UNITED
STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
September 30,
2009
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
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Commission File
Number: 0-51547
WEBMD HEALTH CORP.
(Exact name of registrant as
specified in its charter)
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Delaware
(State of
incorporation)
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20-2783228
(I.R.S. Employer
Identification No.)
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111 Eighth Avenue
New York, New York
(Address of principal
executive office)
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10011
(Zip
code)
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(212) 624-3700
(Registrants
telephone number, including area code)
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
þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such files).
Yes
o No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer
o
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Accelerated filer
þ
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Non-accelerated
filer o
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Smaller reporting
company o
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(Do not check if a smaller reporting
company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act.)
Yes
o No þ
As of November 5, 2009, the Registrant had 57,713,567
shares of WebMD Common Stock outstanding (including unvested
shares of restricted WebMD Common Stock issued under our equity
compensation plans).
WEBMD
HEALTH CORP.
QUARTERLY REPORT ON
FORM 10-Q
For the period ended September 30, 2009
TABLE OF CONTENTS
WebMD®,
WebMD
Health®,
Medscape®,
CME
Circle®,
eMedicine®,
MedicineNet®,
theheart.org®,
RxList®,
Subimo®,
Summex®
and
Medsite®
are among the trademarks of WebMD Health Corp. or its
subsidiaries.
2
FORWARD-LOOKING
STATEMENTS
This Quarterly Report on
Form 10-Q
contains both historical and forward-looking statements. All
statements other than statements of historical fact are, or may
be, forward-looking statements. For example, statements
concerning projections, predictions, expectations, estimates or
forecasts and statements that describe our objectives, future
performance, plans or goals are, or may be, forward-looking
statements. These forward-looking statements reflect
managements current expectations concerning future results
and events and can generally be identified by the use of
expressions such as may, will,
should, could, would,
likely, predict, potential,
continue, future, estimate,
believe, expect, anticipate,
intend, plan, foresee, and
other similar words or phrases, as well as statements in the
future tense.
Forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual
results, performance or achievements to be different from any
future results, performance and achievements expressed or
implied by these statements. The following important risks and
uncertainties could affect our future results, causing those
results to differ materially from those expressed in our
forward-looking statements:
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failure to achieve sufficient levels of usage of www.webmd.com
and our other public portals;
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failure to achieve sufficient levels of usage and market
acceptance of new and updated products and services;
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difficulties in forming and maintaining relationships with
customers and strategic partners;
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the inability to successfully deploy new or updated applications
or services;
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the anticipated benefits from acquisitions not being fully
realized or not being realized within the expected time frames;
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the inability to attract and retain qualified personnel;
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adverse economic conditions and disruptions in the capital
markets;
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general business or regulatory conditions affecting the
healthcare, information technology, and Internet industries
being less favorable than expected; and
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the other risks and uncertainties described in this Quarterly
Report on
Form 10-Q
under the heading Managements Discussion and
Analysis of Financial Condition and Results of
Operations Factors That May Affect Our Future
Financial Condition or Results of Operations.
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These factors are not necessarily all of the important factors
that could cause actual results to differ materially from those
expressed in any of our forward-looking statements. Other
factors, including unknown or unpredictable ones, could also
have material adverse effects on our future results.
The forward-looking statements included in this Quarterly Report
are made only as of the date of this Quarterly Report. Except as
required by law or regulation, we do not undertake any
obligation to update any forward-looking statements to reflect
subsequent events or circumstances.
3
PART I
FINANCIAL INFORMATION
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ITEM 1.
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Financial
Statements
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WEBMD
HEALTH CORP.
(In
thousands, except share and per share data)
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September 30,
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December 31,
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2009
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2008
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(Unaudited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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275,250
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$
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191,659
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Accounts receivable, net of allowance for doubtful accounts of
$1,542 at September 30, 2009 and $1,301 at
December 31, 2008
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87,072
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93,082
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Prepaid advertising
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1,753
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Other current assets
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9,286
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11,358
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Assets of discontinued operations
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12,575
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Total current assets
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371,608
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310,427
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Investments
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126,564
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133,563
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Property and equipment, net
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52,286
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54,165
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Goodwill
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208,967
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208,967
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Intangible assets, net
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21,416
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26,237
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Other assets
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13,259
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22,573
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$
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794,100
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$
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755,932
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Accrued expenses
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$
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31,760
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$
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31,241
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Deferred revenue
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83,861
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79,613
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Due to HLTH
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1,378
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427
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Liabilities of discontinued operations
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2,599
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Total current liabilities
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116,999
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113,880
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Other long-term liabilities
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7,539
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8,334
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Commitments and contingencies
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Stockholders equity:
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Preferred stock, 50,000,000 shares authorized; no shares
issued and outstanding
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Class A Common Stock, $0.01 par value per share,
500,000,000 shares authorized; 10,113,149 shares
issued at September 30, 2009 and 10,044,372 shares
issued at December 31, 2008
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101
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100
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Class B Common Stock, $0.01 par value per share,
150,000,000 shares authorized; 48,100,000 shares
issued and outstanding at September 30, 2009 and
December 31, 2008
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481
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481
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Additional paid-in capital
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565,178
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548,069
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Class A Treasury Stock, at cost; 312,820 shares at
September 30, 2009 and 624,871 shares at
December 31, 2008
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(6,256
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)
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(12,497
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)
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Accumulated other comprehensive loss
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(22,323
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)
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(4,277
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)
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Retained earnings
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132,381
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101,842
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Total stockholders equity
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669,562
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633,718
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$
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794,100
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$
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755,932
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See accompanying notes.
4
WEBMD
HEALTH CORP.
(In
thousands, except per share data, unaudited)
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2009
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2008
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2009
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2008
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Revenue
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$
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111,568
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$
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96,797
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$
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300,463
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$
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263,451
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Cost of operations
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41,965
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34,225
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117,759
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97,120
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Sales and marketing
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26,265
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26,021
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80,623
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76,068
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General and administrative
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15,961
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14,774
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45,826
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42,465
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Depreciation and amortization
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6,988
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7,056
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20,729
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20,815
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Interest income
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834
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2,616
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2,733
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8,419
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Impairment of auction rate securities
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27,406
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Income from continuing operations before income tax provision
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21,223
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17,337
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38,259
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7,996
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Income tax provision
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8,622
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7,375
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15,469
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15,308
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Income (loss) from continuing operations
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12,601
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9,962
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22,790
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(7,312
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)
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Income (loss) from discontinued operations, net of tax
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190
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804
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(5,100
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)
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1,095
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Net income (loss)
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$
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12,791
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$
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10,766
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$
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17,690
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$
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(6,217
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)
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Basic income (loss) per common share:
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Income (loss) from continuing operations
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$
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0.22
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$
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0.17
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$
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0.39
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$
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(0.13
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)
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Income (loss) from discontinued operations
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0.00
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0.02
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(0.09
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)
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0.02
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Net income (loss)
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$
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0.22
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$
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0.19
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$
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0.30
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$
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(0.11
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)
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Diluted income (loss) per common share:
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Income (loss) from continuing operations
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$
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0.21
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$
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0.17
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$
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0.39
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$
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(0.13
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)
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Income (loss) from discontinued operations
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0.00
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0.01
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(0.09
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)
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0.02
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Net income (loss)
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$
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0.21
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$
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0.18
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$
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0.30
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$
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(0.11
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)
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Weighted-average shares outstanding used in computing
per share amounts:
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Basic
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57,777
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57,770
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57,676
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57,699
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Diluted
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58,844
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59,111
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58,445
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57,699
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See accompanying notes.
5
WEBMD
HEALTH CORP.
(In
thousands, unaudited)
|
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|
|
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|
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Nine Months Ended
|
|
|
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September 30,
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|
|
2009
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|
2008
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Cash flows from operating activities:
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Net income (loss)
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$
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17,690
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|
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$
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(6,217
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)
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Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
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Loss (income) from discontinued operations, net of tax
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5,100
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(1,095
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)
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Depreciation and amortization
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20,729
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20,815
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Non-cash advertising
|
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|
1,753
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1,736
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Non-cash stock-based compensation
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17,021
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10,657
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Deferred and other income taxes
|
|
|
14,835
|
|
|
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14,977
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Impairment of auction rate securities
|
|
|
|
|
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27,406
|
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Changes in operating assets and liabilities:
|
|
|
|
|
|
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Accounts receivable
|
|
|
6,010
|
|
|
|
6,275
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Accrued expenses and other long-term liabilities
|
|
|
(276
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)
|
|
|
(286
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)
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Due to HLTH
|
|
|
951
|
|
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|
563
|
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Deferred revenue
|
|
|
4,248
|
|
|
|
5,367
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Other
|
|
|
(587
|
)
|
|
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(2,651
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)
|
|
|
|
|
|
|
|
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Net cash provided by continuing operations
|
|
|
87,474
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|
|
|
77,547
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Net cash provided by discontinued operations
|
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|
728
|
|
|
|
3,205
|
|
|
|
|
|
|
|
|
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Net cash provided by operating activities
|
|
|
88,202
|
|
|
|
80,752
|
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Cash flows from investing activities:
|
|
|
|
|
|
|
|
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Proceeds from maturities and sales of
available-for-sale
securities
|
|
|
1,800
|
|
|
|
43,300
|
|
Purchases of
available-for-sale
securities
|
|
|
|
|
|
|
(127,900
|
)
|
Purchases of property and equipment
|
|
|
(14,131
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)
|
|
|
(15,014
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)
|
Cash received from sale of businesses, net of fees
|
|
|
2,840
|
|
|
|
1,133
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|
|
|
|
|
|
|
|
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Net cash used in continuing operations
|
|
|
(9,491
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)
|
|
|
(98,481
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)
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Net cash used in discontinued operations
|
|
|
(8
|
)
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|
|
(40
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)
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|
|
|
|
|
|
|
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Net cash used in investing activities
|
|
|
(9,499
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)
|
|
|
(98,521
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)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
4,823
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|
|
|
3,453
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Tax benefit on stock-based awards
|
|
|
65
|
|
|
|
315
|
|
|
|
|
|
|
|
|
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Net cash provided by financing activities
|
|
|
4,888
|
|
|
|
3,768
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
83,591
|
|
|
|
(14,001
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
191,659
|
|
|
|
213,753
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
275,250
|
|
|
$
|
199,752
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
6
|
|
1.
|
Summary
of Significant Accounting Policies
|
Background
and Basis of Presentation
WebMD Health Corp. (the Company) is a Delaware
corporation that was incorporated on May 3, 2005. The
Company completed an initial public offering (IPO)
of Class A Common Stock on September 28, 2005. The
Companys Class A Common Stock began trading on the
Nasdaq National Market under the symbol WBMD and now
trades on the Nasdaq Global Select Market under the same symbol.
Prior to the date of the IPO, the Company was a wholly-owned
subsidiary of HLTH Corporation (HLTH) and its
consolidated financial statements had been derived from the
consolidated financial statements and accounting records of
HLTH, principally representing the WebMD segment, using the
historical results of operations, and historical basis of assets
and liabilities of the WebMD related businesses. On
October 23, 2009, the Company completed a merger with HLTH,
with the Company continuing as the surviving corporation (the
HLTH Merger). See Note 11 for a description of
the HLTH Merger. From the completion of the IPO until completion
of the HLTH Merger, the Company was a majority-owned subsidiary
of HLTH, which owned 83.1% of the equity of the Company as of
September 30, 2009, through its ownership of all 48,100,000
outstanding shares of the Companys Class B Common
Stock. The Companys Class A Common Stock had one vote
per share, while the Companys Class B Common Stock
had five votes per share. As a result, the Companys
Class B Common Stock owned by HLTH represented, as of
September 30, 2009, 95.8% of the combined voting power of
the Companys outstanding Common Stock. Also, the
Class B Common Stock was convertible to Class A Common
Stock, on a
one-to-one
basis, at any time at the option of the holder of Class B
Common Stock. Other than with respect to voting rights, and its
convertibility into Class A Common Stock, the rights of the
Class B Common Stock were identical with the rights of the
Class A Common Stock.
The Company provides health information services to consumers,
physicians and other healthcare professionals, employers and
health plans through its public and private online portals and
health-focused publications. The Companys public portals
for consumers enable them to obtain health and wellness
information (including information on specific diseases or
conditions), check symptoms, locate physicians, store individual
healthcare information, receive periodic
e-newsletters
on topics of individual interest and participate in online
communities with peers and experts. The Companys public
portals for physicians and healthcare professionals make it
easier for them to access clinical reference sources, stay
abreast of the latest clinical information, learn about new
treatment options, earn continuing medical education
(CME) credit and communicate with peers. The
Companys public portals generate revenue primarily through
the sale of advertising and sponsorship products, including CME
services. The Company also distributes online content and
services to other entities and generates revenue from these
arrangements through the sale of advertising and sponsorship
products and content syndication fees, provides
e-detailing
promotion and physician recruitment services and provides print
services including the publication of WebMD the Magazine,
a consumer magazine distributed to physician office waiting
rooms. The public portals sponsors and advertisers include
pharmaceutical, biotechnology, medical device and consumer
products companies. The Companys private portals enable
employers and health plans to provide their employees and plan
members with access to personalized health and benefit
information and decision-support technology that helps them make
more informed benefit, provider and treatment choices. The
Company provides related services for use by such employees and
members, including lifestyle education and personalized
telephonic health coaching. The Company generates revenue from
its private portals through the licensing of these services to
employers and health plans either directly or through
distributors.
Interim
Financial Statements
The unaudited consolidated financial statements of the Company
have been prepared by management and reflect all adjustments
(consisting of only normal recurring adjustments) that, in the
opinion of management,
7
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
are necessary for a fair presentation of the interim periods
presented. The results of operations for the three and nine
months ended September 30, 2009 are not necessarily
indicative of the operating results to be expected for any
subsequent period or for the entire year ending
December 31, 2009. Certain information and note disclosures
normally included in financial statements prepared in accordance
with U.S. generally accepted accounting principles
(GAAP) have been condensed or omitted under the
Securities and Exchange Commissions (SEC)
rules and regulations.
The unaudited consolidated financial statements and notes
included herein should be read in conjunction with the
Companys audited consolidated financial statements and
notes for the year ended December 31, 2008, which are
included in the Companys Current Report on
Form 8-K
filed with the SEC on July 2, 2009.
Seasonality
The timing of the Companys revenue is affected by seasonal
factors. Public portal advertising and sponsorship revenue is
seasonal, primarily as a result of the spending patterns of the
advertising and sponsorship clients of the Companys public
portals. This portion of the Companys revenue is usually
the lowest in the first quarter of each calendar year, and
increases during each consecutive quarter throughout the year.
The timing of revenue in relation to expenses of the Company,
much of which do not vary directly with revenue, has an impact
on cost of operations, sales and marketing and general and
administrative expenses as a percentage of revenue in each
calendar quarter.
Accounting
Estimates
The preparation of financial statements in conformity with
U.S. GAAP requires management to make certain estimates and
assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. The Company bases
its estimates on historical experience, current business
factors, and various other assumptions that the Company believes
are necessary to consider to form a basis for making judgments
about the carrying values of assets and liabilities, the
recorded amounts of revenue and expenses, and disclosure of
contingent assets and liabilities. The Company is subject to
uncertainties such as the impact of future events, economic and
political factors and changes in the Companys business
environment; therefore, actual results could differ from these
estimates. Accordingly, the accounting estimates used in the
preparation of the Companys financial statements will
change as new events occur, as more experience is acquired, as
additional information is obtained and as the Companys
operating environment changes. Changes in estimates are made
when circumstances warrant. Such changes in estimates and
refinements in estimation methodologies are reflected in
reported results of operations; if material, the effects of
changes in estimates are disclosed in the notes to the
consolidated financial statements. Significant estimates and
assumptions by management affect: revenue recognition, the
allowance for doubtful accounts, the carrying value of
long-lived assets (including goodwill and intangible assets),
the amortization period of long-lived assets (excluding
goodwill), the carrying value, capitalization and amortization
of software and Web site development costs, the carrying value
of investments in auction rate securities, the provision for
income taxes and related deferred tax accounts, certain accrued
expenses and contingencies, share-based compensation to
employees and transactions with HLTH.
Net
Income (Loss) Per Common Share
Basic income (loss) per common share has been computed using the
weighted-average number of shares of common stock outstanding
during the periods presented. Diluted income (loss) per common
share has been
8
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
computed using the weighted-average number of shares of common
stock outstanding during the periods, increased to give effect
to potentially dilutive securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations(1)
|
|
$
|
12,454
|
|
|
$
|
9,962
|
|
|
$
|
22,525
|
|
|
$
|
(7,312
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of
tax(1)
|
|
$
|
188
|
|
|
$
|
804
|
|
|
$
|
(5,041
|
)
|
|
$
|
1,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: (shares in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares Basic
|
|
|
57,777
|
|
|
|
57,770
|
|
|
|
57,676
|
|
|
|
57,699
|
|
Employee stock options and Deferred Shares
|
|
|
1,067
|
|
|
|
1,341
|
|
|
|
769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted-average shares after assumed
conversions Diluted
|
|
|
58,844
|
|
|
|
59,111
|
|
|
|
58,445
|
|
|
|
57,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.22
|
|
|
$
|
0.17
|
|
|
$
|
0.39
|
|
|
$
|
(0.13
|
)
|
Income (loss) from discontinued operations
|
|
|
0.00
|
|
|
|
0.02
|
|
|
|
(0.09
|
)
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
0.22
|
|
|
$
|
0.19
|
|
|
$
|
0.30
|
|
|
$
|
(0.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.21
|
|
|
$
|
0.17
|
|
|
$
|
0.39
|
|
|
$
|
(0.13
|
)
|
Income (loss) from discontinued operations
|
|
|
0.00
|
|
|
|
0.01
|
|
|
|
(0.09
|
)
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
0.21
|
|
|
$
|
0.18
|
|
|
$
|
0.30
|
|
|
$
|
(0.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Adjusted for the effect of
non-vested restricted stock if dilutive to income (loss) per
common share.
|
As discussed in more detail in the Background and Basis of
Presentation section of this Note 1, the Company had
Class A Common Stock and Class B Common Stock
outstanding until the completion of the HLTH Merger. The
Class B Common Stock had different voting rights than the
Class A Common Stock and it had the ability to convert into
Class A Common Stock. However, other than these
differences, the two classes of common stock were identical to
each other, including as it relates to how dividends would be
distributed, should dividends ever be declared by the Company.
As a result, the calculation of net income (loss) per share for
the Class A and Class B shares is the same. For
purposes of the net income (loss) per share calculation
presented above, the numerator includes the aggregate amount of
the Companys income attributable to both Class A and
Class B common shares, and the denominator includes the
aggregate of the Class A and Class B common shares
outstanding.
The impact of certain shares issued to the former owners of
Subimo, LLC pursuant to the purchase agreement (as amended, the
Subimo Purchase Agreement) for the Companys
acquisition of Subimo, LLC was considered in the calculation of
basic and diluted weighted average shares outstanding during the
three and nine months ended September 30, 2008. Under the
terms of the Subimo Purchase Agreement, the Company had deferred
the issuance of 640,930 shares of Class A Common Stock
(Deferred Shares) until December 2008. Prior to
December 2008, up to 246,508 of the Deferred Shares were
available to be used to settle any outstanding claims or
warranties the Company may have had against the sellers. For
purposes of calculating net income (loss) per share for the
three and nine months ended September 30, 2008, the impact
of 394,422 of the Deferred Shares (representing the
non-contingent portion of the Deferred Shares) was included in
the calculation of basic weighted average shares outstanding.
The additional 246,508 Deferred Shares were considered if their
effect was dilutive.
9
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company has excluded certain outstanding stock options and
Deferred Shares from the calculation of diluted income (loss)
per common share during the periods in which such securities
were anti-dilutive. The total number of shares excluded from the
calculation of diluted income (loss) per common share was
2,116,163 and 5,798,473 for the three and nine months ended
September 30, 2009, respectively, and 2,446,553 and
5,602,351 for the three and nine months ended September 30,
2008, respectively.
Reclassifications
Certain reclassifications have been made to the prior period
financial statements to conform to the current year presentation.
Recent
Accounting Pronouncements
Accounting
Pronouncements Adopted During 2009
Effective January 1, 2009, the Company adopted the revised
authoritative guidance on business combinations which changed
existing practice, in part, as follows: (1) contingent
consideration arrangements are now fair valued at the
acquisition date and included on that basis in the purchase
price consideration; (2) transaction costs are now expensed
as incurred, rather than capitalized as part of the purchase
price; (3) reversal of valuation allowances created in
purchase accounting are now recorded through the income tax
provision; and (4) in order to accrue for a restructuring
plan in purchase accounting, all authoritative guidance would
have to be met at the acquisition date. While the adoption of
this standard did not have a material impact on the
Companys financial statements, it could materially change
the accounting for business combinations consummated in the
future and for tax matters relating to prior acquisitions
settled subsequent to December 31, 2008.
Effective January 1, 2009, the Company adopted the
authoritative guidance which clarifies that unvested share-based
payment awards with a right to receive nonforfeitable dividends
are participating securities. The Company reflected the impact
on the three and nine months ended September 30, 2009 in
the Net Income (Loss) Per Common Share section of Note 1.
The adoption of the new guidance did not have a material impact
on the three and nine months ended September 30, 2008
financial statements.
In April 2009, the Financial Accounting Standards Board
(FASB) issued authoritative guidance requiring
disclosures about fair value of financial instruments in interim
reporting periods. Such disclosures were previously required
only in annual financial statements. Because this pronouncement
applies only to financial statement disclosure, it did not have
an impact on the Companys results of operations, financial
position or cash flows.
In April 2009, the FASB issued authoritative guidance which
changed when and how to assess
other-than-temporary
impairments of securities and to improve the financial statement
presentation of such impairments. A more detailed description of
this new guidance and the impact of its adoption is discussed in
Note 5.
In May 2009, the FASB issued authoritative guidance establishing
general standards of accounting for and disclosure of events
that occur after the balance sheet date but before financial
statements are issued. This new guidance was effective for
interim or annual financial periods ending after June 15,
2009. In response to this guidance, management has evaluated
subsequent events through November 9, 2009, which is the
date that the Companys financial statements were filed.
In June 2009, the FASB issued authoritative guidance which
established the FASB Accounting Standards Codification
(Codification). On the effective date of this new
guidance, the Codification superseded all then-existing non-SEC
accounting and reporting standards. All other non-grandfathered,
non-SEC accounting literature not included in the Codification
became non-authoritative. This new guidance was effective for
financial statements issued for interim and annual periods
ending after September 15, 2009. Because this
10
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
pronouncement applies only to financial statement disclosure, it
did not have an impact on the Companys results of
operations, financial position or cash flows.
Accounting
Pronouncements to be Adopted in the Future
In October 2009, the FASB issued authoritative guidance on
revenue recognition that will become effective for the Company
beginning January 1, 2011, with earlier adoption permitted.
Under the new guidance on arrangements that include software
elements, tangible products that have software components that
are essential to the functionality of the tangible product will
no longer be within the scope of the software revenue
recognition guidance, and software-enabled products will now be
subject to other relevant revenue recognition guidance.
Additionally, the FASB issued authoritative guidance on revenue
arrangements with multiple deliverables that are outside the
scope of the software revenue recognition guidance. Under the
new guidance, when vendor specific objective evidence or third
party evidence for deliverables in an arrangement cannot be
determined, a best estimate of the selling price is required to
separate deliverables. In addition, revenue under multiple
element arrangements will be allocated using the relative
selling price method. The new guidance includes new disclosure
requirements on how the application of the relative selling
price method affects the timing and amount of revenue
recognition. The Company is currently evaluating the impact that
this new guidance will have on the Companys results of
operations, financial position or cash flows.
|
|
2.
|
Discontinued
Operations
|
In March 2009, the Company decided to divest the Little Blue
Book print directory business (LBB). As a result,
the historical financial information for LBB has been reflected
as discontinued operations in the accompanying consolidated
financial statements. During the three months ended
June 30, 2009, the Company recorded an impairment charge of
$8,300 to reduce the carrying value of LBB to its current
estimated fair value. On September 30, 2009, the Company
completed the sale of LBB in which it received cash proceeds of
$2,590 and recognized a pre-tax gain of $27. Summarized
operating results for the discontinued operations of LBB and the
gain recognized on the sale are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Revenue
|
|
$
|
1,875
|
|
|
$
|
3,590
|
|
|
$
|
4,066
|
|
|
$
|
7,794
|
|
Income (loss) before taxes
|
|
|
348
|
|
|
|
1,561
|
|
|
|
(8,432
|
)
|
|
|
2,172
|
|
Gain on disposal before taxes
|
|
|
27
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
The major classes of assets and liabilities of LBB as of
December 31, 2008 were as follows:
|
|
|
|
|
|
Assets of discontinued operations:
|
|
|
|
|
Accounts receivable, net
|
|
$
|
1,058
|
|
Property and equipment, net
|
|
|
98
|
|
Goodwill
|
|
|
11,044
|
|
Intangible assets, net
|
|
|
362
|
|
Other assets
|
|
|
13
|
|
|
|
|
|
|
Total assets
|
|
$
|
12,575
|
|
|
|
|
|
|
Liabilities of discontinued operations:
|
|
|
|
|
Accrued expenses
|
|
$
|
113
|
|
Deferred revenue
|
|
|
876
|
|
Deferred tax liability
|
|
|
1,610
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
2,599
|
|
|
|
|
|
|
11
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
3.
|
Transactions
with HLTH
|
Merger
with HLTH
On October 23, 2009, the Company completed the HLTH Merger,
which is described in Note 11.
