0000704415-09-000014.txt : 20090109 0000704415-09-000014.hdr.sgml : 20090109 20090109163741 ACCESSION NUMBER: 0000704415-09-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20081130 FILED AS OF DATE: 20090109 DATE AS OF CHANGE: 20090109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEALTHWAYS, INC CENTRAL INDEX KEY: 0000704415 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISC HEALTH & ALLIED SERVICES, NEC [8090] IRS NUMBER: 621117144 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19364 FILM NUMBER: 09519167 BUSINESS ADDRESS: STREET 1: 701 COOL SPRINGS BOULEVARD CITY: FRANKLIN STATE: TN ZIP: 37067 BUSINESS PHONE: 6156144929 MAIL ADDRESS: STREET 1: 701 COOL SPRINGS BOULEVARD CITY: FRANKLIN STATE: TN ZIP: 37067 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN HEALTHWAYS INC DATE OF NAME CHANGE: 20000322 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN HEALTHCORP INC /DE DATE OF NAME CHANGE: 19940211 10-Q 1 form10-q_113008.htm HEALTHWAYS, INC. FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended November 30, 2008

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _____ to _____

Commission File Number 000-19364

HEALTHWAYS, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware		62-1117144
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

701 Cool Springs Boulevard, Franklin, TN 37067

(Address of Principal Executive Offices) (Zip Code)

615-614-4929

(Registrant’s Telephone Number, Including Area Code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

As of January 6, 2009 there were outstanding 33,652,826 shares of the Registrant’s Common Stock, par value $.001 per share.

Healthways, Inc.

Form 10-Q

Table of Contents

			Page
Part I
	Item 1.	Financial Statements	4
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
	Item 4.	Controls and Procedures	31
Part II
	Item 1.	Legal Proceedings	32
	Item 1A.	Risk Factors	34
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
	Item 3.	Defaults Upon Senior Securities	34
	Item 4.	Submission of Matters to a Vote of Security Holders	34
	Item 5.	Other Information	34
	Item 6.	Exhibits	34

Part I

Item 1.

Financial Statements

HEALTHWAYS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

ASSETS

	November 30,			August 31,
	2008			2008
Current assets:
Cash and cash equivalents	$	4,351		$	35,242
Accounts receivable, net		121,385			113,312
Prepaid expenses		10,009			8,992
Other current assets		2,795			5,275
Deferred tax asset		25,915			24,948
Total current assets		164,455			187,769

Property and equipment:
Leasehold improvements		38,433			37,475
Computer equipment and related software		136,148			131,296
Furniture and office equipment		29,421			29,209
Capital projects in process		16,045			12,052
		220,047			210,032
Less accumulated depreciation		(108,055	)		(98,971	)
		111,992			111,061

Other assets		15,592			16,575

Customer contracts, net		33,167			34,521
Other intangible assets, net		72,268			72,582
Goodwill, net		484,596			484,305

Total assets	$	882,070		$	906,813

See accompanying notes to the consolidated financial statements.

HEALTHWAYS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

LIABILITIES AND STOCKHOLDERS’ EQUITY

		November 30,			August 31,
		2008			2008
Current liabilities:
Accounts payable	$	15,833		$	18,753
Accrued salaries and benefits		26,867			31,612
Accrued liabilities		24,644			23,555
Deferred revenue		6,955			6,422
Contract billings in excess of earned revenue		75,354			75,454
Income taxes payable		10,863			3,984
Current portion of long-term debt		2,220			2,837
Current portion of long-term liabilities		4,011			3,876
Total current liabilities		166,747			166,493

Long-term debt		304,882			345,395
Long-term deferred tax liability		6,900			9,364
Other long-term liabilities		36,795			31,227

Stockholders’ equity:
Preferred stock
$.001 par value, 5,000,000 shares
authorized, none outstanding		—			—
Common stock
$.001 par value, 120,000,000 shares authorized,
33,614,758 and 33,603,320 shares outstanding		34			34
Additional paid-in capital		211,731			207,918
Retained earnings		160,353			147,772
Accumulated other comprehensive loss		(5,372	)		(1,390	)
Total stockholders’ equity		366,746			354,334

Total liabilities and stockholders’ equity	$	882,070		$	906,813

See accompanying notes to the consolidated financial statements.

HEALTHWAYS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except earnings per share data)

(Unaudited)

	Three Months Ended
	November 30,
	2008		2007

Revenues	$	185,403	$	175,819
Cost of services (exclusive of depreciation and amortization of $8,888 and $7,810, respectively, included below)		129,048		124,186
Selling, general & administrative expenses		17,945		16,848
Depreciation and amortization		12,167		10,458

Operating income		26,243		24,327
Interest expense		5,096		5,341

Income before income taxes		21,147		18,986
Income tax expense		8,566		7,803

Net income	$	12,581	$	11,183

Earnings per share:
Basic	$	0.37	$	0.31

Diluted	$	0.37	$	0.30

Weighted average common shares
and equivalents:
Basic		33,612		35,717
Diluted		34,068		37,690

See accompanying notes to the consolidated financial statements.

HEALTHWAYS, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Three Months Ended November 30, 2008

(In thousands)

(Unaudited)

									Accumulated
					Additional				Other
	Preferred		Common		Paid-in		Retained		Comprehensive
	Stock		Stock		Capital		Earnings		Loss			Total
Balance, August 31, 2008		$—		$34		$207,918		$147,772		$(1,390	)		$354,334

Comprehensive income:

Net income		—		—		—		12,581		—			12,581

Net change in fair value of interest rate
swaps, net of income taxes of $2,158		—		—		—		—		(3,296	)		(3,296	)

Foreign currency translation adjustment		—		—		—		—		(686	)		(686	)

Total comprehensive income													8,599

Exercise of stock options		—		—		28		—		—			28

Tax benefit of option exercises		—		—		65		—		—			65

Share-based employee compensation expense		—		—		3,720		—		—			3,720

Balance, November 30, 2008		$—		$34		$211,731		$160,353		$(5,372	)		$366,746

See accompanying notes to the consolidated financial statements.

HEALTHWAYS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three Months Ended November 30,
	2008			2007
Cash flows from operating activities:
Net income	$	12,581		$	11,183
Adjustments to reconcile net income to net cash provided by
operating activities, net of business acquisitions:
Depreciation and amortization		12,167			10,458
Amortization of deferred loan costs		306			292
Share-based employee compensation expense		3,720			4,162
Excess tax benefits from share-based payment arrangements		(65	)		(5,385	)
Increase in accounts receivable, net		(8,073	)		(20,204	)
Decrease in other current assets		1,463			1,393
(Decrease) increase in accounts payable		(3,296	)		1,189
(Decrease) increase in accrued salaries and benefits		(4,745	)		5,649
Increase in other current liabilities		8,464			15,796
Deferred income taxes		(1,272	)		(2,937	)
Other		304			3,645
Decrease in other assets		153			346
Payments on other long-term liabilities		(58	)		(111	)
Net cash flows provided by operating activities		21,649			25,476

Cash flows from investing activities:
Acquisition of property and equipment		(10,203	)		(15,999	)
Acquisitions, net of cash acquired		(449	)		(106	)
Other		(1,366	)		—
Net cash flows used in investing activities		(12,018	)		(16,105	)

Cash flows from financing activities:
Proceeds from issuance of long-term debt		45,000			—
Payments of long-term debt		(86,130	)		(10,551	)
Exercise of stock options		28			2,668
Excess tax benefits from share-based payment arrangements		65			5,385
Other		515			—
Net cash flows used in financing activities		(40,522	)		(2,498	)

Net (decrease) increase in cash and cash equivalents		(30,891	)		6,873

Cash and cash equivalents, beginning of period		35,242			47,655

Cash and cash equivalents, end of period	$	4,351		$	54,528

See accompanying notes to the consolidated financial statements.

HEALTHWAYS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1)

Interim Financial Reporting

The accompanying consolidated financial statements of Healthways, Inc. and its wholly-owned subsidiaries for the three months ended November 30, 2008 and 2007 are unaudited. However, in our opinion, the consolidated financial statements reflect all adjustments consisting of normal, recurring accruals necessary for a fair presentation.

We have omitted certain financial information that is normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States but that is not required for interim reporting purposes. You should read the accompanying consolidated financial statements in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2008.

(2)

Recently Issued Accounting Standards

Fair Value Measurement

In September 2006 the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurement,” which provides guidance for using fair value to measure assets and liabilities, including a fair value hierarchy that prioritizes the information used to develop fair value assumptions. It also requires expanded disclosure about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value and does not expand the use of fair value in any new circumstances. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.

In February 2008, the FASB issued FASB Staff Position (“FSP”) FAS No. 157-2, “Effective Date of FASB Statement No. 157”, which defers by one year the effective date of the provisions of SFAS No. 157 for non-recurring, nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008. We do not expect the adoption of SFAS No. 157 to have a material impact on our financial position or results of operations.

Business Combinations

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”. This statement expands the definition of a business and a business combination and generally requires the acquiring entity to recognize all of the assets and liabilities of the acquired business, regardless of the percentage ownership acquired, at their fair values. It also requires that contingent consideration and certain acquired contingencies be recorded at fair value on the acquisition date and that acquisition costs generally be expensed as incurred.

SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008. The adoption of SFAS No. 141(R) did not materially impact our financial position or results of operations when it became effective on January 1, 2009.

(3)

Share-Based Compensation

We have several shareholder-approved stock incentive plans for employees and directors. We currently have three types of share-based awards outstanding under these plans: stock options, restricted stock, and restricted stock units. We believe that such awards align the interests of our employees and directors with those of our stockholders. We account for share-based compensation in accordance with SFAS No. 123(R), “Share-Based Payment.” For the three months ended November 30, 2008 and 2007, we recognized share-based compensation costs of $3.7 million and $4.2 million, respectively.

A summary of our stock options as of November 30, 2008 and changes during the three months then ended is presented below:

Options	Shares (000s)		Weighted-Average Exercise Price			Weighted-Average Remaining Contractual Term			Aggregate Intrinsic Value ($000s)
Outstanding at September 1, 2008	5,116		$	26.52
Granted	240			10.10
Exercised	(11	)		2.48
Forfeited or expired	(19	)		41.56
Outstanding at November 30, 2008	5,326			25.55	4.71		$	1,859
Exercisable at November 30, 2008	3,282			16.38	4.34			1,843

The weighted-average grant-date fair value of options granted during the three months ended November 30, 2008 was $5.01.

On December 30, 2008, we completed an offer to purchase outstanding options to acquire shares of common stock of Healthways, Inc. (the “Company”) that were granted between September 1, 2004 and August 15, 2008 under our shareholder-approved stock option plans. See Note 9 for further information.

The following table shows a summary of our restricted stock and restricted stock units (“nonvested shares”) as of November 30, 2008 as well as activity during the three months then ended:

Nonvested Shares	Shares (000s)		Weighted-Average Grant Date Fair Value
Nonvested at September 1, 2008	553		$	43.17
Granted	3			22.01
Vested	(1)			35.91
Forfeited	(12	)		41.36
Nonvested at November 30, 2008	543			43.14

(4)

Derivative Investments and Hedging Activities

SFAS No. 133, “Accounting for Derivative Investments and Hedging Activities,” as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative

instruments embedded in other contracts, and for hedging activities. It requires companies to record all derivatives at estimated fair value as either assets or liabilities on the balance sheet and to recognize the unrealized gains and losses, the treatment of which depends on whether the derivative is designated as a hedging instrument.

As a result of our international initiatives, we are exposed to foreign currency exchange rate risks. A significant portion of these risks is economically hedged with currency options and/or forward contracts in order to minimize our earnings exposure to fluctuations in foreign currency exchange rates. The principal currency hedged is the Euro. These derivative instruments serve as economic hedges and do not qualify for hedge accounting treatment under SFAS No. 133. Accordingly, they require current period mark-to-market accounting, with any change in fair value being recorded each period in the statement of operations. We record the fair market value of our foreign currency derivatives as other current assets or accrued liabilities. We routinely monitor our foreign currency exposures to maximize the overall effectiveness of our foreign currency hedge positions.

