e10vq
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 March 31,
2011
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
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Commission File
Number: 0-51547
WEBMD HEALTH CORP.
(Exact name of registrant as
specified in its charter)
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Delaware
(State of
incorporation)
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20-2783228
(I.R.S. Employer
Identification No.)
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111 Eighth Avenue
New York, New York
(Address of principal
executive office)
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10011
(Zip
code)
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(212) 624-3700
(Registrants
telephone number including area code)
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days.
Yes
þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes
o No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a
non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
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 May 4, 2011, the Registrant had 59,092,091 shares of
Common Stock (including unvested shares of restricted Common
Stock).
WEBMD
HEALTH CORP.
QUARTERLY REPORT ON
FORM 10-Q
For the period ended March 31, 2011
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 platforms;
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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 platforms;
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competition for advertisers and sponsors for our public portals
and mobile platforms;
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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 Part II,
Item 1A of this Quarterly Report on
Form 10-Q.
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These factors are not necessarily all of the important factors
that could cause actual results to differ materially from those
expressed in any of our forward-looking statements. Other
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
PART I
FINANCIAL INFORMATION
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ITEM 1.
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Financial
Statements
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WEBMD
HEALTH CORP.
(In
thousands, except share and per share data)
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March 31,
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December 31,
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2011
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2010
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(Unaudited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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1,065,383
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$
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400,501
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Accounts receivable, net of allowance for doubtful accounts of
$1,710 at March 31, 2011 and $1,493 at December 31,
2010
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128,760
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134,448
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Prepaid expenses and other current assets
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13,389
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12,161
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Deferred tax assets
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22,459
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23,467
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Total current assets
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1,229,991
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570,577
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Property and equipment, net
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59,220
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61,516
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Goodwill
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202,104
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202,104
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Intangible assets, net
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21,970
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22,626
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Deferred tax assets
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67,335
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71,125
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Other assets
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47,584
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14,254
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TOTAL ASSETS
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$
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1,628,204
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$
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942,202
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Accrued expenses
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$
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46,333
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$
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53,181
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Deferred revenue
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96,824
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97,043
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Liabilities of discontinued operations
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17,185
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17,327
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Total current liabilities
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160,342
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167,551
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2.25% convertible notes due 2016
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400,000
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2.50% convertible notes due 2018
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400,000
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Other long-term liabilities
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22,056
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21,756
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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, $0.01 par value per share,
650,000,000 shares authorized; 62,403,290 shares
issued at March 31, 2011 and 62,401,272 shares issued
at December 31, 2010
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624
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624
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Additional paid-in capital
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9,450,676
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9,462,373
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Treasury stock, at cost; 4,601,914 shares at March 31,
2011 and 2,485,391 shares at December 31, 2010
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(244,526
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)
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(129,589
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)
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Accumulated deficit
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(8,560,968
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)
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(8,580,513
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)
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Stockholders equity
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645,806
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752,895
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
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$
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1,628,204
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$
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942,202
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See accompanying notes.
4
WEBMD
HEALTH CORP.
(In
thousands, except per share data, unaudited)
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Three Months Ended
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March 31,
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2011
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2010
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Revenue
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$
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131,609
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$
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108,030
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Cost of operations
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48,449
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42,994
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Sales and marketing
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32,294
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28,407
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General and administrative
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22,821
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18,809
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Depreciation and amortization
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6,424
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7,015
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Interest income
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16
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3,409
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Interest expense
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3,141
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5,139
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Loss on convertible notes
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3,727
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Gain (loss) on investments
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14,060
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(28,848
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)
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Other expense, net
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53
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298
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Income (loss) before income tax provision (benefit)
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32,503
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(23,798
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)
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Income tax provision (benefit)
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12,958
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(20,008
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)
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Net income (loss)
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$
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19,545
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$
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(3,790
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)
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Net income (loss) per common share:
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Basic
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$
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0.33
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$
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(0.07
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)
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Diluted
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$
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0.32
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$
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(0.07
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)
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Weighted-average shares outstanding used in computing per share
amounts:
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Basic
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58,184
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52,191
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Diluted
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67,173
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52,191
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See accompanying notes.
5
WEBMD
HEALTH CORP.
(In
thousands, unaudited)
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Three Months Ended
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March 31,
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2011
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2010
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Cash flows from operating activities:
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Net income (loss)
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$
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19,545
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$
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(3,790
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)
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Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
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Depreciation and amortization
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6,424
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7,015
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Non-cash interest, net
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516
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2,090
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Non-cash stock-based compensation
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9,813
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7,837
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Deferred income taxes
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4,798
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(21,463
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)
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Loss on convertible notes
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3,727
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(Gain) loss on investments
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(14,060
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)
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28,848
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Changes in operating assets and liabilities:
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Accounts receivable
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5,688
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(2,429
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)
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Prepaid expenses and other, net
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622
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(1,829
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)
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Accrued expenses and other long-term liabilities
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(7,642
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)
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(14,224
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)
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Deferred revenue
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(219
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)
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21,665
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Net cash provided by continuing operations
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25,485
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27,447
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Net cash used in discontinued operations
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(142
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)
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(8,233
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)
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Net cash provided by operating activities
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25,343
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19,214
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Cash flows from investing activities:
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Proceeds from sales of
available-for-sale
securities
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4,500
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Proceeds received from ARS option
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5,240
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Purchases of property and equipment
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(4,849
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)
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(3,114
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)
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Finalization of sale price of discontinued operations
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(1,430
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)
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Net cash provided by (used in) investing activities
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391
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(44
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)
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Cash flows from financing activities:
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Proceeds from exercise of stock options
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10,220
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28,224
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Cash used for withholding taxes due on stock-based awards
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(3,172
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)
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(22,449
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)
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Net proceeds from issuance of 2.50% Notes and
2.25% Notes
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774,745
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Repurchases of
31/8%
Notes
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(22,565
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)
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Purchases of treasury stock
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(150,000
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)
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(13,345
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)
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Excess tax benefit on stock-based awards
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7,355
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1,413
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Net cash provided by (used in) financing activities
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639,148
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(28,722
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)
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Net increase (decrease) in cash and cash equivalents
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664,882
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(9,552
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)
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Cash and cash equivalents at beginning of period
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400,501
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459,766
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Cash and cash equivalents at end of period
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$
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1,065,383
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$
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450,214
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See accompanying notes.