Agreements
with HLTH
In connection with the initial public offering in September
2005, the Company entered into a number of agreements with HLTH
governing the future relationship of the companies, including a
Services Agreement, a Tax Sharing Agreement and an Indemnity
Agreement. These agreements covered a variety of matters,
including responsibility for certain liabilities, including tax
liabilities, as well as matters related to HLTH providing the
Company with administrative services, such as payroll,
accounting, tax, employee benefit plans, employee insurance,
intellectual property and legal services. These agreements are
no longer in effect following the HLTH Merger on
October 23, 2009 since HLTH merged into the Company and no
longer exists as a separate entity.
Charges
from HLTH to the Company
Corporate Services: The Company was charged a
services fee (the Services Fee) for costs related to
corporate services provided by HLTH. The services that HLTH
provided included certain administrative services, including
payroll, accounting, tax planning and compliance, employee
benefit plans and legal matters. In addition, the Company
reimbursed HLTH for an allocated portion of certain expenses
that HLTH incurred for outside services and similar items,
including insurance fees, outside personnel, facilities costs,
professional fees, software maintenance fees and
telecommunications costs. HLTH agreed to make the services
available to the Company for up to 5 years following the
initial public offering. These expense allocations were
determined on a basis that HLTH and the Company consider to be a
reasonable assessment of the costs of providing these services,
exclusive of any profit margin. The basis the Company and HLTH
used to determine these expense allocations required management
to make certain judgments and assumptions. The Services Fee is
reflected in general and administrative expense within the
accompanying consolidated statements of operations.
Healthcare Expense: The Company was charged
for its employees participation in HLTHs healthcare
plans. Healthcare expense was charged based on the number of
total employees of the Company and reflected HLTHs average
cost of these benefits per employee. Healthcare expense is
reflected in the accompanying consolidated statements of
operations in the same expense captions as the related salary
costs of those employees.
Stock-Based Compensation Expense: Stock-based
compensation expense is related to stock option issuances and
restricted stock awards of HLTH Common Stock that have been
granted to certain employees of the Company. Stock-based
compensation expense is allocated on a specific employee
identification basis. The expense is reflected in the
accompanying consolidated statements of operations in the same
expense captions as the related salary costs of those employees.
The allocation of stock-based compensation expense related to
HLTH Common Stock is recorded as a capital contribution in
additional paid-in capital.
The following table summarizes the allocations reflected in the
Companys consolidated financial statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Corporate services
|
|
$
|
1,312
|
|
|
$
|
838
|
|
|
$
|
3,442
|
|
|
$
|
2,572
|
|
Healthcare expense
|
|
|
2,234
|
|
|
|
2,144
|
|
|
|
6,486
|
|
|
|
6,122
|
|
Stock-based compensation expense
|
|
|
105
|
|
|
|
79
|
|
|
|
(111
|
)
|
|
|
184
|
|
12
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
4.
|
Related
Party Transaction
|
Fidelity
Human Resources Services Company LLC
In 2004, the Company entered into an agreement with Fidelity
Human Resources Services Company LLC (FHRS) to
integrate the Companys private portals product into the
services FHRS provides to its clients. FHRS provides human
resources administration and benefits administration services to
employers. The Company recorded revenue of $1,989 and $6,326
during the three and nine months ended September 30, 2009,
and $2,272 and $7,062 during the three and nine months ended
September 30, 2008, respectively. Included in accounts
receivable as of September 30, 2009 and December 31,
2008 was $2,039 and $2,070, respectively, related to the FHRS
agreement. FHRS is an affiliate of FMR Corp. which is deemed to
be a related party of the Company due to its publicly reported
ownership of HLTH and the Company. Additionally, affiliates of
FMR Corp. provide services to the Company in connection with the
Companys 401(k) plan.
|
|
5.
|
Fair
Value of Financial Instruments and Credit Facility
|
The Company accounts for certain assets and liabilities at fair
value, which is defined as the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
Additionally, the Company uses valuation techniques that
maximize the use of observable inputs and minimize the use of
unobservable inputs. These inputs are prioritized below:
|
|
|
|
Level 1:
|
Observable inputs such as quoted market prices in active markets
for identical assets or liabilities.
|
|
|
Level 2:
|
Observable market-based inputs or unobservable inputs that are
corroborated by market data.
|
|
|
Level 3:
|
Unobservable inputs for which there is little or no market data,
which require the use of the reporting entitys own
assumptions.
|
The Company did not have any Level 2 assets as of
September 30, 2009 and December 31, 2008. The
following table sets forth the Companys Level 1 and
Level 3 financial assets that were measured and recorded at
fair value on a recurring basis as of September 30, 2009 or
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009
|
|
|
As of December 31, 2008
|
|
|
|
Fair Value
|
|
|
Amortized
|
|
|
|
|
|
Gross
|
|
|
Amortized
|
|
|
|
|
|
Gross
|
|
|
|
Estimate
|
|
|
Cost
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Cost
|
|
|
|
|
|
Unrealized
|
|
|
|
Using:
|
|
|
Basis
|
|
|
Value
|
|
|
Losses
|
|
|
Basis
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Cash and Cash Equivalents
|
|
|
Level 1
|
|
|
$
|
275,250
|
|
|
$
|
275,250
|
|
|
$
|
|
|
|
$
|
191,659
|
|
|
$
|
191,659
|
|
|
$
|
|
|
Auction Rate
Securities(1)
|
|
|
Level 3
|
|
|
|
148,887
|
(2)
|
|
|
126,564
|
|
|
|
(22,323
|
)(2)
|
|
|
137,840
|
|
|
|
133,563
|
|
|
|
(4,277
|
)
|
|
|
|
(1)
|
|
The face (par) value of the auction
rate securities was $163,000 and $164,800 as of
September 30, 2009 and December 31, 2008, respectively.
|
|
(2)
|
|
Amounts reflect cumulative effect
of adoption of new authoritative guidance as discussed below.
|
13
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table reconciles the beginning and ending balances
of the Companys Level 3 assets, which consist of the
Companys auction rate securities for the nine months ended
September 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Fair value as of the beginning of the period
|
|
$
|
133,563
|
|
|
$
|
|
|
Transfers to Level 3
|
|
|
|
|
|
|
169,200
|
|
Redemptions
|
|
|
(1,800
|
)
|
|
|
(3,700
|
)
|
Impairment charge included in earnings
|
|
|
|
|
|
|
(27,406
|
)
|
Interest income accretion included in earnings
|
|
|
|
|
|
|
244
|
|
Unrealized loss included in other comprehensive income
|
|
|
(5,199
|
)
|
|
|
(5,490
|
)
|
|
|
|
|
|
|
|
|
|
Fair value as of the end of the period
|
|
$
|
126,564
|
|
|
$
|
132,848
|
|
|
|
|
|
|
|
|
|
|
The Company holds investments in auction rate securities
(ARS) which have been classified as Level 3
assets as described above. The types of ARS holdings the Company
owns are backed by student loans, 97% guaranteed under the
Federal Family Education Loan Program (FFELP), and had credit
ratings of AAA or Aaa when purchased. Historically, the fair
value of the Companys ARS holdings approximated par value
due to the frequent auction periods, generally every 7 to
28 days, which provided liquidity to these investments.
However, since February 2008, all auctions involving these
securities have failed. The result of a failed auction is that
these ARS holdings will continue to pay interest in accordance
with their terms at each respective auction date; however
liquidity of the securities will be limited until there is a
successful auction, the issuer redeems the securities, the
securities mature or until such time as other markets for these
ARS holdings develop. As a secondary market has yet to develop,
these investments have been classified as long-term investments
as their contractual maturity dates are generally in excess of
20 years. Additionally, during 2009 approximately one-half
of the auction rate securities the Company holds were either
downgraded below AAA or placed on watch status by
one or more of the major credit rating agencies. As of
March 31, 2008, the Company concluded that the estimated
fair value of its ARS no longer approximated the face value. The
Company concluded the fair value of its ARS holdings was
$141,044 compared to a face value of $168,450. The impairment in
value, of $27,406, was considered to be
other-than-temporary,
and accordingly, was recorded as an impairment charge within the
statement of operations during the three months ended
March 31, 2008.
Effective April 1, 2009, the Company was required to adopt
new authoritative guidance which amended the recognition
guidance for
other-than-temporary
impairments of debt securities and changed the presentation of
other-than-temporary
impairments in the financial statements. In accordance with this
new guidance, if an entity intends to sell or if it is more
likely than not that it will be required to sell an impaired
security prior to recovery of its cost basis, the security is to
be considered
other-than-temporarily
impaired and the full amount of impairment must be charged to
earnings. Otherwise, losses on securities which are
other-than-temporarily
impaired are separated into two categories, the portion of loss
which is considered credit loss and the portion of loss which is
due to other factors. The credit loss portion is charged to
earnings while the loss due to other factors is charged to other
comprehensive income. This new guidance requires a cumulative
effect adjustment to be reported as of the beginning of the
period of adoption to reclassify the non-credit component of
previously recognized
other-than-temporary
impairments on debt securities held at that date, from retained
earnings to accumulated other comprehensive income, if the
entity does not intend to sell the debt security and it is not
more likely than not that the entity will be required to sell
the debt security before recovery of its amortized cost basis.
Since the Company has no current intent to sell the auction rate
securities that it holds, and it is not more likely than not
that the Company will be required to sell the securities prior
to recovery, the Company
14
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
estimated the present value of the cash flows expected to be
collected related to the auction rate securities it holds. The
difference between the present value of the estimated cash flows
expected to be collected and the amortized cost basis as of
April 1, 2009, the date this new guidance was adopted, was
$12,847. This represents the cumulative effect of initially
adopting this new guidance and it has been reflected as an
increase to accumulated other comprehensive loss and an increase
to retained earnings in the accompanying balance sheet effective
as of April 1, 2009.
The Company estimates the fair value of its ARS holdings using
an income approach valuation technique. Using this approach,
expected future cash flows are calculated over the expected life
of each security and are discounted to a single present value
using a market required rate of return. Some of the more
significant assumptions made in the present value calculations
were (i) the estimated weighted average lives for the loan
portfolios underlying each individual ARS, which ranged from 4
to 14 years as of March 31, 2008 and (ii) the
required rates of return used to discount the estimated future
cash flows over the estimated life of each security, which
consider both the credit quality for each individual ARS and the
market liquidity for these investments. Additionally, as
discussed above, during 2009, certain of the auction rate
securities the Company holds were downgraded below AAA by one or
more of the major credit rating agencies. These revised credit
ratings were a significant consideration in determining the cash
flows expected to be collected. Substantial judgment and
estimation factors are necessary in connection with making fair
value estimates of Level 3 securities, including estimates
related to expected credit losses as these factors are not
currently observable in the market due to the lack of trading in
the securities. The Company continues to monitor the market for
ARS as well as the individual ARS investments it owns. The
Company may be required to record additional losses, either
realized or unrealized, in future periods if the fair value of
its ARS holdings deteriorates further.
The Company also holds an investment in a privately held company
which is carried at cost, and not subject to fair value
measurements. However, if events or circumstances indicate that
its carrying amount may not be recoverable, it would be reviewed
for impairment. The amount of this investment is $6,471 and it
is included in other assets on the accompanying balance sheets.
Non-Recourse
Credit Facility
On May 6, 2008, the Company entered into a non-recourse
credit facility (the 2008 Credit Facility) with an
affiliate of Citigroup, secured by its ARS holdings (including,
in some circumstances, interest payable on the ARS holdings),
that would allow the Company to borrow up to 75% of the face
amount of the ARS holdings pledged as collateral under the 2008
Credit Facility. No borrowings were made under the 2008 Credit
Facility.
On April 28, 2009, the Company entered into an amended and
restated credit facility with an affiliate of Citigroup (the
2009 Credit Facility), replacing the 2008 Credit
Facility. As of the date of this Quarterly Report, no borrowings
have been made under the 2009 Credit Facility. The 2009 Credit
Facility is secured by the Companys ARS holdings
(including, in some circumstances, interest payable on the ARS
holdings). The Company can make borrowings under the 2009 Credit
Facility until April 27, 2010. Any borrowings outstanding
under the 2009 Credit Facility after February 26, 2010
become demand loans, subject to 60 days notice, with
recourse only to the pledged collateral. Loan proceeds may be
used for general working capital purposes or other lawful
business purposes of the Company (including repurchases of its
own securities), but not for purposes of buying, trading or
carrying other securities. The interest rate applicable to
borrowings under the 2009 Credit Facility will be the Open
Federal Funds Rate plus 3.95%. The maximum that can be borrowed
under the 2009 Credit Facility is 75% of the face amount of the
pledged ARS holdings. As of September 30, 2009, the maximum
the Company would be able to borrow is $122,250. Removals of ARS
from the pledged collateral (including upon their redemption or
sale) will reduce the amount available for borrowing under the
2009 Credit Facility.
15
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The 2009 Credit Facility is governed by an amended and restated
loan agreement, which contains customary representations and
warranties of the Company and certain affirmative covenants and
negative covenants relating to the pledged collateral. Under the
loan agreement, the Company and the lender may, in certain
circumstances, cause the pledged collateral to be sold, with the
proceeds of any such sale required to be applied in full
immediately to repayment of amounts borrowed.
|
|
6.
|
Comprehensive
Income (Loss)
|
Comprehensive income (loss) is comprised of net income (loss)
and other comprehensive income (loss). Other comprehensive
income (loss) includes certain changes in equity that are
excluded from net income (loss), such as changes in unrealized
gain (loss) on
available-for-sale
marketable securities. The following table presents the
components of comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Unrealized gain (loss) on securities
|
|
$
|
1,134
|
|
|
$
|
(4,107
|
)
|
|
$
|
(5,199
|
)
|
|
$
|
(5,490
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive gain (loss)
|
|
|
1,134
|
|
|
|
(4,107
|
)
|
|
|
(5,199
|
)
|
|
|
(5,490
|
)
|
Net income (loss)
|
|
|
12,791
|
|
|
|
10,766
|
|
|
|
17,690
|
|
|
|
(6,217
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
13,925
|
|
|
$
|
6,659
|
|
|
$
|
12,491
|
|
|
$
|
(11,707
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets subject to amortization consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Average
|
|
Gross
|
|
|
|
|
|
|
|
|
Average
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
Remaining
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
Remaining
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Useful Life(a)
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Useful Life(a)
|
|
Content
|
|
$
|
15,954
|
|
|
$
|
(15,286
|
)
|
|
$
|
668
|
|
|
1.1
|
|
$
|
15,954
|
|
|
$
|
(14,541
|
)
|
|
$
|
1,413
|
|
|
1.7
|
Customer relationships
|
|
|
32,430
|
|
|
|
(15,377
|
)
|
|
|
17,053
|
|
|
8.3
|
|
|
32,430
|
|
|
|
(12,872
|
)
|
|
|
19,558
|
|
|
8.7
|
Technology and patents
|
|
|
14,700
|
|
|
|
(14,543
|
)
|
|
|
157
|
|
|
0.2
|
|
|
14,700
|
|
|
|
(13,370
|
)
|
|
|
1,330
|
|
|
0.8
|
Trade names
|
|
|
6,030
|
|
|
|
(2,492
|
)
|
|
|
3,538
|
|
|
6.7
|
|
|
6,030
|
|
|
|
(2,094
|
)
|
|
|
3,936
|
|
|
7.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
69,114
|
|
|
$
|
(47,698
|
)
|
|
$
|
21,416
|
|
|
|
|
$
|
69,114
|
|
|
$
|
(42,877
|
)
|
|
$
|
26,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
The calculation of the weighted
average remaining useful life is based on the net book value and
the remaining amortization period of each respective intangible
asset.
|
Amortization expense was $1,462 and $4,821 during the three and
nine months ended September 30, 2009, respectively, and
$2,342 and $7,142 during the three and nine months ended
September 30, 2008, respectively. Aggregate amortization
expense for intangible assets is estimated to be:
|
|
|
|
|
Year ending December 31:
|
|
|
|
|
2009 (October 1st to December 31st)
|
|
$
|
1,324
|
|
2010
|
|
|
3,231
|
|
2011
|
|
|
2,464
|
|
2012
|
|
|
2,464
|
|
2013
|
|
|
2,464
|
|
Thereafter
|
|
|
9,469
|
|
16
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As a result of the completion of the integration of previously
acquired businesses and efficiencies that the Company continues
to realize from infrastructure investments, the Company recorded
a restructuring charge during 2008 of $2,460 for the severance
expenses related to the reduction of approximately 5% of the
work force and $450 of costs to consolidate facilities and other
exit costs. The remaining accrual related to this charge was
$545 and $2,530 as of September 30, 2009 and
December 31, 2008, respectively and is reflected in accrued
expenses in the accompanying consolidated balance sheets.
|
|
9.
|
Commitments
and Contingencies
|
Roberta
Feinstein v. WebMD Health Corporation, et al.
In June 2009, a purported class action was filed on behalf of
stockholders of the Company in the Supreme Court of the State of
New York, County of New York. Roberta Feinstein v. WebMD
Health Corporation, et al., No. 650369/2009 (Sup. Ct.
N.Y. Co.). The action names as defendants: the Company; certain
directors of the Company; and HLTH. The action alleges, among
other things, that the members of the Companys Board of
Directors breached their fiduciary duties of care, loyalty, good
faith and candor in agreeing to the HLTH Merger and have
attempted to unfairly deprive the Companys stockholders of
the true value of their investment in the Company, with the
action containing additional allegations that HLTH aided and
abetted the breaches of fiduciary duty of the Companys
directors. The lawsuit seeks, among other things, to certify
plaintiff as class representative, a declaration that the
members of the Companys Board of Directors have breached
their fiduciary duties, and an award of attorneys and
experts fees and expenses. The Company believes that the
class claim asserted by the Companys stockholders relating
to the HLTH Merger is without merit and intends to contest it
vigorously.
Other
In the normal course of business, the Company and its
subsidiaries are involved in various other claims and legal
proceedings. While the ultimate resolution of these matters,
including those discussed in Note 11 to the Consolidated
Financial Statements included in the Companys Current
Report on
Form 8-K
filed with the SEC on July 2, 2009, has yet to be
determined, the Company does not believe that their outcomes
will have a material adverse effect on the Companys
consolidated financial position, results of operations or
liquidity.
For information regarding commitments and contingencies
involving HLTH, see Note 11 below.
|
|
10.
|
Stock-Based
Compensation
|
The Company has various stock-based compensation plans under
which directors, officers and other eligible employees receive
awards of options to purchase the Companys Class A
Common Stock and HLTH Common Stock and restricted shares of the
Companys Class A Common Stock and HLTH Common Stock.
The Company also maintained an Employee Stock Purchase Plan
through April 30, 2008, which provided employees with the
ability to buy shares of HLTH Common Stock at a discount. The
following sections of this note summarize the activity for each
of these plans.
HLTH
Plans
Certain WebMD employees participate in the stock-based
compensation plans of HLTH (collectively, the HLTH
Plans). Under the HLTH Plans certain of the Companys
employees have received grants of options to purchase shares of
HLTH Common Stock and restricted shares of HLTH Common Stock.
Additionally, all eligible WebMD employees were provided the
opportunity to participate in HLTHs employee stock
purchase plan through April 30, 2008. All unvested options
to purchase shares of HLTH Common Stock and restricted shares of
HLTH Common Stock held by the Companys employees as of the
effective date of the IPO continue
17
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
to vest under the original terms of those awards. An aggregate
of 2,505,557 shares of HLTH Common Stock remained available
for grant under the HLTH Plans at September 30, 2009.
Following the HLTH Merger, the HLTH Plans became WebMD Plans and
no further grants will be made by WebMD under the HLTH Plans.
For additional information on the HLTH Merger, see Note 11
below.
Stock
Options
Generally, options under the HLTH Plans vest and become
exercisable ratably over periods ranging from three to five
years based on their individual grant dates, subject to
continued employment on the applicable vesting dates. The
majority of options granted under the HLTH Plans expire within
ten years from the date of grant. Options are granted at prices
not less than the fair market value of HLTHs Common Stock
on the date of grant. The following table summarizes activity
for the HLTH Plans relating to the Companys employees
during the nine months ended September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise Price
|
|
|
Contractual Life
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
per Share
|
|
|
(In Years)
|
|
|
Value(1)
|
|
|
Outstanding at January 1, 2009
|
|
|
7,685,557
|
|
|
$
|
13.80
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,115,305
|
)
|
|
|
9.11
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(628,205
|
)
|
|
|
16.46
|
|
|
|
|
|
|
|
|
|
Net transfers from HLTH
|
|
|
315,375
|
|
|
|
11.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2009
|
|
|
6,257,422
|
|
|
$
|
14.26
|
|
|
|
2.3
|
|
|
$
|
19,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at the end of the period
|
|
|
5,850,172
|
|
|
$
|
14.52
|
|
|
|
1.9
|
|
|
$
|
17,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The aggregate intrinsic value is
based on the market price of HLTHs Common Stock on
September 30, 2009, which was $14.61, less the applicable
exercise price of the underlying option. This aggregate
intrinsic value represents the amount that would have been
realized if all the option holders had exercised their options
on September 30, 2009.
|
Proceeds received by HLTH from the exercise of options to
purchase HLTH Common Stock were $2,136 and $10,163 during the
three and nine months ended September 30, 2009,
respectively, and $3,383 and $5,816 during the three and nine
months ended September 30, 2008, respectively. The
intrinsic value related to the exercise of these stock options
was $1,035 and $3,139 during the three and nine months ended
September 30, 2009, respectively, and $2,523 and $3,424
during the three and nine months ended September 30, 2008,
respectively.
Restricted
Stock Awards
HLTH Restricted Stock consists of shares of HLTH Common Stock
which have been awarded to employees with restrictions that
cause them to be subject to substantial risk of forfeiture and
restrict their sale or other transfer by the employee until they
vest. Generally, HLTH Restricted Stock awards vest ratably over
periods ranging from three to five years from their individual
award dates subject to continued employment on the applicable
vesting dates. The following table summarizes the activity of
non-vested HLTH Restricted Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
Average
|
|
|
|
|
Grant Date
|
|
|
Shares
|
|
Fair Value
|
|
Beginning balance at January 1, 2009
|
|
|
|
|
|
$
|
|
|
Net transfers from HLTH
|
|
|
23,000
|
|
|
|
11.29
|
|
|
|
|
|
|
|
|
|
|
Ending balance at September 30, 2009
|
|
|
23,000
|
|
|
|
11.29
|
|
|
|
|
|
|
|
|
|
|
18
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
WebMD
Plans
During September 2005, the Company adopted the 2005 Long-Term
Incentive Plan (as amended, the 2005 Plan).
Additionally, in connection with the acquisition of Subimo, LLC
in December 2006, the Company adopted the WebMD Health Corp.
Long-Term Incentive Plan for Employees of Subimo, LLC (as
amended, the Subimo Plan). The terms of the Subimo
Plan are similar to the terms of the 2005 Plan but it has not
been approved by the Companys stockholders. Awards under
the Subimo Plan were made on the date of the Companys
acquisition of Subimo, LLC in reliance on the NASDAQ Global
Select Market exception to shareholder approval for equity
grants to new hires. No additional grants will be made under the
Subimo Plan. The 2005 Plan and the Subimo Plan are referred to
below as the WebMD Plans. The maximum number of
shares of the Companys Class A Common Stock that may
be subject to options or restricted stock awards under the WebMD
Plans was 14,980,574 as of September 30, 2009, subject to
adjustment in accordance with the terms of the WebMD Plans. The
Company had an aggregate of 2,062,157 shares of
Class A Common Stock available for future grants under the
WebMD Plans at September 30, 2009. Shares of Class A
Common Stock are issued from the Companys treasury stock
when options are exercised or restricted stock is granted to the
extent shares are available in the Companys treasury,
otherwise new Class A Common Stock is issued in connection
with these transactions.
