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 June 30,
2010
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or
|
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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|
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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)
|
|
|
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)
|
(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
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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|
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|
Large
accelerated
filer o
|
Accelerated
filer þ
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Non-accelerated
filer o
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Smaller
reporting
company o
|
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act.)
Yes
o No þ
As of August 4, 2010, the Registrant had 59,376,480 shares
of Common Stock outstanding (including unvested shares of
restricted Common Stock).
WEBMD
HEALTH CORP.
QUARTERLY REPORT ON
FORM 10-Q
For the period ended June 30, 2010
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 our public and
private portals and mobile applications;
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the inability to successfully deploy new or updated applications
or services;
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competition in attracting consumers and healthcare professionals
to our public portals and mobile applications;
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competition for advertisers and sponsors for our public portals
and mobile applications;
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events or conditions that have a negative effect on promotional
or educational spending by pharmaceutical and biotechnology
companies or on the portion of that spending used for
Internet-based services like ours;
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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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adverse changes in general business or regulatory conditions
affecting the healthcare, information technology and Internet
industries; 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.
|
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
unknown or unpredictable factors also could have material
adverse effects on our future results.
The forward-looking statements included in this Quarterly Report
on
Form 10-Q
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
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ITEM 1.
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Financial
Statements
|
WEBMD
HEALTH CORP.
(In
thousands, except share and per share data)
|
|
|
|
|
|
|
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June 30,
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|
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December 31,
|
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2010
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|
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2009
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(Unaudited)
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ASSETS
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Current assets:
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|
|
|
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|
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Cash and cash equivalents
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$
|
534,705
|
|
|
$
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459,766
|
|
Accounts receivable, net of allowance for doubtful accounts of
$1,116 at June 30, 2010 and $1,511 at December 31, 2009
|
|
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104,907
|
|
|
|
118,155
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|
Prepaid expenses and other current assets
|
|
|
14,197
|
|
|
|
11,419
|
|
Investments
|
|
|
|
|
|
|
9,932
|
|
Deferred tax assets
|
|
|
30,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
683,820
|
|
|
|
599,272
|
|
Investments
|
|
|
|
|
|
|
338,446
|
|
Property and equipment, net
|
|
|
51,953
|
|
|
|
52,194
|
|
Goodwill
|
|
|
202,104
|
|
|
|
202,104
|
|
Intangible assets, net
|
|
|
24,166
|
|
|
|
26,020
|
|
Deferred tax assets
|
|
|
82,119
|
|
|
|
50,789
|
|
Other assets
|
|
|
18,074
|
|
|
|
19,723
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
1,062,236
|
|
|
$
|
1,288,548
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
52,426
|
|
|
$
|
63,721
|
|
Deferred revenue
|
|
|
113,070
|
|
|
|
98,474
|
|
1.75% convertible subordinated notes due 2023
|
|
|
|
|
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264,583
|
|
Deferred tax liabilities
|
|
|
|
|
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|
12,955
|
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Liabilities of discontinued operations
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|
19,655
|
|
|
|
34,197
|
|
|
|
|
|
|
|
|
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Total current liabilities
|
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|
185,151
|
|
|
|
473,930
|
|
31/8%
convertible notes due 2025, net of discount of $9,083 at
June 30, 2010 and $22,641 at December 31, 2009
|
|
|
112,414
|
|
|
|
227,659
|
|
Other long-term liabilities
|
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22,220
|
|
|
|
22,191
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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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Common stock, $0.01 par value per share,
650,000,000 shares authorized; 62,396,429 shares
issued at June 30, 2010 and 57,243,710 shares issued
at December 31, 2009
|
|
|
624
|
|
|
|
572
|
|
Additional paid-in capital
|
|
|
9,575,257
|
|
|
|
9,469,857
|
|
Treasury stock, at cost; 4,325,973 shares at June 30,
2010 and 6,296,944 shares at December 31, 2009
|
|
|
(202,739
|
)
|
|
|
(233,651
|
)
|
Accumulated deficit
|
|
|
(8,630,691
|
)
|
|
|
(8,634,585
|
)
|
Accumulated other comprehensive loss
|
|
|
|
|
|
|
(37,425
|
)
|
|
|
|
|
|
|
|
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|
Stockholders equity
|
|
|
742,451
|
|
|
|
564,768
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|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
1,062,236
|
|
|
$
|
1,288,548
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|
|
|
|
|
|
|
|
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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 June 30,
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Six Months Ended June 30,
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2010
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|
2009
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2010
|
|
|
2009
|
|
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Revenue
|
|
$
|
122,707
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$
|
98,631
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|
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$
|
230,737
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$
|
188,895
|
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Cost of operations
|
|
|
45,368
|
|
|
|
39,229
|
|
|
|
88,362
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|
|
|
75,794
|
|
Sales and marketing
|
|
|
29,425
|
|
|
|
26,797
|
|
|
|
57,832
|
|
|
|
54,358
|
|
General and administrative
|
|
|
20,577
|
|
|
|
22,003
|
|
|
|
39,386
|
|
|
|
43,851
|
|
Depreciation and amortization
|
|
|
6,318
|
|
|
|
6,956
|
|
|
|
13,333
|
|
|
|
14,059
|
|
Interest income
|
|
|
420
|
|
|
|
1,958
|
|
|
|
3,829
|
|
|
|
4,220
|
|
Interest expense
|
|
|
3,170
|
|
|
|
5,781
|
|
|
|
8,309
|
|
|
|
12,317
|
|
(Loss) gain on convertible notes
|
|
|
(11,011
|
)
|
|
|
3,473
|
|
|
|
(14,738
|
)
|
|
|
10,120
|
|
Gain (loss) on investments
|
|
|
6,002
|
|
|
|
|
|
|
|
(22,846
|
)
|
|
|
|
|
Other income (expense), net
|
|
|
99
|
|
|
|
(552
|
)
|
|
|
(199
|
)
|
|
|
(821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income tax
provision (benefit)
|
|
|
13,359
|
|
|
|
2,744
|
|
|
|
(10,439
|
)
|
|
|
2,035
|
|
Income tax provision (benefit)
|
|
|
5,675
|
|
|
|
750
|
|
|
|
(14,333
|
)
|
|
|
(467
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income from continuing operations
|
|
|
7,684
|
|
|
|
1,994
|
|
|
|
3,894
|
|
|
|
2,502
|
|
Consolidated loss from discontinued operations, net of a tax
benefit of $7,113 and $5,836 for the three and six months ended
June 30, 2009
|
|
|
|
|
|
|
(13,284
|
)
|
|
|
|
|
|
|
(12,767
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income (loss) inclusive of noncontrolling
interest
|
|
|
7,684
|
|
|
|
(11,290
|
)
|
|
|
3,894
|
|
|
|
(10,265
|
)
|
Income attributable to noncontrolling interest
|
|
|
|
|
|
|
(387
|
)
|
|
|
|
|
|
|
(997
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Company stockholders
|
|
$
|
7,684
|
|
|
$
|
(11,677
|
)
|
|
$
|
3,894
|
|
|
$
|
(11,262
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts attributable to Company stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
7,684
|
|
|
$
|
703
|
|
|
$
|
3,894
|
|
|
$
|
509
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
(12,380
|
)
|
|
|
|
|
|
|
(11,771
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Company stockholders
|
|
$
|
7,684
|
|
|
$
|
(11,677
|
)
|
|
$
|
3,894
|
|
|
$
|
(11,262
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.14
|
|
|
$
|
0.02
|
|
|
$
|
0.07
|
|
|
$
|
0.01
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
(0.28
|
)
|
|
|
|
|
|
|
(0.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Company stockholders
|
|
$
|
0.14
|
|
|
$
|
(0.26
|
)
|
|
$
|
0.07
|
|
|
$
|
(0.25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.13
|
|
|
$
|
0.01
|
|
|
$
|
0.07
|
|
|
$
|
0.01
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
(0.26
|
)
|
|
|
|
|
|
|
(0.25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Company stockholders
|
|
$
|
0.13
|
|
|
$
|
(0.25
|
)
|
|
$
|
0.07
|
|
|
$
|
(0.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding used in computing per share
amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
53,521
|
|
|
|
45,599
|
|
|
|
52,856
|
|
|
|
45,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
62,504
|
|
|
|
46,733
|
|
|
|
57,272
|
|
|
|
46,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
5
WEBMD
HEALTH CORP.
(In
thousands, unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Consolidated net income (loss) inclusive of noncontrolling
interest
|
|
$
|
3,894
|
|
|
$
|
(10,265
|
)
|
Adjustments to reconcile consolidated net income (loss)
inclusive of noncontrolling interest to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Consolidated loss from discontinued operations, net of tax
|
|
|
|
|
|
|
12,767
|
|
Depreciation and amortization
|
|
|
13,333
|
|
|
|
14,059
|
|
Non-cash interest, net
|
|
|
3,885
|
|
|
|
5,310
|
|
Non-cash advertising
|
|
|
|
|
|
|
1,753
|
|
Non-cash stock-based compensation
|
|
|
14,801
|
|
|
|
18,566
|
|
Deferred income taxes
|
|
|
(27,729
|
)
|
|
|
(2,363
|
)
|
Loss (gain) on convertible notes
|
|
|
14,738
|
|
|
|
(10,120
|
)
|
Loss on investments
|
|
|
22,846
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
13,248
|
|
|
|
14,408
|
|
Prepaid expenses and other, net
|
|
|
(2,144
|
)
|
|
|
(3,775
|
)
|
Accrued expenses and other long-term liabilities
|
|
|
(4,801
|
)
|
|
|
(9,544
|
)
|
Deferred revenue
|
|
|
14,596
|
|
|
|
6,648
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing operations
|
|
|
66,667
|
|
|
|
37,444
|
|
Net cash (used in) provided by discontinued operations
|
|
|
(15,501
|
)
|
|
|
5,509
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
51,166
|
|
|
|
42,953
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from sales of
available-for-sale
securities
|
|
|
362,206
|
|
|
|
1,100
|
|
Purchases of property and equipment
|
|
|
(9,719
|
)
|
|
|
(10,955
|
)
|
Finalization of sale price of discontinued operations
|
|
|
(1,430
|
)
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) continuing operations
|
|
|
351,057
|
|
|
|
(9,605
|
)
|
Net cash used in discontinued operations
|
|
|
|
|
|
|
(2,356
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
351,057
|
|
|
|
(11,961
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net of cash used for
employee withholding taxes
|
|
|
8,386
|
|
|
|
18,194
|
|
Repurchases of convertible notes
|
|
|
(81,362
|
)
|
|
|
(123,857
|
)
|
Purchase of treasury stock under repurchase program
|
|
|
(14,914
|
)
|
|
|
|
|
Payment for shares tendered in 2009, delivered in 2010
|
|
|
(6,818
|
)
|
|
|
|
|
Purchase of treasury stock in tender offer
|
|
|
(242,795
|
)
|
|
|
|
|
Tax benefit on stock-based awards
|
|
|
10,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(327,284
|
)
|
|
|
(105,663
|
)
|
Effect of exchange rates on cash
|
|
|
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
74,939
|
|
|
|
(74,601
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
459,766
|
|
|
|
629,848
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
534,705
|
|
|
$
|
555,247
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
6
WEBMD
HEALTH CORP.
(In
thousands, except share and per share data, unaudited)
|
|
1.
|
Summary
of Significant Accounting Policies
|
Background
and Basis of Presentation
WebMD Health Corp. (the Company or
WebMD) is a Delaware corporation that was
incorporated on May 3, 2005. The Company completed an
initial public offering on September 28, 2005. The
Companys common stock trades under the symbol
WBMD on the Nasdaq Global Select Market.
The Company provides health information services to consumers,
physicians and other healthcare professionals, employers and
health plans through its public and private online portals,
mobile applications 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 provides mobile health information
applications for use by consumers and physicians. The Company
also provides
e-detailing
promotion and physician recruitment services, information
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 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. In addition, the Company
offers clients of its private portals telephonic health coaching
services on a per participant basis across an employee or plan
population. The Company generates revenue from its private
portals through the licensing of these portals and related
services to employers and health plans either directly or
through distributors.
From the completion of the initial public offering through the
completion of the merger with HLTH Corporation
(HLTH) on October 23, 2009 (the
Merger), the Company was more than 80% owned by
HLTH. On October 23, 2009, stockholders of HLTH and WebMD
approved the Merger and the transaction was completed later that
day, with HLTH merging into WebMD and WebMD continuing
as the surviving corporation. WebMD automatically succeeded to
all of HLTHs assets, liabilities and commitments upon
completion of the Merger (other than the shares of WebMD
Class B common stock owned by HLTH which were cancelled in
the Merger). In the Merger, each share of HLTH common stock was
converted into 0.4444 shares of WebMD common stock. The
shares of WebMDs Class A common stock were unchanged
in the 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
Merger eliminated both WebMDs Class B common stock
and the dual-class stock structure that had existed at WebMD.
WebMD was the only operating business of HLTH at the time the
Merger closed. Accordingly, the completion of the 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, 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 Merger.
The applicable accounting treatment for the Merger resulted in
HLTH being considered the acquiring entity of the WebMD
non-controlling interest. Accordingly, the pre-acquisition
consolidated financial statements of HLTH became the historical
financial statements of WebMD following the completion of the
Merger, adjusted as
7
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
described in the next paragraph. Accordingly, in these
consolidated financial statements, the defined term
Company refers not only to WebMD but also, where the
context requires, to HLTH. The specific names of HLTH and WebMD
are used only where there is a need to distinguish between the
legal entities. In addition, all references in these
consolidated financial statements to amounts of shares of HLTH
common stock and to market prices or purchase prices for HLTH
common stock have been adjusted to reflect the 0.4444 exchange
ratio in the Merger (the Exchange Ratio), and
expressed as the number of shares of WebMD common stock into
which the HLTH common stock would be converted in the Merger and
the equivalent price per share of WebMD common stock. Similarly,
the exercise price of options and warrants to purchase HLTH
common stock and the number of shares subject to those options
and warrants have been adjusted to reflect the Exchange Ratio.
In the Companys financial statements for the three and six
months ended June 30, 2009 included in this Quarterly
Report: the weighted-average shares outstanding used in
computing income (loss) per common share for the three and six
months ended June 30, 2009 have been adjusted by
multiplying the historical weighted-average shares outstanding
for HLTH by the Exchange Ratio; and basic and diluted income
(loss) per common share have been recalculated to reflect the
adjusted weighted-average shares.