6
WEBMD
HEALTH CORP.
(In thousands, except share and per share data,
unaudited)
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1.
|
Summary
of Significant Accounting Policies
|
Background
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. From the
completion of the initial public offering through the completion
of the Companys merger with HLTH Corporation
(HLTH) on October 23, 2009 (the
Merger), the Company was more than 80% owned by
HLTH. On October 23, 2009, the Merger was completed, with
HLTH merging into WebMD and WebMD continuing as the
surviving corporation. In the Merger, each share of HLTH Common
Stock was converted into 0.4444 shares of WebMD Common
Stock. 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.
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 platforms 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 Company
also provides mobile health information applications for use by
consumers and physicians. The Companys public portals
generate revenue primarily through the sale of advertising and
sponsorship products, including CME services. The public
portals sponsors and advertisers include pharmaceutical,
biotechnology, medical device and consumer products companies.
The Company also generates revenue from the sale of
e-detailing
promotion and physician recruitment services and from
advertising sold in WebMD the Magazine, a consumer
magazine distributed to physician office waiting rooms. In
addition, the Company generates revenue from the sale of certain
information products. 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.
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 months ended March 31, 2011 are not necessarily
indicative of the operating results to be expected for any
subsequent period or for the entire year ending
December 31, 2011. Certain information and note disclosures
normally included in financial statements prepared in accordance
with U.S. generally accepted accounting
7
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 2010, 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
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 Website 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 per common share has been computed using the
weighted-average number of shares of Common Stock outstanding
during the period, adjusted to give effect to participating
non-vested restricted stock during the periods it was
outstanding. Diluted income per common share has been computed
using the weighted-average number of shares of Common Stock
outstanding during the period, increased to give effect
8
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
to potentially dilutive securities and assumes that any dilutive
convertible notes were converted, only in the periods in which
such effect is dilutive (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
19,545
|
|
|
$
|
(3,790
|
)
|
Effect of participating non-vested restricted stock
|
|
|
(170
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) Basic
|
|
|
19,375
|
|
|
|
(3,790
|
)
|
Interest expense on 2.50% Notes, net of tax
|
|
|
1,503
|
|
|
|
|
|
Interest expense on 2.25% Notes, net of tax
|
|
|
315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) Diluted
|
|
$
|
21,193
|
|
|
$
|
(3,790
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average shares Basic
|
|
|
58,184
|
|
|
|
52,191
|
|
Employee stock options and restricted stock
|
|
|
2,527
|
|
|
|
|
|
2.50% Notes
|
|
|
5,377
|
|
|
|
|
|
2.25% Notes
|
|
|
1,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted-average shares after assumed
conversions Diluted
|
|
|
67,173
|
|
|
|
52,191
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share Basic
|
|
$
|
0.33
|
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share Diluted
|
|
$
|
0.32
|
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
The Company has excluded convertible subordinated notes and
convertible notes, as well as certain outstanding stock options
and restricted stock, from the calculation of diluted income per
common share during the periods in which such securities were
anti-dilutive. The following table presents the total weighted
average number of potentially dilutive common shares that were
excluded from the computation of diluted income (loss) per
common share during the periods presented (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Options and restricted stock
|
|
|
1,968
|
|
|
|
16,928
|
|
Convertible notes
|
|
|
|
|
|
|
11,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,968
|
|
|
|
28,767
|
|
|
|
|
|
|
|
|
|
|
Recent
Accounting Pronouncement
Revenue from advertising is recognized as advertisements are
delivered or as publications are distributed. Revenue from
sponsorship arrangements, content syndication and distribution
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 the Company substantially completes
its contractual deliverables as determined by the applicable
agreements.
For contracts that contain multiple deliverables that were
entered into prior to January 1, 2011, revenue is allocated
to each deliverable based on its relative fair value determined
using vendor-specific objective evidence (VSOE). 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
9
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
to the extent VSOE exists for the undelivered elements. In
instances where fair value does not exist for the undelivered
elements, the entire consideration is recognized over the period
that the last element is delivered.
Contracts that contain multiple deliverables that were entered
into subsequent to January 1, 2011 are subject to
Accounting Standards Update
No. 2009-13
Multiple-Deliverable Revenue Arrangements (ASU
2009-13).
ASU 2009-13
requires the allocation of revenue to each deliverable of
multiple-deliverable revenue arrangements, based on the relative
selling price of each deliverable. It also changes the level of
evidence of selling price required to separate deliverables by
allowing a Company to make its best estimate of the standalone
selling price of deliverables when more objective evidence of
selling price is not available.
