobalCorporateTaxRatesTable).

Corporate Tax Rates Healthways’MajorRevenueEarningCountries 2013CorporateTaxRates

(InPercentages)UnitedStates 40Brazil 34France 33.33Australia 30Tax Credits for Corporate Wellness Industry TaxCreditsforthecorporatewellnessindustryhavebeenpresentinmanystatesinrecent years. InMassachusetts, a recentwellness tax credit of up to $10,000waspart of legislation. The credit is in the amount of up to 25 percent of the cost ofimplementing an employee wellness program. In Indiana, the mandated SmallEmployerQualifiedWellnessProgramTaxCreditprovidedacreditof50percentofthecostsincurredbythebusinesstoimplementtheprogram(WellnessTaxCredit).

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Recommendation to Legally Minimize Worldwide Tax Expense Inorder to legallyminimize theworldwide effective tax rates,managers couldbediligentaboutchargingoutexpensestoforeignoperatingoffices.Reducingthetaxespaid in the foreign countrybypushingdownexpenses thatbelong in that foreigncountryhasmanybenefits.First,ithelpsavoidasituationofhavingexcessforeigntax credits that may expire. Second, it could potentially reduce your worldwideeffective tax rate, which is what management is after (International BusinessServices). Advisory Recommendations Healthways’ Balanced Scorecard The balanced scorecard assesses how Healthways is working to meets its goalsthrough performancemeasures to ensure that the company is creating value forshareholders.Thefourmancategoriesarefinancial,customersatisfaction,internalbusiness processes, and innovation and learning. Learning and innovationeventually builds upon internal processes, which in turn improves customersatisfactionandleadstoanimprovedfinancialperformanceoverall.

Visionand

Strategy

InternalBusinessProcesses

• EmployeeTurnover• Logistics

CustomerSatisfaction

• Customerretention• NewCustomers• ResponseTime

Financial• CashFlow• RNOA• Dividends• SalesGrowth• NetIncome

InnovationandLearning

• NewTechnologicalAdvancements• NewPrograms• Applications

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Customized Technological Advancements BecauseHealthwaysmustdifferentiateitself fromcompetitorsinagrowinghealthindustry, it is important that Healthways maintain and surpass consumerexpectations in technological advancements within the company. Healthways hasalwaysbeenattheforefrontoftechnologyandmustcontinuethistrend. In2011,Healthways signed a ten-year, $380 million applications and technology servicesoutsourcingagreementwithHPtosupportgrowthandexpandvaluetoHealthways’customers. With the agreement, HP provides application development andmanagementservicestofurtherthedevelopmentofthecompany’sapplicationsandtechnologyinfrastructure(10-K).Healthways already utilizes Embrace, a technology platform that offers a level ofintegration,providinginformedoutreachtocustomers.Embraceprovidesacentralhome forpopulationhealthdataandallowscustomers theability to connectwiththe company. The agreement with HP serves to increase the functions of thismission-criticalapplicationbysupportinganincreasedvolumeofcustomersandanincreased market demand for multiparty integration. HP utilizes its informationtechnologyinfrastructurelibrarybasedenterpriseservicemanagementplatformtoprovidethesolutions(10-K).Along with new technology, Healthways has implemented a technology advisorycouncil within the company that serves to provide tools, updates, and softwareinformationtokeepHealthwaysup-to-dateandsecure.MembersoftheTechnologyAdvisory Council include Healthways’ technology staff and representatives frompartnerfirms:Microsoft,Oracle,MCI,Concerto,Cisco,Dell,CDW,andHP(10-K).WhileHealthways isworking to improve technological advancements, it needs tomakesurethatitisofferingcustomizedapplicationsforcustomers.Forinstance,amobileapplicationwouldallowcustomerstostoreindividualizeddataandawaytoeasily contact Healthways for solutions to health questions. Customized featurescould include a health tracker, a data table with initial health assessmentinformation, nutrition guidance, etc. Specialized technology for consumers is oneway Healthways can make sure it is differentiating itself for competitors.HealthwayswouldneedtoworkcloselywithHPtomakesurethattheapplicationsweresecure,especiallysincepersonalhealthdatacouldbestored.New, customized applications would add to the innovation of Healthways, whichwould in turn help with internal business processes as Healthways could bettercommunicate and interact with customers. Customer satisfaction would then begreatly improvedwith faster response times, and customer retention rateswouldincreaseduetosatisfactionwiththeapplications.Overall,Healthwayswouldseeanincrease in revenues from customized advancements and would realize a much-neededincreaseinassetstoHealthways’balancesheet.