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, are necessary for a fair presentation of
the interim periods presented. The results of operations for the
three and six months ended June 30, 2010 are not
necessarily indicative of the operating results to be expected
for any subsequent period or for the entire year ending
December 31, 2010. 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 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, 2009, which are
included in the Companys Annual Report on
Form 10-K
filed with the Securities and Exchange Commission.
Seasonality
The timing of the Companys revenue is affected by seasonal
factors. The Companys public portal advertising and
sponsorship revenue is seasonal, primarily due to the annual
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 the Companys 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.
Accounting
Estimates
The preparation of financial statements in conformity with
U.S. GAAP requires management to make 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 the 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
8
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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: 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 and indefinite lived
intangible assets), the carrying value, capitalization and
amortization of software and Web site development costs, the
carrying value of investments, the provision for income taxes
and related deferred tax accounts, certain accrued liabilities,
revenue recognition, contingencies, litigation and related legal
accruals and the value attributed to employee stock options and
other stock-based awards.
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 period. Diluted income (loss) per common share has
been computed using the weighted-average number of shares of
common stock outstanding during the period, increased to give
effect to potentially dilutive securities and assumes that any
dilutive convertible notes were converted, only in the periods
in which such effect is dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
Basic(1)
|
|
$
|
7,596
|
|
|
$
|
703
|
|
|
$
|
3,844
|
|
|
$
|
509
|
|
Interest expense on 1.75% convertible notes, net of tax
|
|
|
592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities of subsidiary
|
|
|
|
|
|
|
(76
|
)
|
|
|
|
|
|
|
(97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations Diluted
|
|
$
|
8,188
|
|
|
$
|
627
|
|
|
$
|
3,844
|
|
|
$
|
412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax Basic
|
|
$
|
|
|
|
$
|
(12,380
|
)
|
|
$
|
|
|
|
$
|
(11,771
|
)
|
Effect of dilutive securities of subsidiary
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax Diluted
|
|
$
|
|
|
|
$
|
(12,327
|
)
|
|
$
|
|
|
|
$
|
(11,715
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares Basic
|
|
|
53,521
|
|
|
|
45,599
|
|
|
|
52,856
|
|
|
|
45,408
|
|
Employee stock options and restricted stock
|
|
|
3,848
|
|
|
|
1,134
|
|
|
|
4,416
|
|
|
|
1,038
|
|
1.75% convertible notes
|
|
|
5,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted-average shares after assumed
conversions Diluted
|
|
|
62,504
|
|
|
|
46,733
|
|
|
|
57,272
|
|
|
|
46,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.14
|
|
|
$
|
0.02
|
|
|
$
|
0.07
|
|
|
$
|
0.01
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
(0.28
|
)
|
|
|
|
|
|
|
(0.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Company stockholders
|
|
$
|
0.14
|
|
|
$
|
(0.26
|
)
|
|
$
|
0.07
|
|
|
$
|
(0.25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.13
|
|
|
$
|
0.01
|
|
|
$
|
0.07
|
|
|
$
|
0.01
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
(0.26
|
)
|
|
|
|
|
|
|
(0.25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Company stockholders
|
|
$
|
0.13
|
|
|
$
|
(0.25
|
)
|
|
$
|
0.07
|
|
|
$
|
(0.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Income from continuing operations
was adjusted for the effect of participating non-vested
restricted stock of $88 and $50 for the three and six months
ended June 30, 2010, respectively.
|
The Company has excluded convertible subordinated notes and
convertible notes, as well as stock options and restricted
stock, from the calculation of diluted income (loss) per common
share during the periods in which such securities were
anti-dilutive. The following table presents the total number of
shares that could potentially dilute income (loss) per common
share in the future that were not included in the computation of
diluted income (loss) per common share during the periods
presented (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Options and restricted stock
|
|
|
2,133
|
|
|
|
11,914
|
|
|
|
2,894
|
|
|
|
13,608
|
|
Convertible notes
|
|
|
3,700
|
|
|
|
14,786
|
|
|
|
11,346
|
|
|
|
15,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,833
|
|
|
|
26,700
|
|
|
|
14,240
|
|
|
|
28,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent
Accounting Pronouncements
Accounting
Pronouncements to be Adopted in the Future
In October 2009, the Financial Accounting Standards Board
(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
10
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 has
not yet determined the impact that this new guidance will have
on its results of operations and financial position.
Reclassifications
Certain reclassifications have been made to the prior period
financial statements to conform to the current year presentation.
|
|
2.
|
Discontinued
Operations
|
Porex
On October 19, 2009, the Company completed the sale of its
Porex business. In connection with the sale of Porex, the
Company received $74,378 in cash at closing, received $67,500 in
senior secured notes (Senior Secured Notes) and
incurred approximately $4,900 of transaction expenses. During
the three months ended March 31, 2010, the Company paid
$1,430 to Porex related to the finalization of a customary
working capital adjustment. The Senior Secured Notes were
secured by certain assets of the acquirer and accrued 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 had an aggregate
principal amount of $10,000 each and were scheduled to mature on
the first, second and third anniversaries of the closing,
respectively; and the Senior Secured Notes of the fourth series
had an aggregate principal amount of $37,500 and was scheduled
to mature on the fourth anniversary of the closing. The Company
estimated that the fair value of the Senior Secured Notes was
$63,598 as of October 19, 2009. On April 1, 2010, the
Company sold the Senior Secured Notes for $65,475 plus accrued
interest.
In addition, the Company agreed to indemnify Porex for certain
tax matters, which were estimated by the Company to be
approximately $4,800. An accrual for these tax matters is
included within liabilities of discontinued operations, within
the accompanying consolidated balance sheets as of
December 31, 2009 and June 30, 2010. In connection
with the sale of Porex, the Company recognized a pre-tax gain of
$25,790 during the three months ended December 31, 2009.
Summarized operating results for the discontinued operations of
Porex are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30, 2009
|
|
June 30, 2009
|
|
Revenue
|
|
$
|
21,924
|
|
|
$
|
40,177
|
|
Earnings before taxes
|
|
|
5,358
|
|
|
|
7,758
|
|
Little
Blue Book Print Directory Business
In March 2009, the Company decided to divest its 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 then estimated
fair value.
11
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On September 30, 2009, the Company completed the sale of
LBB in which it received cash proceeds of $2,590. Summarized
operating results for the discontinued operations of LBB are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30, 2009
|
|
June 30, 2009
|
|
Revenue
|
|
$
|
1,619
|
|
|
$
|
2,191
|
|
Losses before taxes
|
|
|
8,065
|
|
|
|
8,780
|
|
EPS
On September 14, 2006, the Company completed the sale of
Emdeon Practice Services, Inc. (together with its subsidiaries,
EPS) to Sage Software, Inc. (Sage
Software), an indirect wholly owned subsidiary of The Sage
Group plc (the EPS Sale). The Company has certain
indemnity obligations to advance amounts for reasonable defense
costs for initially ten, and now four, former officers and
directors of EPS, who were indicted in connection with the
previously disclosed investigation by the United States Attorney
for the District of South Carolina (the
Investigation), which is more fully described in
Note 10. In connection with the EPS Sale, the Company
agreed to indemnify Sage Software relating to these indemnity
obligations. During the year ended December 31, 2007, based
on information available at that time, the Company determined a
reasonable estimate of the range of probable costs with respect
to its indemnification obligation and, accordingly, recorded an
aggregate pre-tax charge of $73,347, which represented the
Companys estimate of the low end of the probable range of
costs related to this matter. The Company had reserved the low
end of the probable range of costs because no estimate within
the range was a better estimate than any other amount. That
estimate included assumptions as to the duration of the trial
and pre-trial periods, and the defense costs to be incurred
during these periods. The Company updated the estimated range of
its indemnification obligation based on new information received
during the year ended December 31, 2008 and again during
the three months ended June 30, 2009, and as a result,
recorded additional pre-tax charges of $29,078 and $28,800,
respectively. As described in more detail in Note 10, two
of the former officers and directors of EPS were found guilty
however the Court set the verdict aside on May 27, 2010 and
entered a judgment of acquittal. The government entered a notice
of appeal with respect to the Courts order and such appeal
is pending. Two other former officers of EPS are awaiting trial
in Tampa, Florida, which was scheduled to begin on
October 4, 2010; however, on July 9, 2010 the Court in
Tampa placed the case against those defendants on hold pending
resolution of the appeal of the South Carolina ruling. As of
June 30, 2010, and December 31, 2009, the remaining
accrual with respect to the costs for these matters was $9,852
and $25,437, respectively, and is included within liabilities of
discontinued operations on the accompanying consolidated balance
sheets. The ultimate outcome of this matter is still uncertain
and, accordingly, the amount of cost the Company may ultimately
incur could be substantially more than the reserve the Company
has currently provided. If the recorded reserves are
insufficient to cover the ultimate cost of this matter, the
Company will need to record additional charges to its
consolidated statement of operations in future periods.
Also included within liabilities of discontinued operations
related to this matter is $5,000 and $3,957, as of June 30,
2010 and December 31, 2009, respectively, which represents
certain reimbursements received from the Companys
insurance carriers between July 31, 2008 and June 30,
2010. The Company deferred recognizing these insurance
reimbursements within the consolidated statement of operations
given the pending Coverage Litigation, which is described below
in Note 10. During the three months ended June 30,
2009, the Company received reimbursements from its insurance
carriers in the amount of $11,000 which are not subject to the
pending Coverage Litigation. Accordingly, the Company recognized
these amounts within consolidated loss from discontinued
operations during the three months ended June 30, 2009.
12
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
3.
|
Repurchase
and Conversion of Convertible Notes
|
During the three and six months ended June 30, 2009, the
Company repurchased $8,900 and $85,417 principal amount of its
1.75% Convertible Subordinated Notes Due 2023
(1.75% Notes) for $8,500 and $80,123 in cash,
respectively. Also during the three and six months ended
June 30, 2009, the Company repurchased $31,700 and $49,700
principal amount of its
31/8% Convertible
Notes Due 2025
(31/8% Notes)
for $28,689 and $43,734 in cash, respectively. The Company
recognized an aggregate pre-tax gain of $3,473 and $10,120
related to the repurchases of the 1.75% Notes and
31/8% Notes
during the three and six months ended June 30, 2009, which
is reflected within (loss) gain on convertible notes in the
accompanying consolidated statement of operations. The gain
includes the expensing of remaining deferred issuance costs
outstanding related to the repurchased notes.
During the three and six months ended June 30, 2010, the
Company repurchased $32,446 principal amount of its
1.75% Notes for $42,107 in cash and the holders of the
1.75% Notes converted $232,137 principal amount into
6,703,129 shares of WebMD common stock. Also during the
three and six months ended June 30, 2010, the Company
repurchased $12,869 and $32,176 principal amount of its
31/8% Notes
for $16,690 and $39,255 in cash, respectively, and holders of
the
31/8% Notes
converted $12,700 and $96,627 principal amount into 362,586 and
2,758,715 shares of WebMD common stock, respectively. The
Company recognized an aggregate pre-tax loss of $11,011 and
$14,738 related to the repurchase of the 1.75% Notes and
the repurchase and conversions of the
31/8% Notes,
which is reflected within (loss) gain on convertible notes in
the accompanying consolidated statement of operations during the
three and six months ended June 30, 2010, respectively. The
loss includes the expensing of remaining deferred issuance costs
outstanding related to the repurchased and converted notes.
As a result of the conversion and repurchase activity described
above, as of June 30, 2010, the only convertibles notes
that remained outstanding were $121,497 principal amount of the
31/8% Notes,
which were convertible into approximately 3.5 million
shares of WebMD common stock.
|
|
4.
|
Related
Party Transaction
|
Fidelity
Human Resources Services Company LLC
The Company and Fidelity Employer Services Company LLC
(FESCO) are parties to an agreement pursuant to
which WebMD integrates its private portals product into the
services FESCO provides to its clients. FESCO provides human
resources administration and benefit administration services to
employers. The Company recorded revenue of $1,439 and $2,896
during the three and six months ended June 30, 2010 and
$2,302 and $4,994 during the three and six months ended
June 30, 2009, respectively. Included in accounts
receivable as of June 30, 2010 and December 31, 2009
was $1,059 and $2,250, respectively, related to the FESCO
agreement. FESCO is an affiliate of FMR LLC, which is deemed to
be a related party of the Company due to its publicly reported
ownership of shares of the Companys common stock.
Affiliates of FMR LLC also provide services to the Company in
connection with the Companys 401(k) plan.
|
|
5.
|
Fair
Value of Financial Instruments and Non-Recourse Credit
Facilities
|
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.