The Company adopted ASU
2009-13 on a
prospective basis for arrangements entered into or materially
modified on or subsequent to January 1, 2011. Beginning
January 1, 2011, pursuant to the guidance of ASU
2009-13,
when a sales arrangement contains multiple deliverables, the
Company allocates revenue to each deliverable based on relative
selling price. The selling price for a deliverable is based on
VSOE if available, third-party evidence (TPE) if
VSOE is not available, or best estimate of selling price if
neither VSOE nor TPE is available. The Company then recognizes
revenue on each deliverable in accordance with its revenue
recognition policies over the period that delivery occurs. VSOE
of selling price is based on the price charged when the
deliverable is sold separately. In determining VSOE, the Company
requires that a substantial majority of the selling prices fall
within a reasonable range based on historical pricing trends for
specific products and services. TPE is based on competitor
prices of similar deliverables when sold separately. The Company
is not able to determine TPE of selling price as it is unable to
reliably determine what competitors selling prices are for
comparable services, combined with the fact that its services
often contain unique features and customizations such that
comparable services do not exist. The determination of best
estimate of selling price is a judgemental process that
considers multiple factors including, but not limited to recent
selling prices and related discounting practices for each
service, market conditions, customer classes, sales channels and
other factors.
As a result of the adoption of ASU
2009-13,
revenue for the three months ended March 31, 2011 was
approximately $1,800 higher than the revenue that would have
been recorded under the previous accounting standards. The
impact on diluted income per share was $0.02 during the three
months ended March 31, 2011. This resulted from services
that were provided or partially provided during the three months
ended March 31, 2011, for certain deliverables of the
Companys multiple deliverable arrangements which the
Company would have previously deferred the related revenue under
the previous accounting standards. During the three months ended
March 31, 2011, the Company assigned value to these
deliverables using its best estimate of selling price, and
recognized revenue as they were delivered. The multiple
deliverable arrangements that were impacted by ASU
2009-13
related to the Companys public portal revenues and the
services underlying such arrangements are generally delivered
over periods of twelve months or less. The Company is not able
to reasonably estimate the effect of adopting ASU
2009-13 on
future periods as the impact will vary based on many factors
including, but not limited to, the quantity and size of new or
materially modified multiple-deliverable arrangements entered
into, as well as the nature of the various services contained
within those arrangements and the time periods over which those
services are delivered.
Reclassifications
Certain reclassifications have been made to the prior period
financial statements to conform with the current period
presentation.
|
|
2.
|
Discontinued
Operations
|
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
10
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 9. In connection with the EPS Sale, the Company agreed
to indemnify Sage Software relating to these indemnity
obligations. During the years ended December 31, 2007, 2008
and 2009, the Company recorded pre-tax charges of $73,347,
$29,078 and $14,367, respectively, which represented the
Companys estimate of its costs related to this matter. As
described in more detail in Note 9, 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 March 31,
2011 and December 31, 2010, the remaining accrual with
respect to the costs for these matters was $7,385 and $7,527,
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, as of March 31, 2011 and
December 31, 2010, which represents certain reimbursements
received from the Companys insurance carriers between
July 31, 2008 and March 31, 2011. The Company deferred
recognizing these insurance reimbursements within the
consolidated statement of operations given the pending Coverage
Litigation, which is more fully described in Note 9.
Repurchase
and Conversions of
31/8% Notes
During the three months ended March 31, 2010, the Company
repurchased $19,307 principal amount of its
31/8% Convertible
Notes due 2025 (the
31/8% Notes)
for $22,565 in cash. In addition, the holders of the
31/8% Notes
converted $83,927 principal amount into 2,396,129 shares of
WebMD common stock. The Company recognized an aggregate pre-tax
loss of $3,727 related to the repurchase and conversions of the
31/8% Notes,
which is reflected as loss on convertible notes in the
accompanying consolidated statement of operations during the
three months ended March 31, 2010. The loss included the
expensing of remaining deferred issuance costs outstanding
related to the repurchased and converted notes. No
31/8% Notes
were outstanding at March 31, 2011 or December 31,
2010.
2.50% Convertible
Notes due 2018
On January 11, 2011, the Company issued $400,000 aggregate
principal amount of 2.50% Convertible Notes due 2018 (the
2.50% Notes) in a private offering. Unless
previously converted, the 2.50% Notes will mature on
January 31, 2018. Net proceeds from the sale of the
2.50% Notes were approximately $387,345, after deducting
the related offering expenses, of which approximately $100,000
was used to repurchase 1,920,490 shares of the
Companys Common Stock at a price of $52.07 per share, the
last reported sale price of the Companys Common Stock on
January 5, 2011, which repurchase settled on
January 11, 2011. Interest on the 2.50% Notes is
payable semi-annually on January 31 and July 31 of each year,
commencing July 31, 2011. Under the terms of the
2.50% Notes, holders may surrender their 2.50% Notes
for conversion into the Companys Common Stock at an
initial conversion rate of 15.1220 shares of Common Stock
per thousand dollars principal amount of the 2.50% Notes.
This is equivalent to an initial conversion price of
approximately $66.13 per share of Common Stock. In the
aggregate, the 2.50% Notes are convertible into
6,048,800 shares of the Companys Common Stock. The
conversion rate may be adjusted under certain circumstances.
Under the terms of the 2.50% Notes, if the Company
undergoes certain change of control transactions prior to the
maturity date of the 2.50% Notes, holders of the
2.50% Notes will have the right, at their option, to
require the Company to repurchase some or all of their
2.50% Notes at a repurchase price equal to 100% of the
11
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
principal amount of the 2.50% Notes being repurchased, plus
accrued and unpaid interest to, but excluding, the repurchase
date. At the Companys option, and to the extent permitted
by the applicable rules of the Nasdaq Global Select Market (or
the applicable rules of such other exchange on which the
Companys Common Stock may be listed), instead of paying
the repurchase price in cash, the Company may pay the repurchase
price in shares of its Common Stock or a combination of cash and
shares of its Common Stock.