We currently maintain six interest rate swap agreements to reduce our exposure to interest rate fluctuations on our floating rate debt commitments. Under these interest rate swap agreements, the interest rate is fixed with respect to specified amounts of notional principal. The swaps are accounted for in accordance with SFAS No. 133 and were designated at their inception as qualifying cash flow hedges; thus, they are recorded at estimated fair value in the balance sheet, with changes in fair value being reported in other comprehensive income. The fair values of the swaps at November 30, 2008 of ($8.4) million have been reported in other long-term liabilities with an offset, net of tax, included in accumulated other comprehensive loss in the consolidated balance sheets.

(5)

Long-Term Debt

On December 1, 2006, we entered into a Third Amended and Restated Revolving Credit and Term Loan Agreement (the “Third Amended Credit Agreement”). The Third Amended Credit Agreement provides us with a $400.0 million revolving credit facility, including a swingline sub facility of $10.0 million and a $75.0 million sub facility for letters of credit, a $200.0 million term loan facility, and an uncommitted incremental accordion facility of $200.0 million. As of November 30, 2008, availability under our revolving credit facility and swingline sub facility totaled $287.6 million.

Revolving advances under the Third Amended Credit Agreement generally bear interest, at our option, at 1) LIBOR plus a spread of 0.875% to 1.750% or 2) the greater of the federal funds rate plus 0.5%, or the prime rate, plus a spread of 0.000% to 0.250%. Term loan borrowings bear interest, at our option, at 1) LIBOR plus 1.50% or 2) the greater of the federal funds rate plus 0.5%, or the prime rate. The Third Amended Credit Agreement also provides for a fee ranging between 0.150% and 0.300% of unused commitments. The Third Amended Credit Agreement is secured by guarantees from most of the Company’s domestic subsidiaries and by security interests in substantially all of the Company’s and such subsidiaries’ assets.

We are required to repay outstanding revolving loans on the revolving commitment termination date, which is December 1, 2011. We are required to repay term loans in quarterly principal installments aggregating $0.5 million each, which commenced on March 31, 2007, and the entire unpaid principal balance of the term loans is due and payable at maturity on December 1, 2013.

Company’s common stock. As of November 30, 2008, we were in compliance with all of the covenant requirements of the Third Amended Credit Agreement.

As of November 30, 2008, we are currently a party to the following interest rate swap agreements for which we receive a variable rate of interest based on the three-month LIBOR and for which we pay the following fixed rates of interest plus a spread of 0.875% to 1.750% on revolving advances and a spread of 1.50% on term loan borrowings:

Swap #	Notional Amount in ($000’s)	Fixed Interest Rate		Termination Date
1	$230,000	4.995	%	March 31, 2010	⁽¹⁾
2	40,000	3.987	%	December 31, 2009
3	40,000	3.433	%	December 30, 2011
4	50,000	3.688	%	December 30, 2011	⁽²⁾
5	40,000	3.855	%	December 30, 2011	⁽³⁾
6	30,000	3.760	%	March 30, 2011	⁽⁴⁾

(1) The principal value of this swap agreement amortizes over a 39-month period. The notional amount of this swap as of November 30, 2008 was $120 million.

(2) This swap agreement becomes effective April 1, 2009.

(3) This swap agreement becomes effective October 1, 2009.

(4) This swap agreement becomes effective January 2, 2010.

We currently believe that we meet the hedge accounting criteria under SFAS No. 133 in accounting for these interest rate swap agreements.

(6)

Commitments and Contingencies

Former Employee Action

In June 1994, a former employee whom we dismissed in February 1994 filed a “whistle blower” action on behalf of the United States government. Subsequent to its review of this case, the federal government determined not to intervene in the litigation. The employee sued Healthways, Inc. and our wholly-owned subsidiary, American Healthways Services, Inc. (“AHSI”), as well as certain named and unnamed medical directors and one named client hospital, West Paces Medical Center (“WPMC”), and other unnamed client hospitals.

Healthways, Inc. has since been dismissed as a defendant; however, the case is still pending against AHSI. In addition, WPMC has settled claims filed against it as part of a larger settlement agreement that WPMC’s parent organization, HCA Inc., reached with the United States government. The plaintiff has also dismissed its claims against the medical directors with prejudice, and on February 7, 2007 the court granted the plaintiff’s motion and dismissed all claims against all named medical directors.

The complaint alleges that AHSI, the client hospitals and the medical directors violated the federal False Claims Act by entering into certain arrangements that allegedly violated the federal anti-kickback statute and provisions of the Social Security Act prohibiting physician self-referrals. Although no specific monetary damage has been claimed, the plaintiff, on behalf of the federal government, seeks treble damages plus civil penalties and attorneys’ fees. The plaintiff also has requested an award of 30% of any judgment plus expenses.

In the action by the former employee, discovery is complete. On April 28, 2008, AHSI filed a motion for summary judgment seeking dismissal of the plaintiff’s claims. On July 21, 2008, the court granted the motion for summary judgment with respect to the plaintiff’s claims alleging violations of provisions of the Social Security Act prohibiting physician self-referrals, and these claims have been dismissed. The court denied the motion for summary judgment with respect to the plaintiff’s claims alleging violations of the federal anti-kickback statute and ruled that the plaintiff may go to trial as to those claims. The proceedings before the United States District Court for the District of Columbia have concluded, and on December 9, 2008 the Judicial Panel on Multidistrict Litigation ordered that the case be remanded to the United States District Court for the Middle District of Tennessee for trial. No trial date has been set. The parties have had initial discussions regarding their respective positions in the case; however, no resolution of this case has been reached or can be assured prior to the case proceeding to trial.

In a related matter, in February 2006, WPMC filed an arbitration claim seeking indemnification from us for certain costs and expenses incurred by it in connection with the case. In the action by WPMC, initial arbitration proceedings were commenced during the third quarter of fiscal 2006. During September 2007, the parties to this matter agreed to place the arbitration on hold for an indefinite period.

We believe that we have conducted our operations in full compliance with applicable statutory requirements and that we have meritorious defenses to the claims made in the case and the related arbitration proceeding, and intend to contest the claims vigorously.

Securities Class Actions

Beginning on June 5, 2008, Healthways and certain of its present and former officers and/or directors were named as defendants in two putative securities class actions filed in the U.S. District Court for the Middle District of Tennessee, Nashville Division. On August 8, 2008, the court ordered the consolidation of the two related cases, appointed lead plaintiff and lead plaintiff’s counsel, and granted lead plaintiff leave to file a consolidated amended complaint.

The amended complaint, filed on September 22, 2008, alleges that the Company and the individual defendants violated Sections 10(b) of the Securities Exchange Act of 1934 (the “Act”) and that the individual defendants violated Section 20(a) of the Act as “control persons” of Healthways. The amended complaint further alleges that certain of the individual defendants also violated Section 20A of the Act based on their stock sales. Plaintiff purports to bring these claims for unspecified monetary damages on behalf of a class of investors who purchased Healthways stock between July 5, 2007 and August 25, 2008.

In support of these claims, Lead Plaintiff alleges generally that, during the proposed class period, the Company made misleading statements and omitted material information regarding (1) the purported loss or restructuring of certain contracts with customers, (2) the Company’s participation in the Medicare Health Support (“MHS”) pilot program for the Centers for Medicare & Medicaid Services, and (3) the Company’s guidance for fiscal year 2008. Defendants filed a motion to dismiss the amended complaint on November 12, 2008. Discovery has not yet commenced in the consolidated case, and no trial date has been set.

Shareholder Derivative Lawsuits

are based upon substantially the same facts alleged in the securities class action litigation described above. The plaintiffs are seeking to recover damages in an unspecified amount and equitable and/or injunctive relief.

On August 13, 2008, the Court consolidated these two lawsuits and appointed lead counsel. On October 3, 2008, the Court ordered that the consolidated action be stayed until the motion to dismiss in the securities class action has been resolved by the District Court. Discovery has not yet commenced in the consolidated case, and no trial date has been set.

ERISA Lawsuit

Additionally, on July 31, 2008, a purported class action alleging violations of the Employee Retirement Income Security Act (“ERISA”) was filed in the U.S. District Court for the Middle District of Tennessee, Nashville Division against Healthways, Inc. and certain of its directors and officers alleging breaches of fiduciary duties to participants in the Company’s 401(k) plan. The central allegation is that Company stock was an imprudent investment option for the 401(k) plan.

The complaint was amended on September 29, 2008. The named defendants are: the Company, the Board of Directors, certain officers, and members of the Investment Committee charged with administering the 401(k) plan. The amended complaint alleges that the defendants violated ERISA by failing to remove the Company stock fund from the 401(k) plan when it allegedly became an imprudent investment, by failing to disclose adequately the risks and results of the MHS pilot program to 401(k) plan participants, and by failing to seek independent advice as to whether to continue to permit the plan to hold Company stock. It further alleges that the Company and its directors should have been more closely monitoring the Investment Committee and other plan fiduciaries. The amended complaint seeks damages in an undisclosed amount and other equitable relief. Defendants filed a motion to dismiss on October 29, 2008. Discovery in this case has not yet commenced and a trial date of April 27, 2010 has been set.

Outlook

While we believe we have meritorious defenses to the claims made in the foregoing described legal proceedings, resolution of these legal matters could have a material adverse effect on our consolidated results of operations and/or financial condition although we are not able to reasonably estimate a range of potential losses. We believe that we will incur increased legal expenses associated with the defense of the lawsuit by the former employee, which may be material to our consolidated results of operations for fiscal 2009 or in a particular financial reporting period. As these matters are subject to inherent uncertainties, our view of these matters may change in the future.

(7)

Comprehensive Income

Comprehensive income, net of income taxes, was $8.6 million and $10.2 million for the three months ended November 30, 2008 and 2007, respectively.

(8)

Earnings Per Share

The following is a reconciliation of the numerator and denominator of basic and diluted earnings per share for the three months ended November 30, 2008 and 2007:

(In 000s, except per share data)	Three Months		Three Months
	Ended		Ended
	November 30,		November 30,
	2008		2007
Numerator:
Net income - numerator for basic earnings per share	$	12,581	$	11,183

Denominator:
Shares used for basic earnings per share		33,612		35,717
Effect of dilutive stock options and restricted stock units outstanding:
Non-qualified stock options		308		1,842
Restricted stock units		148		131
Shares used for diluted earnings per share		34,068		37,690

Earnings per share:
Basic	$	0.37	$	0.31
Diluted	$	0.37	$	0.30

Dilutive securities outstanding not included in the computation of earnings per share because their effect
is antidilutive:		4,058		461

(9)

Subsequent Events

On December 30, 2008, we completed an offer to purchase outstanding options to acquire shares of common stock of the Company that were granted between September 1, 2004 and August 15, 2008 under our shareholder-approved stock option plans (the “Tender Offer”). We purchased stock options representing the right to acquire 1.1 million shares of the Company’s common stock for $0.7 million in cash. We also expect to recognize $11.5 million of additional stock-based compensation expense in December 2008, which represents the remaining compensation cost for these options as measured at the grant date but not yet recognized prior to the completion of the Tender Offer on December 30, 2008.

We expect to incur a pretax charge for the month of December 2008 of approximately $9.0 million related to a restructuring of the Company announced in October 2008, which includes severance costs, net of any equity forfeitures, and capacity consolidation costs. The restructuring did not materially affect our financial results for the three months ended November 30, 2008.

In December 2008, we decided to discontinue offering one of our products as a standalone program. As a result of this decision we did not renew the expiring trade name associated with this product and recorded an impairment loss of $4.3 million in December to write off this intangible asset.

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

Overview

Founded in 1981, Healthways, Inc. provides specialized, comprehensive solutions to help people improve physical, emotional and social well-being, reducing both direct health care costs and the costs associated with the loss of health-related employee productivity.

Healthways provides highly specific and personalized interventions for each individual in a population, irrespective of health status, age or sponsor. Our evidence-based health, prevention and well-being services are made available to consumers via phone, direct mail, the Internet, face-to-face consultations and venue-based interactions.

In North America, Healthways’ customers include health plans, governments, employers and hospitals in all 50 states, the District of Columbia and Puerto Rico. We successfully entered markets on three additional continents and now provide health improvement programs and services in Germany, Brazil and Australia. We have a worldwide network of care enhancement and coaching centers staffed with licensed health professionals. Our fitness center network encompasses more than 18,000 U.S. locations. We also maintain an extensive network of complementary and alternative medicine providers and chiropractors consisting of more than 32,000 licensed professionals.