13
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
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
June 30, 2010 and December 31, 2009. 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 June 30, 2010 and
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
Fair Value
|
|
|
Amoritized
|
|
|
|
|
|
Gross
|
|
|
Amoritized
|
|
|
|
|
|
Gross
|
|
|
|
Estimate
|
|
|
Cost
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Cost
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Using:
|
|
|
Basis
|
|
|
Value
|
|
|
Gains
|
|
|
Basis
|
|
|
Value
|
|
|
Gains (Losses)
|
|
|
Cash and cash equivalents
|
|
|
Level 1
|
|
|
$
|
534,705
|
|
|
$
|
534,705
|
|
|
$
|
|
|
|
$
|
459,766
|
|
|
$
|
459,766
|
|
|
$
|
|
|
Equity securities
|
|
|
Level 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,470
|
|
|
|
4,851
|
|
|
|
3,381
|
|
Repurchase right
|
|
|
Level 3
|
|
|
|
1,029
|
|
|
|
1,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate
securities(1)
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
320,507
|
|
|
|
279,701
|
|
|
|
(40,806
|
)(2)
|
Senior secured
notes(3)
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,826
|
|
|
|
63,826
|
|
|
|
|
|
|
|
|
(1)
|
|
The face (par) value of the auction
rate securities was $352,700 as of December 31, 2009.
|
|
(2)
|
|
Amounts reflect cumulative effect
of adoption of new authoritative guidance as discussed below.
|
|
(3)
|
|
The face value of the senior
secured notes was $67,500 as of December 31, 2009.
|
The following table reconciles the beginning and ending balances
of the Companys Level 3 assets, which consist of the
auction rate securities, the senior secured notes and the
repurchase right:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Auction Rate
|
|
|
Repurchase
|
|
|
Senior
|
|
|
Auction Rate
|
|
|
|
Securities
|
|
|
Right
|
|
|
Secured Notes
|
|
|
Securities
|
|
|
Fair value as of the beginning of the period
|
|
$
|
279,701
|
|
|
$
|
|
|
|
$
|
63,826
|
|
|
$
|
286,552
|
|
Redemptions
|
|
|
(290,999
|
)
|
|
|
(354
|
)
|
|
|
(65,475
|
)
|
|
|
(1,100
|
)
|
(Loss) gain included in earnings
|
|
|
(29,508
|
)
|
|
|
1,383
|
|
|
|
1,362
|
|
|
|
|
|
Interest income accretion included in earnings
|
|
|
|
|
|
|
|
|
|
|
287
|
|
|
|
|
|
Changes in unrealized gains/losses included in other
comprehensive loss
|
|
|
40,806
|
|
|
|
|
|
|
|
|
|
|
|
(14,728
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of the end of the period
|
|
$
|
|
|
|
$
|
1,029
|
|
|
$
|
|
|
|
$
|
270,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Through April 20, 2010, the Company held investments in
auction rate securities (ARS) which had been
classified as Level 3 assets as described above. The types
of ARS holdings the Company owned were 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 been unsuccessful. The result of
an unsuccessful 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. Additionally,
during 2009, approximately one-half of the auction rate
securities the Company held 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 $302,842 compared to a face value
of $362,950. The impairment in value, of
14
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$60,108, 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 had no current intent to sell the auction rate
securities that it held as of April 1, 2009, and it was not
more likely than not that the Company would be required to sell
the securities prior to recovery of the amortized cost basis,
the Company estimated the present value of the cash flows
expected to be collected related to the auction rate securities
it held. 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 $26,848, or $24,697 net of the effect of
noncontrolling interest. This represented the cumulative effect
of initially adopting this new guidance and has been reflected
as an increase to the cost basis of its investment and an
increase to accumulated other comprehensive loss and an increase
to retained earnings in the Companys balance sheet
effective as of April 1, 2009.
Historically, the Company estimated 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.
Effective April 20, 2010, the Company entered into an
agreement pursuant to which the Company sold all of its holdings
of ARS for an aggregate of $286,399. Under the terms of the
agreement, the Company retained a right (the Repurchase
Right), for a period of two years from the date of the
agreement: (a) to repurchase from the purchaser the same
principal amount of any or all of the various series of ARS
sold, at the agreed upon purchase prices received on
April 20, 2010; and (b) to receive additional proceeds
from the purchaser upon certain redemptions of the various
series of ARS sold.
As described above, while the Company originally recorded a loss
of $60,108 relating to its holdings of ARS in the March 2008
quarter, the Company was required to reclassify $26,848 of that
charge as an unrealized loss through stockholders equity
when WebMD was required to adopt new authoritative guidance
15
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
related to
other-than-temporary
impairments effective April 1, 2009, which had the effect
of increasing the cost basis of the ARS by that amount. As a
result, during the three months ended March 31, 2010, the
Company recorded an additional charge of $28,848, representing
the difference between the cost basis of its ARS holdings and
the proceeds received on April 20, 2010, which includes an
offsetting amount of $660 related to the initial value of the
Repurchase Right. The Company is required to reassess the value
of this Repurchase Right at each reporting period, and any
changes in value will be recorded within the statement of
operations in future periods. During the three months ended
June 30, 2010, the Company increased the value of the
Repurchase Right to $1,029, resulting in a gain of $369, and the
Company realized $354 related to the receipt of additional
proceeds of certain redemptions of the ARS that were sold in
connection with the Repurchase Right. In connection with the
sale of the ARS, the Company recorded a deferred income tax
benefit of approximately $21,900 primarily related to the
reversal of income tax valuation allowance attributable to its
ARS.
The Companys other Level 3 asset was $67,500
principal amount of Senior Secured Notes that the Company
received in connection with its sale of Porex on
October 19, 2009. The Senior Secured Notes were secured by
certain assets of the acquirer of Porex and accrued 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 had an aggregate principal
amount of $10,000 each and were scheduled to mature on the
first, second and third anniversaries of the closing,
respectively; and the Senior Secured Notes of the fourth series
had an aggregate principal amount of $37,500 and was scheduled
to mature on the fourth anniversary of the closing. The Company
estimated that the fair value of the Senior Secured Notes was
$63,826 as of December 31, 2009, of which $9,932 and
$53,894 were classified as current investments and long-term
investments, respectively, within the accompanying consolidated
balance sheet. On April 1, 2010, the Company sold the
Senior Secured Notes for $65,475 plus accrued interest and
recorded a gain of $1,362 representing the excess of this amount
over the adjusted cost basis of the Senior Secured Notes, which
is reflected in gain (loss) on investments in the accompanying
consolidated statement of operations during the three and six
months ended June 30, 2010.
During the three months ended June 30, 2010, the Company
also sold all of its other remaining investments for $5,379 and
recorded a gain of $3,917 representing the excess of the cash
received over the cost basis, which is reflected in gain (loss)
on investments in the accompanying consolidated statement of
operations during the three and six months ended June 30,
2010.
The Company also holds an investment in a privately held company
which is carried at cost, and is 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 consolidated
balance sheets.
The following table presents the carrying value and estimated
fair value of the Companys convertible notes that are
carried at historical cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
December 31, 2009
|
|
|
Carrying Amount
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.75% Notes(a)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
264,583
|
|
|
$
|
296,002
|
|
31/8% Notes(a)
|
|
|
112,414
|
|
|
|
159,911
|
|
|
|
227,659
|
|
|
|
284,716
|
|
|
|
|
(a)
|
|
Fair value estimate incorporates
bid price quotes.
|
16
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Non-Recourse
Credit Facilities
On May 6, 2008, the Company entered into two substantially
similar non-recourse credit facilities (the 2008 Credit
Facilities) secured by its ARS holdings (including, in
some circumstances, interest payable on the ARS holdings), that
would have allowed the Company to borrow up to 75% of the face
amount of the ARS holdings pledged as collateral under the 2008
Credit Facilities. No borrowings were made under the 2008 Credit
Facilities. On April 28, 2009, the Company entered into
amended and restated credit facilities (the 2009 Credit
Facilities), replacing the 2008 Credit Facilities.
Effective April 20, 2010, the 2009 Credit Facilities were
terminated.
The following is a summary of the changes in equity of the
Company and of the noncontrolling interest for the six months
ended June 30, 2009. No comparable table is presented for
the three and six months ended June 30, 2010 as the
Companys noncontrolling interest was eliminated in
connection with the Merger that occurred in October 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2009
|
|
|
|
Stockholders
|
|
|
Noncontrolling
|
|
|
Total
|
|
|
|
Equity
|
|
|
Interest
|
|
|
Equity
|
|
|
Balance as of the beginning of period
|
|
$
|
496,698
|
|
|
$
|
134,223
|
|
|
$
|
630,921
|
|
Comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(11,262
|
)
|
|
|
997
|
|
|
|
(10,265
|
)
|
Net change in unrealized losses on securities
|
|
|
(12,760
|
)
|
|
|
(981
|
)
|
|
|
(13,741
|
)
|
Foreign currency translation adjustment
|
|
|
183
|
|
|
|
|
|
|
|
183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive (loss) income
|
|
|
(23,839
|
)
|
|
|
16
|
|
|
|
(23,823
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock for option exercises and other issuances
|
|
|
15,021
|
|
|
|
3,173
|
|
|
|
18,194
|
|
Stock-based compensation expense
|
|
|
7,291
|
|
|
|
11,646
|
|
|
|
18,937
|
|
Repurchases of
31/8%
convertible notes, net of tax
|
|
|
(3,544
|
)
|
|
|
|
|
|
|
(3,544
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of the end of period
|
|
$
|
491,627
|
|
|
$
|
149,058
|
|
|
$
|
640,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
Comprehensive
Income (Loss)
|
Comprehensive income (loss) is comprised of net (loss) income
and other comprehensive income (loss). Other comprehensive
income (loss) includes foreign currency translation adjustments
and certain changes in equity that are excluded from net income
(loss), such as changes in unrealized losses on securities. The
following table presents the components of comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Foreign currency translation gains
|
|
$
|
|
|
|
$
|
901
|
|
|
$
|
|
|
|
$
|
183
|
|
Unrealized gains (losses) on securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses)
|
|
|
|
|
|
|
(2,177
|
)
|
|
|
13,177
|
|
|
|
(12,760
|
)
|
Unrealized (gains) losses recognized in earnings
|
|
|
(5,260
|
)
|
|
|
|
|
|
|
24,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income
|
|
|
(5,260
|
)
|
|
|
(1,276
|
)
|
|
|
37,425
|
|
|
|
(12,577
|
)
|
Net income (loss)
|
|
|
7,684
|
|
|
|
(11,677
|
)
|
|
|
3,894
|
|
|
|
(11,262
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
2,424
|
|
|
$
|
(12,953
|
)
|
|
$
|
41,319
|
|
|
$
|
(23,839
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
8.
|
Stock
Repurchase Program and 2010 Tender Offer
|
On December 4, 2008, the Company announced the
authorization of a stock repurchase program (the
Program), at which time the Company was authorized
to use up to $30,000 to purchase shares of WebMD common stock,
from time to time, in the open market, through block trades or
in private transactions, depending on market conditions and
other factors. During the three and six months ended
June 30, 2010, the Company repurchased 186,134 and
352,572 shares, respectively, at an aggregate cost of
$8,387 and $14,914, respectively, under the Program. There is a
total of $15,086 that remains available for repurchase under the
Program. Repurchased shares are recorded under the cost method
and are reflected as treasury stock in the accompanying
consolidated balance sheets.
On April 8, 2010, the Company completed a tender offer
through which it repurchased 5,172,204 shares of WebMD
common stock at a price of $46.80 per share for total
consideration of $242,795 which includes $736 of costs directly
attributable to the purchase.
Intangible assets subject to amortization consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
(15,728
|
)
|
|
$
|
226
|
|
|
|
0.5
|
|
|
$
|
15,954
|
|
|
$
|
(15,482
|
)
|
|
$
|
472
|
|
|
|
1.0
|
|
Customer relationships
|
|
|
34,057
|
|
|
|
(17,714
|
)
|
|
|
16,343
|
|
|
|
7.9
|
|
|
|
34,057
|
|
|
|
(16,374
|
)
|
|
|
17,683
|
|
|
|
8.3
|
|
Technology and patents
|
|
|
14,700
|
|
|
|
(14,700
|
)
|
|
|
|
|
|
|
|
|
|
|
14,700
|
|
|
|
(14,700
|
)
|
|
|
|
|
|
|
|
|
Trade names-definite lives
|
|
|
6,030
|
|
|
|
(2,897
|
)
|
|
|
3,133
|
|
|
|
5.9
|
|
|
|
6,030
|
|
|
|
(2,629
|
)
|
|
|
3,401
|
|
|
|
6.4
|
|
Trade names-indefinite lives
|
|
|
4,464
|
|
|
|
|
|
|
|
4,464
|
|
|
|
n/a
|
|
|
|
4,464
|
|
|
|
|
|
|
|
4,464
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
75,205
|
|
|
$
|
(51,039
|
)
|
|
$
|
24,166
|
|
|
|
|
|
|
$
|
75,205
|
|
|
$
|
(49,185
|
)
|
|
$
|
26,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 $777 and $1,854 during the three and
six months ended June 30, 2010, respectively and $1,682 and
$3,440 during the three and six months ended June 30, 2009,
respectively. Aggregate amortization expense for intangible
assets is estimated to be:
|
|
|
|
|
Year Ending December 31:
|
|
|
|
|
2010
(July 1stto
December 31st)
|
|
$
|
1,540
|
|
2011
|
|
|
2,627
|
|
2012
|
|
|
2,627
|
|
2013
|
|
|
2,627
|
|
2014
|
|
|
2,627
|
|
Thereafter
|
|
|
7,654
|
|
|
|
10.
|
Commitments
and Contingencies
|
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 improprieties relating to Medical Manager
Corporation, a predecessor of HLTH (by its merger into HLTH in
18
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. (EPS), a subsidiary that HLTH sold to Sage
Software in September 2006 (the EPS Sale). HLTH and
the Company have been fully 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 has been
continued as a committee of the Board of Directors of the
Company following the 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 and the Company assumed that obligation in the Merger.
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 ten 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 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. Four of the defendants have been dismissed from the
case and two defendants were severed from the case and their
cases were transferred to Tampa, Florida. In addition,
Mr. Singer has entered into a Deferred Prosecution
Agreement with the United States pursuant to which all charges
were dismissed against Mr. Singer on July 26, 2010.
The trial of John Kang and John Sessions, former officers
of Medical Manager Health Systems, began on January 19,
2010 and on March 1, 2010 both men were found guilty by the
jury; however, the Court set the verdict aside on May 27,
2010 and entered a judgment of acquittal. The government entered
a notice of appeal with respect to the Courts order and
such appeal is pending. The trial of the remaining two
defendants was scheduled to begin on October 4, 2010;
however, on July 9, 2010 the Court in Tampa placed the case
against those defendants on hold pending resolution of the
appeal of the South Carolina ruling.
19
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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.
HLTH had (and the Company has assumed in the Merger) certain
indemnity obligations to advance amounts for reasonable defense
costs for the former officers and directors of EPS. For the
years ended December 31, 2009, 2008 and 2007, the Company
recorded pre-tax charges of $14,367, $29,078 and $73,347,
respectively, related to its estimated liability with respect to
these indemnity obligations. See Note 2 for a more detailed
discussion regarding these charges.
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). WebMD
succeeded to HLTH as plaintiff in this action as a result of the
Merger. HLTH was seeking an order requiring the Defendants to
advance
and/or
reimburse expenses that HLTH had incurred and expected to
continue to incur for the advancement of the reasonable defense
costs of initially ten, and now four, former officers and
directors of HLTHs former EPS subsidiary who were indicted
in connection with the Investigation described above in this
Note 10 (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 and the Company
assumed those obligations as a result of the Merger. HLTH
retained (and the Company succeeded to as a result of the
Merger) the right to assert claims and recover proceeds under
the Policies on behalf of SSHI.