2.25% Convertible
Notes due 2016
On March 14, 2011, the Company issued $400,000 aggregate
principal amount of 2.25% Convertible Notes due 2016 (the
2.25% Notes) in a private offering. Unless
previously converted, the 2.25% Notes will mature on
March 31, 2016. Net proceeds from the sale of the
2.25% Notes were approximately $387,400, after deducting
the related offering expenses, of which approximately $50,000
was used to repurchase 868,507 shares of the Companys
Common Stock at a price of $57.57 per share, the last reported
sale price of the Companys Common Stock on March 8,
2011, which repurchase settled on March 14, 2011. Interest
on the 2.25% Notes is payable semi-annually on March 31 and
September 30 of each year, commencing September 30, 2011.
Under the terms of the 2.25% Notes, holders may surrender their
2.25% Notes for conversion into the Companys Common
Stock at an initial conversion rate of 13.5704 shares of
Common Stock per thousand dollars principal amount of the
2.25% Notes. This is equivalent to an initial conversion
price of approximately $73.69 per share of Common Stock. In the
aggregate, the 2.25% Notes are convertible into
5,428,160 shares of the Companys Common Stock. The
conversion rate may be adjusted under certain circumstances.
Under the terms of the 2.25% Notes, if the Company
undergoes certain change of control transactions prior to the
maturity date of the 2.25% Notes, holders of the
2.25% Notes will have the right, at their option, to
require the Company to repurchase some or all of their
2.25% Notes at a repurchase price equal to 100% of the
principal amount of the 2.25% Notes being repurchased, plus
accrued and unpaid interest to, but excluding, the repurchase
date. At the Companys option, and to the extent permitted
by the applicable rules of the Nasdaq Global Select Market (or
the applicable rules of such other exchange on which the
Companys Common Stock may be listed), instead of paying
the repurchase price in cash, the Company may pay the repurchase
price in shares of its Common Stock or a combination of cash and
shares of its Common Stock.
|
|
4.
|
Related
Party Transaction
|
Fidelity
Employer Services Company LLC
Fidelity Employer Services Company LLC (FESCO) is a
distributor of the Companys private portals, integrating
the private portals product into the human resources
administration and benefit administration services that FESCO
provides to its employer clients. The Company recorded revenue
of $1,433 and $1,457 during the three months ended
March 31, 2011 and 2010, respectively, and $1,724 and
$1,587 was included in accounts receivable as of March 31,
2011 and December 31, 2010, respectively, related to the
FESCO agreement. FESCO is an affiliate of FMR LLC, which
reported beneficial ownership of shares that represent
approximately 14.9% of the Companys Common Stock as of
March 31, 2011. Affiliates of FMR LLC also provide
administrative and recordkeeping services to the Company in
connection with the Companys 401(k) plan, stock-based
compensation plans and the health savings accounts of Company
employees.
|
|
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.
|
12
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
Level 2:
|
Observable market-based inputs or unobservable inputs that are
corroborated by market data.
|
|
|
Level 3:
|
Unobservable inputs for which there is little or no market data,
which require the use of the reporting entitys own
assumptions.
|
The Company did not have any Level 2 assets as of
March 31, 2011 and December 31, 2010. 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 March 31, 2011 and
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
December 31, 2010
|
|
|
Fair Value
|
|
Amortized
|
|
|
|
Gross
|
|
Amortized
|
|
|
|
Gross
|
|
|
Estimate
|
|
Cost
|
|
Fair
|
|
Unrealized
|
|
Cost
|
|
Fair
|
|
Unrealized
|
|
|
Using:
|
|
Basis
|
|
Value
|
|
Gains
|
|
Basis
|
|
Value
|
|
Gains (Losses)
|
|
Cash and cash equivalents
|
|
|
Level 1
|
|
|
$
|
1,065,383
|
|
|
$
|
1,065,383
|
|
|
$
|
|
|
|
$
|
400,501
|
|
|
$
|
400,501
|
|
|
$
|
|
|
ARS Option
|
|
|
Level 3
|
|
|
$
|
13,065
|
|
|
$
|
13,065
|
|
|
$
|
|
|
|
$
|
4,245
|
|
|
$
|
4,245
|
|
|
$
|
|
|
The following table reconciles the beginning and ending balances
of the Companys Level 3 assets, which consist of the
ARS Option at March 31, 2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
ARS
|
|
|
Auction Rate
|
|
|
Senior
|
|
|
|
Option
|
|
|
Securities
|
|
|
Secured Notes
|
|
|
Fair value as of the beginning of the period
|
|
$
|
4,245
|
|
|
$
|
279,701
|
|
|
$
|
63,826
|
|
Redemptions
|
|
|
(5,240
|
)
|
|
|
(4,500
|
)
|
|
|
|
|
(Loss) gain included in earnings
|
|
|
14,060
|
|
|
|
(29,508
|
)
|
|
|
|
|
Interest income accretion included in earnings
|
|
|
|
|
|
|
|
|
|
|
287
|
|
Changes in unrealized gains/losses included in other
comprehensive income
|
|
|
|
|
|
|
40,806
|
|
|
|
1,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of the end of the period
|
|
$
|
13,065
|
|
|
$
|
286,499
|
|
|
$
|
65,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, substantially
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 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 $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
13
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 an option (the ARS
Option), 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
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 2010, the Company recorded an additional charge
of $29,508, representing the difference between the cost basis
of its ARS holdings and the proceeds received on April 20,
2010. In connection with the sale of the ARS, the Company
recorded a deferred income tax benefit of approximately $22,000
primarily related to the reversal of income tax valuation
allowance attributable to its ARS. Additionally the Company
recognized gains of $14,712 and $14,060 related to the ARS
Option described above during the period from April 20,
2010 through December 31, 2010 and during the three months
ended
14
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
March 31, 2011, respectively. Through the ARS Option, the
Company received cash proceeds of $10,467 and $5,240 during the
period from April 20, 2010 through December 31, 2010
and during the three months ended March 31, 2011,
respectively. The value of the ARS Option as of March 31,
2011 is estimated to be $13,065 and is reflected in other assets
within the accompanying balance sheet. The ARS Option has been
classified as a Level 3 asset as its valuation requires
substantial judgment. The historical redemption activity of the
specific ARS underlying the ARS Option was the most significant
assumption used to determine an estimated value of the ARS
Option. The Company is required to reassess the value of the ARS
Option at each reporting period, and any changes in value will
be recorded within the statement of operations in future periods.