Stock
Options
Generally, options under the WebMD Plans vest and become
exercisable ratably over periods ranging from four to five years
based on their individual grant dates, subject to continued
employment on the applicable vesting dates. The options granted
under the WebMD Plans expire within ten years from the date of
grant. Options are granted at prices not less than the fair
market value of the Company Class A Common Stock on the
date of grant. The following table summarizes activity for the
WebMD Plans during the nine months ended September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
|
|
Exercise Price
|
|
Contractual Life
|
|
Intrinsic
|
|
|
Shares
|
|
per Share
|
|
(In Years)
|
|
Value(1)
|
|
Outstanding at January 1, 2009
|
|
|
10,284,236
|
|
|
$
|
25.46
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
604,900
|
|
|
|
27.68
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(312,051
|
)
|
|
|
17.73
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(675,250
|
)
|
|
|
27.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2009
|
|
|
9,901,835
|
|
|
$
|
25.68
|
|
|
|
8.2
|
|
|
$
|
88,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at the end of the period
|
|
|
3,091,658
|
|
|
$
|
24.09
|
|
|
|
6.4
|
|
|
$
|
34,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The aggregate intrinsic value is
based on the market price of the Companys Class A
Common Stock on September 30, 2009, which was $33.12, less
the applicable exercise price of the underlying option. This
aggregate intrinsic value represents the amount that would have
been realized if all the option holders had exercised their
options on September 30, 2009.
|
The fair value of each option granted is estimated on the date
of grant using the Black-Scholes option pricing model
considering the assumptions noted in the following table.
Expected volatility is based on implied volatility from traded
options of the Companys Class A Common Stock combined
with historical volatility of the Companys Class A
Common Stock. The expected term represents the period of time
that options are expected to be outstanding following their
grant date, and was determined using historical exercise
19
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
data. The risk-free rate is based on the U.S. Treasury
yield curve for periods equal to the expected term of the
options on the grant date.
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
0.56
|
|
|
|
0.44
|
|
Risk free interest rate
|
|
|
1.46
|
%
|
|
|
2.46
|
%
|
Expected term (years)
|
|
|
3.31
|
|
|
|
3.25
|
|
Weighted-average fair value of options granted during the period
|
|
$
|
11.03
|
|
|
$
|
10.75
|
|
Restricted
Stock Awards
The Companys Restricted Stock consists of shares of the
Company Class A Common Stock which have been awarded to
employees with restrictions that cause them to be subject to
substantial risk of forfeiture and restrict their sale or other
transfer by the employee until they vest. Generally, the
Companys Restricted Stock awards vest ratably over periods
ranging from four to five years from their individual award
dates subject to continued employment on the applicable vesting
dates. The following table summarizes the activity of non-vested
Company Restricted Stock during the nine months ended
September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Average
|
|
|
|
|
|
Grant Date
|
|
|
Shares
|
|
|
Fair Value
|
|
Beginning balance at January 1, 2009
|
|
|
706,009
|
|
|
$25.22
|
Granted
|
|
|
59,000
|
|
|
30.54
|
Vested
|
|
|
(91,688
|
)
|
|
21.74
|
Forfeited
|
|
|
(50,908
|
)
|
|
29.65
|
|
|
|
|
|
|
|
Ending balance at September 30, 2009
|
|
|
622,413
|
|
|
25.88
|
|
|
|
|
|
|
|
Proceeds received from the exercise of options to purchase
shares of the Companys Class A Common Stock were
$2,236 and $5,532 during the three and nine months ended
September 30, 2009, respectively, and $1,061 and $3,453
during the three and nine months ended September 30, 2008,
respectively. The intrinsic value related to the exercise of
these stock options, as well as the fair value of shares of the
Companys Restricted Stock that vested was $4,410 and
$6,017 during the three and nine months ended September 30,
2009, respectively, and $3,299 and $5,769 during the three and
nine months ended September 30, 2008, respectively.
Employee
Stock Purchase Plan
HLTHs Employee Stock Purchase Plan (ESPP)
allowed eligible employees of the Company the opportunity to
purchase shares of HLTH Common Stock through payroll deductions,
up to 15% of a participants annual compensation with a
maximum of 5,000 shares available per participant during
each purchase period. The purchase price of the stock was 85% of
the fair market value on the last day of each purchase period.
There were 31,787 shares of HLTH Common Stock issued to the
Companys employees under HLTHs ESPP during the nine
months ended September 30, 2008. The ESPP was terminated
effective April 30, 2008.
20
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other
At the time of the IPO and each year on the anniversary of the
IPO, the Company issued shares of its Class A Common Stock
to each non-employee director with a value equal to their annual
board and committee retainers. The Company recorded $85 of
stock-based compensation expense during the three months ended
September 30, 2009 and 2008 and $255 during the nine months
ended September 30, 2009 and 2008 in connection with these
issuances.
Additionally, the Company recorded $279 and $837 of stock-based
compensation expense during the three and nine months ended
September 30, 2008, respectively, in connection with a
stock transferability right for shares required were issued in
connection with the acquisition of Subimo, LLC by the Company.
Summary
of Stock-Based Compensation Expense
The following table summarizes the components and classification
of stock-based compensation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
HLTH Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
49
|
|
|
$
|
70
|
|
|
$
|
(167
|
)
|
|
$
|
126
|
|
Restricted stock
|
|
|
56
|
|
|
|
9
|
|
|
|
56
|
|
|
|
26
|
|
WebMD Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
4,495
|
|
|
|
2,655
|
|
|
|
14,011
|
|
|
|
8,163
|
|
Restricted stock
|
|
|
929
|
|
|
|
469
|
|
|
|
2,887
|
|
|
|
1,331
|
|
ESPP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
Other
|
|
|
132
|
|
|
|
372
|
|
|
|
323
|
|
|
|
1,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
5,661
|
|
|
$
|
3,575
|
|
|
$
|
17,110
|
|
|
$
|
10,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations
|
|
$
|
1,743
|
|
|
$
|
997
|
|
|
$
|
4,921
|
|
|
$
|
2,930
|
|
Sales and marketing
|
|
|
1,948
|
|
|
|
1,215
|
|
|
|
5,499
|
|
|
|
3,602
|
|
General and administrative
|
|
|
2,055
|
|
|
|
1,300
|
|
|
|
6,601
|
|
|
|
4,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
5,746
|
|
|
|
3,512
|
|
|
|
17,021
|
|
|
|
10,657
|
|
Income (loss) from discontinued operations, net of tax
|
|
|
(85
|
)
|
|
|
63
|
|
|
|
89
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
5,661
|
|
|
$
|
3,575
|
|
|
$
|
17,110
|
|
|
$
|
10,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009, approximately $994 and $63,864 of
unrecognized stock-based compensation expense related to
unvested awards (net of estimated forfeitures) is expected to be
recognized over a weighted-average period of approximately 3.4
years and 3.3 years, related to the HLTH Plans and the WebMD
Plans, respectively.
Tender
Offer for WebMD Common Stock
On November 3, 2009, the Company announced its intention to
commence a tender offer to purchase up to 5,700,000 shares
of its common stock at a price of $36.00 per share (the
Tender Offer). The Tender Offer is expected to be
completed in December 2009, subject to a number of terms and
conditions.
21
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
HLTH
Merger
As previously disclosed, on October 23, 2009, HLTH and the
Company completed their merger (the HLTH Merger)
with WebMD continuing as the surviving corporation and each
share of HLTH Common Stock being converted into
0.4444 shares of WebMD Common Stock. In the HLTH Merger,
the outstanding shares of WebMDs Class B Common Stock
(all of which were held by HLTH) were cancelled. The shares of
the Companys Class A Common Stock were unchanged in
the HLTH Merger and continue to trade on the NASDAQ Global
Select Market under the symbol WBMD; however, they
are no longer referred to as Class A because
the HLTH Merger eliminated both the Companys Class B
Common Stock held by HLTH and the dual-class stock structure
that had existed at the Company.
The applicable accounting treatment for the HLTH Merger results
in HLTH being treated as the acquiring entity and, as a result,
the pre-acquisition consolidated financial statements of HLTH
will be treated as the historical financial statements of the
Company going forward and will be included in the Companys
Annual Report on
Form 10-K
for the year ending December 31, 2009. However, since the
HLTH Merger was completed after the end of the third quarter,
the financial statements in this Quarterly Report on
Form 10-Q
relate only to the Company and the Companys historical
financial statements.
In connection with the HLTH Merger, WebMD automatically
succeeded to all of HLTHs remaining assets, liabilities
and commitments. As of the October 23, 2009 merger date,
HLTHs more significant assets included approximately
$385,000 in cash, auction rate securities with a fair value of
approximately $145,000 and $67,500 of senior secured notes
receivable from the purchasers of HLTHs Porex business,
which HLTH sold on October 19, 2009. Additionally, the
Company assumed the remainder of HLTHs net operating loss
carryforwards (including those of WebMD) which total
approximately $650,000, which will be used to reduce the federal
tax obligations WebMD would otherwise be required to pay. The
more significant liabilities the Company assumed from HLTH
include $264,583 principal amount of 1.75% Convertible
Notes (which are convertible into approximately 7.6 million
shares of Common Stock of WebMD) and $250,300 principal amount
of
31/8% Convertible
Notes (which are convertible into approximately 7.1 million
shares of Common Stock of WebMD). The holders of the
1.75% Convertible Notes and the
31/8% Convertible
Notes can require the Company to repurchase the notes, beginning
in June 2010 and September 2012, respectively. In addition, as a
result of the completion of the HLTH Merger, the Company
assumed, effective October 23, 2009, the commitments and
contingencies of HLTH, including, but not limited to those
described below.
Porex
Corporation v. Kleanthis Dean Haldopoulos, Benjamin T.
Hirokawa and Micropore Plastics, Inc.
On September 24, 2005, HLTHs former subsidiary, Porex
Corporation, filed a complaint in the Superior Court of Fulton
County against two former employees of Porex, Dean Haldopoulos
and Benjamin Hirokawa, and their corporation, Micropore
Plastics, Inc. (Micropore), alleging
misappropriation of Porexs trade secrets and breaches of
Haldopoulos and Hirokawas employment agreements, and
seeking monetary and injunctive relief. The lawsuit was
subsequently transferred to the Superior Court of DeKalb County,
Georgia. On October 24, 2005, the defendants filed an
Answer and Counterclaims against Porex. In the Answer and
Counterclaims, the defendants allege that Porex breached
non-disclosure and standstill agreements in connection with a
proposed transaction between Porex and Micropore and engaged in
fraud. The defendants also seek punitive damages and expenses of
litigation. In connection with HLTHs recent sale of Porex
(described above in this Note 11), HLTH agreed to indemnify
Porex for any liability that may be incurred by Porex with
respect to defendants counterclaim against Porex and for
certain legal fees of Porex in connection with the case.
Investigations
by United States Attorney for the District of South Carolina and
the SEC
As previously disclosed, the United States Attorney for the
District of South Carolina has been conducting an investigation
of HLTH, which HLTH first learned about on September 3,
2003. Based on the information available to the Company, it
believes that the investigation relates principally to issues of
financial accounting
22
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
improprieties relating to Medical Manager Corporation, a
predecessor of HLTH (by its merger into HLTH in September 2000),
and, more specifically, HLTHs former Medical Manager
Health Systems, Inc. subsidiary. Medical Manager Health Systems
was a predecessor to Emdeon Practice Services, Inc., a
subsidiary that HLTH sold to Sage Software in September 2006.
The Company (and previously HLTH) has been cooperating and the
Company intends to continue to cooperate fully with the
U.S. Attorneys Office. As previously reported, the
Board of Directors of HLTH formed a special committee consisting
solely of independent directors to oversee this matter with the
sole authority to direct HLTHs response to the allegations
that have been raised and that special committee was
reconstituted as a committee of the Board of Directors of the
Company following the HLTH Merger. As previously disclosed, the
Company understands that the SEC is also conducting a formal
investigation into this matter. In connection with the EPS Sale,
HLTH agreed to indemnify Sage Software with respect to this
matter.
The United States Attorney for the District of South Carolina
announced on January 10, 2005, that three former employees
of Medical Manager Health Systems each had agreed to plead
guilty to one count of mail fraud and that one such employee had
agreed to plead guilty to one count of tax evasion for acts
committed while they were employed by Medical Manager Health
Systems. According to the Informations, Plea Agreements and
Factual Summaries filed by the United States Attorney in, and
available from, the District Court of the United States for the
District of South Carolina Beaufort Division, on
January 7, 2005, the three former employees and other then
unnamed co-schemers were engaged in schemes between 1997 and
2002 that included causing companies acquired by Medical Manager
Health Systems to pay the former vice president in charge of
acquisitions and co-schemers kickbacks which were funded through
increases in the purchase price paid by Medical Manager Health
Systems to the acquired companies and that included fraudulent
accounting practices to artificially inflate the quarterly
revenues and earnings of Medical Manager Health Systems when it
was an independent public company called Medical Manager
Corporation from 1997 through 1999, when and after it was
acquired by Synetic, Inc. in July 1999, and when and after it
became a subsidiary of HLTH in September 2000. A fourth former
officer of Medical Manager Health Systems pled guilty to similar
activities later in 2005.
On December 15, 2005, the United States Attorney announced
indictments of the 10 former officers and employees of Medical
Manager Health Systems including Michael A. Singer, a former
Chief Executive Officer of Medical Manager Health Systems and a
former director of HLTH, who was last employed by HLTH as its
Executive Vice President, Physician Software Strategies until
February 2005, John H. Kang, a former President of Medical
Manager Health Systems, who was employed until May 2001 and John
P. Sessions, a former President and Chief Operating Officer of
Medical Manager Health Systems, who was employed until September
2003. The indictment initially charged the defendants with
conspiracy to commit mail, wire and securities fraud, a
violation of Title 18, United States Code, Section 371
and conspiracy to commit money laundering, a violation of
Title 18, United States Code, Section 1956(h) but the
second count was dismissed in early 2009. The allegations set
forth in the indictment describe activities that are
substantially similar to those described above with respect to
the January 2005 plea agreements. One of the defendants passed
away in 2008 and was dismissed from the indictment. One other
defendant was dismissed from the case and one defendant was
severed from the case and his case was transferred to Tampa,
Florida. The trial of the other seven indicted former officers
and directors of Medical Manager Health Systems is scheduled to
begin on January 19, 2010.
Based on the information it has obtained to date, including that
contained in the court documents filed by the United States
Attorney in South Carolina, the Company does not believe that
any member of HLTHs senior management whose duties were
not primarily related to the operations of Medical Manager
Health Systems during the relevant time periods engaged in any
of the violations or improprieties described in those court
documents. The Company understands, however, that in light of
the nature of the allegations involved, the
U.S. Attorneys office has been investigating all
levels of HLTHs and the Companys management. The
Company has not uncovered information that it believes would
require a restatement for any of the years covered by
HLTHs financial statements. In addition, the Company
believes that the amounts of the kickback payments referred to
in the court documents have already been reflected in the
financial statements of HLTH to the extent required.
23
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Following the completion of the HLTH Merger, the Company has
assumed certain indemnity obligations of HLTH to advance amounts
for reasonable defense costs for the eight former officers and
directors of EPS. During the nine months ended
September 30, 2009 and during the years ended
December 31, 2008 and 2007, HLTH recorded pre-tax charges
of $28,800, $29,078 and $73,347, respectively, related to its
estimated liability with respect to these indemnity obligations.
As of September 30, 2009, HLTHs remaining liability
related to this indemnification obligation is estimated to be
between $46,900 to $62,400.
Directors &
Officers Liability Insurance Coverage Litigation
On July 23, 2007, HLTH commenced litigation (the
Coverage Litigation) in the Court of Chancery of the
State of Delaware in and for New Castle County against ten
insurance companies in which HLTH was seeking to compel the
defendant companies (collectively, the Defendants)
to honor their obligations under certain directors and officers
liability insurance policies (the Policies). HLTH
was seeking an order requiring the Defendants to advance
and/or
reimburse expenses that HLTH has incurred and that the Company
expects to continue to incur for the advancement of the
reasonable defense costs of initially ten, and now eight, former
officers and directors of HLTHs former EPS subsidiary who
were indicted in connection with the investigation by United
States Attorney for the District of South Carolina described
above in this Note 11 (the Investigation).
Pursuant to a stipulation among the parties, the Coverage
Litigation was transferred on September 13, 2007 to the
Superior Court of the State of Delaware in and for New Castle
County. The Policies were issued to HLTH and to EPS, which is a
co-plaintiff with the Company in the Coverage Litigation
(collectively, the Plaintiffs). EPS was sold in
September 2006 to Sage Software and has changed its name to Sage
Software Healthcare, Inc. (SSHI). In connection with
HLTHs sale of EPS to Sage Software, HLTH retained certain
obligations relating to the Investigation and agreed to
indemnify Sage Software and SSHI with respect to certain
expenses in connection with the Investigation. The Company has
assumed HLTHs obligations as a result of the HLTH Merger.
HLTH retained the right to assert claims and recover proceeds
under the Policies on behalf of SSHI and the Company has
succeeded to HLTHs rights as a result of the HLTH Merger.
Prior to the filing of the Second Amended Complaint which is
discussed below, the Policies at issue in the Coverage
Litigation consisted of two separate groups of insurance
policies. Each group of policies consists of several layers of
coverage, with different insurers having agreed to provide
specified amounts of coverage at various levels. The first group
of policies was issued to EPS in the amount of $20,000 (the
EPS Policies) and the second group of policies was
issued to Synetic, Inc. (the former parent of EPS, which merged
into HLTH) in the amount of $100,000, of which approximately
$3,600 was paid by the primary carrier with respect to another
unrelated matter (the Synetic Policies).
The carrier with the third level of coverage in the Synetic
Policies filed a motion for summary judgment in the Coverage
Litigation, which most of the carriers who have issued the
Synetic Policies joined, which sought summary judgment that any
liability to pay defense costs should be allocated among the
three sets of policies available to HLTH (including the policies
with respect to which the Coverage Litigation relates and a
third set of policies the issuers of which had not yet been
named by HLTH) such that the Synetic Policies would only be
liable to pay about $23,000 of the $96,400 total coverage
available under such policies. HLTH filed its opposition to the
motion together with its motion for summary judgment against
such carrier and several other carriers who have issued the
Synetic Policies seeking to require such carriers to advance
payment of the defense costs that HLTH is obligated to pay while
the Coverage Litigation is pending. On July 31, 2008, the
Superior Court for the State of Delaware denied the motion filed
by the carriers seeking allocation and granted HLTHs
motion for partial summary judgment to enforce the duty of such
carriers to advance and reimburse these costs. Pursuant to the
Courts order, the issuers of the Synetic Policies
reimbursed HLTH for its costs as described above.
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WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On September 9, 2008 and February 4, 2009,
respectively, the eighth and ninth level carriers of the Synetic
Policies notified HLTH that they believe that they were not
bound by the Courts July 31, 2008 order regarding the
duty of the Synetic carriers to advance and reimburse defense
costs. This resulted in HLTH making a motion to the Court on
February 23, 2009 to require such eighth and ninth level
carriers to advance and reimburse defense costs. HLTH has since
settled with the eighth level carrier. Under the terms of the
settlement such carrier will pay, in full and final settlement,
an
agreed-upon
percentage of the policy amount against each payment of defense
costs made by HLTH as such policy continues to be implicated. On
April 15, 2009, the ninth level carrier made a cross-motion
for summary judgment claiming that, in light of a policy
endorsement applicable only to the ninth level carrier, because
of the time period during which the conspiracy charged in the
Second Superseding Indictment is alleged to have taken place,
the Synetic Policy issued by such carrier does not cover
HLTHs indemnification obligations. HLTH believed that such
carriers motion is without merit and responded to the
motion. On July 15, 2009, the Court granted summary
judgment in favor of the ninth level carrier and unless and
until the Company successfully appeals such decision the ninth
level carrier is not liable to pay any portion of the $10,000
total coverage of its policy with respect to HLTHs
indemnification obligations. As of September, 30, 2009, $79,000
has been paid by insurance companies representing the EPS
Policies and the Synetic Policies through a combination of
payment under the terms of the Policies, payment under
reservation of rights or through settlement. Of this amount,
$57,600 represents the portion received through settlement.
On November 17, 2008, HLTH filed a Second Amended Complaint
which added four new insurance companies as defendants in the
Coverage Action. These carriers are the issuers of a third set
of policies (the Emdeon Policies) that provide
coverage with respect to HLTHs indemnification obligations
to the former officers and directors of HLTHs former EPS
subsidiary who were indicted in connection with the
Investigation. All but one of the carriers who issued the Emdeon
Policies moved for summary judgment asserting that exclusions in
the Emdeon Policies preclude coverage for HLTHs
indemnification obligations and HLTH filed motions seeking to
compel such carriers to advance defense costs that HLTH is
obligated to indemnify. The policy issued by the carrier who did
not join in the motion contains language that was the subject of
the opinions discussed below. On August 31, 2009, the Court
issued two opinions. In the first opinion, the Court granted
summary judgment in favor of HLTH with respect to one of the
exclusions asserted by the carriers who issued the Emdeon
Policies. In the second opinion, the Court granted summary
judgment in favor of the carriers with respect to the other
exclusion asserted by such carriers. One of the carriers only
joined in the first motion with respect to which HLTH prevailed,
although the policy issued by such carrier also contains
language with respect to which the other carriers prevailed. The
Company has made a motion to compel such carrier to advance
defense costs and oral argument for such motion is scheduled for
December 21, 2009. The implication of these opinions, when
considered together, is that unless and until the Company
successfully appeals the second opinion described above, the
Company has (with the possible exception of the carrier who only
joined in the motion regarding the first exclusion) effectively
exhausted its insurance with respect to its obligation to
indemnify the indicted individuals.
The insurance carriers assert that HLTHs insurance
policies provide that under certain circumstances, amounts
advanced by the insurance companies in connection with the
defense costs of the indicted individuals, may have to be repaid
by HLTH, although amounts that HLTH has received in settlement
from certain carriers is not subject to being repaid and any
amounts paid by the eighth level carrier of the Synetic Policies
will not have to be repaid. HLTH has obtained an undertaking
from each indicted individual pursuant to which, under certain
circumstances, such individual has agreed to repay defense costs
advanced on such individuals behalf.
There can be no assurance that the Company will ultimately
prevail in the Coverage Litigation or that the Defendants will
be required to provide funding on an interim basis pending the
resolution of the Coverage Litigation. The Company intends to
continue to satisfy HLTHs legal obligations to the
indicted individuals with respect to advancement of amounts for
their defense costs.
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ITEM 2.
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Managements
Discussion and Analysis of Financial Condition and Results of
Operations
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This Item 2 contains forward-looking statements with
respect to possible events, outcomes or results that are, and
are expected to continue to be, subject to risks, uncertainties
and contingencies, including those identified in this Item. See
Forward-Looking Statements on page 3.
Overview
Managements discussion and analysis of financial condition
and results of operations, or MD&A, is provided as a
supplement to the consolidated financial statements and notes
thereto included elsewhere in this Quarterly Report and is
intended to provide an understanding of our results of
operations, financial condition and changes in financial
condition. Our MD&A is organized as follows:
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Introduction. This section provides a general
description of our company, background information on certain
trends and developments affecting our company, a description of
our merger with HLTH Corporation (which we refer to as the HLTH
Merger) and certain effects of the HLTH Merger and a discussion
of how seasonal factors may impact the timing of our revenue.
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Critical Accounting Policies and
Estimates. This section discusses those
accounting policies that are considered important to the
evaluation and reporting of our financial condition and results
of operations, and whose application requires us to exercise
subjective and often complex judgments in making estimates and
assumptions. In addition, all of our significant accounting
policies, including our critical accounting policies, are
summarized in Note 2 to the Consolidated Financial
Statements contained in Exhibit 99.3 to the Current Report
on
Form 8-K
that we filed on July 2, 2009 with the Securities and
Exchange Commission (which we refer to as the SEC).
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Transactions with HLTH. This section describes
the services that we received from HLTH Corporation (which we
refer to as HLTH) and the costs of these services, as well as
the fees we charged HLTH for our services and our tax sharing
agreement with HLTH.
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Recent Accounting Pronouncements. This section
provides a summary of the most recent authoritative accounting
standards and guidance that have either been recently adopted by
our company or may be adopted in the future.
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Results of Operations and Supplemental Financial and
Operating Information. These sections provide our
analysis and outlook for the significant line items on our
statements of operations, as well as other information that we
deem meaningful to understand our results of operations on a
consolidated basis.
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Liquidity and Capital Resources. This section
provides an analysis of our liquidity and cash flows, as well as
a discussion of our commitments that existed as of
September 30, 2009.
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Factors That May Affect Our Future Financial Condition or
Results of Operations. This section describes
circumstances or events that could have a negative effect on our
financial condition or results of operations, or that could
change, for the worse, existing trends in some or all of our
businesses. The factors discussed in this section are in
addition to factors that may be described elsewhere in this
Quarterly Report.