Specifically, Healthways focuses on:

Keeping Healthy People Healthy

•

Fostering wellness and disease prevention through total population screening, health risk assessments and supportive interventions

•

Providing access to health improvement programs, such as fitness, weight management, complementary and alternative medicine and smoking cessation

Our prevention programs focus on education, physical fitness, health coaching, behavior change techniques and support, and evidence-based interventions to drive adherence to proven standards of care, medication regimens and physicians’ plans of care. Healthways believes this approach optimizes the health status of member populations and reduces the short- and long-term direct health care costs for participants, including costs associated with the loss of health-related employee productivity.

Driving Healthy Behaviors and Mitigating Lifestyle Risk

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Promoting the reduction of lifestyle behaviors that lead to poor health or chronic conditions

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Providing educational materials and personal interactions with highly trained nurses and other health care professionals to create and sustain healthier behaviors for the at-risk and those in the early stages of chronic conditions

We enable health plans and employers to engage everyone in their covered populations through specific interventions that are sensitive to each individual’s health risks and needs. Our products are designed to motivate people to make positive lifestyle changes and accomplish individual goals, such as increasing physical activity for seniors through the Healthways SilverSneakers® fitness program or overcoming nicotine addiction through the QuitNet® on-line smoking cessation community.

Optimizing Care for those with Existing Conditions or Disease

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Incorporating the latest, evidence-based clinical guidelines into interventions to optimize patient health outcomes

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Developing care support plans and motivating members to set attainable goals for themselves

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Providing local market resources to address acute episodic interventions

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Coordinating members’ care with their health care providers

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Providing software licensing and management consulting in support of health and care support services

Healthways provides programs for people with chronic diseases or persistent conditions, including: diabetes, coronary artery disease, heart failure, asthma, chronic obstructive pulmonary disease, end-stage renal disease, cancer, chronic kidney disease, depression, high-risk obesity, metabolic syndrome, acid-related stomach disorders, atrial fibrillation, decubitus ulcer, fibromyalgia, hepatitis C, inflammatory bowel disease, irritable bowel syndrome, low-back pain, osteoarthritis, osteoporosis and urinary incontinence. We also provide high-risk care management for members at risk for hospitalization due to complex conditions. Healthways believes creating real and sustainable behavior change generates measurable, long-term cost savings.

In summary, Healthways’ guiding philosophy and approach to market is predicated on the fundamental belief that healthier people cost less and are more productive. Our programs are designed to help keep healthy individuals healthy, mitigate and delay the progression to disease associated with family or lifestyle risk factors, and promote the best possible health habits for those who are already affected by health conditions or disease.

At the same time, we recognize that each individual plays a variety of roles in his or her pursuit of health, often simultaneously. By providing the full spectrum of services to meet each individual’s needs, we believe our interventions can be delivered at scale and in a manner that reflects those unique needs over time. Further, our extensive and fully accredited complementary and alternative provider network offers convenient access to the significant number of individuals who seek health services outside of the traditional health care system.

Highlights of Performance for the Three Months Ended November 30, 2008

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Revenues for the three months ended November 30, 2008 increased 5.5% over the three months ended November 30, 2007.

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Net income for the three months ended November 30, 2008 increased 12.5% over the three months ended November 30, 2007.

Recent Developments

In August 2008, our Board of Directors approved a change in our fiscal year-end from August 31 to December 31. Accordingly, our next full fiscal year will begin on January 1, 2009 following the four-month transition period ending December 31, 2008. We will file a report covering the four-month transition period on Form 10-QT in February 2009.

December 2008, which represents the remaining compensation cost for these options as measured at the grant date but not yet recognized prior to the completion of the Tender Offer on December 30, 2008.

Forward-Looking Statements

Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements, which are based upon current expectations and involve a number of risks and uncertainties. Forward-looking statements include all statements that do not relate solely to historical or current facts, and can be identified by the use of words like “may,” “believe,” “will,” “expect,” “project,” “estimate,” “anticipate,” “plan,” or “continue.” In order for us to use the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we caution you that the following important factors, among others, may affect these forward-looking statements. Consequently, actual operations and results may differ materially from those expressed in the forward-looking statements. The important factors include but are not limited to:

•

our ability to sign and implement new contracts for Health and Care Support solutions;

•

our ability to accurately forecast performance and the timing of revenue recognition under the terms of our customer contracts ahead of data collection and reconciliation in order to provide forward-looking guidance;

•

the impact of any new or proposed legislation, regulations and interpretations relating to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, including the potential expansion to Phase II for Medicare Health Support programs and any legislative or regulatory changes with respect to Medicare Advantage;

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our ability to reach mutual agreement with CMS with respect to results necessary to achieve success as defined under Phase I of Medicare Health Support;

•

our ability to anticipate the rate of market acceptance of Health and Care Support solutions in potential international markets;

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our ability to accurately forecast the costs necessary to implement our strategy of establishing a presence in international markets;

•

the risks associated with foreign currency exchange rate fluctuations and our ability to hedge against such fluctuations;

•

our ability to retain existing health plan customers if they decide to take programs in-house or are acquired by other health plans which already have or are not interested in Health and Care Support programs;

•

the risks associated with a significant concentration of our revenues with a limited number of customers;

•

our ability to effect cost savings and clinical outcomes improvements under Health and Care Support contracts and reach mutual agreement with customers with respect to cost savings, or to effect such savings and improvements within the time frames contemplated by us;

•

our ability to achieve estimated annualized revenue in backlog in the manner and within the timeframe we expect, which is based on certain estimates regarding the implementation of our services;

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our ability and/or the ability of our customers to enroll participants in our Health and Care Support programs in a manner and within the timeframe anticipated by us;

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our ability to collect contractually earned performance incentive bonuses;

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the ability of our customers to provide timely and accurate data that is essential to the operation and measurement of our performance under the terms of our contracts;

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our ability to favorably resolve contract billing and interpretation issues with our customers;

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our ability to service our debt and make principal and interest payments as those payments become due;

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the risks associated with changes in macroeconomic conditions, which may reduce the demand and/or the timing of purchases for our services from customers or potential customers, reduce the number of covered lives of our existing customers, restrict our ability to obtain additional financing, or impact the availability of credit under our Third Amended Credit Agreement;

•

counterparty risk associated with our interest rate swap agreements;

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our ability to integrate acquired businesses or technologies into our business;

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the impact of any impairment of our goodwill or other intangible assets;

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our ability to develop new products and deliver outcomes on those products;

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our ability to renew and/or maintain contracts with our customers under existing terms or restructure these contracts on terms that would not have a material negative impact on our results of operations;

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our ability to obtain adequate financing to provide the capital that may be necessary to support our operations and to support or guarantee our performance under new contracts;

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unusual and unforeseen patterns of healthcare utilization by individuals with diabetes, cardiac, respiratory and/or other diseases or conditions for which we provide services;

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the ability of our customers to maintain the number of covered lives enrolled in the plans during the terms of our agreements;

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the impact of litigation involving us and/or our subsidiaries;

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the impact of future state, federal, and international health care and other applicable legislation and regulations on our ability to deliver our services and on the financial health of our customers and their willingness to purchase our services; and

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other risks detailed in our other filings with the Securities and Exchange Commission.

We undertake no obligation to update or revise any such forward-looking statements.

Customer Contracts

Contract Terms

We generally determine our contract fees by multiplying a contractually negotiated rate per member per month (“PMPM”) by the number of members covered by our services during the month. We typically set the PMPM rates during contract negotiations with customers based on the value we expect our programs to create and a sharing of that value between the customer and the Company. In addition, some of our services are billed on a fee for service basis.

Our contracts with health plans generally range from three to five years with provisions for subsequent renewal; contracts with self-insured employers, either directly or through their health plans or pharmacy benefit manager, typically have one to three-year terms. Some contracts allow the customer to terminate early.

Some of our contracts provide that a portion (up to 100%) of our fees may be refundable to the customer (“performance-based”) if our programs do not achieve, when compared to a baseline year, a targeted percentage reduction in the customer’s healthcare costs and selected clinical and/or other criteria that focus on improving the health of the members. Approximately 4% of revenues recorded during the three months ended November 30, 2008 were performance-based and were subject to final reconciliation as of November 30, 2008. We anticipate that this percentage will fluctuate due to the level of performance-based fees in new contracts, revenue recognition associated with performance-based fees, and the timing of data reconciliation, which varies according to contract terms. A limited number of contracts also provide opportunities for us to receive incentive bonuses in excess of the contractual PMPM rate if we exceed contractual performance targets.

We participated in two Medicare Health Support pilots, which terminated in January 2008 and July 2008, respectively. These pilots were awarded under the Chronic Care Improvement Program authorized by the Medicare Modernization Act of 2003. We began operating one pilot in August 2005 to serve 20,000 Medicare fee-for-service beneficiaries in Maryland and the District of Columbia. All fees under this pilot were performance-based. This pilot ended on its scheduled termination date of July 31, 2008. In addition, we began serving 20,000 beneficiaries in Georgia in September 2005 in collaboration with CIGNA HealthCare, Inc (“CIGNA”). CIGNA terminated its Chronic Care Improvement Program Cooperative Agreement with CMS effective January 14, 2008. The majority of our fees under our contract with CIGNA were performance-based. Both pilots were for complex diabetes and congestive heart failure disease management services and, while operationally similar to our programs for commercial and Medicare Advantage health plan populations, were modified for the special needs and conditions of this population.

In June 2006, we signed an amendment to our cooperative agreement with CMS for our Medicare Health Support stand-alone pilot in Maryland and the District of Columbia, which, among other things, enabled us to provide congestive heart failure programs to approximately 4,500 additional Medicare fee-for-service beneficiaries for two years beginning on August 1, 2006 (the “refresh population”). This pilot also ended on its scheduled termination date of July 31, 2008. All fees for the refresh population were performance-based.

Technology

Our customer contracts require sophisticated analytical, data management, Internet and computer-telephony solutions based on state-of-the-art technology. These solutions help us deliver our Health and Care Support services to large populations within our customer base. Our predictive modeling capabilities allow us to identify and stratify those participants who are most at risk for an adverse health event. We incorporate behavior-change science with consumer-friendly interactions such as face-to-face, telephonic, print materials and web portals to facilitate consumer preferences for engagement and convenience. We use sophisticated data analytical and reporting solutions to validate the impact of our programs on clinical and financial outcomes. We continue to invest heavily in technology and are continually expanding and improving our proprietary clinical, data management, and reporting systems to continue to meet the information management requirements of our Health and Care Support services.

Contract Revenues

Our contract revenues depend on the contractual terms we establish and maintain with customers to provide Health and Care Support services to their members. Some contracts allow the customer to terminate early. Restructurings and possible terminations at, or prior to, renewal could have a material negative impact on our results of operations and financial condition.

Approximately 19% of our revenues for the three months ended November 30, 2008 were derived from one customer. The loss of this customer or any other large customer or a reduction in the profitability of a contract with any large customer would have a material negative impact on our results of operations, cash flows, and financial condition.

Domestic Commercial Billed Lives and Domestic Commercial Available Lives

The number of domestic commercial available lives and domestic commercial billed lives as of November 30, 2008 and 2007 were as follows:

	November 30,	November 30,
(In 000s)	2008	2007
Available lives⁽¹⁾	195,000	183,400
Billed lives	32,700	26,700

⁽¹⁾ Estimated based on the Atlantic Information Services, Inc. (AIS) Directory of Health Plans and publicly available information.

Backlog

Backlog represents the estimated annualized revenue at target performance for business awarded but not yet started at November 30, 2008. Annualized revenue in backlog as of November 30, 2008 and 2007 was as follows:

	November 30,		November 30,
(In 000s)	2008		2007
Annualized revenue in backlog	$	31,900	$	51,000

Our Health and Care Support services for self-insured employers generally begin on January 1, which has historically resulted in a disproportionate amount of our new business beginning on this date.

Business Strategy

The World Health Organization defines health as “...not only the absence of infirmity and disease, but also a state of physical, mental, and social well-being.”