The Company also holds an investment in a privately held company
which is carried at cost, and not subject to fair value
measurements. However, if events or circumstances indicate that
its carrying amount may not be recoverable, it would be reviewed
for impairment. The total amount of this investment is $6,471
and it is included in other assets on the accompanying
consolidated balance sheets.
For disclosure purposes, the Company is required to measure the
outstanding value of its debt on a recurring basis. The
following table presents the carrying value and estimated fair
value of the Companys convertible notes that were carried
at historical cost as of March 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
December 31, 2010
|
|
|
Carrying Amount
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.50% Notes
|
|
$
|
400,000
|
|
|
$
|
402,252
|
|
|
$
|
|
|
|
$
|
|
|
2.25% Notes
|
|
|
400,000
|
|
|
|
386,416
|
|
|
|
|
|
|
|
|
|
Comprehensive income is comprised of net income (loss) and other
comprehensive income. Other comprehensive income includes
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 income:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Unrealized holding gains
|
|
$
|
|
|
|
$
|
13,837
|
|
Unrealized losses recognized in earnings
|
|
|
|
|
|
|
28,848
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
42,685
|
|
Net income (loss)
|
|
|
19,545
|
|
|
|
(3,790
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
19,545
|
|
|
$
|
38,895
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
Stock
Repurchase Program, 2010 Tender Offers and Other
Repurchases
|
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 months ended March 31,
2010, the Company repurchased 166,438 shares at an
aggregate cost of $6,527 under the Program. No shares were
repurchased under the Program during the three months ended
March 31, 2011. As of March 31, 2011, a total of
$15,086 remained available for repurchases under the Program.
Repurchased shares are recorded under the cost method and are
reflected as treasury stock in the accompanying consolidated
balance sheets.
15
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On September 8, 2010, the Company completed a tender offer
through which it repurchased 3,000,000 shares of its Common
Stock at a price of $52.00 per share for total consideration of
$156,421 which includes $421 of costs directly attributable to
the purchase. On April 8, 2010, the Company completed a
tender offer through which it repurchased 5,172,204 shares
of its 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.
On January 5, 2011, the Company used $100,000 of the
proceeds of the 2.50% Notes to repurchase
1,920,490 shares of the Companys Common Stock at a
price of $52.07 per share. Additionally, on March 8, 2011,
the Company used $50,000 of the proceeds of the 2.25% Notes
to repurchase 868,507 shares of the Companys Common
Stock at a price of $57.57 per share. See Note 3 for
further discussion of the Companys 2.50% Notes and
2.25% Notes. Neither of these share repurchases were made
under the Program.
Intangible assets subject to amortization consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
(15,954
|
)
|
|
$
|
|
|
|
|
|
|
|
$
|
15,954
|
|
|
$
|
(15,954
|
)
|
|
$
|
|
|
|
|
|
|
Customer relationships
|
|
|
34,057
|
|
|
$
|
(19,283
|
)
|
|
|
14,774
|
|
|
|
7.2
|
|
|
|
34,057
|
|
|
$
|
(18,760
|
)
|
|
|
15,297
|
|
|
|
7.5
|
|
Technology and patents
|
|
|
14,700
|
|
|
|
(14,700
|
)
|
|
|
|
|
|
|
|
|
|
|
14,700
|
|
|
|
(14,700
|
)
|
|
|
|
|
|
|
|
|
Trade names-definite lives
|
|
|
6,030
|
|
|
|
(3,298
|
)
|
|
|
2,732
|
|
|
|
5.2
|
|
|
|
6,030
|
|
|
|
(3,165
|
)
|
|
|
2,865
|
|
|
|
5.4
|
|
Trade names-indefinite lives
|
|
|
4,464
|
|
|
|
|
|
|
|
4,464
|
|
|
|
n/a
|
|
|
|
4,464
|
|
|
|
|
|
|
|
4,464
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
75,205
|
|
|
$
|
(53,235
|
)
|
|
$
|
21,970
|
|
|
|
|
|
|
$
|
75,205
|
|
|
$
|
(52,579
|
)
|
|
$
|
22,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 $656 and $1,077 during the three months
ended March 31, 2011 and 2010, respectively. Aggregate
amortization expense for intangible assets is estimated to be:
|
|
|
|
|
Year Ending December 31:
|
|
|
|
|
2011
(April 1st
to
December 31st)
|
|
$
|
1,970
|
|
2012
|
|
$
|
2,627
|
|
2013
|
|
$
|
2,627
|
|
2014
|
|
$
|
2,627
|
|
2015
|
|
$
|
2,617
|
|
Thereafter
|
|
$
|
5,038
|
|
|
|
9.
|
Commitments
and Contingencies
|
Legal
Proceedings
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
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
16
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
On January 19, 2011, the Court granted the motion of the
Messrs. Kang and Sessions for a new trial in the event that
the governments appeal of the Courts ruling to set
aside the verdict is successful. The government is in the
process of deciding whether it will appeal both of these
rulings. 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.