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 the Company (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 the Company) such that the Synetic Policies would
only be liable to pay about $23,000 of the $96,400 total
coverage available under such policies.
20
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 the
Company 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 have been reimbursing the
Company 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 later
settled with the eighth level carrier. Under the terms of the
settlement such carrier has paid, in full and final settlement,
an
agreed-upon
percentage of the policy amount against each payment of defense
costs made by the Company as such policy was 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 was 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 the Companys
indemnification obligations. As of June 30, 2010, $84,200
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,
$62,800 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 was
obligated to indemnify. 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. The Company and the
carriers who issued the Emdeon Policies (with the exception of
the second level carrier with whom the Company has settled) each
appealed the trial Courts August 31, 2009 rulings to
the Supreme Court of Delaware and, on April 22, 2010, the
Supreme Court decided both appeals in favor of the carriers who
issued the Emdeon Policies. The implication of this decision is
that the Company has effectively exhausted its insurance with
respect to its obligation to indemnify the indicted individuals.
The insurance carriers assert that the Companys 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 the Company, although the amounts that the Company has
received in settlement from certain carriers is not subject to
being repaid. The Company 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.
21
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In addition to the Coverage Litigation, on December 22,
2009, TIG Specialty Insurance Company (TIG), the
second level issuer of the EPS Policies, commenced an action
against the Company (the TIG Action) to recover the
$5,000 that TIG advanced to the Company in 2006. The Company has
not yet answered the TIG Action but intends to vigorously defend
its rights.
There can be no assurance that the Company will ultimately
prevail in the TIG Action. The Company intends to continue to
satisfy its legal obligations to the indicted individuals with
respect to advancement of amounts for their defense costs.
Roger
H. Kaye and Roger H. Kaye, MD PC v. WebMD, LLC, et
al.
In December 2009, a lawsuit was filed by Dr. Roger H. Kaye
(and Roger H. Kaye MD PC) individually, and as an alleged class
action, under the Telephone Consumer Protection Act (the
TCPA) and under a similar Connecticut statute, in
the U.S. District Court for the District of Connecticut
against subsidiaries of the Company. The lawsuit claims that
faxes allegedly sent during the period August 1, 2006 to
the present by subsidiaries of the Company and by The Little
Blue Book business that the Company sold in September 2009 were
sent in violation of the TCPA and the Connecticut statute. With
respect to the TCPA claims, the lawsuit seeks statutory damages
in excess of $5,000 for each of two classes of plaintiffs, and a
trebling of those damages. With respect to the claims under the
Connecticut statute, under which trebling is unavailable, the
lawsuit additionally seeks an undetermined amount of damages. In
April 2010, Plaintiffs filed an amended complaint making
substantially the same claims as were asserted in the original
complaint. The Companys subsidiaries have filed their
answer as well as a motion to dismiss the action with prejudice
on the grounds that the Court lacks subject matter jurisdiction
and also filed a motion to stay discovery, which was granted
pending resolution of the motion to dismiss. On July 8,
2010, the Court denied the motion to dismiss and ordered that
class-related
discovery should proceed, while continuing a stay of full merits
discovery. The Court has further ordered the parties to submit a
joint
class-related
discovery plan and schedule by August 23, 2010, targeted
toward determining whether the case should proceed as a class
action. The Company intends to vigorously defend this action.
Other
Legal Proceedings
In the normal course of business, the Company and its
subsidiaries are involved in various 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 2009 Annual
Report on
Form 10-K,
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.
|
|
11.
|
Stock-Based
Compensation
|
Prior to the Merger on October 23, 2009, HLTH had various
stock-based compensation plans (collectively, the HLTH
Plans) under which directors, officers and other eligible
employees received awards of options to purchase HLTH common
stock and restricted shares of HLTH common stock. WebMD also had
similar stock-based compensation plans (the WebMD
Plans) that provide for the grant of stock options,
restricted stock awards, and other awards based on WebMD common
stock. In connection with the Merger, all outstanding stock
options and restricted stock awards under the HLTH Plans were
converted into outstanding stock options and restricted stock
awards of WebMD based on the Merger exchange ratio of 0.4444.
The HLTH Plans and the WebMD Plans are referred to collectively
as the Plans below.
The 2005 Long-Term Incentive Plan (as amended, the 2005
Plan) is the only plan under which future grants can be
made. The maximum number of shares of the Companys common
stock that may be subject to awards under the 2005 Plan was
15,600,000 as of June 30, 2010, subject to adjustment in
accordance with the
22
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
terms of the 2005 Plan. The Company had an aggregate of
1,509,160 shares of common stock available for future
grants under the 2005 Plan at June 30, 2010.
Stock
Options
Generally, options under the 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, and generally expire within ten
years from the date of grant. Options are granted at prices not
less than the fair market value of the Companys common
stock on the date of grant. The following table summarizes stock
option activity for the Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise Price
|
|
|
Contractual Life
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
per Share
|
|
|
(In Years)
|
|
|
Value(1)
|
|
|
Outstanding at January 1, 2010
|
|
|
22,428,953
|
|
|
$
|
29.67
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,620,250
|
|
|
|
45.33
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(8,206,352
|
)
|
|
|
28.77
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(1,812,890
|
)
|
|
|
60.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2010
|
|
|
14,029,961
|
|
|
$
|
28.02
|
|
|
|
7.0
|
|
|
$
|
260,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at the end of the period
|
|
|
6,915,860
|
|
|
$
|
25.65
|
|
|
|
5.2
|
|
|
$
|
145,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The aggregate intrinsic value is
based on the market price of the Companys common stock on
June 30, 2010, which was $46.43, 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 June 30, 2010.
|
The fair value of each option granted is estimated on the date
of grant using the Black-Scholes option pricing model
considering the weighted average assumptions noted in the
following table. Expected volatility is based on implied
volatility from traded options of the Companys common
stock combined with historical volatility of the Companys
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 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.
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2010
|
|
2009
|
|
Expected dividend yield
|
|
0.0%
|
|
0.0%
|
Expected volatility
|
|
0.35
|
|
0.38-.057
|
Risk-free interest rate
|
|
1.47%
|
|
1.42%
|
Expected term (years)
|
|
3.5
|
|
3.5
|
Weighted average fair value of options granted during the period
|
|
$11.56
|
|
$8.93
|
23
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Restricted
Stock Awards
The Companys Restricted Stock consists of shares of the
Companys 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
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 the Companys
Restricted Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Balance as of January 1, 2010
|
|
|
1,106,124
|
|
|
$
|
27.51
|
|
Granted
|
|
|
262,275
|
|
|
|
46.48
|
|
Vested
|
|
|
(144,276
|
)
|
|
|
25.53
|
|
Forfeited
|
|
|
(14,106
|
)
|
|
|
24.60
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2010
|
|
|
1,210,017
|
|
|
$
|
31.89
|
|
|
|
|
|
|
|
|
|
|
Proceeds received from the exercise of stock options were
$19,890 and $48,114 for the three and six months ended
June 30, 2010, respectively, and $11,187 and $18,591 for
the three and six months ended June 30, 2009, respectively.
Additionally, the Company made payments of $17,279 and $39,728
for the three and six months ended June 30, 2010,
respectively, and $34 and $397 for the three and six months
ended June 30, 2009, respectively, related to employee
withholding taxes that were satisfied by withholding shares of
common stock of equal value, in connection with the exercise of
certain stock options and the vesting of restricted stock. The
proceeds and payments described above are reflected within cash
flows from financing activities within the accompanying
consolidated statements of cash flows.
The intrinsic value related to stock options that were
exercised, combined with the fair value of shares of restricted
stock that vested, was $40,450 and $132,701 for the three and
six months ended June 30, 2010, respectively, and $4,303
and $7,892 for the three and six months ended June 30,
2009, respectively.
Other
The Company issues shares of its common stock to each WebMD
non-employee director with a value equal to their annual board
and committee retainers. During 2009, the Company issued the
shares on the date of the Merger, October 23, 2009. The
Company recorded stock-based compensation expense of $94 and
$186 for the three and six months ended June 30, 2010,
respectively and $85 and $170 for the three and six months ended
June 30, 2009, respectively, in connection with these
issuances.
24
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Summary
of Stock-Based Compensation Expense
The following table summarizes the components and classification
of stock-based compensation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
4,779
|
|
|
$
|
6,932
|
|
|
$
|
10,514
|
|
|
$
|
13,548
|
|
Restricted stock
|
|
|
2,022
|
|
|
|
2,601
|
|
|
|
3,980
|
|
|
|
5,368
|
|
Other
|
|
|
163
|
|
|
|
104
|
|
|
|
307
|
|
|
|
192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
6,964
|
|
|
$
|
9,637
|
|
|
$
|
14,801
|
|
|
$
|
19,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations
|
|
$
|
1,475
|
|
|
$
|
1,555
|
|
|
$
|
3,264
|
|
|
$
|
3,178
|
|
Sales and marketing
|
|
|
1,689
|
|
|
|
2,001
|
|
|
|
3,882
|
|
|
|
3,551
|
|
General and administrative
|
|
|
3,800
|
|
|
|
5,856
|
|
|
|
7,655
|
|
|
|
11,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income from continuing operations
|
|
|
6,964
|
|
|
|
9,412
|
|
|
|
14,801
|
|
|
|
18,566
|
|
Consolidated income from discontinued operations
|
|
|
|
|
|
|
225
|
|
|
|
|
|
|
|
542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
6,964
|
|
|
$
|
9,637
|
|
|
$
|
14,801
|
|
|
$
|
19,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010, approximately $77,500 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 3.1 years, related
to the Plans.
Tax benefits attributable to stock-based compensation
represented approximately 39% of stock-based compensation
expense for all periods presented.
|
|
12.
|
Other
Income (Expense), Net
|
Other income (expense), net consists of the following items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Transition service fees(a)
|
|
$
|
|
|
|
$
|
6
|
|
|
$
|
|
|
|
$
|
70
|
|
Reduction of tax contingencies(b)
|
|
|
178
|
|
|
|
245
|
|
|
|
356
|
|
|
|
490
|
|
Legal expense(c)
|
|
|
(79
|
)
|
|
|
(803
|
)
|
|
|
(555
|
)
|
|
|
(1,381
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
$
|
99
|
|
|
$
|
(552
|
)
|
|
$
|
(199
|
)
|
|
$
|
(821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Represents the net fees received
from ViPS and EBSCo (businesses previously sold by the Company)
in relation to their respective transition services agreements.
|
|
(b)
|
|
Represents the reduction of certain
sales and use tax contingencies resulting from the expiration of
various statutes.
|
|
(c)
|
|
Represents the costs and expenses
incurred by the Company related to the investigation by the
United States Attorney for the District of South Carolina and
the SEC and the related Coverage Litigation.
|
On August 5, 2010, the Company announced its intention to
commence a tender offer to purchase up to 3,000,000 shares of
its common stock at a price of $50.00 per share. The Company
would use cash of $150,000 if all 3,000,000 shares are tendered
at a price of $50.00 per share.
25
|
|
ITEM 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
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:
|
|
|
|
|
Introduction. This section provides a general
description of our company, background information on certain
trends, transactions and other developments affecting our
company and a discussion of how seasonal factors may impact the
timing of our revenue.
|
|
|
|
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 our Annual Report on
Form 10-K
for the year ended December 31, 2009 filed with the
Securities and Exchange Commission (which we refer to as the
SEC).
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
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 June 30,
2010.
|
|
|
|
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.
|
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, mobile applications 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 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 generate revenue from our public
portals primarily through the sale of advertising and
sponsorship products, including CME services. We also provide
mobile health
26
information applications for use by consumers and physicians. We
also provide
e-detailing
promotion and physician recruitment services, information
services and provide print services including the publication of
WebMD the Magazine, a consumer magazine distributed to
physician office waiting rooms. The sponsors and advertisers of
our public portals 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. In addition, we offer clients of our private portals
telephonic health coaching services on a per participant basis
across an employee or plan population. We generate revenue from
our private portals through the licensing of these portals and
related services to employers and health plans either directly
or through distributors.
Background
Information on Certain 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:
|
|
|
|
|
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.
|
|
|
|
|
|
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. According to a study of health
information technology by the National Center for Health
Statistics of the Centers for Disease Control and Prevention (or
CDC), approximately 51% of United States adults aged
18-64 had
used the Internet to look up health information during the prior
12 months, based on a survey conducted in the first half of
2009. According to a June 2009 study by the Pew
Internet & American Life Project, 61% of
U.S. adults have searched for health information on the
Internet (compared to 25% in a similar study in 2000) and
approximately 37% of U.S. adults have accessed social media
related to health.
|
|
|
|
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.
|
|
|
|
|
|
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 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 and regulatory conditions
and the following:
|
|
|
|
|
|
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.
|
|
|
|
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
|
27
|
|
|
|
|
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 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.
|
|
|
|
|
Use of Health and Benefits Management
Applications. In a healthcare market where a
greater share of the responsibility for healthcare costs and
decision-making has been 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 and being
able to demonstrate a sufficient return on investment and other
benefits for our private portals clients from those services.
Increasing usage of our private portal services requires us to
continue to 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 that have been adversely affected by
general economic conditions, 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.
|
|
|
|
Developments in Social Media and Other Internet
Applications. In the past several years, video
and multimedia applications have become an increasingly
important part of what users expect from Internet sites. In
addition, consumers are increasingly using the Internet to
access social media as a means to communicate and exchange
information, including regarding health and wellness. Similarly,
physicians and other healthcare professionals are increasingly
participating in condition or topic specific community groups
and other interactive applications. Consumers and healthcare
professionals are also increasingly using handheld devices to
access the Internet, with physicians increasingly using handheld
devices in diagnosis and treatment at the point of care. We have
invested and intend to continue to invest in software and
systems that allow us to meet the demands of our users and
sponsors, including customized content management and publishing
technology to deliver interactive content, multimedia
programming and personalized health applications that engage our
users. The following are some of our recent and current
initiatives to improve the user experience on our Web sites,
expand our services and increase our user base:
|
|
|
|
|
|
Physician Connect, our social networking platform for
physicians, allows them to exchange information online on a
range of topics, including patient care, drug information,
healthcare-related legislation and practice management.