Our business strategy reflects our passion to enhance health and well-being, and as a result, reduce overall costs and improve productivity. Our programs are designed to:

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keep healthy individuals healthy;

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mitigate and slow the progression to disease associated with family or lifestyle risk factors; and

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promote the best possible health for those who are already affected by existing health conditions or disease.

Through our solutions, we work to optimize the health and well-being of entire populations, one person at a time, domestically and internationally, thereby creating value, reducing overall costs and improving productivity for individuals, families, health plans, governments and employers.

We believe it is critical to impact an entire population’s underlying health status and well-being in a long-term, cost effective way. Believing that what gets measured gets acted upon, in January 2008, we entered

into an exclusive, 25-year relationship with Gallup to provide a national, daily pulse of individual and collective well-being. The Gallup-Healthways Well-Being Index^TM is a unique partnership in well-being measurement and research that surveys 1,000 Americans every day, seven days a week. Under the agreement, Gallup evaluates and reports on the well-being of countries, states and communities. We perform similar services for companies, families and individuals.

To impact measurements like the Well-Being Index and thus enhance health and well-being within their respective populations, our current and prospective customers need solutions that focus on the underlying drivers of health care demand, address worsening health status, reverse or slow unsustainable cost trends, foster healthy behaviors, mitigate health risks, and manage chronic conditions. Our strategy is to deliver programs that engage individuals and help them enhance their health status and well-being regardless of their starting point. We believe we can achieve health and well-being improvements in a population and generate significant cost savings and productivity improvements by providing effective programs that support the individual throughout his or her health journey.

We are adding and enhancing solutions to extend our reach and effectiveness and to meet increasing demand for integrated solutions. The flexibility of Healthways’ programs allows customers to provide services they deem appropriate for their organizations. Customers may select from certain single program options up to a total-population approach, in which all members of the customer’s population are eligible to receive benefits.

To support competitive advantage in delivering our services, we plan to continue using our scalable, state-of-the-art call centers, medical information content, behavior change processes and techniques, strategic relationships, health provider networks, fitness center relationships, proprietary technologies and techniques. Healthways anticipates it will continue to enhance, expand and further integrate capabilities, pursue opportunities in domestic government and international markets, and enhance its information technology support. We may add some of these new capabilities and technologies through internal development, strategic alliances with other entities and/or through selective acquisitions or investments.

Critical Accounting Policies

We describe our accounting policies in Note 1of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2008. We prepare the consolidated financial statements in conformity with U.S. generally accepted accounting principles, which require us to make estimates and judgments that affect the reported amounts of assets and liabilities and related disclosures at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.

We believe the following accounting policies are the most critical in understanding the estimates and judgments that are involved in preparing our financial statements and the uncertainties that could impact our results of operations, financial condition and cash flows.

Revenue Recognition

Our contracts with health plans generally range from three to five years with provisions for subsequent renewal; contracts with self-insured employers, either directly or through their health plans, typically have one to three-year terms. Some contracts allow the customer to terminate early.

We generally bill our customers each month for the entire amount of the fees contractually due for the prior month’s enrollment, which typically includes the amount, if any, that is performance-based and may be subject to refund should we not meet performance targets. Deferred revenues arise from contracts which permit upfront billing and collection of fees covering the entire contractual service period, generally 12 months. Contractually, we cannot bill for any incentive bonus until after contract settlement. Fees for service are typically billed in the month after the services are provided.

We recognize revenue as follows: 1) we recognize the fixed portion of PMPM fees and fees for service as revenue during the period we perform our services; 2) we recognize the performance-based portion of the monthly fees based on the most recent assessment of our performance, which represents the amount that the customer would legally be obligated to pay if the contract were terminated as of the latest balance sheet date; and 3) we recognize additional incentive bonuses based on the most recent assessment of our performance, to the extent we consider such amounts collectible.

We assess our level of performance for our contracts based on medical claims and other data that the customer is contractually required to supply. A minimum of four to six months’ data is typically required for us to measure performance. In assessing our performance, we may include estimates such as medical claims incurred but not reported and a medical cost trend compared to a baseline year. In addition, we may also provide contractual reserves, when appropriate, for billing adjustments at contract reconciliation.

Substantially all of the fees under the Medicare Health Support pilots in which we participated were performance-based. Our original cooperative agreements required that, by the end of the third year, we achieve a cumulative net savings (total savings for the intervention population as compared to the control group less fees received from CMS) of 5.0%. Under an amendment to our agreement for our stand-alone Medicare Health Support pilot in Maryland and the District of Columbia, we began serving a “refresh population” of approximately 4,500 beneficiaries on August 1, 2006, which was measured as a separate cohort for two years, by the end of which the program was required to achieve a 2.5% cumulative net savings when compared to a new control cohort. In April 2008, we signed an amendment to our Medicare Health Support protocol with CMS, which changed the financial performance target for both the initial and the refresh populations to budget neutrality. Although we receive the medical claims and other data associated with the intervention group under these pilots on a monthly basis, we assess our performance against the control group under these pilots based on quarterly summary performance reports received from CMS’ independent financial reconciliation contractor. As of November 30, 2008, we had recognized $10.2 million of cumulative performance-based fees under the Medicare Health Support pilots, and contract billings in excess of earned revenue related to these pilots totaled $55.8 million.

Under the terms of our Cooperative Agreement with CMS, we expect to receive the final quarterly summary performance report from CMS’ independent financial reconciliation contractor in the first half of calendar 2009. While the Cooperative Agreement allows for a 30-day reconciliation period upon receipt of the final quarterly summary performance report, we cannot assure you that we will be able to reach a final reconciliation within this timeframe.

If data is insufficient or incomplete to measure performance, or interim performance measures indicate that we are not meeting performance targets, we do not recognize performance-based fees subject to refund as revenues but instead record them in a current liability account entitled “contract billings in excess of earned revenue.” Only in the event we do not meet performance levels by the end of the measurement period, typically one year, are we contractually obligated to refund some or all of the performance-based fees. We would only reverse revenues that we had already recognized if performance to date in the measurement period, previously above targeted levels, subsequently dropped below targeted levels. Historically, any such adjustments have been immaterial to our financial condition and results of operations.

During the settlement process under a contract, which generally occurs six to eight months after the end of a contract year, we settle any performance-based fees and reconcile healthcare claims and clinical data. As of November 30, 2008, performance-based fees that have not yet been settled with our customers but that have been recognized as revenue in the current and prior years totaled approximately $47.9 million. Of this amount, $10.2 million was based on calculations which include estimates such as medical claims incurred but not reported and/or the customer’s medical cost trend compared to a baseline year, while $37.7 million was based entirely on actual data received from our customers. Data reconciliation differences, for which we provide contractual allowances until we reach agreement with respect to identified issues, can arise between the customer and us due to customer data deficiencies, omissions, and/or data discrepancies.

Performance-related adjustments (including any amounts recorded as revenue that were ultimately refunded), changes in estimates, data reconciliation differences, or adjustments to incentive bonuses may cause us to recognize or reverse revenue in a current fiscal year that pertains to services provided during a prior fiscal year. During the three months ended November 30, 2008, we recognized a net increase in revenue of approximately $4.4 million that related to services provided prior to September 1, 2008.

Impairment of Intangible Assets and Goodwill

In accordance with SFAS No. 142 “Goodwill and Other Intangible Assets,” we review goodwill for impairment on an annual basis or more frequently whenever events or circumstances indicate that the carrying value may not be recoverable.

If we determine that the carrying value of goodwill is impaired based upon an impairment review, we calculate any impairment using a fair-value-based goodwill impairment test as required by SFAS No. 142. Fair value is the amount at which the asset could be bought or sold in a current transaction between two willing parties. We estimate fair value using a number of techniques, including quoted market prices, present value techniques based on estimates of cash flows, or multiples of earnings or revenues performance measures.

We amortize other identifiable intangible assets, such as acquired technologies and customer contracts, on the straight-line method over their estimated useful lives, except for a trade name which has an indefinite life and is not subject to amortization. We review intangible assets not subject to amortization on an annual basis or more frequently whenever events or circumstances indicate that the

assets might be impaired. We assess the potential impairment of intangible assets subject to amortization whenever events or changes in circumstances indicate that the carrying values may not be recoverable.

If we determine that the carrying value of other identifiable intangible assets may not be recoverable, we calculate any impairment using an estimate of the asset’s fair value based on the projected net cash flows expected to result from that asset, including eventual disposition.

Future events could cause us to conclude that impairment indicators exist and that goodwill and/or other intangible assets associated with our acquired businesses are impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.

Income Taxes

SFAS No. 109, “Accounting for Income Taxes,” establishes financial accounting and reporting standards for the effect of income taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. SFAS No. 109 requires significant judgment in determining income tax provisions, including determination of deferred tax assets, deferred tax liabilities, and any valuation allowances that might be required against deferred tax assets, and in evaluating tax positions.

Accruals for uncertain tax positions are provided for in accordance with the requirements of Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109”. Under FIN No. 48, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. FIN No. 48 also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our financial position, results of operations, or cash flows.

Share-Based Compensation

In accordance with SFAS No. 123(R), we measure and recognize compensation expense for all share-based payment awards based on estimated fair values at the date of grant. Determining the fair value of share-based awards at the grant date requires judgment in developing assumptions, which involve a number of variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards and expected stock option exercise behavior. In addition, we also use judgment in estimating the number of share-based awards that are expected to be forfeited.

Results of Operations

The following table shows the components of the statements of operations for the three months ended November 30, 2008 and 2007 expressed as a percentage of revenues.

	Three Months Ended
	November 30,
	2008		2007

Revenues	100.0	%	100.0	%
Cost of services (exclusive of depreciation
and amortization included below)	69.6	%	70.6	%
Selling, general and administrative expenses	9.7	%	9.6	%
Depreciation and amortization	6.6	%	5.9	%
Operating income ⁽¹⁾	14.2	%	13.8	%

Interest expense	2.7	%	3.0	%

Income before income taxes ⁽¹⁾	11.4	%	10.8	%
Income tax expense	4.6	%	4.4	%

Net income	6.8	%	6.4	%

⁽¹⁾ Figures may not add due to rounding.

Revenues

Revenues for the three months ended November 30, 2008 increased $9.6 million, or 5.5%, over revenues for the three months ended November 30, 2007, primarily due to the following:

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$12.1 million due to the commencement of new contracts;

•

$3.2 million due to an increase in the recognition of performance-based fees as revenue; and

•

$3.0 million due to growth in the number of self-insured employers on behalf of our health plan customers.

These increases were partially offset by decreases in revenues of $10.8 million primarily due to contract restructurings and terminations with certain customers.

Cost of Services

Cost of services (excluding depreciation and amortization) as a percentage of revenues decreased to 69.6% for the three months ended November 30, 2008 compared to 70.6% for the three months ended November 30, 2007, primarily due to the following:

•

decreased costs related to the two Medicare Health Support pilots in which we participated, which ended in January 2008 and July 2008, respectively; and

•

efficiencies related to certain cost management initiatives.

These decreases were somewhat offset by the following increases in cost of services as a percentage of revenues:

•

increased member utilization of fitness centers for contracts for which we receive a fixed fee per member;

•

contract restructurings with certain customers, as noted above, that resulted in decreased revenues without a proportional corresponding decrease in costs; and

•

increased costs related to information technology hosting security and storage for the three months ended November 30, 2008.

Selling, General and Administrative Expenses

Selling, general and administrative expenses as a percentage of revenues for the three months ended November 30, 2008 remained relatively consistent with the three months ended November 30, 2007.

Depreciation and Amortization

Depreciation and amortization expense increased 16.3% for the three months ended November 30, 2008 compared to the three months ended November 30, 2007, primarily due to increased depreciation expense resulting from capital expenditures of computer software, which we made to enhance our information technology capabilities, and capital expenditures related to our new corporate headquarters. This increase was partially offset by a decrease in amortization expense related to certain intangible assets that became fully amortized in September 2008.

Interest Expense

Interest expense for the three months ended November 30, 2008 decreased $0.2 million compared to the three months ended November 30, 2007, primarily as a result of a decrease in interest rates on outstanding borrowings somewhat offset by a higher average level of outstanding borrowings under the Third Amended Credit Agreement during the three months ended November 30, 2008 compared to the three months ended November 30, 2007.