17
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. Through
March 31, 2011 the Company recorded pre-tax charges
aggregating $116,792 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 9 (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. HLTH filed its
opposition to the motion together with its motion for summary
judgment against such carrier
18
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 began
reimbursing the Company for its costs as described below.
On September 9, 2008 and February 4, 2009,
respectively, the eighth and ninth level carriers of the Synetic
Policies notified HLTH that they believed 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 March 31, 2011, $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.
19
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 to recover the $5,000 that TIG advanced to
the Company in 2006. The Company and TIG settled the matter in
2010.
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 from August 1, 2006
to April 21, 2010 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 parties have agreed on terms to settle the matter
and, on May 1, 2011, the Court entered a final order
approving the settlement and dismissing the lawsuit. The Company
believes that any costs related to this litigation are covered
by insurance, subject to the Companys deductible.
Daniel
Rodimer, et.al., on behalf of themselves and all others
similarly situated v. Apple, Inc., et. al.
On February 17, 2011, the Company was served with a
complaint in this lawsuit, which is pending in the United States
District Court for the Northern District of California. The
Plaintiffs are seeking to have the case certified as a class
action. The complaint alleges that Apple, Inc.
(Apple) and several other defendants, including one
or more subsidiaries of the Company, have violated several
Federal and California statues and are also liable under various
common law claims in connection with the distribution of
software applications for mobile devices through Apples
iTunes store. The Federal Statutes that are alleged to have been
violated are the Computer Fraud and Abuse Act, 18 U.S.C.
§ 1030; and the Electronic Communications Privacy Act,
18 U.S.C. § 2510. The complaint seeks injunctive
relief as well as damages in unspecified amounts. On
April 20, 2011, Plaintiffs and the Company signed an
agreement tolling the statutes of limitations applicable to
Plaintiffs alleged claims against the Company. On
April 21, 2011, Plaintiffs filed a first consolidated class
action complaint that did not name the Company as a party.
Pursuant to the terms of the tolling agreement, Plaintiffs
dismissed the Company from the case without prejudice, with each
party bearing its own costs, and with the reservation of the
right to name the Company as party at a subsequent time, subject
to any substantive defenses available to the Company. The
tolling agreement may be terminated by either party upon
30 days written notice.
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 9 to the Consolidated
Financial Statements included in the Companys 2010 Annual
Report on
Form 10-K,
has yet to
20
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
|
|
10.
|
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 following sections of this note present the historical
activity of the HLTH Plans (on a converted basis after giving
effect to the Merger exchange ratio of 0.4444) combined with the
historical activity of the WebMD Plans, which are collectively
referred to as the Plans.
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
18,200,000 as of March 31, 2011, subject to adjustment in
accordance with the terms of the 2005 Plan. The Company had an
aggregate of 3,366,458 shares of Common Stock available for
future grants under the 2005 Plan at March 31, 2011.
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, 2011
|
|
|
10,227,755
|
|
|
$
|
30.79
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
408,400
|
|
|
|
52.82
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(873,029
|
)
|
|
|
28.35
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(110,594
|
)
|
|
|
37.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2011
|
|
|
9,652,532
|
|
|
$
|
31.87
|
|
|
|
7.3
|
|
|
$
|
208,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at the end of the period
|
|
|
3,869,804
|
|
|
$
|
28.06
|
|
|
|
6.0
|
|
|
$
|
98,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The aggregate intrinsic value is
based on the market price of the Companys Common Stock on
March 31, 2011, which was $53.42, 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 March 31, 2011.
|
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
21
WEBMD
HEALTH CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
combined with assumptions for future exercise activity. 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.
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2011
|
|
2010
|
|
Expected dividend yield
|
|
0.0%
|
|
0.0%
|
Expected volatility
|
|
0.30
|
|
0.25
|
Risk-free interest rate
|
|
1.97%
|
|
1.61%
|
Expected term (years)
|
|
4.6
|
|
3.4
|
Weighted average fair value of options granted during the period
|
|
$15.38
|
|
$8.52
|
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 at January 1, 2011
|
|
|
1,106,751
|
|
|
$
|
33.13
|
|
Granted
|
|
|
129,000
|
|
|
|
53.90
|
|
Vested
|
|
|
(139,243
|
)
|
|
|
25.72
|
|
Forfeited
|
|
|
(9,000
|
)
|
|
|
42.89
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2011
|
|
|
1,087,508
|
|
|
$
|
36.47
|
|
|
|
|
|
|
|
|
|
|
Proceeds received from the exercise of options to purchase
shares of the Companys Common Stock were $10,220 and
$28,224 during the three months ended March 31, 2011 and
2010, respectively. Additionally, in connection with the
exercise of certain stock options and the vesting of restricted
stock, the Company made payments of $3,172 and $22,449 during
the three months ended March 31, 2011 and 2010,
respectively, related to employee statutory withholding taxes
that were satisfied by withholding shares of Common Stock of
equal value from the respective employees. 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, aggregated $30,303 and $92,251 for the three
months ended March 31, 2011 and 2010, respectively.
Other
Each year, 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. The Company recorded $86 and $92
of stock-based compensation expense for the three months ended
March 31, 2011 and 2010, respectively, in connection with
these issuances.
22
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
|
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Stock options
|
|
$
|
6,623
|
|
|
$
|
5,787
|
|
Restricted stock
|
|
|
3,104
|
|
|
|
1,958
|
|
Other
|
|
|
86
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
9,813
|
|
|
$
|
7,837
|
|
|
|
|
|
|
|
|
|
|
Included in:
|
|
|
|
|
|
|
|
|
Cost of operations
|
|
$
|
2,103
|
|
|
$
|
1,789
|
|
Sales and marketing
|
|
|
2,391
|
|
|
|
2,193
|
|
General and administrative
|
|
|
5,319
|
|
|
|
3,855
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
9,813
|
|
|
$
|
7,837
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2011, approximately $79,600 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 2.7 years, related
to the Plans.