Physicians can also create polls to elicit tailored,
constructive feedback from other physicians. We also offer third
parties the opportunity to sponsor Physician Connect discussions
and polls so that they can gain insights into physicians
perspectives and areas of interest. By the end of 2009,
Physician Connect had attracted more than 120,000 physician
members. Medscape from WebMD also offers a variety of
sponsored and unsponsored blogs where healthcare professionals
can share their thoughts and opinions with the Medscape from
WebMD community.
|
|
|
|
In March 2010, we launched The WebMD Community, a social
networking initiative that gives consumers the ability to
connect with health experts and with other WebMD members to
exchange information, experiences and support. The WebMD
Community is being integrated throughout each of the core
content areas of WebMD.com, giving members the ability to safely
and easily connect
|
28
|
|
|
|
|
with others on topics that are most relevant to them. In
addition to expert-led communities, members are empowered to
create their own communities and to exchange information with
other users. The WebMD Community also enables third party
sponsors to create branded experiences and to host consumer
discussions on specific health and wellness topics most
important to them.
|
|
|
|
|
|
Medscape Mobile is a free medical application for physicians
that includes Medscapes specialty-specific news,
comprehensive drug information and clinical reference tools.
Medscape Mobile also includes CME activities organized by
specialty and designed for use on a mobile device. Medscape
Mobile was launched for
iPhone®
and iPod
touch®
users in 2009. In April 2010, Medscape Mobile was launched on
the
Blackberry®
platform. Medscape Mobile has attracted over 400,000 users to
date.
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WebMD Mobile is a free consumer application that allows
consumers to access certain WebMD tools on an iPhone, including
Symptom Checker, First Aid, and Pill Identifier applications, as
well as other health information. It has been downloaded nearly
two million times since launch and is the leading free
health application in the iTunes Store. During the second
quarter of 2010, we launched WebMD Mobile for the
iPad®
and it has been downloaded over 400,000 times to date.
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We are pursuing opportunities to expand the reach of our brands
outside the United States. In October 2009, we launched our
first major consumer portal outside the United States in
partnership with Boots, the UKs leading pharmacy-led
health and beauty retailer.
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Healthcare Reform Legislation. The Patient
Protection and Affordable Care Act, as amended by the Health
Care and Education Reconciliation Act of 2010 (which we refer to
as the Reform Legislation), was signed into law in March 2010.
The Reform Legislation makes extensive changes to the current
system of healthcare insurance and benefits. In general, the
Reform Legislation seeks to reduce healthcare costs and decrease
the number of uninsured legal U.S. residents by, among
other things, requiring individuals to carry, and certain
employers to offer health insurance or be subject to penalties.
The Reform Legislation also imposes new regulations on health
insurers, including guaranteed coverage requirements,
prohibitions on certain annual and all lifetime limits on
amounts paid on behalf of or to plan members, increased
restrictions on rescinding coverage, establishment of minimum
medical loss ratio requirements, a requirement to cover
preventive services on a first dollar basis, the establishment
of state insurance exchanges and essential benefit packages, and
greater limitations on how health insurers price certain of
their products. The Reform Legislation also contains provisions
that will affect the revenues and profits of pharmaceutical and
medical device companies, including new taxes on certain sales
of their products. Many of the provisions of the Reform
Legislation that expand insurance coverage will not become
effective until 2014 and many provisions require implementing
regulations and interpretive guidance to be issued before they
will be fully implemented. In addition, it is difficult to
foresee how individuals and businesses will respond to the
choices available to them under the Reform Legislation.
Furthermore, the Reform Legislation will result in future state
legislative and regulatory changes, which we are unable to
predict at this time, in order for states to comply with certain
provisions of the Reform Legislation and to participate in
grants and other incentive opportunities. In addition, several
states have filed lawsuits challenging the constitutionality of
certain provisions of the Reform Legislation. Accordingly, while
we do not currently anticipate any significant adverse effects
on WebMD as a direct result of application of the Reform
Legislation to our businesses or on our company in its capacity
as an employer, we are unable to predict what the indirect
impacts of the Reform Legislation will be on WebMDs
businesses through its effects on other healthcare industry
participants, including pharmaceutical and medical device
companies that are advertisers and sponsors of our public
portals and employers and health plans that are clients of our
private portals. However, we believe that certain aspects of the
Reform Legislation and future implementing regulations that seek
to reduce healthcare costs may create opportunities for WebMD,
including with respect to our 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. We cannot yet
determine the scope of any such opportunities or what
competition we may face in our efforts to pursue such
opportunities.
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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.
Background
Information on Certain Transactions and Other Significant
Developments
Merger with HLTH. From the completion of our
initial public offering until the completion of our merger with
HLTH Corporation (which we refer to as HLTH) on October 23,
2009 (which we refer to as the Merger), WebMD was more than 80%
owned by HLTH. On October 23, 2009, stockholders of HLTH
and WebMD approved the Merger and the transaction was completed
later that day, with HLTH merging into WebMD and WebMD
continuing as the surviving corporation. WebMD automatically
succeeded to all of HLTHs assets, liabilities and
commitments upon completion of the Merger (other than the shares
of WebMD Class B common stock owned by HLTH which were
cancelled in the Merger). In the Merger, each share of HLTH
common stock was converted into 0.4444 shares of WebMD
common stock. The shares of WebMDs Class A common
stock were unchanged in the 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 Merger eliminated both
WebMDs Class B common stock and the dual-class stock
structure that had existed at 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.
WebMD was the only operating business of HLTH at the time the
Merger closed. Accordingly, the completion of the 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, 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 Merger.
The applicable accounting treatment for the Merger resulted in
HLTH being considered the acquiring entity of the WebMD
non-controlling interest. Accordingly, the pre-acquisition
consolidated financial statements of HLTH became the historical
financial statements of WebMD following the completion of the
Merger, adjusted as described in the next paragraph.
Accordingly, in this MD&A, WebMD (or the use of
we, our, or similar words) refers not
only to WebMD itself but also, where the context requires, to
HLTH. The specific names of HLTH and WebMD are used only where
there is a need to distinguish between the legal entities. In
addition, all references in this MD&A to amounts of shares
of HLTH common stock and to market prices or purchase prices for
HLTH common stock have been adjusted to reflect the 0.4444
exchange ratio in the Merger (which we refer to as the Exchange
Ratio) and are expressed as the number of shares of WebMD common
stock into which the HLTH common stock would be converted in the
Merger and the equivalent price per share of WebMD common stock.
Similarly, the exercise price of options and warrants to
purchase HLTH common stock and the number of shares subject to
those options and warrants have been adjusted to reflect the
Exchange Ratio.
In our financial statements for the three and six months ended
June 30, 2009 included in this Quarterly Report: the
weighted-average shares outstanding used in computing income
(loss) per common share for the three and six months ended
June 30, 2009 have been adjusted by multiplying the
historical weighted-average shares outstanding for HLTH by the
Exchange Ratio; and basic and diluted income (loss) per common
share have been recalculated to reflect the adjusted
weighted-average shares.
Repurchase and Conversion of Convertible
Notes. During the three and six months ended
June 30, 2010, we repurchased $32,446 principal amount of
our 1.75% Convertible Subordinated Notes Due 2023 (which we
refer to as the 1.75% Notes) for $42,107 in cash and the
holders of the 1.75% Notes converted
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$232,137 principal amount into 6,703,129 shares of WebMD
common stock. The majority of these conversions occurred
following a Notice of Redemption that we delivered in May 2010.
Also during the three and six months ended June 30, 2010,
we repurchased $12,869 and $32,176 principal amount of our
31/8% Convertible
Notes due 2025 (which we refer to as the
31/8% Notes)
for $16,690 and $39,255 in cash, respectively, and the holders
of the
31/8% Notes
converted $12,700 and $96,627 principal amount into 362,586 and
2,758,715 shares of WebMD common stock, respectively. We
recognized an aggregate pre-tax loss of $11,011 and $14,738
related to the repurchase of the 1.75% Notes and the
repurchase and conversions of the
31/8% Notes
during the three and six months ended June 30, 2010,
respectively. The loss includes the expensing of remaining
deferred issuance costs outstanding related to the repurchased
and converted notes.
As a result of the conversion and repurchase activity described
above, as of June 30, 2010, the only convertibles notes
that remained outstanding were $121,497 principal amount of the
31/8% Notes,
which were convertible into approximately 3.5 million
shares of WebMD common stock.
Tender Offers. On April 8, 2010, we
completed a tender offer for our common stock and repurchased
5,172,204 shares at a price of $46.80 per share. In this
MD&A, we refer to this tender offer as the 2010 Tender
Offer. The total cost of the 2010 Tender Offer was $242,795,
which includes $736 of costs directly attributable to the
purchase. On December 10, 2009, we completed a tender offer
for our common stock and repurchased 6,339,227 shares at a
price of $37.00 per share. In this MD&A, we refer to this
tender offer as the 2009 Tender Offer (and, together with the
2010 Tender Offer, as the Tender Offers). The total cost of the
2009 Tender Offer was $235,220, which includes $670 of costs
directly attributable to the purchase. The Tender Offers
represented an opportunity for WebMD to return capital to
stockholders who elected to tender their shares of WebMD common
stock, while stockholders who chose not to participate in the
Tender Offers automatically increased their relative percentage
interest in our company at no additional cost to them.
Additionally, on August 5, 2010, we announced our intention
to commence another tender offer to purchase up to
3 million shares of our common stock at a price of $50.00
per share. We expect to complete this tender offer by September
2010, subject to a number of terms and conditions.
Sale of Porex; Senior Secured Notes. SNTC
Holding, Inc., a wholly-owned subsidiary of our company, entered
into a stock purchase agreement, dated as of September 17,
2009, for the sale of our Porex business (which we refer to as
Porex) for which we received $74,378 in cash at closing,
received $67,500 in senior secured notes (which we refer to as
the Senior Secured Notes) and incurred approximately $4,900 of
transaction expenses. The sale was completed on October 19,
2009. During the three months ended March 31, 2010, we also
paid $1,430 to Porex related to the finalization of a customary
working capital adjustment. On April 1, 2010, we sold the
Senior Secured Notes to their issuer for $65,475 (which
represented 97% of the aggregate principal amount) plus accrued
interest through that date. We recognized a pre-tax gain of
$1,362 related to the sale of the Senior Secured Notes during
the three months ended June 30, 2010.
Auction Rate Securities. Effective
April 20, 2010, we entered into an agreement pursuant to
which we sold our holdings of auction rate securities (which we
refer to as ARS), for an aggregate of $286,399. Under the terms
of the agreement, we retained the right (which we refer to as
the Repurchase Right), for a period of two years from the date
of the agreement: (a) to repurchase from the purchaser the
same principal amount of any or all of the various series of ARS
sold at the agreed upon purchase prices received on
April 20, 2010; and (b) to receive from the purchaser
additional proceeds upon certain redemptions of the various
series of ARS sold. As a result, during the three months ended
March 31, 2010, we recorded a charge of $28,848,
representing the difference between the adjusted cost basis of
our ARS holdings and the proceeds received on April 20,
2010, which includes an offsetting amount of $660 related to the
initial value of the Repurchase Right. Additionally, during the
three months ended June 30, 2010, we recorded an additional
gain of $369 related to an increase in the value of the
Repurchase Right and realized $354 related to the receipt of
additional proceeds of certain redemptions of the ARS we sold in
connection with the Repurchase Right.
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). WebMD
succeeded
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to HLTH as plaintiff in this action as a result of the Merger.
HLTH was seeking an order requiring the Defendants to advance
and/or
reimburse expenses that HLTH has incurred and expected to
continue to incur for the advancement of the reasonable defense
costs of initially ten, and now four, 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 (which we refer to as the
Investigation) described in Note 10, Commitments and
Contingencies located in the Notes to the consolidated
financial statements included in this Quarterly Report.
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 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 and we
assumed those obligations as a result of the Merger. HLTH
retained (and we succeeded to as a result of the Merger) the
right to assert claims and recover proceeds under the Policies
on behalf of SSHI.
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 us (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 us) 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 we are 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 have
been reimbursing us for our 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 later
settled with the eighth level carrier. Under the terms of the
settlement such carrier has paid, in full and final settlement,
an
agreed-upon
percentage of the policy amount against each payment of defense
costs made by us as such policy was 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 was 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 we successfully appeal 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 our indemnification
obligations. As of June 30, 2010, $84,200 has been paid by
insurance companies representing the EPS Policies and the
Synetic
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Policies through a combination of payment under the terms of the
Policies, payment under reservation of rights or through
settlement. Of this amount, $62,800 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
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 was
obligated to indemnify. 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. We and the carriers who
issued the Emdeon Policies (with the exception of the second
level carrier with whom we have settled) each appealed the trial
Courts August 31, 2009 rulings to the Supreme Court
of Delaware and, on April 22, 2010, the Supreme Court
decided both appeals in favor of the carriers who issued the
Emdeon Policies. The implication of this decision is that we
have effectively exhausted our insurance with respect to our
obligation to indemnify the indicted individuals.
The insurance carriers assert that our 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 us, although
the amounts that we have received in settlement from certain
carriers is not subject to being repaid. We have 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.
In addition to the Coverage Litigation, on December 22,
2009, TIG Specialty Insurance Company (which we refer to as
TIG), the second level issuer of the EPS Policies, commenced an
action against us (which we refer to as the TIG Action) to
recover the $5,000 that TIG advanced to us in 2006. We have not
yet answered the TIG Action but intend to vigorously defend our
rights.
There can be no assurance that we will ultimately prevail in the
TIG Action. We intend to continue to satisfy our legal
obligations to the indicted individuals with respect to
advancement of amounts for their defense costs.
Indemnification Obligations to Former Officers and Directors
of EPS. HLTH has certain indemnity obligations to
advance amounts for reasonable defense costs for initially ten,
and now four, former officers and directors of EPS, who were
indicted in connection with the Investigation. In connection
with the sale of EPS, HLTH agreed to indemnify Sage Software
relating to these indemnity obligations and we also assumed that
obligation in the Merger. During 2007, based on information
available at that time, we determined a reasonable estimate of
the range of probable costs with respect to our indemnification
obligation and accordingly, recorded an aggregate pre-tax charge
of $73,347, which represented our estimate of the low end of the
probable range of costs related to this matter. We reserved the
low end of the probable range of costs because no estimate
within the range was a better estimate than any other amount.