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In this MD&A, dollar amounts are in thousands, unless
otherwise noted.
Introduction
Our
Company
We are a leading provider of health information services to
consumers, physicians and other healthcare professionals,
employers and health plans through our public and private online
portals and health-focused publications. Our public portals for
consumers enable them to obtain health and wellness information
(including information on specific diseases or conditions),
check symptoms, locate physicians, store individual healthcare
information, receive periodic
e-newsletters
on topics of individual interest and participate in online
communities with peers and experts. Our public portals for
physicians and healthcare professionals make it
26
easier for them to access clinical reference sources, stay
abreast of the latest clinical information, learn about new
treatment options, earn continuing medical education (which we
refer to as CME) credit and communicate with peers. We also
distribute our online content and services to other entities and
generate revenue from these arrangements through the sale of
advertising and sponsorship products and content syndication
fees. We also provide
e-detailing
promotion and physician recruitment services for use by
pharmaceutical, medical device and healthcare companies. We also
provide print services including the publication of WebMD the
Magazine, a consumer magazine distributed to physician
office waiting rooms. Our sponsors and advertisers include
pharmaceutical, biotechnology, medical device and consumer
products companies. Our private portals enable employers and
health plans to provide their employees and members with access
to personalized health and benefit information and
decision-support technology that helps them to make more
informed benefit, treatment and provider decisions. We also
provide related services for use by such employees and members,
including lifestyle education and personalized telephonic health
coaching. We generate revenue from our private portals through
the licensing of these portals to employers and health plans
either directly or through distributors.
Recent
Developments
Tender Offer for WebMD Common Stock. On
November 3, 2009, we announced our intention to commence a
tender offer to purchase up to 5,700,000 shares of our
common stock at a price of $36.00 per share (which we refer
to as the Tender Offer). The Tender Offer is expected to be
completed in December 2009, subject to a number of terms and
conditions.
Completion of the HLTH Merger. On
October 23, 2009, stockholders of HLTH and WebMD approved
the HLTH Merger and the transaction was completed later that
day, with HLTH merging into WebMD and WebMD continuing
as the surviving corporation. As described below under
Effects of the HLTH Merger, WebMD
automatically succeeded to all of HLTHs assets,
liabilities and commitments upon completion of the HLTH Merger
(other than the shares of WebMD Class B Common Stock owned
by HLTH which were cancelled in the HLTH Merger). Prior to
completion of the HLTH Merger, HLTH owned approximately 83% of
the outstanding shares of capital stock of WebMD. The key
reasons for the merger included allowing HLTHs
stockholders to participate directly in the ownership of WebMD,
while eliminating HLTHs controlling interest in WebMD and
the inefficiencies associated with having two separate public
companies, increasing the ability of WebMD to raise capital and
to obtain financing, and improving the liquidity of WebMD Common
Stock by significantly increasing the number of shares held by
public stockholders.
In the HLTH Merger, each share of HLTH Common Stock was
converted into 0.4444 shares of WebMD Common Stock and the
outstanding shares of WebMDs Class B Common Stock
(all of which were held by HLTH) were cancelled. The shares of
WebMDs Class A Common Stock were unchanged in the
HLTH Merger and continue to trade on the NASDAQ Global Select
Market under the symbol WBMD; however, they are no
longer referred to as Class A because the HLTH
Merger eliminated both WebMDs Class B Common Stock
held by HLTH and the dual-class stock structure that had existed
at WebMD. After giving effect to the exchange of HLTH Common
Stock for WebMD Common Stock in the HLTH Merger on
October 23, 2009, WebMD had 57,363,409 shares of stock
outstanding (including unvested shares of restricted WebMD
Common Stock).
Sale of Porex; Senior Secured Notes. SNTC
Holding, Inc., a wholly-owned subsidiary of HLTH, entered into a
Stock Purchase Agreement, dated as of September 17, 2009,
for the sale of HLTHs Porex business (which we refer to as
Porex) for $142,000, consisting of $74,500 in cash payable at
closing, subject to customary adjustment based on the amount of
Porexs working capital, and $67,500 in senior secured
notes (which we refer to as the Senior Secured Notes). The sale
was completed on October 19, 2009. The Senior Secured Notes
are secured by certain assets of the acquirer. The Senior
Secured Notes accrue interest at a rate of 8.75% per annum,
payable quarterly. The Senior Secured Notes were issued in four
series: the Senior Secured Notes of the first, second and third
series have an aggregate principal amount of $10,000 each and
mature on the first, second and third anniversaries of the
closing, respectively; and the Senior Secured Notes of the
fourth series have an aggregate principal amount of $37,500 and
mature on the fourth anniversary of the closing.
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Effects of the HLTH Merger. Since HLTH
completed the sale of Porex prior to the HLTH Merger, WebMD was
the only operating business of HLTH at the time the HLTH Merger
closed. Accordingly, the completion of the HLTH Merger did not
have a significant effect on the operations of WebMD since there
were no HLTH business operations to combine with WebMDs
business operations and, while HLTH had previously been
providing certain corporate services to WebMD under a Services
Agreement and had certain other agreements with WebMD (as
described below under Transactions with
HLTH), those agreements ceased when WebMD acquired HLTH.
The employees and resources of HLTH used to provide services to
WebMD under the Services Agreement became employees and
resources of WebMD upon completion of the HLTH Merger.
WebMD, as the surviving company in the HLTH Merger,
automatically became subject to HLTHs liabilities and
commitments and became owner of HLTHs assets (other than
the shares of WebMD Class B Common Stock that were
cancelled in the HLTH Merger). The significant assets that WebMD
succeeded to included cash and investments with a fair value of
approximately $530,000 as of October 23, 2009 and the
Senior Secured Notes received in connection with the sale of
Porex, as described above under Sale of Porex;
Senior Secured Notes. The significant liabilities and
commitments and contingencies assumed by WebMD in the HLTH
Merger included the following:
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Convertible Notes. As a result of the HLTH
Merger, WebMD assumed HLTHs obligations under the
31/8% Convertible
Notes due September 1, 2025 (which we refer to as the
31/8% Notes)
and the 1.75% Convertible Subordinated Notes due
June 15, 2023 (which we refer to as the 1.75% Notes
and, collectively with the
31/8% Notes,
the Notes). Following the Merger, the Notes became convertible,
in accordance with and subject to the provisions of the
respective indentures pursuant to which they were issued, into
the right to receive shares of WebMD Common Stock equal to the
shares of Common Stock of HLTH into which such Notes would have
been convertible prior to the completion of the HLTH Merger,
multiplied by the .4444 HLTH Merger exchange ratio. As of the
closing of the HLTH Merger, there were $250,300 principal amount
of the
31/8% Notes
outstanding (the conversion of which would result in the
issuance of a total of approximately 7,145,000 shares of
Common Stock of WebMD, representing a conversion price of $35.03
per share of WebMD Common Stock or 28.5503 shares of WebMD
Common Stock for each $1,000 principal amount) and $264,583
principal amount of the 1.75% Notes outstanding (the
conversion of which would result in the issuance of a total of
approximately 7,640,000 shares of Common Stock of WebMD,
representing a conversion price of $34.63 per share of WebMD
Common Stock or 28.8759 shares of WebMD Common Stock for
each $1,000 principal amount). The
31/8% Notes
are convertible at any time at the option of the holder and the
1.75% Notes are convertible if the sale price of
WebMDs Common Stock exceeds 120% of the conversion price
for specified periods and in certain other circumstances.
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Unless previously redeemed or converted, the
31/8% Notes
will mature on September 1, 2025. Interest on the
31/8% Notes
accrues at the rate of
31/8%
per annum and is payable semiannually on March 1 and
September 1, commencing March 1, 2006. Holders of the
31/8% Notes
may require WebMD to repurchase their
31/8% Notes
on September 1, 2012, September 1, 2015 and
September 1, 2020, at a price equal to 100% of the
principal amount of the
31/8% Notes
being repurchased, plus any accrued and unpaid interest, payable
in cash. Additionally, the holders of the
31/8% Notes
may require WebMD to repurchase the
31/8% Notes
upon a change in control of WebMD at a price equal to 100% of
the principal amount of the
31/8% Notes,
plus accrued and unpaid interest, payable in cash or, at
WebMDs option, in shares of WebMDs common stock or
in a combination of cash and shares of WebMDs common
stock. The HLTH Merger is not considered to be a change of
control for the
31/8%
Notes. On or after September 5, 2010, September 5,
2011 and September 5, 2012, the
31/8% Notes
are redeemable, at the option of WebMD, for cash at redemption
prices of 100.893%, 100.446% and 100.0%, respectively, plus
accrued and unpaid interest.
Unless previously redeemed or converted, the 1.75% Notes
will mature on June 15, 2023. Interest on the
1.75% Notes accrues at the rate of 1.75% per annum and is
payable semiannually on June 15 and December 15, commencing
December 15, 2003. The 1.75% Notes are redeemable by
WebMD after June 15, 2008 and prior to June 20, 2010,
subject to certain conditions, including the sale price of
WebMDs Common Stock exceeding certain levels for specified
periods. If the 1.75% Notes are
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redeemed by WebMD during this period, WebMD will be required to
make additional interest payments. After June 20, 2010, the
1.75% Notes are redeemable at any time for cash at 100% of
their principal amount. Holders of the 1.75% Notes may
require WebMD to repurchase their 1.75% Notes on
June 15, 2010, June 15, 2013 and June 15, 2018,
for cash at 100% of the principal amount of the
1.75% Notes, plus accrued interest. Upon a change in
control, holders may require WebMD to repurchase their
1.75% Notes for, at WebMDs option, cash or shares of
Common Stock of WebMD, or a combination thereof, at a price
equal to 100% of the principal amount of the 1.75% Notes
being repurchased. The HLTH Merger is not considered to be a
change of control for the 1.75% Notes.
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Porex Corporation v. Kleanthis Dean Haldopoulos,
Benjamin T. Hirokawa and Micropore Plastics,
Inc. On September 24, 2005, HLTHs
former subsidiary, Porex Corporation, filed a complaint in the
Superior Court of Fulton County against two former employees of
Porex, Dean Haldopoulos and Benjamin Hirokawa, and their
corporation, Micropore Plastics, Inc. (which we refer to as
Micropore), alleging misappropriation of Porexs trade
secrets and breaches of Haldopoulos and Hirokawas
employment agreements, and seeking monetary and injunctive
relief. The lawsuit was subsequently transferred to the Superior
Court of DeKalb County, Georgia. On October 24, 2005, the
defendants filed an Answer and Counterclaims against Porex. In
the Answer and Counterclaims, the defendants allege that Porex
breached non-disclosure and standstill agreements in connection
with a proposed transaction between Porex and Micropore and
engaged in fraud. The defendants also seek punitive damages and
expenses of litigation. In connection with HLTHs recent
sale of Porex (described above under Sale of
Porex; Senior Secured Notes), HLTH agreed to indemnify
Porex for any liability that may be incurred by Porex with
respect to defendants counterclaim against Porex and for
certain legal fees of Porex in connection with the case.
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Investigations by United States Attorney for the District of
South Carolina and the SEC. As previously
disclosed, the United States Attorney for the District of South
Carolina has been conducting an investigation of HLTH, which
HLTH first learned about on September 3, 2003. Based on the
information available to WebMD, it believes that the
investigation relates principally to issues of financial
accounting improprieties relating to Medical Manager
Corporation, a predecessor of HLTH (by its merger into HLTH in
September 2000), and, more specifically, HLTHs former
Medical Manager Health Systems, Inc. subsidiary. Medical Manager
Health Systems was a predecessor to Emdeon Practice Services,
Inc., a subsidiary that HLTH sold to Sage Software in September
2006. WebMD (and previously HLTH) has been cooperating and WebMD
intends to continue to cooperate fully with the
U.S. Attorneys Office. As previously reported, the
Board of Directors of HLTH formed a special committee consisting
solely of independent directors to oversee this matter with the
sole authority to direct HLTHs response to the allegations
that have been raised and that special committee was
reconstituted as a committee of the Board of Directors of WebMD
following the HLTH Merger. As previously disclosed, WebMD
understands that the SEC is also conducting a formal
investigation into this matter. In connection with the EPS Sale,
HLTH agreed to indemnify Sage Software with respect to this
matter.
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The United States Attorney for the District of South Carolina
announced on January 10, 2005, that three former employees
of Medical Manager Health Systems each had agreed to plead
guilty to one count of mail fraud and that one such employee had
agreed to plead guilty to one count of tax evasion for acts
committed while they were employed by Medical Manager Health
Systems. According to the Informations, Plea Agreements and
Factual Summaries filed by the United States Attorney in, and
available from, the District Court of the United States for the
District of South Carolina Beaufort Division, on
January 7, 2005, the three former employees and other then
unnamed co-schemers were engaged in schemes between 1997 and
2002 that included causing companies acquired by Medical Manager
Health Systems to pay the former vice president in charge of
acquisitions and co-schemers kickbacks which were funded through
increases in the purchase price paid by Medical Manager Health
Systems to the acquired companies and that included fraudulent
accounting practices to artificially inflate the quarterly
revenues and earnings of Medical Manager Health Systems when it
was an independent public company called Medical Manager
Corporation from 1997 through 1999, when and after it was
acquired by Synetic, Inc. in July 1999, and when and after it
became a subsidiary of HLTH
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in September 2000. A fourth former officer of Medical Manager
Health Systems pled guilty to similar activities later in 2005.
On December 15, 2005, the United States Attorney announced
indictments of the 10 former officers and employees of Medical
Manager Health Systems including Michael A. Singer, a former
Chief Executive Officer of Medical Manager Health Systems and a
former director of HLTH, who was last employed by HLTH as its
Executive Vice President, Physician Software Strategies until
February 2005, John H. Kang, a former President of Medical
Manager Health Systems, who was employed until May 2001 and John
P. Sessions, a former President and Chief Operating Officer of
Medical Manager Health Systems, who was employed until September
2003. The indictment initially charged the defendants with
conspiracy to commit mail, wire and securities fraud, a
violation of Title 18, United States Code, Section 371
and conspiracy to commit money laundering, a violation of
Title 18, United States Code, Section 1956(h) but the
second count was dismissed in early 2009. The allegations set
forth in the indictment describe activities that are
substantially similar to those described above with respect to
the January 2005 plea agreements. One of the defendants passed
away in 2008 and was dismissed from the indictment. One other
defendant was dismissed from the case and one defendant was
severed from the case and his case was transferred to Tampa,
Florida. The trial of the other seven indicted former officers
and directors of Medical Manager Health Systems is scheduled to
begin on January 19, 2010.
Based on the information it has obtained to date, including that
contained in the court documents filed by the United States
Attorney in South Carolina, WebMD does not believe that any
member of HLTHs senior management whose duties were not
primarily related to the operations of Medical Manager Health
Systems during the relevant time periods engaged in any of the
violations or improprieties described in those court documents.
WebMD understands, however, that in light of the nature of the
allegations involved, the U.S. Attorneys office has
been investigating all levels of HLTHs and WebMDs
management. WebMD has not uncovered information that it believes
would require a restatement for any of the years covered by
HLTHs financial statements. In addition, WebMD believes
that the amounts of the kickback payments referred to in the
court documents have already been reflected in the financial
statements of HLTH to the extent required.
Following the completion of the HLTH Merger, WebMD has assumed
certain indemnity obligations of HLTH to advance amounts for
reasonable defense costs for the eight former officers and
directors of EPS. During the nine months ended
September 30, 2009 and during the years ended
December 31, 2008 and 2007, HLTH recorded pre-tax charges
of $28,800, $29,078 and $73,347, respectively, related to its
estimated liability with respect to these indemnity obligations.
As of September 30, 2009, HLTHs remaining liability
related to this indemnification obligation is estimated to be
between $46,900 to $62,400.
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Directors & Officers Liability Insurance Coverage
Litigation. On July 23, 2007, HLTH commenced
litigation (which we refer to as the Coverage Litigation) in the
Court of Chancery of the State of Delaware in and for
New Castle County against ten insurance companies in which
HLTH was seeking to compel the defendant companies (which we
refer to collectively as the Defendants) to honor their
obligations under certain directors and officers liability
insurance policies (which we refer to as the Policies). HLTH was
seeking an order requiring the Defendants to advance
and/or
reimburse expenses that HLTH has incurred and that WebMD expects
to continue to incur for the advancement of the reasonable
defense costs of initially ten, and now eight, former officers
and directors of HLTHs former EPS subsidiary who were
indicted in connection with the investigation by United States
Attorney for the District of South Carolina described above in
Investigations by United States Attorney for
the District of South Carolina and the SEC (which we refer
to as the Investigation).
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Pursuant to a stipulation among the parties, the Coverage
Litigation was transferred on September 13, 2007 to the
Superior Court of the State of Delaware in and for New Castle
County. The Policies were issued to HLTH and to EPS, which is a
co-plaintiff with WebMD in the Coverage Litigation (which we
refer to collectively as the Plaintiffs). EPS was sold in
September 2006 to Sage Software and has changed its name to Sage
Software Healthcare, Inc. (which we refer to as SSHI). In
connection with
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HLTHs sale of EPS to Sage Software, HLTH retained certain
obligations relating to the Investigation and agreed to
indemnify Sage Software and SSHI with respect to certain
expenses in connection with the Investigation. WebMD has assumed
HLTHs obligations as a result of the HLTH Merger. HLTH
retained the right to assert claims and recover proceeds under
the Policies on behalf of SSHI and WebMD has succeeded to
HLTHs rights as a result of the HLTH Merger.
Prior to the filing of the Second Amended Complaint which is
discussed below, the Policies at issue in the Coverage
Litigation consisted of two separate groups of insurance
policies. Each group of policies consists of several layers of
coverage, with different insurers having agreed to provide
specified amounts of coverage at various levels. The first group
of policies was issued to EPS in the amount of $20,000 (which we
refer to as the EPS Policies) and the second group of policies
was issued to Synetic, Inc. (the former parent of EPS, which
merged into HLTH) in the amount of $100,000, of which
approximately $3,600 was paid by the primary carrier with
respect to another unrelated matter (which we refer to as the
Synetic Policies).
The carrier with the third level of coverage in the Synetic
Policies filed a motion for summary judgment in the Coverage
Litigation, which most of the carriers who have issued the
Synetic Policies joined, which sought summary judgment that any
liability to pay defense costs should be allocated among the
three sets of policies available to HLTH (including the policies
with respect to which the Coverage Litigation relates and a
third set of policies the issuers of which had not yet been
named by HLTH) such that the Synetic Policies would only be
liable to pay about $23,000 of the $96,400 total coverage
available under such policies. HLTH filed its opposition to the
motion together with its motion for summary judgment against
such carrier and several other carriers who have issued the
Synetic Policies seeking to require such carriers to advance
payment of the defense costs that HLTH is obligated to pay while
the Coverage Litigation is pending. On July 31, 2008, the
Superior Court for the State of Delaware denied the motion filed
by the carriers seeking allocation and granted HLTHs
motion for partial summary judgment to enforce the duty of such
carriers to advance and reimburse these costs. Pursuant to the
Courts order, the issuers of the Synetic Policies
reimbursed HLTH for its costs as described above.
On September 9, 2008 and February 4, 2009,
respectively, the eighth and ninth level carriers of the Synetic
Policies notified HLTH that they believe that they were not
bound by the Courts July 31, 2008 order regarding the
duty of the Synetic carriers to advance and reimburse defense
costs. This resulted in HLTH making a motion to the Court on
February 23, 2009 to require such eighth and ninth level
carriers to advance and reimburse defense costs. HLTH has since
settled with the eighth level carrier. Under the terms of the
settlement such carrier will pay, in full and final settlement,
an
agreed-upon
percentage of the policy amount against each payment of defense
costs made by HLTH as such policy continues to be implicated. On
April 15, 2009, the ninth level carrier made a cross-motion
for summary judgment claiming that, in light of a policy
endorsement applicable only to the ninth level carrier, because
of the time period during which the conspiracy charged in the
Second Superseding Indictment is alleged to have taken place,
the Synetic Policy issued by such carrier does not cover
HLTHs indemnification obligations. HLTH believed that such
carriers motion is without merit and responded to the
motion. On July 15, 2009, the Court granted summary
judgment in favor of the ninth level carrier and unless and
until WebMD successfully appeals such decision the ninth level
carrier is not liable to pay any portion of the $10,000 total
coverage of its policy with respect to HLTHs
indemnification obligations. As of September, 30, 2009, $79,000
has been paid by insurance companies representing the EPS
Policies and the Synetic Policies through a combination of
payment under the terms of the Policies, payment under
reservation of rights or through settlement. Of this amount,
$57,600 represents the portion received through settlement.
On November 17, 2008, HLTH filed a Second Amended Complaint
which added four new insurance companies as defendants in the
Coverage Action. These carriers are the issuers of a third set
of policies (which we refer to as the Emdeon Policies) that
provide coverage with respect to HLTHs indemnification
obligations to the former officers and directors of HLTHs
former EPS subsidiary who were indicted in connection with the
Investigation. All but one of the carriers who issued the Emdeon
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Policies moved for summary judgment asserting that exclusions in
the Emdeon Policies preclude coverage for HLTHs
indemnification obligations and HLTH filed motions seeking to
compel such carriers to advance defense costs that HLTH is
obligated to indemnify. The policy issued by the carrier who did
not join in the motion contains language that was the subject of
the opinions discussed below. On August 31, 2009, the Court
issued two opinions. In the first opinion, the Court granted
summary judgment in favor of HLTH with respect to one of the
exclusions asserted by the carriers who issued the Emdeon
Policies. In the second opinion, the Court granted summary
judgment in favor of the carriers with respect to the other
exclusion asserted by such carriers. One of the carriers only
joined in the first motion with respect to which HLTH prevailed,
although the policy issued by such carrier also contains
language with respect to which the other carriers prevailed.
WebMD has made a motion to compel such carrier to advance
defense costs and oral argument for such motion is scheduled for
December 21, 2009. The implication of these opinions, when
considered together, is that unless and until WebMD successfully
appeals the second opinion described above, WebMD has (with the
possible exception of the carrier who only joined in the motion
regarding the first exclusion) effectively exhausted its
insurance with respect to its obligation to indemnify the
indicted individuals.
The insurance carriers assert that HLTHs insurance
policies provide that under certain circumstances, amounts
advanced by the insurance companies in connection with the
defense costs of the indicted individuals, may have to be repaid
by HLTH, although amounts that HLTH has received in settlement
from certain carriers is not subject to being repaid and any
amounts paid by the eighth level carrier of the Synetic Policies
will not have to be repaid. HLTH has obtained an undertaking
from each indicted individual pursuant to which, under certain
circumstances, such individual has agreed to repay defense costs
advanced on such individuals behalf.
There can be no assurance that WebMD will ultimately prevail in
the Coverage Litigation or that the Defendants will be required
to provide funding on an interim basis pending the resolution of
the Coverage Litigation. WebMD intends to continue to satisfy
HLTHs legal obligations to the indicted individuals with
respect to advancement of amounts for their defense costs.
Accounting Treatment of the HLTH Merger. The
applicable accounting treatment for the HLTH Merger results in
HLTH being treated as the acquiring entity and, as a result, the
pre-acquisition consolidated financial statements of HLTH will
be treated as the historical financial statements of WebMD going
forward and will be included in WebMDs Annual Report on
Form 10-K
for the year ending December 31, 2009. However, since the
HLTH Merger was completed after the end of the third quarter,
the financial statements in this Quarterly Report on
Form 10-Q
relate only to WebMD and WebMDs historical
financial statements.
Background
Information on Certain Trends and Developments
Trends Influencing the Use of Our
Services. Several key trends in the healthcare
and Internet industries are influencing the use of healthcare
information services of the types we provide or are developing.
Those trends are described briefly below:
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Use of the Internet by Consumers and
Physicians. The Internet has emerged as a major
communications medium and has already fundamentally changed many
sectors of the economy, including the marketing and sales of
financial services, travel, and entertainment, among others. The
Internet is also changing the healthcare industry and has
transformed how consumers and physicians find and utilize
healthcare information.
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Healthcare consumers increasingly seek to educate themselves
online about their healthcare related issues, motivated in part
by the continued availability of new treatment options and in
part by the larger share of healthcare costs they are being
asked to bear due to changes in the benefit designs being
offered by health plans and employers. The Internet has
fundamentally changed the way consumers obtain health and
wellness information, enabling them to have immediate access to
searchable information and dynamic interactive content to check
symptoms, assess risks, understand diseases, find providers and
evaluate treatment options. The Internet is the consumers
fastest growing health information resource, according to a
national study released in August 2008 by the
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Center for Studying Health System Change. Researchers found that
32 percent of American consumers (approximately
70 million adults) conducted online health searches in
2007, compared with 16 percent in 2001. More than half of
those surveyed said the information changed their overall
approach to maintaining their health. Four in five said the
information helped them better understand how to treat an
illness or condition.