Income Tax Expense

Our effective tax rate decreased to 40.5% for the three months ended November 30, 2008 compared to 41.1% for the three months ended November 30, 2007 primarily due to a decrease in the amount of foreign losses for which no tax benefit is recognized. The difference between the statutory federal income tax rate of 35.0% and our effective tax rate is due primarily to the impact of state income taxes, the lack of tax benefit on certain expenses incurred in international initiatives, the impact of tax interest accruals, and certain non-deductible expenses for income tax purposes.

Outlook

We anticipate that revenues for fiscal 2009 will likely decrease over fiscal 2008 revenues primarily due to contract restructurings and terminations with certain customers that may more than offset revenue increases from new or existing customers.

Should revenues for fiscal 2009 decrease as discussed above, cost of services and/or selling, general and administrative expenses as a percentage of revenues for fiscal 2009 could increase due to certain costs that cannot be reduced in the same proportion and/or timeframe as the potential decrease in

revenues. In addition, we may incur increased legal expenses in fiscal 2009 associated with the defense of a lawsuit by a former employee (discussed more fully in “Legal Proceedings” below).

As previously mentioned under “Recent Developments”, we expect to recognize $11.5 million of additional stock-based compensation expense in December 2008 related to the Tender Offer. We also expect to incur a pretax charge for the month of December 2008 of approximately $13.0 million related to a restructuring of the Company announced in October 2008, which includes $9.0 million related to severance costs, net of any equity forfeitures, and capacity consolidation and also $4.3 million related to the write-off a trade name.

As discussed in “- Liquidity and Capital Resources” below, a significant portion of our long-term debt is subject to fixed interest rate swap agreements; however, due to current economic conditions that have created uncertainty and credit constraints in the markets, we cannot predict the impact that potential changes in interest rates will have on our variable rate debt. We anticipate that our effective tax rate for the December 2008 and for fiscal 2009 will not change significantly; however, we continue to evaluate the impact of changes within our operations on our geographic mix of earnings and overall tax rate.

Liquidity and Capital Resources

Operating activities for the three months ended November 30, 2008 generated cash of $21.6 million compared to $25.5 million for the three months ended November 30, 2007. The decrease in operating cash flow is primarily due to the following:

•

an employee bonus payment to non-officers during the three months ended November 30, 2008 compared to no bonus payment during the three months ended November 30, 2007;

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an increase in income tax payments during the three months ended November 30, 2008 compared to the three months ended November 30, 2007, primarily due to an increase in final tax payments pertaining to the previous fiscal year; and

•

a decrease in days payables outstanding from November 30, 2007 to November 30, 2008.

This decrease was somewhat offset by an increase in operating cash flow during the three months ended November 30, 2008 compared to the three months ended November 30, 2007, primarily due to increased cash collections on accounts receivable for the three months ended November 30, 2008 compared to the three months ended November 30, 2007.

Investing activities during the three months ended November 30, 2008 used $12.0 million in cash, which primarily consisted of purchases of property and equipment associated with information technology hardware and software.

Financing activities during the three months ended November 30, 2008 used $40.5 million in cash, primarily from repayments on borrowings under the Third Amended Credit Agreement.

On December 1, 2006, we entered into the Third Amended Credit Agreement. The Third Amended Credit Agreement provides us with a $400.0 million revolving credit facility, including a swingline sub facility of $10.0 million and a $75.0 million sub facility for letters of credit, a $200.0 million term loan facility, and an uncommitted incremental accordion facility of $200.0 million. As of November 30, 2008, availability under our revolving credit facility and swingline sub facility totaled $287.6 million.

The Third Amended Credit Agreement contains various financial covenants, which require us to maintain, as defined, ratios or levels of 1) total funded debt to EBITDA, 2) fixed charge coverage, and 3) net worth. The Third Amended Credit Agreement also restricts the payment of dividends and limits the amount of repurchases of the Company’s common stock. As of November 30, 2008, we were in compliance with all of the covenant requirements of the Third Amended Credit Agreement.

Swap #	Notional Amount in ($000’s)	Fixed Interest Rate		Termination Date
1	$230,000	4.995	%	March 31, 2010	⁽¹⁾
2	40,000	3.987	%	December 31, 2009
3	40,000	3.433	%	December 30, 2011
4	50,000	3.688	%	December 30, 2011	⁽²⁾
5	40,000	3.855	%	December 30, 2011	⁽³⁾
6	30,000	3.760	%	March 30, 2011	⁽⁴⁾

(1) The principal value of this swap agreement amortizes over a 39-month period. The notional amount of this swap as of November 30, 2008 was $120 million.

(2) This swap agreement becomes effective April 1, 2009.

(3) This swap agreement becomes effective October 1, 2009.

(4) This swap agreement becomes effective January 2, 2010.

We currently believe that we meet the hedge accounting criteria under SFAS No. 133 in accounting for these interest rate swap agreements.

We believe that cash flows from operating activities, our available cash, and our expected available credit under the Third Amended Credit Agreement will continue to enable us to meet our contractual obligations and to fund our current operations for the foreseeable future. However, if our operations require significant additional financing resources, such as capital expenditures for technology improvements, additional call centers and/or letters of credit or other forms of financial assurance to guarantee our performance under the terms of new contracts, or if we are required to refund performance-based fees pursuant to contract terms, or if there is an adverse resolution to certain outstanding litigation,

we may need to raise additional capital by expanding our existing credit facility and/or issuing debt or equity. If we face a limited ability to arrange such financing, it may restrict our ability to effectively operate our business. Current economic conditions, including turmoil and uncertainty in the financial services industry, have created constraints on liquidity and the ability to obtain credit in the markets. Should the credit markets not improve, we cannot assure you that we would be able to secure additional financing if needed and, if such funds were available, whether the terms or conditions would be acceptable to us.

If contract development accelerates or acquisition opportunities arise, we may need to issue additional debt or equity to provide the funding for these increased growth opportunities. We may also issue equity in connection with future acquisitions or strategic alliances. We cannot assure you that we would be able to issue additional debt or equity on terms that would be acceptable to us.

Recently Issued Accounting Standards

Fair Value Measurement

In September 2006 the FASB issued SFAS No. 157, “Fair Value Measurement,” which provides guidance for using fair value to measure assets and liabilities, including a fair value hierarchy that prioritizes the information used to develop fair value assumptions. It also requires expanded disclosure about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value and does not expand the use of fair value in any new circumstances. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.

In February 2008, the FASB issued FSP FAS No. 157-2, “Effective Date of FASB Statement No. 157”, which defers by one year the effective date of the provisions of SFAS No. 157 for non-recurring, nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008. We do not expect the adoption of SFAS No. 157 to have a material impact on our financial position or results of operations.

Business Combinations

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are subject to market risk related to interest rate changes, primarily as a result of the Third Amended Credit Agreement, which bears interest based on floating rates. Revolving advances under the Third Amended Credit Agreement generally bear interest, at our option, at 1) LIBOR plus a spread of

0.875% to 1.750% or 2) the greater of the federal funds rate plus 0.5%, or the prime rate, plus a spread of 0.000% to 0.250%. Term loan borrowings bear interest, at our option, at 1) LIBOR plus 1.50% or 2) the greater of the federal funds rate plus 0.5%, or the prime rate.

In order to manage our interest rate exposure under the Third Amended Credit Agreement, we have entered into six interest rate swap agreements effectively converting our floating rate debt to fixed obligations with interest rates ranging from 3.433% to 4.995%.

A one-point interest rate change would have resulted in interest expense fluctuating approximately $0.3 million for the three months ended November 30, 2008.

As a result of our investment in international initiatives, as of November 30, 2008 we are also exposed to foreign currency exchange rate risks. Because a significant portion of these risks is economically hedged with currency options and/or forwards contracts and because our international initiatives are not yet material to our consolidated results of operations, a 10% change in foreign currency exchange rates would not have had a material impact on our results of operations or financial position for the three months ended November 30, 2008. We do not execute transactions or hold derivative financial instruments for trading purposes.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our chief executive officer and chief financial officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of November 30, 2008. Based on that evaluation, the chief executive officer and chief financial officer have concluded that our disclosure controls and procedures effectively and timely provide them with material information relating to the Company and its consolidated subsidiaries required to be disclosed in the reports the Company files or submits under the Exchange Act.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal controls over financial reporting during the quarter ended November 30, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II

Item 1.

Legal Proceedings

Former Employee Action

Securities Class Action Litigation

Shareholder Derivative Lawsuits

Also, on June 27, 2008 and July 24, 2008, respectively, two shareholders filed putative derivative actions purportedly on behalf of Healthways in the Chancery Court for the State of Tennessee, Twentieth Judicial District, Davidson County, against certain directors and officers of the Company. These actions are based upon substantially the same facts alleged in the securities class action litigation described above. The plaintiffs are seeking to recover damages in an unspecified amount and equitable and/or injunctive relief.

ERISA Lawsuit

plan participants, and by failing to seek independent advice as to whether to continue to permit the plan to hold Company stock. It further alleges that the Company and its directors should have been more closely monitoring the Investment Committee and other plan fiduciaries. The amended complaint seeks damages in an undisclosed amount and other equitable relief. Defendants filed a motion to dismiss on October 29, 2008. Discovery in this case has not yet commenced and a trial date of April 27, 2010 has been set.

Outlook

Item 1A. Risk Factors

Not Applicable.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not Applicable.

Item 3. Defaults Upon Senior Securities

Not Applicable.

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

Not Applicable.

Item 5. Other Information

Not Applicable.

Item 6. Exhibits

(a)

Exhibits

10.1		Capital Accumulation Plan, as amended and restated November 6, 2008

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended

32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

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

			Healthways, Inc.
			(Registrant)




Date	January 9, 2009	By	/s/ Mary A. Chaput
			Mary A. Chaput
			Executive Vice President
			Chief Financial Officer
			(Principal Financial Officer)




Date	January 9, 2009	By	/s/ Alfred Lumsdaine
			Alfred Lumsdaine
			Senior Vice President and
			Controller
			(Principal Accounting Officer)

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Exhibit 10.1

Amended and Restated Corporate and Subsidiary Officer

Capital Accumulation Plan

Section 1. Establishment and Purpose

1.1 Establishment. Healthways, Inc. established the CORPORATE AND SUBSIDIARY OFFICER CAPITAL ACCUMULATION PLAN (hereinafter called the “Plan”) effective as of September 1, 1987, as a deferred compensation plan for Participants as described herein. This Amended and Restated Plan is adopted effective November 6, 2008.

1.2 Purpose. The purpose of this Plan is to provide a means whereby compensation payable to Company and Subsidiary officers may be deferred for a specified period and, when combined with Company additions, provide for capital accumulation toward savings goals.

1.3 Plan for a Select Group. The Plan shall cover certain Employees of the Company who are members of a “select group of management or highly compensated employees” within the meaning of ERISA Sections 201(2), 301(a)(3) and 401(a)(1). The Company shall have the authority to take any and all actions necessary or desirable in order for the Plan to satisfy the requirements set forth in ERISA and the regulations thereunder applicable to plans maintained for Employees who are members of a select group of management or highly compensated employees.

1.4 Not a Funded Plan. It is the intention and purpose of the Company that the Plan shall be deemed to be “unfunded” for tax purposes and deemed a plan as would properly be described as “unfunded” for purposes of Title I of ERISA. The Plan shall be administered in such a manner, notwithstanding any contrary provision of the Plan, in order that it will be so deemed and would be so described.

1.5 Section 409A. The Plan is intended to conform with the requirements of Section 409A of the Code and the Regulations issued thereunder and shall be implemented and administered in a manner consistent therewith.

Section 2. Definitions

2.1 Definitions. Whenever used hereinafter, the following terms shall have the meaning set forth below:

(a) “Account” means the total of a Participant’s pay deferrals, Company additions and growth additions thereon.

(b) “Alternate Payee” means any spouse, former spouse, child or other dependent of a Participant who is recognized by a Domestic Relations Order as having a right to receive all, or a portion of, the benefits payable under this Plan to that Participant.

(c)	“Board” means the Board of Directors of the Company.