Tax benefits attributable to stock-based compensation
represented 39% and 40% of stock-based compensation expense
during the three months ended March 31, 2011 and 2010,
respectively.
Other expense, net consists of the following items:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Reduction of tax
contingencies(a)
|
|
$
|
|
|
|
$
|
178
|
|
Legal
expense(b)
|
|
|
(53
|
)
|
|
|
(476
|
)
|
|
|
|
|
|
|
|
|
|
Other expense, net
|
|
$
|
(53
|
)
|
|
$
|
(298
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Represents the reduction of certain
sales and use tax contingencies resulting from the expiration of
various statutes.
|
|
(b)
|
|
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.
|
23
|
|
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 our results of
operations and financial condition. Our MD&A is organized
as follows:
|
|
|
|
|
Introduction. This section provides: a general
description of our company and its business; 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 Estimates and
Policies. 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 included in our Annual
Report on
Form 10-K
for the year ended December 31, 2010 filed with the
Securities and Exchange Commission (which we refer to as the
SEC).
|
|
|
|
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
March 31, 2011.
|
|
|
|
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.
|
Introduction
Our Company. WebMD Health Corp. is a
Delaware corporation that was incorporated on May 3, 2005.
We completed an initial public offering on September 28,
2005. Our Common Stock trades under the symbol WBMD
on the Nasdaq Global Select Market.
Our Business. 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 platforms
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 also provide mobile health
information applications for use by consumers and physicians. We
generate revenue from our public portals primarily through the
sale of advertising and sponsorship products, including CME
services. Our public portals sponsors and advertisers
include pharmaceutical, biotechnology, medical device and
consumer products companies. We also generate revenue from the
sale of
e-detailing
promotion and physician recruitment services and from
advertising sold in WebMD the Magazine, a consumer
24
magazine distributed to physician office waiting rooms. In
addition, we generate revenue from the sale of certain
information products.
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 larger share of healthcare costs they are being asked to
bear due to changes in the benefit designs being offered by
health plans and employers. The Internet has fundamentally
changed the way consumers obtain health and wellness
information, enabling them to have immediate access to
searchable information and dynamic interactive content to check
symptoms, assess risks, understand diseases, find providers and
evaluate treatment options.
|
|
|
|
The Internet 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. In
addition, in an effort to improve operating efficiencies, some
pharmaceutical companies have been reducing their field sales
forces in the past several years. We believe that, in their
effort to achieve greater overall marketing efficiency,
pharmaceutical companies will continue to increase the use of
online promotional marketing to physicians and other healthcare
professionals, including through use of 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 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,
including internal approvals relating to compliance with the
laws and regulations applicable to the marketing of healthcare
products. Recently, we have seen a trend toward the lengthening
of this internal review process as it applies to our services
for pharmaceutical companies.
|
25
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.
|
|
|
|
|
Reaching Health-Conscious Consumers. More than
half of the traffic to our consumer portals is in areas of
health and wellness that are not related solely to diseases and
conditions. The demand for reaching health-conscious consumers
is growing significantly. In addition to pharmaceutical,
biotechnology and medical device companies, our public portals
advertisers and sponsors include consumer products companies
whose products relate to health, wellness, diet, fitness,
lifestyle, safety and illness prevention. During 2010, we
supported a growing number of consumer product company clients,
including Johnson & Johnson, Proctor &
Gamble and Nestle Corp., along with retailers such as Wal-Mart
and Target. We plan to continue to focus on increasing
sponsorship revenues from consumer products companies, retailers
and other companies that are interested in communicating
health-related or safety-related information about their
products or services to our audience.
|
|
|
|
Use of Health and Benefits 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 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
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 mobile devices to
access the Internet, with physicians increasingly using mobile
devices in diagnosis and treatment at the point of care. Mobile,
while not yet a meaningful revenue source for us, is expected to
be an important area of growth for the future. We are focused on
delivering a multi-screen platform that extends the user
experience beyond the desktop portal onto the mobile device. 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 Websites,
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
|
26
|
|
|
|
|
legislation and practice management. Physicians can also create
polls to assess the opinions of their colleagues on a range of
topics. 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. As of March 31, 2011, Physician Connect
had attracted more than 150,000 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 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.
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Medscape Mobile is a free medical application 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, for
Blackberry®
users in April 2010 and for
iPadtm
and
Androidtm
users in January 2011. As of March 31, 2011, Medscape
Mobile had attracted approximately one million registered
users.
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WebMD for iPhone and WebMD for iPad are free
applications for consumers that provide mobile access to certain
WebMD content and tools on an
iPhone®
or
iPadtm,
including Symptom Checker, First Aid, and Pill Identifier
applications, as well as other health information. As of
May 6, 2011, these applications had been downloaded more
than five million times. We also provide the entire mobile
audience with access to our consumer content and tools through
our new mobile site at www.m.webmd.com.
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We are pursuing opportunities to expand the reach of our brands
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. 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. In
addition, in certain markets outside of the U.S., we expect to
provide some of our online services directly to healthcare
professionals and, to a lesser extent, consumers.
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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 system of
healthcare insurance and benefits in the U.S. 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 certain
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 regulations
and interpretive guidance to be issued before they will be fully
implemented. Some provisions do not apply
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to health plans that were in place when the Reform Legislation
was enacted and have not been substantially changed since. 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, a number of states have filed lawsuits challenging the
constitutionality of certain provisions of the Reform
Legislation. As of May 9, 2011, two federal courts have
ruled that the requirement for individuals to carry insurance is
unconstitutional, but other courts have upheld this provision,
and the Supreme Court has rejected a request for expedited
review of one of the rulings against the provision, suggesting
that an extended appellate process is likely.