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The Internet has also become a primary source of information for
physicians seeking to improve clinical practice and is growing
relative to traditional information sources, such as
conferences, meetings and offline journals.
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Increased Online Marketing and Education Spending for
Healthcare Products. Pharmaceutical,
biotechnology and medical device companies spend large amounts
each year marketing their products and educating consumers and
physicians about them; however, only a small portion of this
amount is currently spent on online services. We believe that
these companies, which comprise the majority of the advertisers
and sponsors of our public portals, are becoming increasingly
aware of the effectiveness of the Internet relative to
traditional media in providing health, clinical and
product-related information to consumers and physicians, and
this increasing awareness will result in increasing demand for
our services. However, notwithstanding our general expectation
for increased demand, our advertising and sponsorship revenue
may vary significantly from quarter to quarter due to a number
of factors, including general economic conditions and the
following:
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The majority of our advertising and sponsorship contracts are
for terms of approximately four to twelve months. We have
relatively few longer term advertising and sponsorship contracts.
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The time between the date of initial contact with a potential
advertiser or sponsor regarding a specific program and the
execution of a contract with the advertiser or sponsor for that
program may be subject to delays over which we have little or no
control, including as a result of budgetary constraints of the
advertiser or sponsor or their need for internal approvals.
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Other factors that may affect the timing of contracting for
specific programs with advertisers and sponsors, or receipt of
revenue under such contracts, include: the timing of FDA
approval for new products or for new approved uses for existing
products; the timing of FDA approval of generic products that
compete with existing brand name products; the timing of
withdrawals of products from the market; the timing of roll-outs
of new or enhanced services on our public portals; seasonal
factors relating to the prevalence of specific health conditions
and other seasonal factors that may affect the timing of
promotional campaigns for specific products; and the scheduling
of conferences for physicians and other healthcare professionals.
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Changes in Health Plan Design; Health Management
Initiatives. In a healthcare market where a
greater share of the responsibility for healthcare costs and
decision-making has been increasingly shifting to consumers, use
of information technology (including personal health records) to
assist consumers in making informed decisions about healthcare
has also increased. We believe that through our WebMD Health and
Benefits Manager tools, including our personal health record
application, we are well positioned to play a role in this
environment. However, our strategy depends, in part, on
increasing usage of our private portal services by our employer
and health plan clients employees and members,
respectively. Increasing usage of our services requires us to
continue to deliver and improve the underlying technology and
develop new and updated applications, features and services. In
addition, we face competition in the area of healthcare
decision-support tools and online health management applications
and health information services. Many of our competitors have
greater financial, technical, product development, marketing and
other resources than we do, and may be better known than we are.
We also expect that, for clients and potential clients in the
industries most seriously affected by recent adverse changes in
general economic conditions (including those in the financial
services and automotive industries), we may continue to
experience some reductions in initial contracts, contract
expansions and contract renewals for our private portal
services, as well as reductions in the size of existing
contracts.
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Healthcare Reform Legislation. Congress is
currently considering significant healthcare reform legislation.
Healthcare reform legislation, if enacted, may increase
governmental involvement in healthcare and health insurance, may
change the way health insurance is funded (including the role
that employers play in such funding), may change reimbursement
rates and other terms of such insurance coverage, may affect the
way information technology is used in healthcare, and may
otherwise change the environment in which healthcare industry
participants operate and the specific roles such participants
play in the industry. One important focus of healthcare reform
is control of healthcare costs over the long term. We believe
that our services can play an important role in efforts to
reduce healthcare costs. Accordingly, healthcare reform may
create opportunities for us, including with respect to personal
health record applications and health and benefits
decision-support tools and, more generally, with respect to our
capabilities in providing health and wellness information and
education. However, we are unable to predict future legislation
or proposals with any certainty or to predict the effect they
could have on our business, and healthcare industry participants
may respond to healthcare reform legislation or to the
uncertainties created by potential legislation by reducing their
expenditures or postponing expenditure decisions, including
expenditures for our services.
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The healthcare industry in the United States and relationships
among healthcare payers, providers and consumers are very
complicated. In addition, the Internet and the market for online
services are relatively new and still evolving. Accordingly,
there can be no assurance that the trends identified above will
continue or that the expected benefits to our businesses from
our responses to those trends will be achieved. In addition, the
market for healthcare information services is highly competitive
and not only are our existing competitors seeking to benefit
from these same trends, but the trends may also attract
additional competitors.
Divestiture of the Little Blue Book Print Directory
Business. In March 2009, we decided to divest the
Little Blue Book print directory business (which we refer to as
LBB). As a result, the historical financial information for LBB
has been reflected as discontinued operations within the
consolidated financial statements contained elsewhere in this
Quarterly Report. During the three months ended June 30,
2009, we recorded an impairment charge of $8,300 to reduce the
carrying value of LBB to its current estimated fair value. On
September 30, 2009, we completed the sale of LBB in which
we received cash proceeds of $2,590 and recognized a pre-tax
gain of $27. The revenue and operating results of LBB had
previously been reflected within our former publishing and other
services operating segment. As a result of our decision to
divest LBB, we eliminated the separate segment presentation for
publishing and other services. We are currently reporting
revenue in the following two categories: public portal
advertising and sponsorship and private portal services.
Non-Recourse Credit Facility. On May 6,
2008 we entered into a non-recourse credit facility (which we
refer to as the 2008 Credit Facility) with an affiliate of
Citigroup, secured by our auction rate securities (including, in
some circumstances, interest payable on the auction rate
securities), that would allow us to borrow up to 75% of the face
amount of the auction rate securities pledged as collateral
under the 2008 Credit Facility. No borrowings were made under
the 2008 Credit Facility. A description of our auction rate
securities (which we refer to as ARS) is included under
Critical Accounting Policies and
Estimates Fair Value of Investments below.
On April 28, 2009, we entered into an amended and restated
credit facility with an affiliate of Citigroup (which we refer
to as the 2009 Credit Facility), replacing the 2008 Credit
Facility. As of the date of this Quarterly Report, no borrowings
have been made under the 2009 Credit Facility. The 2009 Credit
Facility is secured by our ARS holdings (including, in some
circumstances, interest payable on the ARS holdings). We can
make borrowings under the 2009 Credit Facility until
April 27, 2010. Any borrowings outstanding under the 2009
Credit Facility after February 26, 2010 become demand
loans, subject to 60 days notice, with recourse only to the
pledged collateral. Loan proceeds may be used for general
working capital purposes or other lawful business purposes
(including repurchases of our own securities), but not for
purposes of buying, trading or carrying other securities. The
interest rate applicable to borrowings under the 2009 Credit
Facility will be the Open Federal Funds Rate plus 3.95%. The
maximum that can be borrowed under the 2009 Credit Facility is
75% of the face amount of the pledged ARS holdings. As of
September 30, 2009, the maximum that we would be able to
borrow is $122,250. Removals of ARS from the pledged collateral
(including upon their redemption or sale) will reduce the amount
available for borrowing under the 2009 Credit Facility. The
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2009 Credit Facility is governed by an amended and restated loan
agreement, which contains customary representations and
warranties of WebMD, as borrower, and certain affirmative
covenants and negative covenants relating to the pledged
collateral. Under the loan agreement, WebMD and the lender may,
in certain circumstances, cause the pledged collateral to be
sold, with the proceeds of any such sale required to be applied
in full immediately to repayment of amounts borrowed.
HLTH had a similar non-recourse credit facility with an
affiliate of Citigroup secured by its ARS holdings, which WebMD
succeeded to as a result of the HLTH Merger. As of
September 30, 2009, the maximum that HLTH was able to
borrow under its credit facility was $142,350.
Seasonality
The timing of our revenue is affected by seasonal factors.
Revenue within our public portal advertising and sponsorship is
seasonal, primarily due to the annual spending patterns of the
advertising and sponsorship clients of our public portals. This
portion of our revenue is usually the lowest in the first
quarter of each calendar year, and increases during each
consecutive quarter throughout the year. The timing of revenue
in relation to our expenses, much of which do not vary directly
with revenue, has an impact on cost of operations, sales and
marketing and general and administrative expenses as a
percentage of revenue in each calendar quarter.
Critical
Accounting Policies and Estimates
Our MD&A is based upon our consolidated financial
statements and notes to consolidated financial statements, which
were prepared in conformity with U.S. generally accepted
accounting principles. The preparation of the unaudited
consolidated financial statements requires us to make estimates
and assumptions that affect the amounts reported in the
unaudited consolidated financial statements and accompanying
notes. We base our estimates on historical experience, current
business factors, and various other assumptions that we believe
are necessary to consider to form a basis for making judgments
about the carrying values of assets and liabilities, the
recorded amounts of revenue and expenses and disclosure of
contingent assets and liabilities. We are subject to
uncertainties such as the impact of future events, economic and
political factors, and changes in our business environment;
therefore, actual results could differ from these estimates.
Accordingly, the accounting estimates used in preparation of our
financial statements will change as new events occur, as more
experience is acquired, as additional information is obtained
and as our operating environment changes. Changes in estimates
are made when circumstances warrant. Such changes in estimates
and refinements in estimation methodologies are reflected in
reported results of operations; if material, the effects of
changes in estimates are disclosed in the notes to our unaudited
consolidated financial statements.
We evaluate our estimates on an ongoing basis, including those
related to revenue recognition, the allowance for doubtful
accounts, the carrying value of prepaid advertising, the
carrying value of long-lived assets (including goodwill and
intangible assets), the carrying value of marketable securities,
the amortization period of long-lived assets (excluding
goodwill), the carrying value, capitalization and amortization
of software and Web site development costs, the provision for
income taxes and related deferred tax accounts, certain accrued
expenses and contingencies, share-based compensation to
employees and transactions with HLTH.
We believe the following reflects our critical accounting
policies and our more significant judgments and estimates used
in the preparation of our unaudited consolidated financial
statements:
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Revenue Recognition. Revenue from advertising
is recognized as advertisements are delivered or as publications
are distributed. Revenue from sponsorship arrangements, content
syndication and distribution arrangements, and licenses of
healthcare management tools and private portals as well as
related health coaching services, are recognized ratably over
the term of the applicable agreement. Revenue from the
sponsorship of CME is recognized over the period we
substantially complete our contractual deliverables as
determined by the applicable agreements. When contractual
arrangements contain multiple elements, revenue is allocated to
each element based on its relative fair value determined using
prices charged when elements are sold separately. In certain
instances where fair value does not exist for all the elements,
the amount of revenue allocated to the delivered elements equals
the total
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consideration less the fair value of the undelivered elements.
In instances where fair value does not exist for the undelivered
elements, revenue is recognized when the last element is
delivered.
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Long-Lived Assets. Our long-lived assets
consist of property and equipment, goodwill and other intangible
assets. Goodwill and other intangible assets arise from the
acquisitions we have made. The amount assigned to intangible
assets is subjective and based on our estimates of the future
benefit of the intangible assets using accepted valuation
techniques, such as discounted cash flow and replacement cost
models. Our long-lived assets, excluding goodwill, are amortized
over their estimated useful lives, which we determined based on
the consideration of several factors including the period of
time the asset is expected to remain in service. We evaluate the
carrying value and remaining useful lives of long-lived assets,
excluding goodwill, whenever indicators of impairment are
present. We evaluate the carrying value of goodwill annually,
and whenever indicators of impairment are present. We use a
discounted cash flow approach to determine the fair value of
goodwill. There was no impairment of goodwill noted as a result
of our impairment testing in 2008.
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Fair Value of Investments. We hold investments
in ARS which are backed by student loans, 97% guaranteed under
the Federal Family Education Loan Program (FFELP), and had
credit ratings of AAA or Aaa when purchased. Historically, the
fair value of our ARS investments approximated par value due to
the frequent auction periods, generally every 7 to 28 days,
which provided liquidity to these investments. However, since
February 2008, all auctions involving these securities have
failed. The result of a failed auction is that these ARS will
continue to pay interest in accordance with their terms at each
respective auction date; however, liquidity of the securities
will be limited until there is a successful auction, the issuer
redeems the securities, the securities mature or until such time
as other markets for our ARS holdings develop. We cannot be
certain regarding the amount of time it will take for an auction
market or other markets to develop. Additionally, approximately
one-half of the auction rate securities we hold were, during
2009, either downgraded below AAA or placed on watch
status by one or more of the major credit rating agencies.
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We estimate the fair value of our ARS investments using an
income approach valuation technique. Using this approach,
expected future cash flows are calculated over the expected life
of each security and are discounted to a single present value
using a market required rate of return. Some of the more
significant assumptions made in the present value calculations
include (i) the estimated weighted average lives for the
loan portfolios underlying each individual ARS and (ii) the
required rates of return used to discount the estimated future
cash flows over the estimated life of each security, which
consider both the credit quality for each individual ARS and the
market liquidity for these investments. Additionally, effective
April 1, 2009, we adopted new authoritative guidance which
required us to separate losses associated with our ARS into two
categories, the portion of the loss which is considered credit
loss and the portion of the loss which is due to other factors.
As discussed above, certain of the auction rate securities we
hold were, during 2009, downgraded below AAA by one or more of
the major credit rating agencies. These revised credit ratings
were a significant consideration in determining the estimated
credit loss associated with our ARS. This new authoritative
guidance is discussed in more detail in Recent
Accounting Pronouncements Accounting Pronouncements
Adopted During 2009 below.
Our ARS have been classified as Level 3 assets as their
valuation, including the portion of their valuation attributable
to credit losses, requires substantial judgment and estimation
of factors that are not currently observable in the market due
to the lack of trading in the securities. If different
assumptions were used for the various inputs to the valuation
approach including, but not limited to, assumptions involving
the estimated lives of the ARS investments, the estimated cash
flows over those estimated lives, and the estimated discount
rates applied to those cash flows, the estimated fair value of
these investments could be significantly higher or lower than
the fair value we determined. We continue to monitor the market
for auction rate securities as well as the individual ARS
investments we own. We may be required to record losses in
future periods, either realized or unrealized, if the fair value
of our ARS deteriorates further.
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Stock-Based Compensation. In December 2004,
the FASB issued authoritative guidance which requires all
share-based payments to employees, including grants of employee
stock options, to be recognized as compensation expense over the
service period (generally the vesting period) in the
Consolidated Financial Statements based on their fair values.
The fair value of each option granted is estimated on the date
of grant using the Black-Scholes option pricing model. The
assumptions used in this model are expected dividend yield,
expected volatility, risk-free interest rate and expected term.
We elected to use the modified prospective transition method.
Under the modified prospective transition method, awards that
were granted or modified on or after January 1, 2006 are
measured and accounted for in accordance with this guidance.
Unvested stock options and restricted stock awards that were
granted prior to January 1, 2006 will continue to be
accounted for, using the same grant date fair value and same
expense attribution method used under previously issued
authoritative guidance, except that all awards are recognized in
the results of operations over the remaining vesting periods.
The impact of forfeitures that may occur prior to vesting is
also estimated and considered in the amount recognized for all
stock-based compensation beginning January 1, 2006. As of
September 30, 2009, approximately $994 and $63,864 of
unrecognized stock-based compensation expense related to
unvested awards of WebMD employees (net of estimated
forfeitures) is expected to be recognized over a
weighted-average period of approximately 3.4 years and 3.3
years, related to the HLTH and WebMD stock-based compensation
plans, respectively.
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Deferred Tax Assets. Our deferred tax assets
are comprised primarily of net operating loss carryforwards on a
separate return basis. Subject to certain limitations, these
loss carryforwards may be used to offset taxable income in
future periods, reducing the amount of taxes we might otherwise
be required to pay. A significant portion of our deferred tax
assets are reserved for by a valuation allowance. In determining
the need for a valuation allowance, management determined the
probability of realizing deferred tax assets, taking into
consideration factors including historical operating results,
expectations of future earnings and taxable income. Management
will continue to evaluate the need for a valuation allowance
and, in the future, should management determine that realization
of the net deferred tax asset is more likely than not, some or
all of the remaining valuation allowance will be reversed, and
our effective tax rate may be reduced by such reversal.
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Transactions with HLTH. As discussed further
below, our expenses reflect a services fee for an allocation of
costs for corporate services provided by HLTH. Our expenses also
reflect the allocation of a portion of the cost of HLTHs
healthcare plans and the allocation of stock-based compensation
expense related to restricted stock awards and other stock-based
compensation. We were also included in the consolidated federal
tax return filed by HLTH thru the date of the HLTH Merger.
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Transactions
with HLTH
Agreements
with HLTH
In connection with our initial public offering in September
2005, we entered into a number of agreements with HLTH governing
the future relationship of the companies, including a Services
Agreement, a Tax Sharing Agreement and an Indemnity Agreement.
These agreements covered a variety of matters, including
responsibility for certain liabilities, including tax
liabilities, as well as matters related to HLTH providing us
with administrative services, such as payroll, tax, employee
benefit plan, employee insurance, intellectual property and
legal services. These agreements are no longer in effect
following the HLTH Merger on October 23, 2009 since HLTH
merged into WebMD and no longer exists as a separate entity.
Charges
from HLTH to WebMD
Corporate Services: We were charged a services
fee (which we refer to as the Services Fee) for costs related to
corporate services provided to us by HLTH. The services that
HLTH provided include certain administrative services, including
payroll, accounting, tax planning and compliance, employee
benefit plans and legal matters. In addition, we reimbursed HLTH
for an allocated portion of certain expenses that HLTH incurred
for outside services and similar items, including insurance
fees, outside personnel, facilities costs,
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professional fees, software maintenance fees and
telecommunications costs. HLTH agreed to make the services
available to us for up to 5 years following the initial
public offering. These expense allocations were determined on a
basis that we and HLTH consider to be a reasonable assessment of
the cost of providing these services, exclusive of any profit
margin. The basis we and HLTH used to determine these expense
allocations required management to make certain judgments and
assumptions. The Services Fee is reflected in general and
administrative expense within our consolidated statements of
operations.
Healthcare Expense: We are charged for our
employees participation in HLTHs healthcare plans.
Healthcare expense is charged based on the number of our total
employees and reflects HLTHs average cost of these
benefits per employee. Healthcare expense is reflected in the
accompanying consolidated statements of operations in the same
expense captions as the related salary costs of those employees.
Stock-Based Compensation Expense: Stock-based
compensation expense is related to stock option issuances and
restricted stock awards of HLTH Common Stock that have been
granted to certain of our employees. Stock-based compensation
expense is allocated on a specific employee identification
basis. The expense is reflected in our consolidated statements
of operations in the same expense captions as the related salary
costs of those employees. The allocation of stock-based
compensation expense related to HLTH Common Stock is recorded as
a capital contribution in additional paid-in capital.
The following table summarizes the allocations reflected in our
consolidated financial statements:
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2009
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2008
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2009
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2008
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Corporate services
|
|
$
|
1,312
|
|
|
$
|
838
|
|
|
$
|
3,442
|
|
|
$
|
2,572
|
|
Healthcare expense
|
|
|
2,234
|
|
|
|
2,144
|
|
|
|
6,486
|
|
|
|
6,122
|
|
Stock-based compensation expense
|
|
|
105
|
|
|
|
79
|
|
|
|
(111
|
)
|
|
|
184
|
|
Recent
Accounting Pronouncements
Accounting
Pronouncements Adopted During 2009
Effective January 1, 2009, we adopted the revised
authoritative guidance on business combinations which changed
existing practice, in part, as follows: (1) contingent
consideration arrangements are now fair valued at the
acquisition date and included on that basis in the purchase
price consideration; (2) transaction costs are now expensed
as incurred, rather than capitalized as part of the purchase
price; (3) reversal of valuation allowances created in
purchase accounting are now recorded through the income tax
provision; and (4) in order to accrue for a restructuring
plan in purchase accounting, all authoritative guidance would
have to be met at the acquisition date. While the adoption of
this standard did not have a material impact on our financial
statements, it could materially change the accounting for
business combinations consummated in the future and for tax
matters relating to prior acquisitions settled subsequent to
December 31, 2008.
Effective January 1, 2009, we adopted the authoritative
guidance which clarifies that unvested share-based payment
awards with a right to receive nonforfeitable dividends are
participating securities. We reflected the impact on the three
and nine months ended September 30, 2009 in the Net Income
(Loss) Per Common Share section of Note 1 contained
elsewhere in this Quarterly Report. The adoption of the new
guidance did not have a material impact on the three and nine
months ended September 30, 2008 financial statements.
In April 2009, the Financial Accounting Standards Board (which
we refer to as the FASB) issued authoritative guidance requiring
disclosures about fair value of financial instruments in interim
reporting periods. Such disclosures were previously required
only in annual financial statements. Because this pronouncement
applies only to financial statement disclosure, it did not have
an impact on our results of operations, financial position or
cash flows.
In April 2009, the FASB issued authoritative guidance which
changed when and how to assess
other-than-temporary
impairments of securities and to improve the financial statement
presentation of such impairments. A more detailed description of
this new guidance and the impact of its adoption is discussed in
Note 5 contained elsewhere in this Quarterly Report.
38
In May 2009, the FASB issued authoritative guidance establishing
general standards of accounting for and disclosure of events
that occur after the balance sheet date but before financial
statements are issued. This new guidance was effective for
interim or annual financial periods ending after June 15,
2009. In response to this guidance, management has evaluated
subsequent events through November 9, 2009, which is the
date that our financial statements were filed.
In June 2009, the FASB issued authoritative guidance which
established the FASB Accounting Standards Codification
(Codification). On the effective date of this new
guidance, the Codification superseded all then-existing non-SEC
accounting and reporting standards. All other non-grandfathered,
non-SEC accounting literature not included in the Codification
became non-authoritative. This new guidance was effective for
financial statements issued for interim and annual periods
ending after September 15, 2009. Because this pronouncement
applies only to financial statement disclosure, it did not have
an impact on our results of operations, financial position or
cash flows.
Accounting
Pronouncements to be Adopted in the Future
In October 2009, the FASB issued authoritative guidance on
revenue recognition that will become effective for us beginning
January 1, 2011, with earlier adoption permitted. Under the
new guidance on arrangements that include software elements,
tangible products that have software components that are
essential to the functionality of the tangible product will no
longer be within the scope of the software revenue recognition
guidance, and software-enabled products will now be subject to
other relevant revenue recognition guidance. Additionally, the
FASB issued authoritative guidance on revenue arrangements with
multiple deliverables that are outside the scope of the software
revenue recognition guidance. Under the new guidance, when
vendor specific objective evidence or third party evidence for
deliverables in an arrangement cannot be determined, a best
estimate of the selling price is required to separate
deliverables. In addition, revenue under multiple element
arrangements will be allocated using the relative selling price
method. The new guidance includes new disclosure requirements on
how the application of the relative selling price method affects
the timing and amount of revenue recognition. We are currently
evaluating the impact that this new guidance will have on our
results of operations, financial position or cash flows.
39
Results
of Operations
The following table sets forth our consolidated statements of
operations data and expresses that data as a percentage of
revenue for the periods presented:
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Three Months Ended September 30,
|
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|
Nine Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Revenue
|
|
$
|
111,568
|
|
|
|
100.0
|
|
|
$
|
96,797
|
|
|
|
100.0
|
|
|
$
|
300,463
|
|
|
|
100.0
|
|
|
$
|
263,451
|
|
|
|
100.0
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations
|
|
|
41,965
|
|
|
|
37.6
|
|
|
|
34,225
|
|
|
|
35.4
|
|
|
|
117,759
|
|
|
|
39.2
|
|
|
|
97,120
|
|
|
|
36.9
|
|
Sales and marketing
|
|
|
26,265
|
|
|
|
23.5
|
|
|
|
26,021
|
|
|
|
26.9
|
|
|
|
80,623
|
|
|
|
26.8
|
|
|
|
76,068
|
|
|
|
28.9
|
|
General and administrative
|
|
|
15,961
|
|
|
|
14.3
|
|
|
|
14,774
|
|
|
|
15.3
|
|
|
|
45,826
|
|
|
|
15.3
|
|
|
|
42,465
|
|
|
|
16.1
|
|
Depreciation and amortization
|
|
|
6,988
|
|
|
|
6.3
|
|
|
|
7,056
|
|
|
|
7.3
|
|
|
|
20,729
|
|
|
|
6.9
|
|
|
|
20,815
|
|
|
|
7.9
|
|
Interest income
|
|
|
834
|
|
|
|
0.7
|
|
|
|
2,616
|
|
|
|
2.8
|
|
|
|
2,733
|
|
|
|
0.9
|
|
|
|
8,419
|
|
|
|
3.2
|
|
Impairment of auction rate securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,406
|
|
|
|
10.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income tax provision
|
|
|
21,223
|
|
|
|
19.0
|
|
|
|
17,337
|
|
|
|
17.9
|
|
|
|
38,259
|
|
|
|
12.7
|
|
|
|
7,996
|
|
|
|
3.0
|
|
Income tax provision
|
|
|
8,622
|
|
|
|
7.7
|
|
|
|
7,375
|
|
|
|
7.6
|
|
|
|
15,469
|
|
|
|
5.1
|
|
|
|
15,308
|
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
12,601
|
|
|
|
11.3
|
|
|
|
9,962
|
|
|
|
10.3
|
|
|
|
22,790
|
|
|
|
7.6
|
|
|
|
(7,312
|
)
|
|
|
(2.8
|
)
|
Income (loss) from discontinued operations, net of tax
|
|
|
190
|
|
|
|
0.2
|
|
|
|
804
|
|
|
|
0.8
|
|
|
|
(5,100
|
)
|
|
|
(1.7
|
)
|
|
|
1,095
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
12,791
|
|
|
|
11.5
|
|
|
$
|
10,766
|
|
|
|
11.1
|
|
|
$
|
17,690
|
|
|
|
5.9
|
|
|
$
|
(6,217
|
)
|
|
|
(2.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
Revenue from our public portal advertising and sponsorship is
derived from online advertising, sponsorship (including online
CME services),
e-detailing
promotion and physician recruitment services, content
syndication and distribution, and other print services
(including advertisements in WebMD the Magazine). Revenue
from our private portal services is derived from licensing our
private online portals to employers, healthcare payers and
others, along with related services including lifestyle
education and personalized telephonic coaching.