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Continue with Existing Outsource Agreements Healthways has been increasing and applying new advancements to its companyoverthepastfewyears,andenteringintooutsourcingagreements,forexample,theagreement with HP. Because Healthways’ agreement with HP is relatively recentandextendsfortenyears,unlessterminatedearlier,itisinHealthwaysbestinteresttonotenterintoanyagreementsbasedontechnologyuntil2021oruntilthecurrentagreementhasbeen terminated. It isalsobest thatHealthwaysnotenter intoanymoreoutsourcingagreementsuntiltheobligationsduetoHParepaidoff.Outsourcing obligation payments to HP are $23,017,000 in 2014, $40,020,000 in2015-2016, $36,154,000 in 2017-2018, $43,025,000 in 2019 and after. Allremainingpaymentswillbeapproximately$291.6million in total.TheagreementallowsHealthways to terminate all or a portion of the services after the first twoyearsprovidedtheypayterminationfees(10-K).Healthways already has a competitive advantage by outsourcing to HP. Thecompanyalsoneeds to time toworkon thesecurityof theEmbraceprogramandotherapplicationsthataredevelopedsincepersonalhealthdatawillbepresentonthe applications. No outsourcing will decrease contract obligations and decreaseliabilities,whichare already toohighandhavemadeHealthways riskyover time.Thedebt-to-equityratiothatHealthwayscurrentlyoperatesatis1.47,showingthatHealthways is being financed with too much debt and not enough equity. Thecurrentratiois0.96,meaningthattherearenotenoughcurrentassetstocoverdebt.Holding back on any more contractual obligations will give Healthways theopportunitytopayoffitsobligationswithoutaddingmoreon.Continuingwithexistingoutsourceagreementspertainstothefinancialsideofthebalancedscorecard.Healthwaysmustfocusonloweringitsdebt-to-equityratioandliabilities before it can agree to outsource any more projects or aspects of thecompany.New Acquisitions WhileHealthwaysisconfidentontheforefrontoftechnologywithitsHPagreementforfutureyears,thecompanystillneedstocontinuetogrowanddifferentiateitselfwith specialized, science-base programs. In August 2011, Healthways acquiredNavvis&Company,afirmthatprovidesstrategiccounselandchangemanagementservicestohealthcaresystems.InApril2012,HealthwaysacquiredAscentiaHealthCareSolutions,a firmthatsupportsandpromotespopulationhealthmanagement,patient centered programs, payer strategies, and physician practice enhancementprogram(10-K).Because of these acquisitions, net goodwill onHealthways financial statements is$338,800,000,makingup45percentoftotalassets.WhileHealthwaysalreadyhasavery large amount of goodwill on its financial statements, an increase in assets

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wouldstilladdvaluetoHealthwaysandincreasestockvalues.However,Healthwaysneedstobecarefulinfutureacquisitionstonotovervalueacompany.Overvaluingacompanywill causeHealthways to buy it at a premium,which iswhy goodwill isalreadysohigh.Acquisitionsarenecessary forHealthways,as ithelpsmake themmore competitive in the industry and a more valuable company. For instance,Navvis’doesbusinesswithsixofthetenlargesthealthsystemsintheU.S.,makingita big acquisition for Healthways and contributing not only to Healthways’ healthsystems,butalsoitsbrand(10-K).AcquisitionsalsoallowHealthwaystorespondtothegrowingdemandfromhealthplanprovidersandbusinessesas thewellness industrycontinuestosee increasedgrowth. In order to compete with new entrants to the market, Healthways mustmaintainitsmarketingasa leaderinscience-based,award-winningprograms,andgaining other companies makes these programs possible. Healthways’ wellnessprogramsandhealthassessmentsarethemainitemsthatcustomersarefocusedonwhen going into business with Healthways, and theymust keep them up-to-datewith the latest improvements and a strong innovation network. New, innovativeprojectshelpwithgrowth,which leads tomoreefficientoperationsand increasedcustomersatisfactionwithnewprograms.Overall,itleadstoanincreaseingoodwillandassets,whichincreaseHealthways’totalvalueasacompanyandincreasesstockvalues.

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