(d) A “Change in Control” shall be deemed to have occurred upon the first to occur of any of the following events:

(i) Any one person or group (as described in Regulations promulgated under Section 409A) acquires ownership of stock of the Company that, together with stock held by such person or group, constitutes more than fifty percent (50%) of the total fair market value or total voting power of the stock of the Company; or

(ii) Notwithstanding that the Company has not undergone a Change in Control as described in 2.1(d)(i), a Change in Control of the Company occurs on the date that either:

(A) Any one person or more than one person acting as a group (as described in Regulations promulgated under Section 409A), acquires or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons ownership of stock of the Company possessing thirty percent (30%) or more of the total voting power of the stock of such corporation; or

(B) A majority of members of the Company’s Board is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Company’s Board prior to the date of the appointment or election; or

(iii) Any one person or group (as described in Regulations promulgated under Section 409A) acquires or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons assets from the Company that have a total gross fair market value equal to or more than forty percent (40%) of the total gross fair market value of all the assets of the Company immediately prior to such acquisition or acquisitions. For this purpose, gross fair market value means the value of the assets of the Company, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets.

In determining whether a Change in Control has occurred, the following rules shall be applicable:

(I) For purposes of a change in ownership described in Section 2.1(d)(i) above, if any one person or more than one person acting as a group is considered to own more than fifty percent (50%) of the total fair market value or total voting power of the stock of a corporation, the acquisition of additional stock by the same person or persons is not considered to cause a change in the ownership of the corporation (or to cause a change in the effective control of the corporation as described in Section 2.1(d)(ii)). An increase in the percentage of stock owned by any one person, or persons acting as a group, as a result of a transaction in which the corporation acquires its stock in exchange for property will be treated as an acquisition of stock. Section 2.1(d)(i) applies only when there is a transfer of stock of a corporation (or issuance of stock of a corporation) and stock in such corporation remains outstanding after the transaction. For purposes of Section 2.1(d)(i), persons will not be considered to be acting as a group solely because they purchase or own stock of the same corporation at the same time or as a result of a public offering. Persons will, however, be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock, or similar business transaction with the corporation. If a person, including an entity, owns stock in both corporations that enter into a merger, consolidation, purchase or acquisition of stock, or similar transaction, such shareholder is considered to be acting as a group with other shareholders only with respect to the ownership in that corporation prior to the transaction giving rise to the change and not with respect to the ownership interest in the other corporation.

(II) For purposes of a change in effective control of a corporation described in Section 2.1(d)(ii) above, if one person, or more than one person acting as a group, is considered

to effectively control a corporation within the meaning of Section 2.1(d)(ii), the acquisition of additional control of the corporation by the same person or persons is not considered to cause a change in the effective control of the corporation within the meaning of Section 2.1(d)(ii) or to cause a change in the ownership of the corporation within the meaning of Section 2.1(d)(i). Persons will or will not be considered to be acting as a group in accordance with rules similar to those set forth in the preceding clause (I) and as specifically provided in section 1.409A-3(i)(5)(vi)(D) of the Regulations under Section 409A.

(III) For purposes of a change in the ownership of a substantial portion of a corporation’s assets described in 2.1(d)(iii) above, there is not a Change in Control event when there is a transfer to an entity that is controlled by the shareholders of the transferring corporation immediately after the transfer. A transfer of assets by a corporation is not treated as a change in ownership of such assets if the assets are transferred to (i) a shareholder of the corporation (immediately before the asset transfer) in exchange for or with respect to its stock, (ii) an entity, fifty percent (50%) or more of the total value or voting power of which is owned, directly or indirectly, by the corporation, (iii) a person, or more than one person acting as a group, that owns, directly or indirectly, fifty percent (50%) or more of the total value or voting power of all the outstanding stock of the corporation, or (iv) an entity, at least fifty (50%) of the total value or voting power of which is owned, directly or indirectly, by a person described in immediately preceding clause (iii). For purposes of the foregoing, and except as otherwise provided, a person’s status is determined immediately after the transfer of assets. Persons will or will not be considered to be acting as a group in accordance with rules similar to those set forth in the preceding clause (I), and as specifically provided in section 1.409A-3(i)(5)(vii)(C) of the Regulations under Section 409A.

(IV) Section 318(a) of the Code applies for purposes of determining stock ownership. Stock underlying a vested option is considered owned by the individual who owns the vested option (and the stock underlying an unvested option is not considered owned by the individual who holds the unvested option). If, however, a vested option is exercisable for stock that is not substantially vested (as defined by Regulation 1.83-3(b) and (j)) the stock underlying the option is not treated as owned by the individual who holds the option.

(V) Whether a Change in Control has occurred will be determined by the Company in accordance with the rules and definitions set forth in this Section 2.1. This determination shall be made in a manner consistent with Section 409A and the Regulations thereunder.

(e) “Code” means the Internal Revenue Code of 1986, as amended. References to any section of the Internal Revenue Code shall include any successor provision thereto.

(f)	“Company” means Healthways, Inc., a Delaware corporation.

(g)

“Company 401(k) Plan” means the Healthways, Inc. Retirement Savings Plan.

(h) “Disability” means a “disability” as determined under the Company’s long-term disability insurance policy if the Participant receives a distribution from the Plan due to the Participant’s Separation from Service in connection with the Participant’s Disability. Notwithstanding the foregoing, if the Participant will receive a distribution from the Plan upon his Disability and such distribution is not made due to the Participant’s Separation from Service, then Disability means a period of time during which a Participant is (i) unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected

to last for a continuous period of not less than twelve (12) months, (ii) by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, receiving income replacement benefits for a period of not less than three (3) months under an accident and health plan covering employees of the Company or (iii) is determined to be totally disabled by the Social Security Administration.

(i) “Domestic Relations Order” means a judgment, decree or order (including approval of a property settlement agreement) which is made pursuant to a state domestic relations law, which relates to the provision of child support, alimony payments or marital property rights to an Alternate Payee, and which creates or recognizes the existence of an Alternate Payee’s right to, or assigns to an Alternate Payee the right to, receive all or a portion of the benefits payable to a Participant.

(j) “Early Retirement” means a Participant’s Separation from Service where (i) the sum of the Participant’s age plus years of employment at the Company as of the proposed early retirement date is equal to or greater than 70, (ii) the Participant has given written notice to the Company at least one year prior to the proposed early retirement date of his or her intent to retire and (iii) the Chief Executive Officer has approved in writing such early retirement request prior to the proposed early retirement date, provided that in the event the Chief Executive Officer does not approve the request for early retirement or the Chief Executive Officer is the Participant giving notice of his or her intent to retire, then in both cases, the Board shall make the determination of whether to approve or disapprove such request.

(k)	“Employee” means a full-time regular salaried officer of the Company or any of its Subsidiaries.

(l) The acronym “ERISA” means the Employee Retirement Income Security Act of 1974, as amended. Whenever a reference is made herein to a specific ERISA section, such reference shall be deemed to include any successor ERISA section having the same or a substantially similar purpose.

(m) “Identification Date” means the date determined by the Company in accordance with Section 1.409A-1(i)(3) of the Regulations which is the last day of the 12-month period for determination of Specified Employees. Unless otherwise designated, the Identification Date shall be December 31.

(n) “Normal Retirement” means a Participant’s Separation from Service on or after the Participant reaches age 65.

(o) “Participant” means an Employee of the Company or an Employee of any Subsidiary of the Company who is designated by the Board to participate in this Plan.

(p)	“Plan Year” means the 12-month period beginning January 1 and ending December 31.

(q)

“Regulations” means the regulations promulgated by the Treasury Department under the Code.

(r) “Section 409A” shall mean Section 409A of the Code, related Regulations and guidance thereunder, including such Regulations and guidance promulgated after the Effective Date of the Plan.

(s) “Separation from Service” means for any Participant the occurrence of any one of the following events:

(i)

The Participant is discharged by the Company;

(ii) The Participant voluntarily terminates employment (including an Early or Normal Retirement) with the Company;

(iii)

The Participant terminates employment due to the Participant’s Disability; or

(iv)

The Participant dies while employed with the Company.

For purposes of determining whether a Separation from Service has occurred, the term “Company” shall include a Subsidiary, and no Separation from Service shall be deemed to have occurred if the Participant remains employed by a Subsidiary.

A Separation from Service does not occur if the Participant is on military leave, sick leave or other bona fide leave of absence if the period of leave does not exceed six months or such longer period during which the Participant’s right to reemployment is provided by statute or contract. If the period of leave exceeds six months and the Participant’s right to reemployment is not provided either by statute or contract, a Separation from Service will be deemed to have occurred on the first day following the six-month period. If the period of leave is due to any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than six months, where the impairment causes the Participant to be unable to perform the duties of his or her position of employment or any substantially similar position of employment, a 29-month period of absence may be substituted for the six-month period.

Whether a Separation from Service has occurred is based on whether the facts and circumstances indicate that the Company and the Participant reasonably anticipated that no further services would be performed after a certain date or that the level of bona fide services the Participant would perform after such date (whether as an employee or as an independent contractor) would permanently decrease to no more than twenty percent (20%) of the average level of bona fide services performed (whether as an employee or an independent contractor) over the immediately preceding 36 month period (or the full period of services to the Company if the Participant has been providing services to the Company for less than 36 months).

If a Participant provides services both as an employee and as a member of the Board, the services provided as a director are not taken into account in determining whether the Participant has incurred a Separation from Service as an employee for purposes of Plan, unless this Plan is aggregated under Section 409A with any plan in which the Participant participates as a director.

All determinations of whether a Separation from Service has occurred will be made in a manner consistent with Section 409A and the Regulations thereunder.

(t) “Specified Employee” means a “key employee” of the Company as described in Section 416(i)(1)(A)(i), (ii) or (iii) of the Code (without regard to Section 416(i)(5) of the Code) (generally, an officer having annual compensation of more than $150,000 (in 2008, as adjusted); a 5% owner; or a 1% owner having annual compensation of more than $150,000), determined at any time during the 12-month period ending on the Identification Date. A Participant who is a Specified Employee on an Identification Date shall be treated as a Specified Employee for the twelve month period beginning on January 1 (or such other date designated in accordance with Section 7.3) immediately following such Identification Date. For purposes hereof, the term “officer” shall be determined on the basis of all facts, including the source of his authority, the term for which elected or appointed, and the nature and extent of his duties. Generally, the term “officer” means an administrative executive who is in regular and continued service. An Employee who merely has the title of an officer, but not the authority of an officer, is not to be considered an officer hereunder. Similarly, an Employee who does not have the title of an officer but has

the authority of an officer is an officer for this purpose. Furthermore, for purposes hereof, during any 12-month period following an Identification Date, no more than 50 employees of all members of the controlled group consisting of the Company and any corporation required to be aggregated with the Company under Section 414(b) or 414(c) of the Code, or if less, the greater of three individuals or ten percent (10%) of such employees of all members of such controlled group, shall be treated as officers hereunder.

(u) “Subsidiary” means any corporation, 80% or more of the total combined voting power of all classes of stock of which is directly or indirectly owned by the Company.

(v) “Unforeseeable Emergency” means a severe financial hardship of the Participant resulting from an illness or accident of the Participant, the Participant’s spouse, the Participant’s beneficiary, or the Participant’s dependent (as defined in Section 152 of the Code without regard to Sections 152(b)(1), (b)(2) and (d)(1)(B) of the Code), loss of the Participant’s property due to casualty (including the need to rebuild a home following damage to a home not otherwise covered by insurance), or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. Examples of an Unforeseeable Emergency include:

(i)

the imminent foreclosure of or eviction from the Participant’s primary residence;

(ii) the need to pay for medical expenses, including nonrefundable deductibles, as well as the costs of prescription drugs; and

(iii) the need to pay for the funeral expenses of the Participant’s spouse, the Participant’s beneficiary, or the Participant’s dependent (as defined in Section 152 of the Code without regard to Sections 152(b)(1), (b)(2) and (d)(1)(B) of the Code).

Notwithstanding the foregoing, the purchase of a home or the payment of college tuition are not normally deemed to be an Unforeseeable Emergency. Whether an event constitutes an Unforeseeable Emergency shall be determined in accordance with Regulation 1.409A-3(i)(3).

(w) The acronym “USERRA” means the Uniformed Services Employment and Reemployment Rights Act of 1994, as amended.