Cost of operations consists of costs related to services and
products we provide to customers and costs associated with the
operation and maintenance of our public and private portals.
These costs relate to editorial and production, Web site
operations, non-capitalized Web site development costs, and
costs associated with our lifestyle education and personalized
telephonic coaching services, and costs related to the
production and distribution of our publications. These costs
consist of expenses related to salaries and related expenses,
non-cash stock-based compensation, creating and licensing
content, telecommunications, leased properties and printing and
distribution.
Sales and marketing expense consists primarily of advertising,
product and brand promotion, salaries and related expenses, and
non-cash stock-based compensation. These expenses include items
related to salaries and related expenses of account executives,
account management and marketing personnel, costs and expenses
for marketing programs, and fees for professional marketing and
advertising services. Also included in sales and marketing
expense are the non-cash advertising expenses discussed below.
General and administrative expense consists primarily of
salaries, non-cash stock-based compensation and other
salary-related expenses of administrative, finance, legal,
information technology, human resources and executive personnel.
These expenses include costs of general insurance and costs of
accounting and internal control systems to support our
operations and a services fee for certain services performed for
us by HLTH.
40
Our discussions throughout this MD&A reference certain
non-cash expenses. The following is a summary of our principal
non-cash expenses:
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|
|
|
|
Non-cash advertising expense. Expense related
to the use of our prepaid advertising inventory that we received
from News Corporation in exchange for equity instruments that
HLTH issued in connection with an agreement it entered into with
News Corporation in 1999 and subsequently amended in 2000. This
non-cash advertising expense is included in sales and marketing
expense when we use the asset for promotion of our brand.
|
|
|
|
Non-cash stock-based compensation
expense. Expense related to awards of our
restricted Class A Common Stock and awards of employee
stock options, as well as awards of restricted HLTH Common Stock
and awards of HLTH stock options that have been granted to
certain of our employees. Expense also related to shares issued
to our non-employee directors. Non-cash stock-based compensation
expense is reflected in the same expense captions as the related
salary costs of the respective employees.
|
The following table is a summary of our non-cash expenses
included in the respective statements of operations captions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Advertising expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
$
|
|
|
|
$
|
178
|
|
|
$
|
1,753
|
|
|
$
|
1,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations
|
|
$
|
1,743
|
|
|
$
|
997
|
|
|
$
|
4,921
|
|
|
$
|
2,930
|
|
Sales and marketing
|
|
|
1,948
|
|
|
|
1,215
|
|
|
|
5,499
|
|
|
|
3,602
|
|
General and administrative
|
|
|
2,055
|
|
|
|
1,300
|
|
|
|
6,601
|
|
|
|
4,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
5,746
|
|
|
|
3,512
|
|
|
|
17,021
|
|
|
|
10,657
|
|
Income (loss) from discontinued operations, net of tax
|
|
|
(85
|
)
|
|
|
63
|
|
|
|
89
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
5,661
|
|
|
$
|
3,575
|
|
|
$
|
17,110
|
|
|
$
|
10,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
and Nine Months Ended September 30, 2009 and
2008
The following discussion is a comparison of our results of
operations on a consolidated basis for the three and nine months
ended September 30, 2009 and 2008.
Revenue. Our total revenue increased 15.3% and
14.0% to $111,568 and $300,463 in the three and nine months
ended September 30, 2009, respectively, from $96,797 and
$263,451 during the same periods last year. This increase is
primarily due to higher revenue from our public portals. A more
detailed discussion regarding changes in revenue is included
below under Supplemental Financial and
Operating Information.
Cost of Operations. Cost of operations
increased to $41,965 and $117,759 in the three and nine months
ended September 30, 2009, respectively, from $34,225 and
$97,120 during the same periods last year. As a percentage of
revenue, cost of operations was 37.6% and 39.2% in the three and
nine months ended September 30, 2009, respectively,
compared to 35.4% and 36.9% in the same periods last year.
Included in cost of operations in 2009 were non-cash expenses
related to stock-based compensation of $1,743 and $4,921 during
the three and nine months ended September 30, 2009,
respectively, compared to $997 and $2,930 during the same
periods last year. The increases in non-cash expenses during the
three and nine month periods of 2009 compared to the same
periods last year were primarily related to stock options and
restricted stock awards granted to our employees in December
2008. Cost of operations excluding non-cash expense was $40,222
and $112,838 in the three and nine months ended
September 30, 2009, respectively, or 36.1% and 37.6% of
revenue, compared to $33,228 and $94,190, or 34.3% and 35.8% of
revenue during the same periods last year. The increase in
absolute dollars, as well as the increase as a percentage of
revenue during the three and nine months ended
September 30, 2009 compared to the prior year periods was
primarily attributable to
41
an increase of $1,800 and $6,700 of development and distribution
expense, respectively and an increase of $4,700 and $10,600 of
website operations expense, respectively associated with the
delivery of our advertising and sponsorship arrangements and
increased traffic to our websites.
Sales and Marketing. Sales and marketing
expense increased to $26,265 and $80,623 in the three and nine
months ended September 30, 2009, respectively, from $26,021
and $76,068 in the same periods last year. As a percentage of
revenue, sales and marketing expense was 23.5% and 26.8% for the
three and nine months ended September 30, 2009,
respectively, compared to 26.9% and 28.9% during the same
periods last year. Included in sales and marketing expense were
non-cash expenses related to advertising of $1,753 in the nine
months ended September 30, 2009, compared to $178 and
$1,736 in the three and nine months ended September 30,
2008. There were no non-cash expenses related to advertising in
the three months ended September 30, 2009. Also included in
sales and marketing expense were non-cash expenses related to
stock-based compensation of $1,948 and $5,499 in the three and
nine months ended September 30, 2009, respectively,
compared to $1,215 and $3,602 in the same periods last year. The
increases in non-cash stock-based compensation expense were
primarily related to stock options and restricted stock awards
granted to our employees in December 2008. Sales and marketing
expense, excluding non-cash expenses, was $24,317 and $73,371 or
21.8% and 24.4% of revenue in the three and nine months ended
September 30, 2009, respectively, compared to $24,628 and
$70,730 or 25.4% and 26.8% of revenue in the same periods last
year. Sales and marketing expense excluding non-cash expenses,
in absolute dollars, was generally consistent for the three
months ended September 30, 2009 when compared to the prior
year. The increase in absolute dollars for the nine months ended
September 30, 2009 compared to the prior year, was
primarily attributable to increases in compensation-related
costs due to increased staffing and sales commissions related to
higher revenue. The decrease as a percentage of revenue for the
three and nine months ended September 30, 2009 compared to
prior year was primarily due to our ability to achieve the
increase in revenue without incurring a proportional increase in
sales and marketing expense.
General and Administrative. General and
administrative expense increased to $15,961 and $45,826 in the
three and nine months ended September 30, 2009,
respectively, from $14,774 and $42,465 in the same periods last
year. As a percentage of revenue, general and administrative
expense was 14.3% and 15.3% for the three and nine months ended
September 30, 2009, respectively, compared to 15.3% and
16.1% during the same periods last year. Included in general and
administrative expense during the three and nine months ended
September 30, 2009 was non-cash stock-based compensation
expense of $2,055 and $6,601, respectively, compared to $1,300
and $4,125 in the same periods last year. The increases in
non-cash stock-based compensation expense were primarily related
to stock options and restricted stock awards granted to our
employees in December 2008. General and administrative expense,
excluding non-cash expenses, was $13,906 and $39,225 or 12.5%
and 13.1% of revenue in the three and nine months ended
September 30, 2009, respectively, compared to $13,474 and
$38,340 or 13.9% and 14.6% of revenue in the same periods last
year. Accordingly, general and administrative expenses excluding
non-cash expenses, in absolute dollars, remained generally
consistent for the three and nine months ended
September 30, 2009 compared to the prior year periods and
general and administrative expense as a percentage of revenue
was slightly lower for the three and nine months ended
September 30, 2009 compared to the prior year periods. As
we were able to increase our revenue without incurring a
proportional increase in general and administrative expense.
Depreciation and Amortization. Depreciation
and amortization expense remained consistent at $6,988 and
$20,729 in the three and nine months ended September 30,
2009, respectively, and $7,056 and $20,815 in the same periods
last year. The slight decrease over the prior year periods was
due to lower amortization expense of approximately $880 and
$2,321 during the three and nine months ended September 30,
2009, respectively, resulting from certain intangible assets
becoming fully amortized which was partially offset by an
increase in depreciation expense of approximately $812 and
$2,235, during the three and nine months ended
September 30, 2009, respectively, resulting from capital
expenditures made in 2008 and 2009.
Interest Income. Interest income decreased to
$834 in the three months ended September 30, 2009 from
$2,616 in the same period last year. Interest income decreased
to $2,733 in the nine months ended September 30, 2009 from
$8,419 in the same period last year. The decrease in the three
and nine month
42
periods resulted from decreases in the average interest rate of
our investments, partially offset by increases in cash available
for investment.
Income Tax Provision. The income tax provision
of $8,622 and $15,469 for the three and nine months ended
September 30, 2009, respectively, and income tax provision
of $7,375 and $15,308 for the three and nine months ended
September 30, 2008, respectively, represents taxes related
to federal, state and other jurisdictions. The effective tax
rate was significantly higher in the prior nine month period
since the income tax provision excludes a benefit for the
impairment of ARS, as it is currently not deductible for tax
purposes.
Income (Loss) from Discontinued Operations, Net of
Tax. Income (loss) from discontinued operations,
net of tax, represents the Little Blue Book print directory
business. During the nine months ended September 30, 2009,
we recorded an impairment charge of $8,300 to reduce the
carrying value of LBB to our current estimate of fair value. For
additional information, see Introduction
Background Information on Certain Trends and
Developments Divestiture of the Little Blue Book
Print Directory Business above.
Net Income (Loss). Net income was $12,791 and
$17,690 for the three and nine months ended September 30,
2009, compared to a net income (loss) of $10,766 and $(6,217)
for the three and nine months ended September 30, 2008. Net
loss for the nine months ended September 30, 2008 reflects
the impairment charge of $27,406 related to our ARS during the
three months ended March 31, 2008, while net income for the
nine month period ended September 30, 2009 reflects the
smaller charge with respect to the carrying value of LBB, net of
tax, as described above.
Supplemental
Financial and Operating Information
The following table and the discussion that follows presents
information for groups of revenue based on similar services we
provide, as well as information related to a non-GAAP
performance measure that we use to monitor the performance of
our business which we refer to as Earnings before
interest, taxes, non-cash and other items or
Adjusted EBITDA. Due to the fact that Adjusted
EBITDA is a non-GAAP measure, we have also included a
reconciliation from Adjusted EBITDA to net income (loss).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public portal advertising and sponsorship
|
|
$
|
89,414
|
|
|
$
|
74,658
|
|
|
$
|
232,695
|
|
|
$
|
197,523
|
|
Private portal services
|
|
|
22,154
|
|
|
|
22,139
|
|
|
|
67,768
|
|
|
|
65,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
111,568
|
|
|
$
|
96,797
|
|
|
$
|
300,463
|
|
|
$
|
263,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before interest, taxes, non-cash and other items
(Adjusted EBITDA)
|
|
$
|
33,123
|
|
|
$
|
25,467
|
|
|
$
|
75,029
|
|
|
$
|
60,191
|
|
Interest, taxes, non-cash and other items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
834
|
|
|
|
2,616
|
|
|
|
2,733
|
|
|
|
8,419
|
|
Depreciation and amortization
|
|
|
(6,988
|
)
|
|
|
(7,056
|
)
|
|
|
(20,729
|
)
|
|
|
(20,815
|
)
|
Non-cash advertising
|
|
|
|
|
|
|
(178
|
)
|
|
|
(1,753
|
)
|
|
|
(1,736
|
)
|
Non-cash stock-based compensation
|
|
|
(5,746
|
)
|
|
|
(3,512
|
)
|
|
|
(17,021
|
)
|
|
|
(10,657
|
)
|
Impairment of auction rate securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,406
|
)
|
Income tax provision
|
|
|
(8,622
|
)
|
|
|
(7,375
|
)
|
|
|
(15,469
|
)
|
|
|
(15,308
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
12,601
|
|
|
|
9,962
|
|
|
|
22,790
|
|
|
|
(7,312
|
)
|
Income (loss) from discontinued operations, net of tax
|
|
|
190
|
|
|
|
804
|
|
|
|
(5,100
|
)
|
|
|
1,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
12,791
|
|
|
$
|
10,766
|
|
|
$
|
17,690
|
|
|
$
|
(6,217
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following discussion is a comparison of the results of
operations for our two groups of revenue and our Adjusted EBITDA
for the three and nine months ended September 30, 2009 and
2008.
43
Public Portal Advertising and
Sponsorship. Public portal advertising and
sponsorship revenue was $89,414, and $232,695 for the three and
nine months ended September 30, 2009, respectively, an
increase of $14,756 and $35,172 or 19.8% and 17.8%. The increase
in public portal advertising and sponsorship revenue was
primarily attributable to an increase in the number and average
size of unique sponsored programs on our sites, including both
brand sponsorship and educational programs. The number of such
programs grew to 850, as of September 30, 2009 compared to
800 in the prior year period. In general, pricing remained
relatively stable for our advertising and sponsorship programs
and was not a significant source of the revenue increase. Public
portal advertising and sponsorship revenue includes revenue
previously referred to as advertising and
sponsorship revenue and content syndication and
other revenue, as well as other print service revenue
(which consists primarily of revenue from advertising in
WebMD the Magazine).
Private Portal Services. Private portal
services revenue was $22,154 and $67,768 for the three and nine
months ended September 30, 2009, respectively, an increase
of $15 and $1,840 or 0.1% and 2.8%. This increase was due to an
increase in the number of companies using our private portal
platform to 135 as of September 30, 2009 from 129 in the
prior year period. In general, pricing remained relatively
stable for our private portal services and was not a significant
source of the revenue increase. We also have approximately 140
additional customers who purchase stand-alone decision support
services from us. Private portal services revenue includes
revenue previously referred to as licensing revenue.
Adjusted EBITDA. Adjusted EBITDA increased to
$33,123 and $75,029 in the three and nine months ended
September 30, 2009, respectively, from $25,467 and $60,191
in the same periods last year. As a percentage of revenue,
Adjusted EBITDA was 29.7% and 25.0% for the three and nine
months ended September 30, 2009, respectively, compared to
26.3% and 22.8% during the same periods last year. This increase
as a percentage of revenue was primarily due to higher revenue,
without incurring a proportionate increase in overall expenses.
Explanatory Note Regarding Adjusted
EBITDA. Adjusted EBITDA is a non-GAAP financial
measure and should be viewed as supplemental to, and not as an
alternative for, income (loss) from continuing
operations or net income (loss) calculated in
accordance with GAAP. Our management uses Adjusted EBITDA as an
additional measure of performance for purposes of business
decision-making, including developing budgets, managing
expenditures, and evaluating potential acquisitions or
divestitures.
Period-to-period
comparisons of Adjusted EBITDA help our management identify
additional trends in financial results that may not be shown
solely by
period-to-period
comparisons of income (loss) from continuing operations or net
income (loss). In addition, we use Adjusted EBITDA in the
incentive compensation programs applicable to many of our
employees in order to evaluate our performance. Our management
recognizes that Adjusted EBITDA has inherent limitations because
of the excluded items, particularly those items that are
recurring in nature. In order to compensate for those
limitations, management also reviews the specific items that are
excluded from Adjusted EBITDA, but included in income (loss)
from continuing operations or net income (loss), as well as
trends in those items. The amounts of those items are set forth,
for the applicable periods, in the reconciliations of Adjusted
EBITDA to income (loss) from continuing operations or to net
income (loss) above. We believe that the presentation of
Adjusted EBITDA is useful to investors in their analysis of our
results for reasons similar to the reasons why our management
finds it useful and because it helps facilitate investor
understanding of decisions made by our management in light of
the performance metrics used in making those decisions. In
addition, we believe that providing Adjusted EBITDA, together
with a reconciliation of Adjusted EBITDA to income (loss) from
continuing operations or to net income (loss), helps investors
make comparisons between us and other companies that may have
different capital structures, different effective income tax
rates and tax attributes, different capitalized asset values
and/or
different forms of employee compensation. However, Adjusted
EBITDA is intended to provide a supplemental way of comparing us
with other public companies and is not intended as a substitute
for comparisons based on income (loss) from continuing
operations or net income (loss) calculated in
accordance with GAAP. In making any comparisons to other
companies, investors need to be aware that companies use
different non-GAAP measures to evaluate their financial
performance. Please see the Explanation of
Non-GAAP Financial Information filed as
Exhibit 99.1 to this Quarterly Report for additional
background information regarding our use of Adjusted EBITDA.
Exhibit 99.1 is incorporated in this MD&A by this
reference.
44
Liquidity
and Capital Resources
As of September 30, 2009, we had $275,250 of cash and cash
equivalents and we owned investments in ARS with a face value of
$163,000 and a fair value of $126,564. While liquidity for our
ARS investments is currently limited, we entered into a
non-recourse credit facility with Citigroup in April 2009 that
will allow us to borrow up to 75% of the face amount of our ARS
holdings through April 2010. See
Introduction Background
Information on Certain Trends and Developments
Non-Recourse Credit Facility and
Critical Accounting Policies and
Estimates Fair Value of Investments above. Our
working capital as of September 30, 2009 was $254,609.
Cash provided by operating activities of our continuing
operations during the nine months ended September 30, 2009
was $87,474, compared to $77,547 for the nine months ended
September 30, 2008, an increase of $9,927. This increase
was comprised of an increase of $14,500 in cash provided by
operating activities before interest income and changes in
operating assets and liabilities, which reflects the impact of
the increased revenues compared to the prior year period, offset
by a decrease in interest income of $5,700 resulting from lower
rates of return on invested balances. Changes in operating
assets and liabilities contributed $10,300 of cash flow for the
nine months ended September 30, 2009 compared to $9,300 in
the prior year period. Cash provided by changes in operating
assets and liabilities are primarily affected by fluctuations in
the timing of each period end in relation to items such as
payments received from customers, payments made to vendors, and
internal payroll and billing cycles.
Cash used in investing activities of our continuing operations
during the nine months ended September 30, 2009 was $9,491
which related to investments in property and equipment of
$14,131 primarily to enhance our technology platform, partially
offset by cash received from the sale of LBB of $2,590, from the
sale of the ACS/ACP Business of $250 and from the sale of
available-for-sale
securities of $1,800. Cash used in investing activities of our
continuing operations during the nine months ended
September 30, 2008 was $98,481 which primarily related to
net purchases of
available-for-sale
securities of $84,600 and investments in property and equipment
of $15,014 primarily to enhance our technology platform.
Cash provided by financing activities of our continuing
operations during the nine months ended September 30, 2009
and 2008 primarily related to proceeds from the issuance of
common stock of $4,823 and $3,453, respectively.
Our liquidity and capital resources will be impacted during the
fourth quarter of 2009 as a result of the completion of the HLTH
Merger, which was completed on October 23, 2009. See
Introduction Recent
Developments Completion of the HLTH Merger
above. As a result of the HLTH Merger, we assumed the assets and
liabilities of HLTH that WebMD did not already own prior to the
HLTH Merger. As of the October 23, 2009 merger date,
HLTHs more significant assets included approximately
$385,000 in cash, auction rate securities with a fair value of
approximately $145,000 and the Senior Secured Notes, with a
principal amount of $67,500, received from the purchasers of
HLTHs Porex business which HLTH sold on October 19,
2009. Additionally, WebMD assumed the remainder of HLTHs
net operating loss carryforwards (including those of WebMD)
which total approximately $650,000, which will be used to reduce
the federal tax obligations WebMD would otherwise be required to
pay. The more significant liabilities we assumed from HLTH
include $264,583 principal amount of 1.75% Convertible
Notes (which are convertible into approximately 7.6 million
shares of Common Stock of WebMD), $250,300 principal amount of
31/8% Convertible
Notes (which are convertible into approximately 7.1 million
shares of Common Stock of WebMD), and a remaining
indemnification liability related to the legal defense costs of
certain officers of a former subsidiary of HLTH, which is
estimated to be approximately $46,900 to $62,400. The
1.75% Convertible Notes and the
31/8% Convertible
Notes can be put to WebMD for cash, at the option of the
holders, beginning in June 2010 and September 2012,
respectively. As a result of the completion of the HLTH Merger
on October 23, 2009, WebMD now has cash and investments of
approximately $1 billion, convertible debt of approximately
$515,000 and net operating losses of approximately $650,000.
Our liquidity and capital resources is also expected to be
impacted in the near future as a result of the tender offer
WebMD intends to commence. WebMD announced on November 3,
2009 that it intends to commence a tender offer to purchase up
to 5.7 million shares of its common stock at a price per
share of
45
$36.00 per share. WebMD would use cash of $205,200 if all
5.7 million shares are tendered at $36.00 per share.
Based on our plans and expectations as of the date of the
Quarterly Report and taking into consideration issues relating
to the liquidity of our ARS investments and the effects of the
HLTH Merger on our assets and liabilities, we believe that our
available cash resources and future cash flow from operations
will provide sufficient cash resources to meet the commitments
described above and to fund our currently anticipated working
capital and capital expenditure requirements for up to
twenty-four months. Our future liquidity and capital
requirements will depend upon numerous factors, including
retention of customers at current volume and revenue levels, our
existing and new application and service offerings, competing
technological and market developments, and potential future
acquisitions. In addition, our ability to generate cash flow is
subject to numerous factors beyond our control, including
general economic, regulatory and other matters affecting us and
our customers. We plan to continue to enhance our online
services to our audience and sponsors and will continue to
invest in acquisitions, strategic relationships, facilities,
technological infrastructure and product development. We intend
to grow our existing businesses and enter into complementary
ones through both internal investments and acquisitions. We may
need to raise additional funds to support expansion, develop new
or enhanced applications and services, respond to competitive
pressures, acquire complementary businesses or technologies or
take advantage of unanticipated opportunities. If required, we
may raise such additional funds through public or private debt
or equity financing, strategic relationships or other
arrangements. We cannot assure you that such financing will be
available on acceptable terms, if at all, or that such financing
will not be dilutive to our stockholders. Future indebtedness
may impose various restrictions and covenants on us that could
limit our ability to respond to market conditions, to provide
for unanticipated capital investments or to take advantage of
business opportunities.
Factors
That May Affect Our Future Financial Condition or Results of
Operations
This section describes circumstances or events that could have a
negative effect on our financial results or operations or that
could change, for the worse, existing trends in some or all of
our businesses. The occurrence of one or more of the
circumstances or events described below could have a material
adverse effect on our financial condition, results of operations
and cash flows or on the trading prices of the common stock and
convertible notes that we have issued or securities we may issue
in the future. The risks and uncertainties described in this
Quarterly Report are not the only ones facing us. Additional
risks and uncertainties that are not currently known to us or
that we currently believe are immaterial may also adversely
affect our business and operations.
Risks
Related to Our Operations and the Healthcare Content We
Provide
If we are
unable to provide content and services that attract and retain
users to The WebMD Health Network on a consistent basis, our
advertising and sponsorship revenue could be reduced
Users of The WebMD Health Network have numerous other
online and offline sources of healthcare information services.