That estimate included assumptions as to the duration of the
trial and pre-trial periods, and the defense costs to be
incurred during these periods. During 2008 and 2009, we updated
the estimated range of our indemnification obligation based on
new information received during those periods, and as a result,
recorded additional pre-tax charges of $29,078 and $14,367,
respectively. As described in more detail above, two of the
former officers and directors of EPS were found guilty however
the Court set the verdict aside on May 27, 2010 and entered
a judgment of acquittal. The government entered a notice of
appeal with respect to the Courts order and such appeal is
pending. Two other former officers of EPS are awaiting trial in
Tampa, Florida, which was scheduled to begin on October 4,
2010; however, on July 9, 2010 the Court in Tampa placed
the case against those defendants on hold pending resolution of
the appeal of the South Carolina ruling. As of June 30,
2010, the remaining accrual with respect to the costs for these
matters was $9,852 and is included within liabilities of
discontinued operations on the accompanying consolidated balance
sheet. The ultimate outcome of this matter is still uncertain
and, accordingly, the amount of cost we may ultimately incur
could be substantially more than the
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reserve we have currently provided. If the recorded reserves are
insufficient to cover the ultimate cost of this matter, we will
need to record additional charges to our results of operations
in future periods.
Seasonality
The timing of our revenue is affected by seasonal factors. Our
public portal advertising and sponsorship revenue 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 consolidated
financial statements requires us to make estimates and
assumptions that affect the amounts reported in the 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 the 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 the 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 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 long-lived assets (including
goodwill and indefinite lived intangible assets), the
amortization period of long-lived assets (excluding goodwill and
indefinite lived intangible assets), the carrying value,
capitalization and amortization of software and Web site
development costs, the carrying value of investments, the
provision for income taxes and related deferred tax accounts,
certain accrued liabilities, contingencies, litigation and
related legal accruals and the value attributed to employee
stock options and other stock-based awards.
We believe the following reflects our critical accounting
policies and our more significant judgments and estimates used
in the preparation of our 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,
information services 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 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 fair value using exit price
and market participant view, such as discounted cash flow and
replacement cost models. Our long-lived assets, excluding
goodwill and indefinite lived intangible assets, are amortized
over their estimated useful
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lives, which we determine 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 and
indefinite lived intangible assets, whenever indicators of
impairment are present. We evaluate the carrying value of
goodwill and indefinite lived intangible assets annually, or
whenever indicators of impairment are present. We use a
discounted cash flow approach to determine the fair value of
goodwill and indefinite lived intangible assets. Long-lived
assets held for sale are reported at the lower of cost or fair
value less cost to sell. There was no impairment of goodwill or
indefinite lived intangible assets noted as a result of our
impairment testing in 2009 for any of our continuing operations.
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Fair Value of Investments. Through
April 20, 2010, we held investments in ARS which were
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
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 our ARS holdings develop.
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We estimated the fair value of our 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 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.
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 had been used for the various inputs to the
valuation approach including, but not limited to, assumptions
involving the estimated lives of the ARS holdings, 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 in prior periods could have been
significantly higher or lower than the fair value we determined.
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Stock-Based Compensation. Effective
January 1, 2006, we adopted 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.
Unvested stock options and restricted stock awards that were
granted prior to January 1, 2006 continued 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. As of
June 30, 2010, there was approximately $77.5 million
of unrecognized stock-based compensation expense (net of
estimated forfeitures) related to unvested stock options and
restricted stock awards held by employees, which is expected to
be recognized over a weighted-average period of approximately
3.1 years, related to our stock-based compensation plans.
|
35
|
|
|
|
|
Deferred Tax Assets. Our deferred tax assets
are comprised primarily of net operating loss carryforwards.
These net operating 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 net deferred tax assets, including the portion related to
excess tax benefits of stock-based awards, are reserved for by a
valuation allowance as required by relevant accounting
literature. The remaining portion of our net deferred tax assets
are no longer reserved for by a valuation allowance. Management
determines the need for a valuation allowance by assessing 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 in
the future.
|
|
|
|
Tax Contingencies. Our tax contingencies are
recorded to address potential exposures involving tax positions
we have taken that could be challenged by tax authorities. These
potential exposures result from applications of various
statutes, rules, regulations and interpretations. Our estimates
of tax contingencies reflect assumptions and judgments about
potential actions by taxing jurisdictions. We believe that these
assumptions and judgments are reasonable. However, our accruals
may change in the future due to new developments in each matter
and the ultimate resolution of these matters may be greater or
less than the amount that we have accrued. Consistent with our
historical financial reporting, we have elected to reflect
interest and penalties related to uncertain tax positions as
part of the income tax provision.
|
Recent
Accounting Pronouncements
Accounting
Pronouncements to be Adopted in the Future
In October 2009, the Financial Accounting Standards Board (which
we refer to as 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 and financial position.
36
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Revenue
|
|
$
|
122,707
|
|
|
|
100.0
|
|
|
$
|
98,631
|
|
|
|
100.0
|
|
|
$
|
230,737
|
|
|
|
100.0
|
|
|
$
|
188,895
|
|
|
|
100.0
|
|
Cost of operations
|
|
|
45,368
|
|
|
|
37.0
|
|
|
|
39,229
|
|
|
|
39.8
|
|
|
|
88,362
|
|
|
|
38.3
|
|
|
|
75,794
|
|
|
|
40.1
|
|
Sales and marketing
|
|
|
29,425
|
|
|
|
24.0
|
|
|
|
26,797
|
|
|
|
27.2
|
|
|
|
57,832
|
|
|
|
25.1
|
|
|
|
54,358
|
|
|
|
28.8
|
|
General and administrative
|
|
|
20,577
|
|
|
|
16.7
|
|
|
|
22,003
|
|
|
|
22.1
|
|
|
|
39,386
|
|
|
|
17.1
|
|
|
|
43,851
|
|
|
|
23.3
|
|
Depreciation and amortization
|
|
|
6,318
|
|
|
|
5.1
|
|
|
|
6,956
|
|
|
|
7.1
|
|
|
|
13,333
|
|
|
|
5.8
|
|
|
|
14,059
|
|
|
|
7.4
|
|
Interest income
|
|
|
420
|
|
|
|
0.3
|
|
|
|
1,958
|
|
|
|
2.0
|
|
|
|
3,829
|
|
|
|
1.7
|
|
|
|
4,220
|
|
|
|
2.2
|
|
Interest expense
|
|
|
3,170
|
|
|
|
2.6
|
|
|
|
5,781
|
|
|
|
5.9
|
|
|
|
8,309
|
|
|
|
3.6
|
|
|
|
12,317
|
|
|
|
6.5
|
|
(Loss) gain on convertible notes
|
|
|
(11,011
|
)
|
|
|
(9.0
|
)
|
|
|
3,473
|
|
|
|
3.5
|
|
|
|
(14,738
|
)
|
|
|
(6.4
|
)
|
|
|
10,120
|
|
|
|
5.4
|
|
Gain (loss) on investments
|
|
|
6,002
|
|
|
|
4.9
|
|
|
|
|
|
|
|
|
|
|
|
(22,846
|
)
|
|
|
(9.9
|
)
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
99
|
|
|
|
0.1
|
|
|
|
(552
|
)
|
|
|
(0.6
|
)
|
|
|
(199
|
)
|
|
|
(0.1
|
)
|
|
|
(821
|
)
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income tax
provision (benefit)
|
|
|
13,359
|
|
|
|
10.9
|
|
|
|
2,744
|
|
|
|
2.8
|
|
|
|
(10,439
|
)
|
|
|
(4.5
|
)
|
|
|
2,035
|
|
|
|
1.1
|
|
Income tax provision (benefit)
|
|
|
5,675
|
|
|
|
4.6
|
|
|
|
750
|
|
|
|
0.8
|
|
|
|
(14,333
|
)
|
|
|
(6.2
|
)
|
|
|
(467
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income from continuing operations
|
|
|
7,684
|
|
|
|
6.3
|
|
|
|
1,994
|
|
|
|
2.0
|
|
|
|
3,894
|
|
|
|
1.7
|
|
|
|
2,502
|
|
|
|
1.3
|
|
Consolidated loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(13,284
|
)
|
|
|
(13.4
|
)
|
|
|
|
|
|
|
|
|
|
|
(12,767
|
)
|
|
|
(6.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income (loss) inclusive of noncontrolling
interest
|
|
|
7,684
|
|
|
|
6.3
|
|
|
|
(11,290
|
)
|
|
|
(11.4
|
)
|
|
|
3,894
|
|
|
|
1.7
|
|
|
|
(10,265
|
)
|
|
|
(5.4
|
)
|
Income attributable to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
(387
|
)
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
(997
|
)
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Company stockholders
|
|
$
|
7,684
|
|
|
|
6.3
|
|
|
$
|
(11,677
|
)
|
|
|
(11.8
|
)
|
|
$
|
3,894
|
|
|
|
1.7
|
|
|
$
|
(11,262
|
)
|
|
|
(6.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, information services 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. Our customers include pharmaceutical, biotechnology,
medical device and consumer products companies, as well as
employers and health plans.
Cost of operations consists of salaries and related expenses,
and non-cash stock-based compensation expense related to
providing and distributing services and products we provide to
customers and costs associated with the operation and
maintenance of our public and private portals. Cost of
operations also consists of editorial and production costs, Web
site operations costs, non-capitalized Web site development
costs, costs we pay to our distribution partners, costs
associated with our lifestyle education and personalized
telephonic coaching services, and costs related to the
production and distribution of our publications, including costs
related to creating and licensing content, telecommunications,
leased properties and printing and distribution.
37
Sales and marketing expense consists primarily of advertising,
product and brand promotion, as well as selling expenses
including salaries and related expenses, and non-cash
stock-based compensation for account executives and account
management. These expenses include items related to salaries and
related expenses of 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.
Also included in general and administrative expense are general
insurance and costs of accounting and internal control systems
to support our operations.
Our discussions throughout MD&A make references to certain
non-cash expenses. The following is a summary of our principal
non-cash expenses:
|
|
|
|
|
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 we
issued in connection with an agreement we entered into with News
Corporation in 1999 and subsequently amended in 2000. This
non-cash advertising expense is included in sales and marketing
expense as we use the asset for promotion of our brand.
|
|
|
|
Non-cash stock-based compensation
expense. Expense related to the awards of all
share-based payments to employees and non-employee directors,
such as grants of employee stock options and restricted stock.
Non-cash stock-based compensation expense is reflected in the
same expense captions as the related salary cost of the
respective employee.
|
The following table is a summary of our non-cash expenses
included in the respective statements of operations captions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Advertising expense included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations
|
|
$
|
1,475
|
|
|
$
|
1,555
|
|
|
$
|
3,264
|
|
|
$
|
3,178
|
|
Sales and marketing
|
|
|
1,689
|
|
|
|
2,001
|
|
|
|
3,882
|
|
|
|
3,551
|
|
General and administrative
|
|
|
3,800
|
|
|
|
5,856
|
|
|
|
7,655
|
|
|
|
11,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
6,964
|
|
|
$
|
9,412
|
|
|
$
|
14,801
|
|
|
$
|
18,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following discussion is a comparison of our results of
operations on a consolidated basis for the three and six months
ended June 30, 2010 and 2009.
Revenue
Our total revenue increased 24.4% and 22.2% to $122,707 and
$230,737 in the three and six months ended June 30, 2010,
respectively, from $98,631 and $188,895 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.
Costs and
Expenses
Cost of Operations. Cost of operations
increased to $45,368 and $88,362 in the three and six months
ended June 30, 2010, respectively, from $39,229 and $75,794
during the same periods last year. As a percentage of revenue,
cost of operations was 37.0% and 38.3% in the three and six
months ended June 30, 2010, compared to 39.8% and 40.1% in
the same periods last year. Included in cost of operations was
non-
38
cash expense related to stock-based compensation of $1,475 and
$3,264 during the three and six months ended June 30, 2010,
respectively, compared to $1,555 and $3,178 during the same
periods last year. Cost of operations excluding such non-cash
expense was $43,893 and $85,098 in the three and six months
ended June 30, 2010, respectively, or 35.8% and 36.9% of
revenue, compared to $37,674 and $72,616, or 38.2% and 38.4% of
revenue during the same periods last year. The increase in
absolute dollars during the three and six months ended
June 30, 2010 compared to the prior year periods was
primarily attributable to an increase of approximately $4,700
and $8,000 of Website operations expense associated with the
delivery of our advertising and sponsorship arrangements and
increased traffic to our Websites, and an increase of
approximately $1,000 and $3,400 in development and distribution
expense.
Sales and Marketing. Sales and marketing
expense increased to $29,425 and $57,832 in the three and six
months ended June 30, 2010, respectively, from $26,797 and
$54,358 during the same periods last year. As a percentage of
revenue, sales and marketing expense was 24.0% and 25.1% in the
three and six months ended June 30, 2010, compared to 27.2%
and 28.8% in the same periods last year. Included in sales and
marketing expense were non-cash expenses related to advertising
of $1,753 in the six months ended June 30, 2009, and
stock-based compensation of $1,689 and $3,882 during the three
and six months ended June 30, 2010, respectively, compared
to $2,001 and $3,551 during the same periods last year. Sales
and marketing expense, excluding such non-cash expenses, was
$27,736 and $53,950 in the three and six months ended
June 30, 2010, respectively, or 22.6% and 23.4% of revenue,
compared to $24,796 and $49,054, or 25.1% and 26.0% of revenue
during the same periods last year. The increase in absolute
dollars was primarily attributable to an increase in
compensation related costs due to increased staffing.
General and Administrative. General and
administrative expense decreased to $20,577 and $39,386 in the
three and six months ended June 30, 2010, respectively,
from $22,003 and $43,851 during the same periods last year. As a
percentage of revenue, general and administrative expense was
16.7% and 17.1% in the three and six months ended June 30,
2010, compared to 22.1% and 23.3% in the same periods last year.
Included in general and administrative expense was non-cash
stock-based compensation expense of $3,800 and $7,655 during the
three and six months ended June 30, 2010, respectively,
compared to $5,856 and $11,837 during the same periods last
year. The decrease in non-cash stock-based compensation expense
was primarily due to certain stock options and restricted stock
awards becoming fully vested during 2009, for which there was no
comparable expense in 2010. General and administrative expense,
excluding such non-cash expense, was $16,777 and $31,731 in the
three and six months ended June 30, 2010, respectively, or
13.7% and 13.8% of revenue, compared to $16,147 and $32,014, or
16.4% and 16.9% of revenue during the same periods last year.