2.2 Gender and Number. Except when otherwise indicated by the context, any masculine terminology when used in the Plan shall also include the feminine gender, and the definition of any term herein in the singular shall also include the plural.

Section 3. Eligibility for Participation

3.1 Eligibility. Participation in the Plan shall be limited to Employees who are designated as Participants by the Board. In the event an Employee no longer meets the requirements for participation in this Plan, he or she shall become an inactive Participant effective as of the end of the Plan Year in which such determination is made and he or she shall retain all the rights described under this Plan, except the right to make any further deferrals or receive any additional Company additions, until the time that he or she again becomes an active Participant.

Section 4. Election to Defer

4.1 Deferral Amount. No later than the December 31 preceding each Plan Year, any Participant may, by written notice to the Company, elect to defer an amount not less than 2% nor more than 10% of the Participant’s base salary for such Plan Year. Notwithstanding the foregoing, with respect to the first Plan Year a Participant is eligible to participate, the Participant must, by written notice, make his deferral election (subject to the percentage limitations discussed in the previous sentence) within thirty (30) days after he first becomes eligible to participate in the Plan. Such election shall only apply to base salary which is payable for services rendered by the Participant during the remainder of the Plan Year following his election. If the Participant fails to make an election within thirty (30) days of the date he is first eligible to participate in the Plan, then the Participant will not be permitted to make a deferral election until the next Plan Year. Notwithstanding the foregoing, if a Participant’s first date of eligibility is January 1, then the Participant must make his initial election prior to December 31 of the preceding Plan Year.

4.2 Deferral Period. Simultaneous with a Participant’s deferral election specified in Section 4.1, the Participant shall also designate the time for payout of his or her Account. Payments must begin no earlier than four years from the beginning of each Plan Year, and no later than the earliest to occur of: (a) the date specified in the election (or in the event that no date is specified, the date will be four years from the beginning of such Plan Year), (b) Disability, or (c) Separation from Service.

4.3 Manner of Payment Election. Concurrent with the election in Section 4.1, the Participant, by written notice to the Company, also shall elect the manner in which the Account will be paid. The Participant may choose to have payment made either in a lump sum or in periodic annual installments over a fixed number of years. Notwithstanding the foregoing, if payment results from a Participant’s Separation from Service, such payment shall be made in a lump sum at a date one year following the date of the Participant’s Separation from Service. If payout results from the death or Disability of the Participant, payout will be made in a lump sum within ninety (90) days of the Participant’s death, or after the determination of Disability, with the determination of the date upon which such payments shall be made to be determined by the Company in its sole discretion.

4.4 Separate Payout Elections. The Participant may elect separate payout elections for time and manner of payment during the term of his or her participation. Each separate election regarding time and manner of payment must be made at the time the Participant’s deferral election is made for the particular Plan Year (no later than December 31 preceding the Plan Year as provided in Section 4.1) and will apply only to the amounts deferred during such Plan Year, including base salary, Company additions and growth additions.

4.5 Irrevocable Elections. The elections in this Section 4 are irrevocable and may not be modified or terminated by the Participant or his or her beneficiary except as provided in Section 7.2 following a distribution due to an Unforeseeable Emergency or following a determination that the Participant suffers from a Disability as defined in Section 2.1(h)).

4.6	Fully Vested. Amounts deferred under this Section 4 are fully vested to the Participant.

4.7 USERRA. Notwithstanding any provision of this Plan to the contrary, the Company may permit a deferral election to be made at a different time than specified under this Section 4 as required to satisfy the requirements of USERRA.

Section 5. Company Additions

5.1 Mandatory Company Matching Additions. On the last day of each Plan Year, the Company shall add to each Participant’s Account a matching addition equal to not less than 25% of the Participant’s deferrals during that Plan Year; provided, however, that the amount of deferrals upon which the Company’s aggregate matching additions to the Participant’s Account under the Plan and the Participant’s account under the Company 401(k) Plan are based shall not exceed 6% of the Participant’s base salary for that Plan Year.

5.2 Discretionary Company Additions. The Board, in its sole discretion, may provide for discretionary additions to the Plan based solely on the Company’s financial performance for the Plan Year. The maximum discretionary Company addition which may be made in any Plan Year is 20% of a Participant’s base salary paid during the Plan Year. Discretionary Company additions are made to all Participants regardless of a Participant’s deferrals into the Plan and such additions are credited to the Account of Participants as of the last day of each Plan Year.

5.3 Vesting. Company additions shall vest 25% per year over four years on the last day of each Plan Year as long as the Participant continues to be employed by the Company or any of its Subsidiaries. The first vesting date is the date the addition is credited to the Participant’s Account. Notwithstanding the foregoing, a Participant shall fully vest in any Company additions pursuant to Section 5.1 and Section 5.2 (i) if the Participant Separates from Service with the Company and any Subsidiary by reason of his or her death, Disability, Normal Retirement or Early Retirement or (ii) as separately provided for in the Participant’s separate employment agreement with the Company. Except as otherwise provided in this Plan, a Participant shall forfeit any Company additions that have not vested as of the Participant’s Separation from Service.

5.4 Employment at Year End. No Company addition shall be made for persons who (i) are no longer employed by the Company or (ii) no longer meet the definition of Employee on the last day of the Plan Year.

Section 6. Deferred Accounts

6.1 Participant Accounts. The Company shall establish and maintain a bookkeeping Account for each Participant, to be credited as of the date the deferred compensation would have been paid. Accounts also shall be credited as of the date Company additions are made as described in Section 5, and their status as vested or nonvested noted according to Section 5.3.

6.2 Growth Additions. Each Participant’s Account shall be credited with a growth addition. The growth addition shall be equal to said Account balance multiplied by a growth increment, the amount of which shall be determined from time to time by the Board. Growth additions shall be calculated on a monthly basis based on the Participant’s Account balance but shall be credited to the Participant’s Account and compounded annually as of the last day of each Plan Year. However, for Participants whose payout results from a Separation from Service, the growth factor on employee deferrals and on associated compounded growth factors will be calculated through the date of payment to the Participant.

Growth additions shall vest to the extent the Company additions to which they apply are vested under Section 5.3. Growth additions on Participant deferrals are fully vested when credited to the Participant’s Account. Growth additions will be paid at such time and in such manner as the Participant’s other Account balances.

6.3 Charges Against Accounts. There shall be charged against each Participant’s Account any payments made to the Participant or to his or her beneficiary in accordance with Section 7 hereof.

6.4 Contractual Obligation. It is intended that the Company is under a contractual obligation to make payments from a Participant’s Account when due. Account balances shall not be financed through a trust fund or insurance contracts or otherwise unless such trust fund or insurance contracts are owned by the Company. Payment of Account balances shall be made out of the general funds of the Company.

6.5 Unsecured Interest. No Participant or beneficiary shall have any interest whatsoever in any specific asset of the Company. To the extent that any person acquires a right to receive payments under this Plan, such right shall be no greater than the right of any unsecured general creditor of the Company.

Section 7. Payment of Deferred Amounts

7.1 Payment of Deferred Amounts. Payment of a Participant’s Account shall be paid in a lump sum or in periodic annual installments over a fixed number of years, in the manner provided for by the Company and elected by the Participant under Section 4.3 of this Plan. Subject to Section 4.3 and Section 7.3, payments shall begin within ninety (90) days following the dates described by Section 4 of this Plan with the determination of the date upon which such payments shall be made to be determined by the Company in its sole discretion.

7.2 Unforeseeable Emergency. The Board, in its sole discretion, may permit a distribution from a Participant’s Account in the event that the Participant establishes, to the satisfaction of the Board, an Unforeseeable Emergency. In making its determination, the Board shall examine the relevant facts and circumstances of each case. A distribution may not be made to the extent that the Unforeseeable Emergency is or may be relieved through reimbursement or compensation from insurance or otherwise, by liquidation of the Participant’s assets (to the extent the liquidation of such assets would not cause severe financial hardship) or by cessation of deferrals under the Plan. If the Board determines that an Unforeseeable Emergency exists, then a distribution from the vested portion of the Participant’s Account may be made to the Participant, provided that such distribution shall not be in excess of the amount reasonably necessary to satisfy the Unforeseeable Emergency (which may include amounts necessary to pay any Federal, state, foreign or local income taxes or penalties reasonably anticipated to result from the distribution). A distribution, if any, under this Section 7.2 shall be made as soon as practical following the Board’s determination of the occurrence of an Unforeseeable Emergency, but not later than ninety (90) days following the date of the Board’s determination, with the determination of the date upon which such distribution shall be made to be determined by the Company in its sole discretion. A Participant’s deferral elections under Section 4.1 for the remainder of the Plan Year will be cancelled upon such a withdrawal due to Unforeseeable Emergency.

7.3 Six-Month Delay of Certain Payments. Except as otherwise provided in this Section 7.3, a distribution made because of a Separation from Service to a Participant who is a Specified Employee as of the date of his Separation from Service shall not occur before the date which is six months after the Separation from Service.

For this purpose, a Participant who is a Specified Employee on an Identification Date shall be treated as Specified Employee for the twelve-month period beginning on the January 1 immediately following such Identification Date. The Company may designate another date for commencement of this twelve month period, provided that such date must follow the Identification Date and occur no later than the first day of the fourth month thereafter, provided that such designation is made in accordance with

Regulations under Section 409A and is the same for all nonqualified deferred compensation plans of the Company or any Subsidiary.

The Company may elect to apply an alternative method to identify Participants who will be treated as Specified Employees for purposes of the six-month delay in distributions if the method satisfies each of the following requirements: (i) the alternative method is reasonably designed to include all Specified Employees, (ii) the alternative method is an objectively determinable standard providing no direct or indirect election to any Participant regarding its application, and (iii) the alternative method results in either all Specified Employees or no more than 200 Specified Employees being identified in the class as of any date. Use of an alternative method that satisfies these requirements will not be treated as a change in the time and form of payment for purposes of Section 1.409A-2(b) of the Regulations.

The six-month delay provided for in this Section 7.3 does not apply to payments made to an Alternate Payee pursuant to a Domestic Relations Order described in Section 7.5 or to payments that occur after the death of the Participant.

7.4 Permissible Delays in Payment. Distributions from a Participant’s Account may be delayed beyond the date payment would otherwise occur in accordance with the provisions of this Section 7 in any of the following circumstances as long as the Company treats all payments to similarly situated Participants on a reasonably consistent basis.

(a) The Company may delay payment if it reasonably anticipates that its deduction with respect to such payment would not be permitted by the application of Section 162(m) of the Code. Payment must be made during the Participant’s first taxable year in which the Company reasonably anticipates, or should reasonably anticipate, that if the payment is made during such year the deduction of such payment will not be barred by the application of Section 162(m) of the Code or during the period beginning with the Participant’s Separation from Service and ending on the later of the last day of the Company’s taxable year in which the Participant Separates from Service or the 15th day of the third month following the Participant’s Separation from Service.

(b) The Company may also delay payment if it reasonably anticipates that the making of the payment will violate Federal securities laws or other applicable laws provided payment is made at the earliest date on which the Company reasonably anticipates that the making of the payment will not cause such violation.

(c) The Company may delay payment during the periods specified in Section 11.2 for review and appeal of claims or during any other period while there is a bona fide dispute as to the amount or timing of such payment in accordance with Section 1.409A-3(g) of the Regulations.

(d) The Company may delay payment upon such other events and conditions as the Secretary of the Treasury may prescribe in generally applicable guidance published in the Internal Revenue Bulletin.

7.5 Permitted Acceleration of Payment. The Company may permit acceleration of the time or schedule of any payment or amount scheduled to be paid pursuant to a payment under the Plan upon the following events:

(i)

payments to an Alternate Payee (but in no event to a Participant) at such times and in such amounts as specified in a Domestic Relations Order which is determined by the Company to be valid and which does not require the Plan to pay benefits in excess of the

balance of the Participant’s Account. The Company may require that reasonable expenses incurred and paid by the Company in evaluating the Domestic Relations Order and complying with its terms shall be deducted from the Participant’s Account;

(ii)

to the extent necessary for any Federal officer or employee in the executive branch to comply with an ethics agreement with the Federal government;

(iii)

to the extent reasonably necessary to avoid the violation of an applicable Federal, state, local or foreign ethics law or conflicts of interest law (in accordance with Regulation 1-409A-3(j)(4)(iii));

(iv)

to the extent required to pay employment taxes on base salary deferred under the Plan (in accordance with Regulation 1.409A-3(j)(4)(vi));

(v)

at any time the Plan fails to meet the requirements of Section 409A (any such payment may not exceed the amount required to be included in income as a result of the failure to comply with Section 409A);

(vi)

upon the occurrence of any of the circumstances when the Plan is terminated pursuant to Sections 12.1(b) or 13.1 of the Plan; or

(vii)

upon the occurrence of any other events permitted by the provisions of Regulation 1.409A-3(j)(4) or any successor thereto.