Our ability to compete for user traffic on our public portals
depends upon our ability to make available a variety of health
and medical content, decision-support applications and other
services that meet the needs of a variety of types of users,
including consumers, physicians and other healthcare
professionals, with a variety of reasons for seeking
information. Our ability to do so depends, in turn, on:
|
|
|
|
|
our ability to hire and retain qualified authors, journalists
and independent writers;
|
|
|
|
our ability to license quality content from third
parties; and
|
|
|
|
our ability to monitor and respond to increases and decreases in
user interest in specific topics.
|
We cannot assure you that we will be able to continue to develop
or acquire needed content, applications and tools at a
reasonable cost. In addition, since consumer users of our public
portals may be attracted to The WebMD Health Network as a
result of a specific condition or for a specific purpose, it is
difficult for us to predict the rate at which they will return
to the public portals. Because we generate revenue by, among
other
46
things, selling sponsorships of specific pages, sections or
events on The WebMD Health Network, a decline in user
traffic levels or a reduction in the number of pages viewed by
users could cause our revenue to decrease and could have a
material adverse effect on our results of operations.
Developing
and implementing new and updated applications, features and
services for our public and private portals may be more
difficult than expected, may take longer and cost more than
expected and may not result in sufficient increases in revenue
to justify the costs
Attracting and retaining users of our public portals and clients
for our private portals requires us to continue to improve the
technology underlying those portals and to continue to develop
new and updated applications, features and services for those
portals. If we are unable to do so on a timely basis or if we
are unable to implement new applications, features and services
without disruption to our existing ones, we may lose potential
users and clients.
We rely on a combination of internal development, strategic
relationships, licensing and acquisitions to develop our portals
and related applications, features and services. Our development
and/or
implementation of new technologies, applications, features and
services may cost more than expected, may take longer than
originally expected, may require more testing than originally
anticipated and may require the acquisition of additional
personnel and other resources. There can be no assurance that
the revenue opportunities from any new or updated technologies,
applications, features or services will justify the amounts
spent.
We face
significant competition for our healthcare information products
and services
The markets for healthcare information products and services are
intensely competitive, continually evolving and, in some cases,
subject to rapid change.
|
|
|
|
|
Our public portals face competition from numerous other
companies, both in attracting users and in generating revenue
from advertisers and sponsors. We compete for users with online
services and Web sites that provide health-related information,
including both commercial sites and
not-for-profit
sites. We compete for advertisers and sponsors with:
health-related Web sites; general purpose consumer Web sites
that offer specialized health
sub-channels;
other high-traffic Web sites that include both
healthcare-related and non-healthcare-related content and
services; search engines that provide specialized health search;
and advertising networks that aggregate traffic from multiple
sites. Our public portals also face competition from offline
publications and information services.
|
|
|
|
Our private portals compete with: providers of healthcare
decision-support tools and online health management
applications, including personal health records; wellness and
disease management vendors; and health information services and
health management offerings of healthcare benefits companies and
their affiliates.
|
Many of our competitors have greater financial, technical,
product development, marketing and other resources than we do.
These organizations may be better known than we are and have
more customers or users than we do. We cannot provide assurance
that we will be able to compete successfully against these
organizations or any alliances they have formed or may form.
Since there are no substantial barriers to entry into the
markets in which our public portals participate, we expect that
competitors will continue to enter these markets.
Failure
to maintain and enhance the WebMD brand could have a
material adverse effect on our business
We believe that the WebMD brand identity that we
have developed has contributed to the success of our business
and has helped us achieve recognition as a trusted source of
health and wellness information. We also believe that
maintaining and enhancing that brand is important to expanding
the user base for our public portals, to our relationships with
sponsors and advertisers and to our ability to gain additional
employer and healthcare payer clients for our private portals.
We have expended considerable resources on establishing and
enhancing the WebMD brand and our other brands, and
we have developed policies and procedures designed to preserve
and enhance our brands, including editorial procedures designed
to provide quality control of the information we publish. We
expect to continue to devote resources and efforts to maintain
and enhance our
47
brands. However, we may not be able to successfully maintain or
enhance awareness of our brands, and events outside of our
control may have a negative effect on our brands. If we are
unable to maintain or enhance awareness of our brands, and do so
in a cost-effective manner, our business could be adversely
affected.
Our
online businesses have a limited operating history
Our online businesses have a limited operating history and
participate in relatively new markets. These markets, and our
online businesses, have undergone significant changes during
their short history and can be expected to continue to change.
Many companies with business plans based on providing healthcare
information and related services through the Internet have
failed to be profitable and some have filed for bankruptcy
and/or
ceased operations. Even if demand from users exists, we cannot
assure you that our businesses will continue to be profitable.
Our
failure to attract and retain qualified executives and employees
may have a material adverse effect on our business
Our business depends largely on the skills, experience and
performance of key members of our management team. We also
depend, in part, on our ability to attract and retain qualified
writers and editors, software developers and other technical
personnel and sales and marketing personnel. Competition for
qualified personnel in the healthcare information services and
Internet industries is intense. We cannot assure you that we
will be able to hire or retain a sufficient number of qualified
personnel to meet our requirements, or that we will be able to
do so at salary and benefit costs that are acceptable to us.
Failure to do so may have an adverse effect on our business.
The
timing of our advertising and sponsorship revenue may vary
significantly from quarter to quarter and is subject to factors
beyond our control, including regulatory changes affecting
advertising and promotion of drugs and medical devices and
general economic conditions
Our advertising and sponsorship revenue may vary significantly
from quarter to quarter due to a number of factors, many of
which are not in our control, and some of which may be difficult
to forecast accurately, including potential effects on demand
for our services as a result of regulatory changes affecting
advertising and promotion of drugs and medical devices and
general economic conditions. The majority of our advertising and
sponsorship programs are for terms of approximately four to
twelve months. We have relatively few longer term advertising
and sponsorship programs. We cannot assure you that our current
advertisers and sponsors will continue to use our services
beyond the terms of their existing contracts or that they will
enter into any additional contracts.
The time between the date of initial contact with a potential
advertiser or sponsor regarding a specific program and the
execution of a contract with the advertiser or sponsor for that
program may be lengthy, especially for larger contracts, and may
be subject to delays over which we have little or no control,
including as a result of budgetary constraints of the advertiser
or sponsor or their need for internal approvals. Other factors
that could affect the timing of contracting for specific
programs with advertisers and sponsors, or receipt of revenue
under such contracts, include:
|
|
|
|
|
the timing of FDA approval for new products or for new approved
uses for existing products;
|
|
|
|
the timing of FDA approval of generic products that compete with
existing brand name products;
|
|
|
|
the timing of withdrawals of products from the market;
|
|
|
|
the timing of roll outs of new or enhanced services on our
public portals;
|
|
|
|
seasonal factors relating to the prevalence of specific health
conditions and other seasonal factors that may affect the timing
of promotional campaigns for specific products; and
|
|
|
|
the scheduling of conferences for physicians and other
healthcare professionals.
|
48
We may be
unsuccessful in our efforts to increase advertising and
sponsorship revenue from consumer products companies
Most of our advertising and sponsorship revenue has, in the
past, come from pharmaceutical, biotechnology and medical device
companies. We have been focusing on increasing sponsorship
revenue from consumer products companies that are interested in
communicating health-related or safety-related information about
their products to our audience. However, while many consumer
products companies are increasing the portion of their
promotional spending used on the Internet, we cannot assure you
that these advertisers and sponsors will find our consumer Web
sites to be as effective as other Web sites or traditional media
for promoting their products and services. If we encounter
difficulties in competing with the other alternatives available
to consumer products companies, this portion of our business may
develop more slowly than we expect or may fail to develop. In
addition, revenues from consumer products companies are more
likely to reflect general economic conditions, and to be reduced
to a greater extent during economic downturns or recessions,
than revenues from pharmaceutical, biotechnology and medical
device companies.
Lengthy
sales and implementation cycles for our private online portals
make it difficult to forecast our revenues from these
applications and may have an adverse impact on our
business
The period from our initial contact with a potential client for
a private online portal and the first purchase of our solution
by the client is difficult to predict. In the past, this period
has generally ranged from six to twelve months, but in some
cases has been longer. Potential sales may be subject to delays
or cancellations due to a clients internal procedures for
approving large expenditures and other factors beyond our
control, including the effect of general economic conditions on
the willingness of potential clients to commit to licensing our
private portals. The time it takes to implement a private online
portal is also difficult to predict and has lasted as long as
six months from contract execution to the commencement of live
operation. Implementation may be subject to delays based on the
availability of the internal resources of the client that are
needed and other factors outside of our control. As a result, we
have limited ability to forecast the timing of revenue from new
clients. This, in turn, makes it more difficult to predict our
financial performance from quarter to quarter.
During the sales cycle and the implementation period, we may
expend substantial time, effort and money preparing contract
proposals, negotiating contracts and implementing the private
online portal without receiving any related revenue. In
addition, many of the expenses related to providing private
online portals are relatively fixed in the short term, including
personnel costs and technology and infrastructure costs. Even if
our private portal revenue is lower than expected, we may not be
able to reduce related short-term spending in response. Any
shortfall in such revenue would have a direct impact on our
results of operations.
Our
ability to provide comparative information on hospital cost and
quality depends on our ability to obtain the required data on a
timely basis and, if we are unable to do so, our private portal
services would be less attractive to clients
We provide, in connection with our private portal services,
comparative information about hospital cost and quality. Our
ability to provide this information depends on our ability to
obtain comprehensive, reliable data. We currently obtain this
data from a number of public and private sources, including the
Centers for Medicare and Medicaid Services (CMS), many
individual states and the Leapfrog Group. We cannot provide
assurance that we would be able to find alternative sources for
this data on acceptable terms and conditions. Accordingly, our
business could be negatively impacted if CMS or our other data
sources cease to make such information available or impose terms
and conditions for making it available that are not consistent
with our planned usage. In addition, the quality of the
comparative information services we provide depends on the
reliability of the information that we are able to obtain. If
the information we use to provide these services contains errors
or is otherwise unreliable, we could lose clients and our
reputation could be damaged.
49
Our
ability to renew existing agreements with employers and health
plans will depend, in part, on our ability to continue to
increase usage of our private portal services by their employees
and plan members
In a healthcare market where a greater share of the
responsibility for healthcare costs and decision-making has been
increasingly shifting to consumers, use of information
technology (including personal health records) to assist
consumers in making informed decisions about healthcare has also
increased. We believe that through our WebMD Health and Benefits
Manager platform, including our personal health record
application, we are well positioned to play a role in this
consumer-directed healthcare environment. However, our ability
to renew existing agreements for these services depends, in
part, on increasing usage of our private portal services by our
employer and health plan clients employees and members.
Increasing usage of our services requires us to continue to
deliver and improve the underlying technology and develop new
and updated applications, features and services. In addition, we
face competition in the area of healthcare decision-support
tools and online health management applications and health
information services. Many of our competitors have greater
financial, technical, product development, marketing and other
resources than we do, and may be better known than we are. We
cannot provide assurance that we will be able to meet our
development and implementation goals or that we will be able to
compete successfully against other vendors offering competitive
services and, if we are unable to do so, we may experience
static or diminished usage for our private portal services and
possible non-renewals of our customer agreements.
We may be
subject to claims brought against us as a result of content we
provide
Consumers access health-related information through our online
services, including information regarding particular medical
conditions and possible adverse reactions or side effects from
medications. If our content, or content we obtain from third
parties, contains inaccuracies, it is possible that consumers,
employees, health plan members or others may sue us for various
causes of action. Although our Web sites contain terms and
conditions, including disclaimers of liability, that are
intended to reduce or eliminate our liability, the law governing
the validity and enforceability of online agreements and other
electronic transactions is evolving. We could be subject to
claims by third parties that our online agreements with
consumers and physicians that provide the terms and conditions
for use of our public or private portals are unenforceable. A
finding by a court that these agreements are invalid and that we
are subject to liability could harm our business and require
costly changes to our business.
We have editorial procedures in place to provide quality control
of the information that we publish or provide. However, we
cannot assure you that our editorial and other quality control
procedures will be sufficient to ensure that there are no errors
or omissions in particular content. Even if potential claims do
not result in liability to us, investigating and defending
against these claims could be expensive and time consuming and
could divert managements attention away from our
operations. In addition, our business is based on establishing
the reputation of our portals as trustworthy and dependable
sources of healthcare information. Allegations of impropriety or
inaccuracy, even if unfounded, could harm our reputation and
business.
Expansion
to markets outside the United States will subject us to
additional risks
One element of our growth strategy is to seek to expand our
online services to markets outside the United States. Generally,
we expect that we would accomplish this through partnerships or
joint ventures with other companies having expertise in the
specific country or region. However, our participation in
international markets will still be subject to certain risks
beyond those applicable to our operations in the United States,
such as:
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difficulties in staffing and managing operations outside of the
United States;
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fluctuations in currency exchange rates;
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burdens of complying with a wide variety of legal, regulatory
and market requirements;
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variability of economic and political conditions, including the
extent of the impact of recent adverse economic conditions in
markets outside the United States;
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tariffs or other trade barriers;
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costs of providing and marketing products and services in
different markets;
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potentially adverse tax consequences, including restrictions on
repatriation of earnings; and
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difficulties in protecting intellectual property.
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Risks
Related to the Internet and Our Technological
Infrastructure
Any
service interruption or failure in the systems that we use to
provide online services could harm our business
Our online services are designed to operate 24 hours a day,
seven days a week, without interruption. However, we have
experienced and expect that we will in the future experience
interruptions and delays in services and availability from time
to time. We rely on internal systems as well as third-party
vendors, including data center providers and bandwidth
providers, to provide our online services. We may not maintain
redundant systems or facilities for some of these services. In
the event of a catastrophic event with respect to one or more of
these systems or facilities, we may experience an extended
period of system unavailability, which could negatively impact
our relationship with users. In addition, system failures may
result in loss of data, including user registration data,
content, and other data critical to the operation of our online
services, which could cause significant harm to our business and
our reputation.
To operate without interruption or loss of data, both we and our
service providers must guard against:
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damage from fire, power loss and other natural disasters;
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communications failures;
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software and hardware errors, failures and crashes;
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security breaches, computer viruses and similar disruptive
problems; and
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other potential service interruptions.
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Any disruption in the network access or co-location services
provided by third-party providers to us or any failure by these
third-party providers or our own systems to handle current or
higher volume of use could significantly harm our business. We
exercise little control over these third-party vendors, which
increases our vulnerability to problems with services they
provide.
Any errors, failures, interruptions or delays experienced in
connection with these third-party technologies and information
services or our own systems could negatively impact our
relationships with users and adversely affect our brand and our
business and could expose us to liabilities to third parties.
Although we maintain insurance for our business, the coverage
under our policies may not be adequate to compensate us for all
losses that may occur. In addition, we cannot provide assurance
that we will continue to be able to obtain adequate insurance
coverage at an acceptable cost.
Implementation
of additions to or changes in hardware and software platforms
used to deliver our online services may result in performance
problems and may not provide the additional functionality that
was expected
From time to time, we implement additions to or changes in the
hardware and software platforms we use for providing our online
services. During and after the implementation of additions or
changes, a platform may not perform as expected, which could
result in interruptions in operations, an increase in response
time or an inability to track performance metrics. In addition,
in connection with integrating acquired businesses, we may move
their operations to our hardware and software platforms or make
other changes, any of which could result in interruptions in
those operations. Any significant interruption in our ability to
operate any of our online services could have an adverse effect
on our relationships with users and clients and, as a result, on
our financial results. We rely on a combination of purchasing,
licensing, internal development, and acquisitions to
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develop our hardware and software platforms. Our implementation
of additions to or changes in these platforms may cost more than
originally expected, may take longer than originally expected,
and may require more testing than originally anticipated. In
addition, we cannot provide assurance that additions to or
changes in these platforms will provide the additional
functionality and other benefits that were originally expected.
If the
systems we use to provide online portals experience security
breaches or are otherwise perceived to be insecure, our business
could suffer
We retain and transmit confidential information, including
personal health records, in the processing centers and other
facilities we use to provide online services. It is critical
that these facilities and infrastructure remain secure and be
perceived by the marketplace as secure. A security breach could
damage our reputation or result in liability. We may be required
to expend significant capital and other resources to protect
against security breaches and hackers or to alleviate problems
caused by breaches. Despite the implementation of security
measures, this infrastructure or other systems that we interface
with, including the Internet and related systems, may be
vulnerable to physical break-ins, hackers, improper employee or
contractor access, computer viruses, programming errors,
denial-of-service
attacks or other attacks by third parties or similar disruptive
problems. Any compromise of our security, whether as a result of
our own systems or the systems that they interface with, could
reduce demand for our services and could subject us to legal
claims from our clients and users, including for breach of
contract or breach of warranty.
Our
online services are dependent on the development and maintenance
of the Internet infrastructure
Our ability to deliver our online services is dependent on the
development and maintenance of the infrastructure of the
Internet by third parties. The Internet has experienced a
variety of outages and other delays as a result of damages to
portions of its infrastructure, and it could face outages and
delays in the future. The Internet has also experienced, and is
likely to continue to experience, significant growth in the
number of users and the amount of traffic. If the Internet
continues to experience increased usage, the Internet
infrastructure may be unable to support the demands placed on
it. In addition, the reliability and performance of the Internet
may be harmed by increased usage or by
denial-of-service
attacks. Any resulting interruptions in our services or
increases in response time could, if significant, result in a
loss of potential or existing users of and advertisers and
sponsors on our Web sites and, if sustained or repeated, could
reduce the attractiveness of our services.
Customers who utilize our online services depend on Internet
service providers and other Web site operators for access to our
Web sites. All of these providers have experienced significant
outages in the past and could experience outages, delays and
other difficulties in the future due to system failures
unrelated to our systems. Any such outages or other failures on
their part could reduce traffic to our Web sites.
Third
parties may challenge the enforceability of our online
agreements
The law governing the validity and enforceability of online
agreements and other electronic transactions is evolving. We
could be subject to claims by third parties that the online
terms and conditions for use of our Web sites, including
disclaimers or limitations of liability, are unenforceable. A
finding by a court that these terms and conditions or other
online agreements are invalid could harm our business.
We could
be subject to breach of warranty or other claims by clients of
our online portals if the software and systems we use to provide
them contain errors or experience failures
Errors in the software and systems we use could cause serious
problems for clients of our online portals. We may fail to meet
contractual performance standards or client expectations.
Clients of our online portals may seek compensation from us or
may seek to terminate their agreements with us, withhold
payments due to us, seek refunds from us of part or all of the
fees charged under those agreements or initiate litigation or
other dispute resolution procedures. In addition, we could face
breach of warranty or other claims by clients or additional
development costs. Our software and systems are inherently
complex and, despite testing and quality control, we cannot be
certain that they will perform as planned.
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We attempt to limit, by contract, our liability to our clients
for damages arising from our negligence, errors or mistakes.
However, contractual limitations on liability may not be
enforceable in certain circumstances or may otherwise not
provide sufficient protection to us from liability for damages.
We maintain liability insurance coverage, including coverage for
errors and omissions. However, it is possible that claims could
exceed the amount of our applicable insurance coverage, if any,
or that this coverage may not continue to be available on
acceptable terms or in sufficient amounts. Even if these claims
do not result in liability to us, investigating and defending
against them would be expensive and time consuming and could
divert managements attention away from our operations. In
addition, negative publicity caused by these events may delay or
hinder market acceptance of our services, including unrelated
services.
Risks
Related to the Healthcare Industry, Healthcare Regulation and
Internet Regulation
Developments
in the healthcare industry could adversely affect our
business
Most of our revenue is derived from the healthcare industry and
could be affected by changes affecting healthcare spending. We
are particularly dependent on pharmaceutical, biotechnology and
medical device companies for our advertising and sponsorship
revenue. General reductions in expenditures by healthcare
industry participants could result from, among other things:
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government regulation or private initiatives that affect the
manner in which healthcare providers interact with patients,
payers or other healthcare industry participants, including
changes in pricing or means of delivery of healthcare products
and services;
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consolidation of healthcare industry participants;
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reductions in governmental funding for healthcare; and
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adverse changes in business or economic conditions affecting
healthcare payers or providers, pharmaceutical, biotechnology or
medical device companies or other healthcare industry
participants.
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Federal and state legislatures and agencies periodically
consider reforming aspects of the United States healthcare
system and Congress is currently considering significant
healthcare reform legislation. Healthcare reform legislation, if
enacted, may increase governmental involvement in healthcare and
health insurance, may change the way health insurance is funded
(including the role that employers play in such funding), may
change reimbursement rates and other terms of such insurance
coverage, may affect the way information technology is used in
healthcare, and may otherwise change the environment in which
healthcare industry participants operate and the specific roles
such participants play in the industry. Healthcare industry
participants may respond to healthcare reform legislation or to
the uncertainties created by potential legislation by reducing
their expenditures or postponing expenditure decisions,
including expenditures for WebMDs services. We are unable
to predict future legislation or proposals with any certainty or
to predict the effect they could have on WebMD.
Even if general expenditures by industry participants remain the
same or increase, developments in the healthcare industry may
result in reduced spending in some or all of the specific market
segments that we serve or are planning to serve. For example,
use of our products and services could be affected by:
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changes in the design of health insurance plans;
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a decrease in the number of new drugs or medical devices coming
to market; and
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decreases in marketing expenditures by pharmaceutical or medical
device companies, including as a result of governmental
regulation or private initiatives that discourage or prohibit
advertising or sponsorship activities by pharmaceutical or
medical device companies.
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In addition, our customers expectations regarding pending
or potential industry developments may also affect their
budgeting processes and spending plans with respect to products
and services of the types we provide.
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The healthcare industry has changed significantly in recent
years and we expect that significant changes will continue to
occur. However, the timing and impact of developments in the
healthcare industry are difficult to predict. We cannot assure
you that the markets for our products and services will continue
to exist at current levels or that we will have adequate
technical, financial and marketing resources to react to changes
in those markets.
Government
regulation of healthcare creates risks and challenges with
respect to our compliance efforts and our business
strategies
The healthcare industry is highly regulated and is subject to
changing political, legislative, regulatory and other
influences. Existing and new laws and regulations affecting the
healthcare industry could create unexpected liabilities for us,
could cause us to incur additional costs and could restrict our
operations. Many healthcare laws are complex, and their
application to specific products and services may not be clear.
In particular, many existing healthcare laws and regulations,
when enacted, did not anticipate the healthcare information
services that we provide. However, these laws and regulations
may nonetheless be applied to our products and services. Our
failure to accurately anticipate the application of these laws
and regulations, or other failure to comply, could create
liability for us, result in adverse publicity and negatively
affect our businesses. Some of the risks we face from healthcare
regulation are as follows:
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Regulation of Drug and Medical Device Advertising and
Promotion. The WebMD Health Network provides
services involving advertising and promotion of prescription and
over-the-counter
drugs and medical devices. If the Food and Drug Administration
(FDA) or the Federal Trade Commission (FTC) finds that any
information on The WebMD Health Network or in WebMD
the Magazine violates FDA or FTC regulations, they may take
regulatory or judicial action against us
and/or the
advertiser or sponsor of that information. State attorneys
general may also take similar action based on their states
consumer protection statutes. Any increase or change in
regulation of drug or medical device advertising and promotion
could make it more difficult for us to contract for sponsorships
and advertising. Members of Congress, physician groups and
others have criticized the FDAs current policies, and have
called for restrictions on advertising of prescription drugs to
consumers and increased FDA enforcement. We cannot predict what
actions the FDA or industry participants may take in response to
these criticisms. It is also possible that new laws would be
enacted that impose restrictions on such advertising. In
addition, recent private industry initiatives have resulted in
voluntary restrictions, which advertisers and sponsors have
agreed to follow. Our advertising and sponsorship revenue could
be materially reduced by additional restrictions on the
advertising of prescription drugs and medical devices to
consumers, whether imposed by law or regulation or required
under policies adopted by industry members.
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Anti-kickback Laws. There are federal and
state laws that govern patient referrals, physician financial
relationships and inducements to healthcare providers and
patients. The federal healthcare programs anti-kickback
law prohibits any person or entity from offering, paying,
soliciting or receiving anything of value, directly or
indirectly, for the referral of patients covered by Medicare,
Medicaid and other federal healthcare programs or the leasing,
purchasing, ordering or arranging for or recommending the lease,
purchase or order of any item, good, facility or service covered
by these programs. Many states also have similar anti-kickback
laws that are not necessarily limited to items or services for
which payment is made by a federal healthcare program. These
laws are applicable to manufacturers and distributors and,
therefore, may restrict how we and some of our customers market
products to healthcare providers, including
e-details.
Any determination by a state or federal regulatory agency that
any of our practices violate any of these laws could subject us
to civil or criminal penalties and require us to change or
terminate some portions of our business and could have an
adverse effect on our business. Even an unsuccessful challenge
by regulatory authorities of our practices could result in
adverse publicity and be costly for us to respond to.