General and administrative expenses excluding non-cash expenses,
in absolute dollars, remained generally consistent for the three
and six months ended June 30, 2010 compared to the prior
year periods and general and administrative expense as a
percentage of revenue was slightly lower for the three and six
months ended June 30, 2010 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 was $6,318 and $13,333 in the three and
six months ended June 30, 2010, respectively, compared to
$6,956 and $14,059 during the same period last year. The
decrease over the prior year period was due to lower
amortization expense of $905 and $1,586 during the three and six
months ended June 30, 2010, respectively, resulting from
certain intangible assets becoming fully amortized, which was
partially offset by an increase in depreciation expense of $267
and $860 during the three and six months ended June 30,
2010, respectively, relating to capital expenditures in 2010 and
2009.
Interest Income. Interest income decreased to
$420 and $3,829 in the three and six months ended June 30,
2010, respectively, from $1,958 and $4,220 in the same periods
last year. The decrease resulted from the sale of our
investments in auction rate securities in April 2010 and a
decrease in the average interest rate of our investments
partially offset by the interest on the Senior Secured Notes
that we received during the three months ended March 31,
2010 for which there was no prior year comparable amount.
Interest Expense. Interest expense was $3,170
and $8,309 in the three and six months ended June 30, 2010,
respectively, compared to $5,781 and $12,317 in the same periods
last year. Interest expense in the three
39
and six months ended June 30, 2010 included non-cash
interest expense of $1,795 and $4,172, respectively, and $2,511
and $5,310 in the prior year periods related to the amortization
of the debt discount for our
31/8% Notes
and the amortization of the debt issuance costs for both our
31/8% Notes
and our 1.75% Notes. The decrease in interest expense is a
result of lower debt outstanding during 2010 when compared to
2009 due to the repurchases and conversions of our convertible
debt over these periods.
(Loss) Gain on Conversions and Repurchases of Convertible
Notes. During the three and six months ended
June 30, 2010, we repurchased $32,446 principal amount of
our 1.75% Notes. Additionally, during the three and six
months ended June 30, 2010, we repurchased $12,869 and
$32,176 principal amount of our
31/8% Notes
and the holders of the
31/8% Notes
converted $12,700 and $96,627 principal amount into shares of
our common stock, respectively. As a result of these repurchases
and conversions, we recognized a net loss of $11,011 and $14,738
during the three and six months ended June 30, 2010,
respectively.
During the three and six months ended June 30, 2009, we
repurchased $8,900 and $85,417 principal amount of our
1.75% Convertible Notes for $8,500 and $80,123,
respectively, and we repurchased $31,700 and $49,700 principal
amount of our
31/8% Convertible
Notes for $28,689 and $43,734, respectively. We recognized a net
gain on the repurchase of these notes of $3,473 and $10,120
during the three and six months ended June 30, 2009,
respectively.
Gain (Loss) on Investments. On April 20,
2010, we sold our holdings of ARS for an aggregate of $286,399.
As a result, during the three months ended March 31, 2010,
we recorded a charge of $28,848, representing the difference
between the adjusted cost basis of our ARS holdings and the
proceeds received on April 20, 2010, which includes an
offsetting amount of $660 related to the initial value of the
Repurchase Right. During the three months ended June 30,
2010, we recorded gains of $6,002 related to the sale of our
remaining equity investments, the sale of our Senior Secured
Notes and adjustments in the value of our Repurchase Right.
There were no comparable amounts in the prior year periods.
Other Income (Expense), Net. Other income
(expense), net was $99 and $(199) in the three and six months
ended June 30, 2010, respectively, compared to $(552) and
$(821) in the prior periods. Included in other income (expense),
net was $79 and $555 for the three and six months ended
June 30, 2010 compared to $803 and $1,381 in the prior
periods of external legal costs and expenses we incurred related
to the investigation by the United States Attorney for the
District of South Carolina and the SEC and the related Coverage
Litigation. Also included in other income (expense), net for the
three and six months ended June 30, 2010 was $178 and $356
compared to $245 and $490 in the prior year periods related to
the reversal of certain sales and use tax contingencies
resulting from the expiration of various statutes of limitations.
Income Tax (Provision) Benefit. The income tax
provision of $5,675 and benefit of $14,333 for the three and six
months ended June 30, 2010, respectively, and income tax
provision of $750 and benefit of $467 in the prior year periods
represents taxes related to federal, state and other
jurisdictions. Included in the income tax benefit during the six
months ended June 30, 2010 is a deferred tax benefit of
approximately $21,900 primarily related to the reversal of
income tax valuation allowance attributable to the sale of our
auction rate securities. Additionally, the income tax
(provision) benefit during the three and six months ended
June 30, 2010 includes a deferred tax benefit of
approximately $4,353 and $5,843, respectively, and a deferred
tax provision of approximately $1,287 and $3,738 in the prior
year periods related to the repurchases and conversions of our
convertible notes.
Loss from Discontinued Operations, Net of
Tax. Loss from discontinued operations was
$13,284 and $12,767 for the three and six months ended
June 30, 2009. Loss from discontinued operations primarily
represents a pre-tax charge of $14,367 related to our indemnity
obligations to advance amounts for reasonable defense costs for
the former officers and directors of HLTHs former EPS
subsidiary, who were indicted in connection with the
investigation by the United States Attorney for the District of
South Carolina and the SEC. Also included in loss from
discontinued operations are the net operating results of our
Porex business and the Little Blue Book print directory business.
40
Income Attributable to Noncontrolling
Interest. Income attributable to noncontrolling
interest of $387 and $997 for the three and six months ended
June 30, 2009 represents the interest of the former WebMD
minority shareholders.
Supplemental
Financial and Operating Information
The following table and the discussion that follows presents
information for groups of revenue based on similar services we
provide, as well as information related to a non-GAAP
performance measure that we use to monitor the performance of
our business which we refer to as Earnings before
interest, taxes, non-cash and other items or
Adjusted EBITDA. Due to the fact that Adjusted
EBITDA is a non-GAAP measure, we have also included a
reconciliation from Adjusted EBITDA to net income.
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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2010
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2009
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2010
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2009
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Revenue
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|
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Public portal advertising and sponsorship
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$
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100,592
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$
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75,992
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$
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186,849
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$
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143,281
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Private portal services
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22,115
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|
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22,639
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43,888
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45,614
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$
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122,707
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$
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98,631
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$
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230,737
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$
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188,895
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Earnings before interest, taxes, non-cash and other items
(Adjusted EBITDA)
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$
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34,301
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$
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20,021
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$
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59,958
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$
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35,282
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Interest, taxes, non-cash and other items
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|
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Interest income
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420
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|
|
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1,958
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|
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3,829
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|
|
4,220
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Interest expense
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(3,170
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)
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|
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(5,781
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)
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(8,309
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)
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(12,317
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)
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Income tax (provision) benefit
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(5,675
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)
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(750
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)
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14,333
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|
|
467
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Depreciation and amortization
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(6,318
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)
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|
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(6,956
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)
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(13,333
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)
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|
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(14,059
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)
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Non-cash stock-based compensation
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(6,964
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)
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(9,412
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)
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(14,801
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)
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(18,566
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)
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Non-cash advertising
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(1,753
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)
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(Loss) gain on convertible notes
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(11,011
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)
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3,473
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(14,738
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)
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10,120
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Gain (loss) on investments
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6,002
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(22,846
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)
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Other income (expense), net
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99
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(559
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)
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(199
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)
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|
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(892
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)
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Consolidated income from continuing operations
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7,684
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1,994
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3,894
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|
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2,502
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Consolidated loss from discontinued operations, net of tax
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(13,284
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)
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|
|
|
|
|
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(12,767
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)
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|
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|
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Consolidated net income (loss) inclusive of noncontrolling
interest
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7,684
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|
|
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(11,290
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)
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|
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3,894
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|
|
|
(10,265
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)
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Income attributable to noncontrolling interest
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|
|
|
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|
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(387
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)
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|
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|
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(997
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)
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Net income (loss) attributable to Company stockholders
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$
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7,684
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|
|
$
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(11,677
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)
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$
|
3,894
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$
|
(11,262
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)
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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 six months ended June 30, 2010 and 2009.
Public Portal Advertising and
Sponsorship. Public portal advertising and
sponsorship revenue was $100,592 and $186,849 in the three and
six months ended June 30, 2010, respectively, an increase
of $24,600 and $43,568 or 32.4% and 30.4% from the prior year
periods. The increase in public portal advertising and
sponsorship revenue was primarily attributable to an increase in
the average size and number of unique sponsored programs on our
sites, including both brand sponsorship and educational
programs. The number of such programs grew to approximately 850
as of June 30, 2010, compared to approximately 750 as of
June 30, 2009. In general, pricing remained relatively
stable for our advertising and sponsorship programs and was not
a significant source of the revenue increase.
41
Private Portal Services. Private portal
services revenue was $22,115 and $43,888 in the three and six
months ended June 30, 2010, respectively, a decrease of
$524 and $1,726 or 2.3% and 3.8% from the prior year periods.
The number of companies using our private portal platform was
129 as of June 30, 2010, compared to 137 in the prior year
period. The decline in revenue was primarily due to a decline in
the number of employees and health plan members of our customers
and a reduction in the overall number of customers. In general,
pricing remained relatively stable for our private portal
services and was not a significant source of the revenue
decrease. We also have approximately 130 additional customers
who purchase stand-alone decision support services from us.
Adjusted EBITDA. Adjusted EBITDA increased to
$34,301 and $59,958 in the three and six months ended
June 30, 2010, respectively from $20,021 and $35,282 in the
prior year periods. As a percentage of revenue, Adjusted EBITDA
was 28.0% and 26.0% for the three and six months ended
June 30, 2010, respectively, compared to 20.3% and 18.7% in
the prior year periods. This increase as a percentage of revenue
was primarily due to higher revenue, specifically related to the
increase in the average size and number of brands and sponsored
programs in our public portals, 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. 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. 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.
Liquidity
and Capital Resources
As of June 30, 2010, we had $534,705 of cash and cash
equivalents. Our working capital as of June 30, 2010 was
$498,669. Our working capital is affected by 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, as well as the seasonality within our business.
Accordingly, our working capital, and its impact on cash flow
from operations, can fluctuate materially from period to period.
Cash provided by operating activities from our continuing
operations during the six months ended June 30, 2010 was
$66,667, which related to consolidated net income of $3,894,
adjusted for the losses on investments and convertible notes
aggregating $37,584, for the non-cash deferred income tax
benefit of $27,729, and other non-cash expenses of $32,019,
which include depreciation and amortization expense, non-cash
interest expense and non-cash stock-based compensation expense.
Additionally, changes in operating assets and liabilities
provided cash flow of $20,899, primarily due to cash provided by
an increase in deferred revenue of $14,596 and a decrease in
accounts receivable of $13,248 offset by cash used as a result
of a decrease in accrued liabilities and other long-term
liabilities of $4,801 and an increase in prepaid expenses of
$2,144.
Cash provided by operating activities from our continuing
operations during the six months ended June 30, 2009 was
$37,444, which related to a consolidated net loss of $10,265,
adjusted for a loss from discontinued
42
operations of $12,767, for the non-operating gains on
repurchases of convertible notes of $10,120, and for non-cash
expenses of $37,325, which include depreciation and amortization
expense, non-cash interest expense, non-cash advertising
expense, non-cash stock-based compensation expense and deferred
income taxes. Additionally, changes in operating assets and
liabilities provided cash flow of $7,737, primarily due to a
decrease in accounts receivable and an increase in deferred
revenue partially offset by a decrease in accrued liabilities
and other long-term liabilities.
Cash provided by investing activities from our continuing
operations was $351,057 during the six months ended
June 30, 2010, compared to cash used by investing
activities from our continuing operations of $9,605 in the prior
year period. During the six months ended June 30, 2010, we
received $362,206 related to sales of available for sale
securities compared to $1,100 in the prior year period. The
proceeds received during the six months ended June 30,
2010, primarily related to $291,353 from the sale of our auction
rate securities and $65,475 related to the sale of the Senior
Secured Notes. We used $9,719 in connection with purchases of
property and equipment in the six months ended June 30,
2010 compared to $10,955 of purchases of property and equipment
in the prior year period. In the 2010 period, we also used
$1,430 to finalize the sale price of our discontinued operations
related to our Porex business.
Cash used in financing activities from our continuing operations
was $327,284 during the six months ended June 30, 2010,
compared to cash used in financing activities from our
continuing operations of $105,663 in the prior year period. Cash
used in financing activities in the 2010 period principally
related to the repurchase of 5.2 million shares of our
common stock through our tender offer for $242,795, $81,362 used
for the repurchase of our 1.75% Notes and
31/8% Notes,
the purchase of $14,914 of treasury stock under our repurchase
program and $6,818 used for payment of shares that tendered in
the 2009 Tender Offer but that were not delivered and paid for
until 2010. These uses of cash were offset by net proceeds of
$8,386 from the issuance of common stock in connection with
employee stock-based awards and a related tax benefit of
$10,219. Cash used in financing activities during the three
months ended June 30, 2009 principally related to the
repurchases of our 1.75% Notes and our
31/8% Notes
in the aggregate of $123,857. This use of cash was offset by net
proceeds of $18,194 from the issuance of common stock in
connection with employee stock-based awards.
Included in our consolidated statements of cash flows for the
six months ended June 30, 2009 were cash flows (used in)
provided by discontinued operations. Also included in cash flows
from discontinued operations during the six months ended
June 30, 2010 and 2009 is the receipt of $1,043 and
$20,053, respectively, of reimbursements from our
Director & Officer insurance carriers, offset by
$15,585 and $23,210 in payments made in the 2010 and 2009
periods, respectively, in connection with the defense costs of
the former officers and directors of our former EPS subsidiary
in connection with the investigation by the United States
Attorney for the District of South Carolina and the SEC. For
additional information, see Introduction
Background Information on Certain Transactions and other
Significant Developments Directors &
Officers Liability Insurance Coverage Litigation and
Indemnification Obligations to Former Officers
and Directors of EPS. Also included within the cash flows
from our discontinued operations during the six months ended
June 30, 2009 is an aggregate $8,666 related to our Porex
and LBB operations, through the date when the discontinued
operations were divested.