Notwithstanding the foregoing, the Company shall not allow any Participant discretion with respect to whether a payment will be accelerated and shall not permit any election, direct or indirect, by a Participant as to whether the Company’s discretion under this Section 7.5 will be exercised.

Section 8. Federal Income Tax Consequences

8.1 Federal Income Tax Consequences. It is intended that the Plan shall be considered nonqualified for Federal income tax purposes. Thus, the Company shall not be entitled to a tax deduction until the earlier of (i) the year payment is actually made or (ii) the year in which the Participant reports such amounts as income.

Section 9. Beneficiary

9.1 Beneficiary. A Participant must designate a beneficiary or beneficiaries who, upon his or her death, are to receive the distributions that otherwise would have been paid to him or her. All designations shall be in writing and shall be effective only if and when delivered to the Chief Financial Officer or his or her designee or a replacement designated by the Board during the lifetime of the Participant. If a designated beneficiary predeceases the Participant and no revised beneficiary designation is made, amounts will be prorated to living beneficiaries. If all beneficiaries predecease the Participant, amounts shall be paid to the Participant’s estate.

A Participant may from time to time during his or her lifetime change his or her beneficiary or beneficiaries by a written instrument delivered to the Chief Financial Officer or his or her designee or a replacement designated by the Board. In the event a Participant shall not designate a beneficiary or beneficiaries pursuant to this Section 9.1, or if for any reason such designation shall be ineffective, in

whole or in part, the distribution that otherwise would have been paid to such Participant shall be paid to his or her estate and in such event, the term “beneficiary” shall include his or her estate.

Section 10. Rights of Employees, Participants

10.1 Employment. Nothing in this Plan shall interfere with or limit in any way the right of the Company or any of its Subsidiaries to terminate any Employee’s or Participant’s employment at any time, nor confer upon any Employee or Participant any right to continue in the employ of the Company or any of its Subsidiaries.

10.2 Nontransferability. Except for payments to an Alternate Payee pursuant to a Domestic Relations Order, no right or interest of any Participant in this Plan shall be assignable or transferable, or subject to any lien, directly, by operation of law, or otherwise, including executive, levy, garnishment, attachment, pledge, and bankruptcy. In the event of a Participant’s death, payment of any amounts due under this Plan shall be made to the Participant’s designated beneficiary, or in the absence of such designation, to the Participant’s estate within ninety (90) days of the Participant’s death with the determination of the date upon which such distribution shall be made to be determined by the Company in its sole discretion.

10.3 Participation. No Employee shall have a right to be selected as a Participant, or, having been so selected, to be selected again as a Participant.

Section 11. Administration

11.1 Administration. The Board shall be responsible for the administration of the Plan. The Board is authorized to interpret the Plan, to prescribe, amend, and rescind rules and regulations relating to the Plan, provide for conditions and assurances deemed necessary or advisable to protect the interests of the Company, and to make all other determinations necessary or advisable for the administration of the Plan, but only to the extent not contrary to the express provisions of the Plan. The Board shall determine, within the limits of the express provisions of the Plan, the Employees to whom, and the time or times at which, participation shall be extended, and the amount which may be deferred. In making such determinations, the Board may take into account the nature of the services rendered by such Employees or classes of Employees, their present and potential contributions to the Company’s or its Subsidiaries’ success and such other factors as the Board in its discretion shall deem relevant. The determination of the Board, interpretation or other action made or taken pursuant to the provisions of the Plan, shall be final and shall be binding and conclusive for all purposes and upon all persons.

11.2 Claims Procedures. The Company shall make all determinations in its sole discretion as to the right of any Participant to a benefit under the Plan. Any denial by the Company of a claim for benefits under the Plan by a claimant shall be stated in writing by the Company and delivered or mailed to the claimant within a reasonable period of time but not later than 90 days after receipt by the Company of his claim, unless special circumstances require an extension of time for processing the claim. If such an extension is required, written notice thereof shall be provided to the claimant before the end of this 90-day period which shall indicate the special circumstances requiring the extension and the date by which the Company expects to render a decision. In no event shall the extension exceed 90 days from the end of the initial 90-day period.

If a claim for benefits under the Plan is wholly or partially denied, the Company shall notify the claimant of the denial of the claim in writing, delivered in person or mailed by first class mail to the claimant’s last known address. Such notice of denial shall contain:

(a)

the specific reason or reasons for denial of the claim;

(b)

a reference to the relevant provision(s) of the Plan upon which the denial is based;

(c) a description of any additional material or information necessary for the claimant to perfect the claim, together with an explanation of why such material or information is necessary; and

(d)

an explanation of the Plan’s claim review procedure.

If no such notice is provided, and if the claim has not been granted within the time specified above for approval of the claim, the claim shall be deemed denied and subject to review as described below.

Any claimant or authorized representative of the claimant whose claim for benefits under the Plan has been denied or deemed denied, in whole or in part, may upon written notice delivered to the Company request a review of such denial of benefits. Such claimant shall have 60 days from the date the claim is deemed denied, or 60 days from receipt of the notice denying the claim, as the case may be, in which to request such a review. The claimant’s notice must specify the relief requested and the reason the claimant believes the denial should be reversed. In pursuing his appeal, the claimant will be permitted to submit written comments, documents, records, or other relevant information relating to his claim. In addition, the claimant will be provided, upon receipt and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to his claim.

The Company will conduct the review of any appeal. This review will take into account all information submitted by the claimant regarding his claim, regardless of whether or not such information was submitted or considered in the initial decision. A decision regarding such review will be made within a reasonable period of time but not later than 60 days after receipt of the claimant’s appeal, unless special circumstances require an extension of time for processing the claim. If such an extension is required, written notice thereof shall be provided to the claimant before the end of this 60-day period which shall indicate the special circumstances requiring the extension and the date by which the Company expects to render the final decision. In no event shall the extension exceed 60 days from the end of the initial 60-day period.

If the claimant’s appeal is denied in whole or in part, the claimant will receive a written notification of the denial which will include (i) the specific reasons for the denial, (ii) reference to the specific provision(s) of the Plan upon which the denial was based, and (iii) a statement of the claimant’s right to bring an action under ERISA. The interpretations, determinations, and decisions of the Company shall be final and binding upon all persons with respect to any right, benefit and privilege hereunder, subject to the review procedures set forth in this Section 11.2.

Section 12. Amendment, Modification, and Termination of the Plan

12.1	Amendment, Modification, and Termination of the Plan.

a. Power to Amend. The Board from time to time may amend or modify the Plan in accordance with Section 409A and the Regulations promulgated thereunder, provided, however, that no such action of the Board, without approval of the Participant, may adversely affect in any way amounts already deferred pursuant to Section 4.1 of this Plan nor the vesting schedule for an Account as it exists at the time of the modification.

b. Power to Terminate Plan. The Plan may be terminated by the Company under one of the following conditions:

(i)

The Company may terminate the Plan at its sole discretion, provided that:

(A) All arrangements sponsored by the Company that would be aggregated with the Plan under Section 1.409A-1(c)(2) of the Regulations are terminated with respect to all Participants;

(B) No payments will be made, other than those otherwise payable under the terms of the Plan absent a Plan termination, within 12 months of the termination of the Plan;

(D) The Company does not adopt a new arrangement that would be aggregated with any terminated arrangement under Section 409A at any time within the three-year period following the date of termination of the Plan; and

(E) The termination does not occur proximate to a downturn in the financial health of the Company.

(ii) The Company, at its discretion, may terminate the Plan within 12 months of a corporate dissolution taxed under Section 331 of the Code, or with the approval of a bankruptcy court pursuant to 11 U.S.C. §503(b)(1)(A), provided that amounts deferred under the Plan are included in the gross income of Participants in the latest of the following years (or, if earlier, the taxable year in which the amount is actually or constructively received):

(A)

The calendar year in which the Plan termination occurs;

(B) The first calendar year in which the amount is no longer subject to a substantial risk of forfeiture; or

(C)

The first calendar year in which the payment is administratively practicable;

(iii) The Company, at its discretion, may terminate the Plan pursuant to irrevocable action taken by the Company within the 30 days preceding or the 12 months following a Change in Control, provided:

(A) All agreements, methods, programs and other arrangements sponsored by the Company (or its successor) immediately after the Change in Control which are treated as a single plan under Section 1.409A-1(c)(2) of the Regulation are also terminated;

(B) All payments to Participants due under the Plan are made within 12 months of the date of the Plan’s termination; and

(C) All participants under the other terminated similar arrangements described in clause (i) are required to receive all amounts of deferred compensation within 12 months of the action taken by the Company (or its successor) to terminate such arrangements.

(iv) In accordance with such other events and conditions as may be prescribed by the Secretary of the Treasury in generally applicable guidance published in the Internal Revenue Bulletin.

If the Plan is terminated pursuant to this Section 12.1(b) at a date other than the last day of the Plan Year, the Company may make, in the Board’s sole discretion, a pro-rated discretionary Company addition to each Participant’s Account based on operating earnings of the Company generated through the date the Plan is terminated.

12.2 No Liability for Plan Amendment or Termination. Neither the Company, nor any officer, nor any Board member thereof shall have any liability as a result of the amendment or termination of the Plan (including a termination pursuant to Section 13.1 below). Without limiting the generality of the foregoing, the Company shall have no liability for terminating the Plan notwithstanding the fact that a Participant may have expected to have future allocations made on Participant’s behalf hereunder had the Plan remained in effect.

Section 13. Change in Control

13.1 Change in Control. Notwithstanding any other provision of the Plan to the contrary, if the Company is involved in a Change in Control, the Plan will be terminated in accordance with Section 12.1(b) and Section 409A and all amounts deferred, including any growth additions and Company additions, will immediately vest and be paid out to the Participants in accordance with Section 12.1(b) and Section 409A.

Section 14. Requirements of Law

14.1 Requirements of Law. The payment of cash pursuant to this Plan shall be subject to all applicable laws, rules and regulations as may be required.

14.2 Governing Law. The Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Tennessee.

Section 15. Withholding Taxes

15.1 Withholding Taxes. The Company shall have the right to deduct from all payments under this Plan an amount necessary to satisfy any Federal, state, or local withholding tax requirements.

Section 16. Effective Date of the Plan

16.1 Effective Date. This Amended and Restated Plan shall become effective as of November 6, 2008 (the “Effective Date”).

EX-31 4 ex31-1_0109009.htm EX-31.1, SECTION 302 CEO CERTIFICATION

Exhibit 31.1

CERTIFICATION

I, Ben R. Leedle, Jr., certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Healthways, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: January 9, 2009

/s/ Ben R. Leedle, Jr.

Ben R. Leedle, Jr.

President and Chief Executive Officer

EX-31 5 ex31-2_010909.htm EX-31.2, SECTION 302 CFO CERTIFICATION

Exhibit 31.2

CERTIFICATION

I, Mary A. Chaput, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Healthways, Inc.;

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: January 9, 2009

/s/ Mary A. Chaput

Mary A. Chaput

Executive Vice President and Chief Financial Officer

EX-32 6 ex-32_010909.htm EX-32, SECTION 906 CEO AND CFO CERTIFICATION

Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Healthways, Inc. (the "Company") on Form 10-Q for the period ended November 30, 2008, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Ben R. Leedle, Jr., President and Chief Executive Officer of the Company, and Mary A. Chaput, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Ben R. Leedle, Jr.

Ben R. Leedle, Jr.

President and Chief Executive Officer

January 9, 2009

/s/ Mary A. Chaput

Mary A. Chaput

Executive Vice President and Chief Financial Officer

January 9, 2009