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Medical Professional Regulation. The practice
of most healthcare professions requires licensing under
applicable state law. In addition, the laws in some states
prohibit business entities from practicing medicine. If a state
determines that some portion of our business violates these
laws, it may seek to have us discontinue those portions or
subject us to penalties or licensure requirements. Any
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determination that we are a healthcare provider and have acted
improperly as a healthcare provider may result in liability to
us.
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Government
regulation of the Internet could adversely affect our
business
The Internet and its associated technologies are subject to
government regulation. However, whether and how existing laws
and regulations in various jurisdictions, including privacy and
consumer protection laws, apply to the Internet is still
uncertain. Our failure, or the failure of our business partners
or third-party service providers, to accurately anticipate the
application of these laws and regulations to our products and
services and the manner in which we deliver them, or any other
failure to comply with such laws and regulations, could create
liability for us, result in adverse publicity and negatively
affect our business. In addition, new laws and regulations, or
new interpretations of existing laws and regulations, may be
adopted with respect to the Internet and online services,
including in areas such as: user privacy, confidentiality,
consumer protection, pricing, content, copyrights and patents,
and characteristics and quality of products and services. We
cannot predict how these laws or regulations will affect our
business.
Internet user privacy and the use of consumer information to
track online activities are major issues both in the United
States and abroad. For example, in February 2009, the FTC
published Self-Regulatory Principles to govern the tracking of
consumers activities online in order to deliver
advertising targeted to the interests of individual consumers
(sometimes referred to as behavioral advertising). These
principles serve as guidelines to industry. In addition, there
is the possibility of proposed legislation and enforcement
activities relating to behavioral advertising. We have privacy
policies posted on our Web sites that we believe comply with
applicable laws requiring notice to users about our information
collection, use and disclosure practices. We also notify users
about our information collection, use and disclosure practices
relating to data we receive through offline means such as paper
health risk assessments. We cannot assure you that the privacy
policies and other statements we provide to users of our
products and services, or our practices will be found sufficient
to protect us from liability or adverse publicity in this area.
A determination by a state or federal agency or court that any
of our practices do not meet applicable standards, or the
implementation of new standards or requirements, could adversely
affect our business.
We face
potential liability related to the privacy and security of
personal health information we collect from or on behalf of
users of our services
Privacy and security of personal health information,
particularly personal health information stored or transmitted
electronically, is a major issue in the United States. The
Privacy Standards and Security Standards under the Health
Insurance Portability and Accountability Act of 1996 (or HIPAA)
establish a set of national privacy and security standards for
the protection of individually identifiable health information
by health plans, healthcare clearinghouses and healthcare
providers (referred to as covered entities) and their business
associates. Currently, only covered entities are directly
subject to potential civil and criminal liability under these
Standards. However, the American Recovery and Reinvestment Act
of 2009 amends the HIPAA Privacy and Security Standards and
makes certain provisions applicable to those portions of our
business, such as those managing employee or plan member health
information for employers or health plans, that are business
associates of covered entities. Currently, we are bound by
certain contracts and agreements to use and disclose protected
health information in a manner consistent with the Privacy
Standards and Security Standards. Beginning on February 17,
2010, some provisions of the HIPAA Privacy and Security
Standards will apply directly to us. Currently, depending on the
facts and circumstances, we could potentially be subject to
criminal liability for aiding and abetting or conspiring with a
covered entity to violate the Privacy Standards or Security
Standards. As of February 17, 2010, we will be directly
subject to HIPAAs criminal and civil penalties. We cannot
assure you that we will adequately address the risks created by
these Standards.
We are unable to predict what changes to these Standards might
be made in the future or how those changes, or other changes in
applicable laws and regulations, could affect our business. Any
new legislation or regulation in the area of privacy of personal
information, including personal health information, could affect
the way we operate our business and could harm our business.
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Failure
to maintain CME accreditation could adversely affect Medscape,
LLCs ability to provide online CME offerings
Medscape, LLCs continuing medical education (or CME)
activities are planned and implemented in accordance with the
current Essential Areas and Policies of the Accreditation
Council for Continuing Medical Education, or ACCME, which
oversees providers of CME credit, and other applicable
accreditation standards. ACCMEs standards for commercial
support of CME are intended to ensure, among other things, that
CME activities of ACCME-accredited providers, such as Medscape,
LLC, are independent of commercial interests, which
are defined as entities that produce, market, re-sell or
distribute healthcare goods and services, excluding certain
organizations. Commercial interests, and entities
owned or controlled by commercial interests, are
ineligible for accreditation by the ACCME. The standards also
provide that accredited CME providers may not place their CME
content on Web sites owned or controlled by a commercial
interest. In addition, accredited CME providers may not
ask commercial interests for speaker or topic
suggestions, and are also prohibited from asking
commercial interests to review CME content prior to
delivery.
From time to time, ACCME revises its standards for commercial
support of CME. As a result of certain past ACCME revisions, we
adjusted our corporate structure and made changes to our
management and operations intended to allow Medscape, LLC to
provide CME activities that are developed independently from
programs developed by its sister companies, which may not be
independent of commercial interests. We believe that
these changes allow Medscape, LLC to satisfy the applicable
standards.
In June 2008, the ACCME published for comment several proposals,
including the following:
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The ACCME stated that due consideration should be given to
eliminating commercial support of CME.
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The ACCME proposed that: (a) accredited providers must not
receive communications from commercial interests announcing or
prescribing any specific content that would be a preferred, or
sought-after, topic for commercially supported CME (e.g.,
therapeutic area, product-line, patho-physiology); and
(b) receiving communications from commercial interests
regarding a commercial interests internal criteria for
providing commercial support would also not be permissible.
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The comment period for these proposals ended on
September 12, 2008, and the ACCME has determined not to
take any action as to these proposals at this point. However, in
April 2009, the ACCME published for comment several other
proposals, including the following:
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Commercial Support-Free
Designation. In order to clarify the distinction
between CME that does include relationships with industry from
CME that does not include relationships with industry, the ACCME
is considering creating a new designation and review process for
CME providers that wish to identify their program of CME as one
that does not utilize funds donated by commercial interests. The
designation would be termed: Commercial
Support-Free. The ACCME has indicated that a range of
standards for Commercial Support-Free CME are
possible, including for example: (1) the CME provider not
accepting any commercial support for any CME activity, or any
part of its CME program; and (2) the CME provider not using
funds from advertising or promotion, paid by commercial
interests, to underwrite the costs of CME.
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Independent CME Funding Entity. The ACCME is
considering creating a granting entity that would accept
unrestricted donations for the purpose of funding CME. The funds
would be distributed to ACCME recognized and accredited
organizations for development and presentation of ACCME-
compliant CME. The ACCME is proposing for comment that the
entity would: (1) be independent of the ACCME; (2) not
provide funds to the ACCME; (3) be managed by its own
governance structure; (4) establish its own granting
criteria reflecting practice gaps established through methods
consistent with ACCMEs content validation policies; and
(5) fund CME done for U.S. learners.
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The comment period for these proposals ended on May 21,
2009. In September 2009, the ACCME determined not to take action
on these proposals at this time. We cannot predict whether these
or similar proposals may be considered in the future or what
other alternatives may be considered by ACCME in the future. The
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elimination of, or restrictions on, commercial support for CME
could adversely affect the volume of sponsored online CME
programs implemented through our Web sites.
Medscape, LLCs current ACCME accreditation expires at the
end of July 2010. In order for Medscape, LLC to renew its
accreditation, it will be required to demonstrate to the ACCME
that it continues to meet ACCME requirements. If Medscape, LLC
fails to maintain its status as an accredited ACCME provider
(whether at the time of such renewal or at an earlier time as a
result of a failure to comply with existing or additional ACCME
standards), it would not be permitted to accredit CME activities
for physicians and other healthcare professionals. Instead,
Medscape, LLC would be required to use third parties to provide
such CME-related services. That, in turn, could discourage
potential supporters from engaging Medscape, LLC to develop CME
or education-related activities, which could have a material
adverse effect on our business.
Government
regulation and industry initiatives could adversely affect the
volume of sponsored online CME programs implemented through our
Web sites or require changes to how Medscape, LLC offers
CME
CME activities may be subject to government oversight or
regulation by Congress, the FDA, the Department of Health and
Human Services, the federal agency responsible for interpreting
certain federal laws relating to healthcare, and by state
regulatory agencies. Medscape, LLC
and/or the
sponsors of the CME activities that Medscape, LLC accredits may
be subject to enforcement actions if any of these CME activities
are deemed improperly promotional, potentially leading to the
termination of sponsorships.
During the past several years, educational activities, including
CME, directed at physicians have been subject to increased
governmental scrutiny to ensure that sponsors do not influence
or control the content of the activities. For example, the
U.S. Senate Finance Committee conducted an investigation of
the sponsorship of CME activities, including an examination of
the ACCMEs role in ensuring that CME activities are
independent from the influence of their supporters. In response,
pharmaceutical companies and medical device companies have
developed and implemented internal controls and procedures that
promote adherence to applicable regulations and requirements. In
implementing these controls and procedures, supporters of CME
may interpret the regulations and requirements differently and
may implement varying procedures or requirements. These controls
and procedures:
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may discourage pharmaceutical companies from providing grants
for independent educational activities;
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may slow their internal approval for such grants;
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may reduce the volume of sponsored educational programs that
Medscape, LLC produces to levels that are lower than in the
past, thereby reducing revenue; and
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may require Medscape, LLC to make changes to how it offers or
provides educational programs, including CME.
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In addition, future changes to laws, regulations or
accreditation standards, or to the internal compliance programs
of supporters or potential supporters, may further discourage,
significantly limit, or prohibit supporters or potential
supporters from engaging in educational activities with
Medscape, LLC, or may require Medscape, LLC to make further
changes in the way it offers or provides educational activities.
Other
Risks Applicable to Our Company and to Ownership of Our
Securities
Negative
conditions in the market for certain auction rate securities may
result in WebMD incurring a loss on such investments
As of September 30, 2009, HLTH and WebMD had a total of
approximately $352.8 million (face value) of investments in
certain auction rate securities (ARS). Those ARS had a book
value of $272.0 million as of September 30, 2009. As a
result of the HLTH Merger, WebMD now owns the ARS investments
that were held by HLTH at the time of the HLTH Merger. The types
of ARS investments that WebMD owns are backed by student loans,
97% of which are guaranteed under the Federal Family Education
Loan Program (FFELP), and
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all had credit ratings of AAA or Aaa when purchased. WebMD does
not own any other type of ARS investments.
Since February 2008, negative conditions in the regularly held
auctions for these securities have prevented holders from being
able to liquidate their holdings through that type of sale. In
the event WebMD needs to or wants to sell its ARS investments,
it may not be able to do so until a future auction on these
types of investments is successful or until a buyer is found
outside the auction process. If potential buyers are unwilling
to purchase the investments at their carrying amount, WebMD
would incur a loss on any such sales. In addition, the credit
ratings on some of the ARS investments in our portfolio have
been downgraded, and there may be additional such rating
downgrades in the future. If uncertainties in the credit and
capital markets continue, these markets deteriorate further or
ARS investments in our portfolio experience additional credit
rating downgrades, there could be further fair value adjustments
or
other-than-temporary
impairments in the carrying value of our ARS investments.
Provisions
in our organizational documents and Delaware law may inhibit a
takeover, which could adversely affect the value of our Common
Stock
Our Restated Certificate of Incorporation and Bylaws, as well as
Delaware corporate law, contain provisions that could delay or
prevent a change of control or changes in our management and
Board of Directors that holders of our Common Stock might
consider favorable and may prevent them from receiving a
takeover premium for their shares. These provisions include, for
example, our classified board structure and the authorization of
our Board of Directors to issue up to 50 million shares of
preferred stock without a stockholder vote. In addition, our
Restated Certificate of Incorporation provides that stockholders
may not act by written consent and may not call special
meetings. These provisions apply even if an offer may be
considered beneficial by some of our stockholders. If a change
of control or change in management is delayed or prevented, the
market price of our Common Stock could decline.
If
certain transactions occur with respect to WebMDs capital
stock, limitations may be imposed on WebMDs ability to
utilize net operating loss carryforwards and tax credits to
reduce its income taxes
WebMD has substantial accumulated net operating loss (NOL)
carryforwards and tax credits available to offset taxable income
in future tax periods. If certain transactions occur with
respect to WebMDs capital stock (including issuances,
redemptions, recapitalizations, exercises of options,
conversions of convertible debt, purchases or sales by
5%-or-greater shareholders and similar transactions) that result
in a cumulative change of more than 50% of the ownership of
capital stock over a three-year period (as determined under
rules prescribed by the U.S. Internal Revenue Code and
applicable Treasury regulations), an annual limitation would be
imposed with respect to the ability to utilize WebMDs NOL
carryforwards and federal tax credits.
On November 25, 2008, HLTH repurchased
83,699,922 shares of its common stock in a tender offer.
The tender offer resulted in a cumulative change of more than
50% of the ownership of HLTHs capital, as determined under
the applicable rules and regulations. As a result of this
ownership change, there will be an annual limitation imposed on
the ability to utilize WebMDs NOL carryforwards and
federal tax credits. The HLTH Merger may increase the
possibility of another such annual limitation.
Because substantially all of WebMDs NOL carryforwards have
already been reduced by a valuation allowance for financial
accounting purposes, we would not expect an annual limitation on
the utilization of the NOL carryforwards to significantly reduce
the net deferred tax asset, although the timing of cash flows
may be impacted to the extent any such annual limitation
deferred the utilization of NOL carryforwards to future tax
years.
The
ongoing investigations by the United States Attorney for the
District of South Carolina and the SEC could negatively impact
our company and how it is perceived
The United States Attorney for the District of South Carolina is
conducting an investigation of our company. Based on the
information available to us as of the date of this Quarterly
Report, we believe that the investigation relates principally to
issues of financial accounting improprieties for Medical Manager
58
Corporation, a predecessor of HLTH (by its merger into HLTH in
September 2000), and Medical Manager Health Systems, a former
subsidiary of HLTH; however, we cannot be sure of the
investigations exact scope. In addition, we understand
that the SEC is conducting a formal investigation into this
matter. Adverse developments in connection with the
investigations, if any, including as a result of matters that
the authorities or WebMD may discover, could have a negative
impact on our company and on how it is perceived by current and
potential investors and customers.
WebMD intends to continue to fully cooperate with the
authorities in this matter. We believe that the amount of the
expenses that we will incur in connection with the
investigations will continue to be significant and we are not
able to determine, at this time, what portion of those amounts
may ultimately be covered by insurance or may ultimately be
repaid to us by individuals to whom we are advancing amounts for
their defense costs. In connection with the sale of Emdeon
Practice Services to Sage Software, HLTH agreed to indemnify
Sage Software with respect to this matter and, following the
completion of our merger with HLTH, we have assumed this
obligation.
We may
not be successful in protecting our intellectual property and
proprietary rights
Our intellectual property and proprietary rights are important
to our businesses. The steps that we take to protect our
intellectual property, proprietary information and trade secrets
may prove to be inadequate and, whether or not adequate, may be
expensive. We rely on a combination of trade secret, patent and
other intellectual property laws and confidentiality procedures
and non-disclosure contractual provisions to protect our
intellectual property. We cannot assure you that we will be able
to detect potential or actual misappropriation or infringement
of our intellectual property, proprietary information or trade
secrets. Even if we detect misappropriation or infringement by a
third party, we cannot assure you that we will be able to
enforce our rights at a reasonable cost, or at all. In addition,
our rights to intellectual property, proprietary information and
trade secrets may not prevent independent third-party
development and commercialization of competing products or
services.
Third
parties may claim that we are infringing their intellectual
property, and we could suffer significant litigation or
licensing expenses or be prevented from providing certain
services, which may harm our business
We could be subject to claims that we are misappropriating or
infringing intellectual property or other proprietary rights of
others. These claims, even if not meritorious, could be
expensive to defend and divert managements attention from
our operations. If we become liable to third parties for
infringing these rights, we could be required to pay a
substantial damage award and to develop non-infringing
technology, obtain a license or cease selling the products or
services that use or contain the infringing intellectual
property. We may be unable to develop non-infringing products or
services or obtain a license on commercially reasonable terms,
or at all. We may also be required to indemnify our customers if
they become subject to third-party claims relating to
intellectual property that we license or otherwise provide to
them, which could be costly.
Acquisitions,
business combinations and other transactions may be difficult to
complete and, if completed, may have negative consequences for
our business and our security holders
WebMD has been built, in part, through acquisitions. We intend
to continue to seek to acquire or to engage in business
combinations with companies engaged in complementary businesses.
In addition, we may enter into joint ventures, strategic
alliances or similar arrangements with third parties. These
transactions may result in changes in the nature and scope of
our operations and changes in our financial condition. Our
success in completing these types of transactions will depend
on, among other things, our ability to locate suitable
candidates and negotiate mutually acceptable terms with them,
and to obtain adequate financing. Significant competition for
these opportunities exists, which may increase the cost of and
decrease the opportunities for these types of transactions.
Financing for these transactions may come from several sources,
including:
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cash and cash equivalents on hand and marketable securities;
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proceeds from the incurrence of indebtedness; and
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59
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proceeds from the issuance of common stock, preferred stock,
convertible debt or of other securities.
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The issuance of additional equity or debt securities could:
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cause substantial dilution of the percentage ownership of our
stockholders at the time of the issuance;
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cause substantial dilution of our earnings per share;
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subject us to the risks associated with increased leverage,
including a reduction in our ability to obtain financing or an
increase in the cost of any financing we obtain;
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subject us to restrictive covenants that could limit our
flexibility in conducting future business activities; and
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adversely affect the prevailing market price for our outstanding
securities.
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We do not intend to seek security holder approval for any such
acquisition or security issuance unless required by applicable
law, regulation or the terms of then existing securities.
Our
business will suffer if we fail to successfully integrate
acquired businesses and technologies or to assess the risks in
particular transactions
We have in the past acquired, and may in the future acquire,
businesses, technologies, services, product lines and other
assets. The successful integration of the acquired businesses
and assets into our operations, on a cost-effective basis, can
be critical to our future performance. The amount and timing of
the expected benefits of any acquisition, including potential
synergies between our company and the acquired business, are
subject to significant risks and uncertainties. These risks and
uncertainties include, but are not limited to, those relating to:
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our ability to maintain relationships with the customers of the
acquired business;
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our ability to retain or replace key personnel;
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potential conflicts in sponsor or advertising relationships or
in relationships with strategic partners;
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our ability to coordinate organizations that are geographically
diverse and may have different business cultures; and
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compliance with regulatory requirements.
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We cannot guarantee that any acquired businesses will be
successfully integrated with our operations in a timely or
cost-effective manner, or at all. Failure to successfully
integrate acquired businesses or to achieve anticipated
operating synergies, revenue enhancements or cost savings could
have a material adverse effect on our business, financial
condition and results of operations.
Although our management attempts to evaluate the risks inherent
in each transaction and to value acquisition candidates
appropriately, we cannot assure you that we will properly
ascertain all such risks or that acquired businesses and assets
will perform as we expect or enhance the value of our company as
a whole. In addition, acquired companies or businesses may have
larger than expected liabilities that are not covered by the
indemnification, if any, that we are able to obtain from the
sellers.
We may
not be able to raise additional funds when needed for our
business or to exploit opportunities
Our future liquidity and capital requirements will depend upon
numerous factors, including the success of our service
offerings, market developments, and repurchases of our common
stock. We may need to raise additional funds to support
expansion, develop new or enhanced applications and services,
respond to competitive pressures, acquire complementary
businesses or technologies or take advantage of unanticipated
opportunities. If required, we may raise such additional funds
through public or private debt or equity financing, strategic
relationships or other arrangements. There can be no assurance
that such financing will be available on acceptable terms, if at
all, or that such financing will not be dilutive to our
stockholders.
As widely reported, financial markets experienced extreme
disruption during portions of 2008 and 2009, including
volatility in the prices of securities and severely diminished
liquidity and availability of credit. Financing may continue to
be difficult to obtain on acceptable terms and we could be
forced to cancel or delay investments or transactions that we
would otherwise have made.
60
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ITEM 3.
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Quantitative
and Qualitative Disclosures About Market Risk
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Interest
Rate Sensitivity
The primary objective of our investment activities is to
preserve principal and maintain adequate liquidity, while at the
same time maximizing the yield we receive from our investment
portfolio.
Changes in prevailing interest rates will cause the fair value
of certain of our investments to fluctuate, such as our
investments in auction rate securities that generally bear
interest at rates indexed to LIBOR. As of September 30,
2009, the fair market value of our auction rate securities was
$127 million. However, our cash and money market
investments, which approximate $275 million at
September 30, 2009, are not subject to changes in fair
value as a result of changes in interest rates.
WebMD has entered into a non-recourse credit facility
(Credit Facility) with an affiliate Citigroup that
is secured by its ARS holdings (including, in some
circumstances, interest payable on the ARS holdings), that will
allow WebMD to borrow up to 75% of the face amount of the ARS
holdings pledged as collateral under the Credit Facility. The
interest rate applicable to such borrowings will be the Open
Federal Funds Rate plus 3.95%. No borrowings have been made
under the Credit Facility to date.
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ITEM 4.
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Controls
and Procedures
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As required by Exchange Act
Rule 13a-15(b),
WebMD management, including the Chief Executive Officer and
Chief Financial Officer, conducted an evaluation of the
effectiveness of WebMDs disclosure controls and
procedures, as defined in Exchange Act
Rule 13a-15(e),
as of September 30, 2009. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded
that WebMDs disclosure controls and procedures were
effective as of September 30, 2009.
In connection with the evaluation required by Exchange Act
Rule 13a-15(d),
WebMD management, including the Chief Executive Officer and
Chief Financial Officer, concluded that no changes in
WebMDs internal control over financial reporting occurred
during the third quarter of 2009 that have materially affected,
or are reasonably likely to materially affect, WebMDs
internal control over financial reporting.
61
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ITEM 1.
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Legal
Proceedings
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The information relating to legal proceedings contained in
Note 9 and 11 to the Consolidated Financial Statements
included in Part I, Item 1 of this Quarterly Report is
incorporated herein by this reference.
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ITEM 2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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(c) The following table provides information about
purchases by WebMD during the three months ended
September 30, 2009 of equity securities that are registered
by us pursuant to Section 12 of the Exchange Act:
Issuer
Purchases of Equity Securities
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Total Number
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Total Number of Shares
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Approximate Dollar Value of Shares
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of Shares
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Average Price
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Purchased as Part of Publicly
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that May Yet Be Purchased Under
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Period
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Purchased(1)
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Paid per Share
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Announced Plans or Programs(2)
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the Plans or Programs(2)
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7/01/09 - 7/31/09
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$
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$
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30,000,000
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8/01/09 - 8/31/09
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$
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$
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30,000,000
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9/01/09 - 9/30/09
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17,683
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$
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33.15
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$
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30,000,000
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Total
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17,683
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$
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33.15
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(1)
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Represents shares withheld from
WebMD Restricted Class A Common Stock that vested during
the respective periods in order to satisfy withholding
requirements related to the vesting of the awards. The value of
these shares was determined based on the closing price of WebMD
Class A Common Stock on the vesting date.
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(2)
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Relates to the repurchase program
that WebMD announced on December 4, 2008, at which time
WebMD was authorized to use up to $30 million to purchase
shares of its Class A Common Stock from time to time. As of
September 30, 2009, no shares had been purchased under this
repurchase program. For additional information, see Note 4
to the Consolidated Financial Statements included in our Annual
Report on
Form 10-K
for the year ended December 31, 2008.
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The exhibits listed in the accompanying Exhibit Index on
page E-1
are filed or furnished as part of this Quarterly Report.
62
EXHIBIT INDEX
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Exhibit No.
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Description
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3
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.1
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Restated Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.1 to the
Registrants Registration Statement on
Form S-8
filed on October 23, 2009
(Reg. No. 333-162651))
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3
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.2
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Amended and Restated By-laws of the Registrant (incorporated by
reference to Exhibit 3.2 to the Registrants
Registration Statement on
Form S-8
filed on October 23, 2009
(Reg. No. 333-162651))
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10
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.1
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Letter Amendment, dated as of July 9, 2009, among HLTH
Corporation, WebMD Health Corp. and Martin J. Wygod
(incorporated by reference to Exhibit 10.1 to the Current
Report on
Form 8-K
filed by the Registrant on July 14, 2009)
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31
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.1
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Rule 13a-14(a)/15d-14(a)
Certification of Chief Executive Officer of Registrant
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31
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.2
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Rule 13a-14(a)/15d-14(a)
Certification of Chief Financial Officer of Registrant
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32
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.1
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Section 1350 Certification of Chief Executive Officer of
Registrant
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32
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.2
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Section 1350 Certification of Chief Financial Officer of
Registrant
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99
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.1
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Explanation of Non-GAAP Financial Measures
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E-1