Our liquidity and capital resources is expected to be impacted
in the near future as a result of the tender offer we intend to
commence. We announced on August 5, 2010 that we intend to
commence a tender offer to purchase up to 3 million shares
of our common stock at a price of $50.00 per share. We would use
cash of $150,000 if all 3 million shares are tendered at a
price of $50.00 per share. Other potential future uses of cash
include redemptions or additional repurchases of our convertible
notes, additional repurchases of our common stock and our
anticipated 2010 capital expenditure requirements for the full
year which we currently estimate to be up to $30,000. Our
anticipated capital expenditures relate to expansion of our
facilities and improvements that will be deployed across our
public and private portal web sites in order to enable us to
service future growth in unique users and page views, as well as
to create new sponsorship areas for our customers, and to
improve the systems used to provide our private portal
applications.
Based on our plans and expectations as of the date of this
Quarterly Report, we believe that our available cash resources
and future cash flow from operations will provide sufficient
cash resources to meet the
43
commitments described above and to fund our currently
anticipated working capital and capital expenditure requirements
for at least the next 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
the relevance of our online services to our audience and
sponsors and will continue to invest in acquisitions, strategic
relationships, facilities and technological infrastructure and
product development. We intend to grow each of 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:
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our ability to hire and retain qualified authors, journalists
and independent writers;
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our ability to license quality content from third
parties; and
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our ability to monitor and respond to increases and decreases in
user interest in specific topics.
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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 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.
44
Developing
and implementing new and updated features and services for our
public and private portals and our mobile applications 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 our
mobile applications and clients for our private portals requires
us to continue to improve the technology underlying those
portals and applications and to continue to develop new and
updated features and services for those portals and
applications. If we are unable to do so on a timely basis or if
we are unable to implement new 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, mobile applications and related features and services.
Our development
and/or
implementation of new technologies, 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.
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Our public portals and mobile applications 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.
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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. In
addition, 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 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.
45
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 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 within 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:
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approval for new products or for new approved uses for existing
products;
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the timing of FDA approval of generic products that compete with
existing brand name products;
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the timing of withdrawals of products from the market;
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the timing of rollouts of new or enhanced services on our public
portals;
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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
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the scheduling of conferences for physicians and other
healthcare professionals.
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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
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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.
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
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 environment. However, our
strategy depends, in part, on increasing usage
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of our private portal services by our employer and health plan
clients employees and members and being able to
demonstrate a sufficient return on investment and other benefits
for our private portals clients from those services. Increasing
usage of our private portal services requires us to continue to
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 and mobile applications
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 or
mobile applications 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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challenges caused by language and cultural differences;
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difficulties in staffing and managing operations from a distance;
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uncertainty regarding liability for services and content;
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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 adverse economic conditions in markets
outside the United States;
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tariffs or other trade barriers;
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fluctuations in currency exchange rates;
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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, bandwidth providers
and mobile carriers, 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 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.
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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.
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
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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 significant federal healthcare reform legislation was
enacted in March 2010, as discussed in the next risk factor.
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.
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.
Recently
enacted federal health care reform legislation could adversely
affect our healthcare industry customers and clients, causing
them to reduce expenditures, including expenditures for our
services
The Patient Protection and Affordable Care Act, as amended by
the Health Care and Education Reconciliation Act of 2010 (which
we refer to as the Reform Legislation), was signed into law in
March 2010. The Reform Legislation makes extensive changes to
the current system of healthcare insurance and benefits. In
general, the Reform Legislation seeks to reduce healthcare costs
and decrease the number of uninsured legal U.S. residents
by, among other things, requiring individuals to carry, and
certain employers to offer health insurance or be subject to
penalties. The Reform Legislation also imposes new regulations
on health insurers, including guaranteed coverage
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requirements, prohibitions on certain annual and all lifetime
limits on amounts paid on behalf of or to plan members,
increased restrictions on rescinding coverage, establishment of
minimum medical loss ratio requirements, a requirement to cover
preventive services on a first dollar basis, the establishment
of state insurance exchanges and essential benefit packages, and
greater limitations on how health insurers price certain of
their products. The Reform Legislation also contains provisions
that will affect the revenues and profits of pharmaceutical and
medical device companies, including new taxes on certain sales
of their products.
Many of the provisions of the Reform Legislation that expand
insurance coverage will not become effective until 2014 and many
provisions require implementing regulations and interpretive
guidance to be issued before they will be fully implemented. In
addition, it is difficult to foresee how individuals and
businesses will respond to the choices available to them under
the Reform Legislation. Furthermore, the Reform Legislation will
result in future state legislative and regulatory changes, which
we are unable to predict at this time, in order for states to
comply with certain provisions of the Reform Legislation and to
participate in grants and other incentive opportunities. In
addition, several states have filed lawsuits challenging the
constitutionality of certain provisions of the Reform
Legislation. Accordingly, while we do not currently anticipate
any significant adverse effects on WebMD as a direct result of
application of the Reform Legislation to our businesses or on
our company in its capacity as an employer, we are unable to
predict what the indirect impacts of the Reform Legislation will
be on WebMDs businesses through its effects on other
healthcare industry participants, including pharmaceutical and
medical device companies that are advertisers and sponsors of
our public portals and employers and health plans that are
clients of our private portals. Healthcare industry participants
may respond to the Reform Legislation or to uncertainties
created by the Reform Legislation by reducing their expenditures
or postponing expenditure decisions, including expenditures for
our services, which could have a material adverse effect on our
business.
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, in our mobile
applications, or in WebMD the Magazine violates
applicable 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. We cannot predict what actions the FDA or
industry participants may take in the future, but the FDAs
enforcement against pharmaceutical advertising increased in 2009
from 2008 levels. 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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False Claims Laws. The Federal False Claims
Act imposes liability on any person or entity who, among other
things, knowingly presents, or causes to be presented, a false
or fraudulent claim for payment by a Federal healthcare program.
In addition, various states have enacted false claim laws
analogous to the Federal False Claims Act, and many of these
states laws apply where a claim is submitted to any third-party
payor and not merely a federal healthcare program. When an
entity is determined to have violated the Federal False Claims
Act, it may be required to pay up to three times the actual
damages sustained by the government plus civil penalties. In
recent years an increasing number of Federal False Claims Act
cases have been brought against drug manufacturers and resulted
in significant monetary settlements and imposition of federally
supervised corporate integrity agreements in circumstances that
include allegations that company-sponsored CME was unlawful
off-label promotion. Any action against us for violation of
these laws could cause us to incur significant legal expenses
and may adversely affect our ability to operate our business.
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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
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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GINA. The Genetic Information
Nondiscrimination Act (GINA) prohibits discrimination based on
genetic information in employment and in health insurance
coverage. The law applies to our private portal customers,
including both employers and group health plans. WebMDs
Health Risk Assessment (or HRA), HealthQuotient, is typically
offered to employees as a voluntary component of their
employer-sponsored wellness program. Title I of GINA can have
significant implications for wellness programs offered by group
health plans in that it prohibits the collection of genetic
information, which includes an individuals family medical
history, prior to or in connection with enrollment or for
underwriting purposes. Underwriting purposes includes providing
incentives or rewards for completion of an HRA that requests
genetic information. Title II of GINA prohibits employment
discrimination based on genetic information as well as the
request or purchase of genetic information of employees or their
family members with limited exceptions, including a limited
exception for voluntary wellness programs. WebMD may face
challenges as a result of varying interpretations of the law by
the multiple enforcing agencies including the
U.S. Departments of Health and Human Services
(HHS), Labor and Treasury and the Equal Employment
Opportunity Commission. It is possible that the final
regulations may require modifications to our HealthQuotient
product to either eliminate or revise the family history
section. Interpretations of the law may increase operational
costs or decrease demand for our product.
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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, marketing, 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, personal data security 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, supported by certain public
statements, that the FTC may revise or eliminate the principles
in favor of a more restrictive approach for companies that
utilize behavioral advertising. In addition, there is a
possibility of legislation, regulations and increased
enforcement activities relating to privacy and behavioral
advertising. A number of bills have been introduced in Congress
in recent months that, if passed in their current or modified
forms, could impose substantial new regulations on online
behavioral advertising activities. We have privacy policies
posted on our Web sites that we believe comply with existing
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. Moreover, we take steps to reasonably
protect certain sensitive personal information we hold. 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.
Failure
to comply with laws relating to privacy and security of personal
information, including personal health information, could result
in liability to us and concerns about privacy-related issues
could damage our reputation and our business
Privacy and security of personal information stored or
transmitted electronically, including personal health
information, is a major issue in the United States. While we
strive to comply with all applicable privacy and security laws
and regulations, as well as our own posted privacy policies, any
failure or perceived failure to comply may result in proceedings
or actions against us by government entities or others, or could
cause us to lose users and customers, which could have a
material adverse effect on our business. In addition, we are
unable to predict what additional legislation or regulation in
the area of privacy of personal information, including personal
health information, could be enacted and what effect that could
have on our operations and business. Concerns about our
practices with regard to the collection, use, disclosure, or
security of personal information or other privacy-related
matters, even if unfounded and even if we are in compliance with
applicable laws, could damage our reputation and harm our
business.
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. Previously, only covered entities were directly
subject to potential civil and criminal liability under these
Standards. However, the Health Information Technology for
Economic and Clinical Health (HITECH) Act, which was enacted as
part of the American Recovery and Reinvestment Act of 2009
(ARRA) amended the HIPAA Privacy and Security Standards and made
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.
54
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 began to apply directly to
us. For periods prior to that, 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 became directly subject to
HIPAAs criminal and civil penalties. HITECH increased
civil penalty amounts for violations of HIPAA and significantly
strengthens enforcement by requiring HHS to conduct periodic
audits to confirm compliance and authorizing state attorneys
general to bring civil actions seeking either injunctions or
damages in response to violations of HIPAA Privacy and Security
Standards that threaten the privacy of state residents. It is
expected that HHS will issue additional regulations to implement
many of the HITECH amendments. We cannot assure you that we will
adequately address the risks created by these amended HIPAA
Privacy and Security Standards. In addition, 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.
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 Elements and the 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 assure, 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.
From time to time, the 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.
Medscape, LLCs current ACCME accreditation expires in
2016. 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, HHS, and 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. In response,
pharmaceutical and medical device companies have developed and
implemented internal controls and procedures that promote
adherence to applicable regulations and requirements. In
55
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.
|
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
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 to purchase
our company 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 our capital stock,
limitations may be imposed on our ability to utilize net
operating loss carryforwards and tax credits to reduce our
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.
In November 2008, HLTH repurchased 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 is an annual limitation
imposed on the ability to utilize our NOL carryforwards and
federal tax credits.
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.
56
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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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.
57
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.
58
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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 have historically caused
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. However, as our
investments in auction rate securities were sold for cash in
April 2010, future changes in interest rates will not impact the
value of these investments. The fair values of our cash and
money market investments, which approximate $534.7 million
at June 30, 2010, are not subject to changes in interest
rates.
The
31/8% Notes
that we have issued have fixed interest rates; changes in
interest rates will not impact our financial condition or
results of operations.
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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 June 30, 2010. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that
WebMDs disclosure controls and procedures were effective
as of June 30, 2010.
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 second quarter of 2010 that have materially affected,
or are reasonably likely to materially affect, WebMDs
internal control over financial reporting.
59
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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 10 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 June 30,
2010 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
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Paid per Share
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Announced Plans or Programs
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the Plans or Programs
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04/01/10 - 04/30/10
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5,172,204
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(1)
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$
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46.80
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5,172,204
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(1)
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$
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23,472,780
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05/01/10 - 05/31/10
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186,134
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(2)
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$
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45.06
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186,134
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(2)
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$
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15,085,946
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06/01/10 - 06/30/10
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951
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(3)
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$
|
47.37
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$
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15,085,946
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Total
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5,359,289
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$
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46.74
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5,358,338
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(1)
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WebMD purchased
5,172,204 shares of WebMD common stock at $46.80 per share
pursuant to a tender offer announced in March 2010 and completed
in April 2010. For additional information, see Note 8 to
the Consolidated Financial Statements included in Item 1 of
this Quarterly Report.
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(2)
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These repurchases were made
pursuant to the repurchase program that WebMD announced in
December 2008, at which time WebMD was authorized to use up to
$30 million to purchase shares of its common stock from
time to time. For additional information, see Note 8 to the
Consolidated Financial Statements included in Item 1 of
this Quarterly Report.
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(3)
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Reflects 951 shares withheld
from WebMD restricted common stock that vested during June in
order to satisfy withholding tax requirements related to the
vesting of the awards. The value of these shares was determined
based on the closing price of WebMD common stock on the date of
vesting.
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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.
60
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
WebMD
Health Corp.
Anthony Vuolo
Chief Operating Officer and
Chief Financial Officer
Date: August 9, 2010
61
EXHIBIT INDEX
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Exhibit No.
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Description
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2
|
.1
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Purchase and Release Agreement, dated as of April 20, 2010,
between WebMD Health Corp. and Citigroup Global Markets Inc.
(incorporated by reference to Exhibit 2.1 to the
Registrants Current Report on
Form 8-K
filed on April 26, 2010)*
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3
|
.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
|
.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
|
.1
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Letter Agreement, dated as of June 28, 2010, between the
Registrant and Wayne Gattinella**
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10
|
.2
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Letter Agreement, dated as of June 28, 2010, between the
Registrant and Kevin Cameron**
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10
|
.3
|
|
Letter Agreement, dated as of June 28, 2010, between the
Registrant and Anthony Vuolo**
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31
|
.1
|
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Rule 13a-14(a)/15d-14(a)
Certification of Chief Executive Officer of Registrant
|
|
31
|
.2
|
|
Rule 13a-14(a)/15d-14(a)
Certification of Chief Financial Officer of Registrant
|
|
32
|
.1
|
|
Section 1350 Certification of Chief Executive Officer of
Registrant
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|
32
|
.2
|
|
Section 1350 Certification of Chief Financial Officer of
Registrant
|
|
99
|
.1
|
|
Explanation of Non-GAAP Financial Measures
|
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|
* |
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With respect to the agreement filed as Exhibit 2.1, certain
of the exhibits and the schedules to that agreement have been
omitted pursuant to Item 601(b)(2) of
Regulation S-K.
The Registrant will furnish copies of any of the exhibits and
schedules to the Securities and Exchange Commission upon request. |
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** |
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Agreement relates to executive compensation. |
E-1