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While we do not currently anticipate any significant adverse
effects on WebMD as a direct result of the 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.
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. For example, the
Reform Legislation encourages use of wellness programs through
grants to small employers to establish such programs, permission
for employers to offer rewards, in the form of waivers of
cost-sharing, premium discounts, or additional benefits, to
employees for participating in these programs and meeting
certain standards, and the inclusion of wellness services and
chronic disease management among the essential health benefits
that certain plans are required to provide. However, we cannot
yet determine the scope of any such opportunities or what
competition we may face in our efforts to pursue such
opportunities.
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, the transaction was
completed, with HLTH merging into WebMD and WebMD
continuing as the surviving corporation. In the Merger, each
share of HLTH common stock was converted into 0.4444 shares
of WebMD common stock. 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. In this MD&A, WebMD (or
the use of we, our, or similar words)
refers not only to WebMD itself but also, where the
28
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.
Convertible Notes. During the three months
ended March 31, 2010, we repurchased $19,307 principal
amount of our
31/8% Convertible
Notes due 2025 (which we refer to as the
31/8% Notes)
for $22,565 in cash. In addition, the holders of the
31/8% Notes
converted $83,927 principal amount into 2,396,129 shares of
WebMD common stock. We recognized an aggregate pre-tax loss of
$3,727 related to the repurchase and conversions of the
31/8% Notes
during the three months ended March 31, 2010. The loss
includes the expensing of remaining deferred issuance costs
outstanding related to the repurchased and converted notes.
On January 11, 2011, we issued $400,000 aggregate principal
amount of 2.50% Convertible Notes due 2018 (which we refer
to as the 2.50% Notes) in a private offering. Unless
previously converted, the 2.50% Notes will mature on
January 31, 2018. Net proceeds from the sale of the
2.50% Notes were approximately $387,345, after deducting
the related offering expenses, of which approximately $100,000
was used by us to repurchase 1,920,490 shares of WebMD
Common Stock at a price of $52.07 per share, the last reported
sale price of WebMD Common Stock on January 5, 2011, which
repurchase settled on January 11, 2011. Interest on the
2.50% Notes is payable semiannually on January 31 and July
31 of each year, commencing July 31, 2011. Under the terms
of the 2.50% Notes, holders may surrender their
2.50% Notes for conversion into WebMD Common Stock at an
initial conversion rate of 15.1220 shares of WebMD Common
Stock per thousand dollars principal amount of 2.50% Notes.
This is equivalent to an initial conversion price of
approximately $66.13 per share of Common Stock. In the
aggregate, the 2.50% Notes are convertible into
6,048,800 shares of Common Stock.
On March 14, 2011, we issued $400,000 aggregate principal
amount of 2.25% Convertible Notes due 2016 (which we refer
to as the 2.25% Notes) in a private offering. Unless
previously converted, the 2.25% Notes will mature on
March 31, 2016. Net proceeds from the sale of the
2.25% Notes were approximately $387,400, after deducting
the related offering expenses, of which approximately $50,000
was used to repurchase 868,507 shares of WebMDs
Common Stock at a price of $57.57 per share, the last reported
sale price of WebMD Common Stock on March 8, 2011, which
repurchase settled on March 14, 2011. Interest on the
2.25% Notes is payable semi-annually on March 31 and
September 30 of each year, commencing September 30, 2011.
Under the terms of the 2.25% Notes, holders may surrender their
2.25% Notes for conversion into WebMD Common Stock at an
initial conversion rate of 13.5704 shares of Common Stock
per thousand dollars principal amount of the 2.25% Notes.
This is equivalent to an initial conversion price of
approximately $73.69 per share of Common Stock. In the
aggregate, the 2.25% Notes are convertible into
5,428,160 shares of Common Stock.
Tender Offers. On September 8, 2010, we
completed a tender offer for our common stock and repurchased
3,000,000 shares at a price of $52.00 per share. In this
MD&A, we refer to this tender offer as the September 2010
Tender Offer. The total cost of the September 2010 Tender Offer
was $156,421, which includes $421 of costs directly attributable
to the purchase. 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 for total consideration of
$242,795, which includes $736 of costs directly attributable to
the purchase. In this MD&A, we refer to this tender offer
as the April 2010 Tender Offer and, together with the September
2010 Tender Offer as the Tender Offers. 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.
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) and paid
accrued interest through that date.
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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 he terms
of the agreement, we retained an option (which we refer to as
the ARS Option), 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. Through the ARS Option, we received cash proceeds of
$10,467 during the period from April 20, 2010 through
December 31, 2010 and $5,240 during the first quarter of
2011.
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 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 Emdeon Practice Services
subsidiary (which we refer to as EPS) 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 9, 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 began
reimbursing us for our costs as described below.
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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 March 31, 2011, $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 (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 to recover the $5,000 that TIG advanced to us
in 2006. Our company and TIG settled this matter in 2010.
We intend to continue to satisfy our legal obligation to the
indicted individuals with respect to advancement of amounts for
their defense costs.
Indemnification Obligations to Former Officers and Directors
of EPS. HLTH had 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
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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. On January 19, 2011, the Court granted the
motion of those two individuals for a new trial in the event
that the governments appeal of the Courts ruling to
set aside the verdict is successful. The government is in the
process of deciding whether it will appeal both of these
rulings. 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 March 31,
2011, the remaining accrual with respect to the costs for these
matters was $7,385 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 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 Estimates and Policies
Critical
Accounting 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 Website
development costs, the carrying value of investments, the
provision for income taxes and related deferred tax accounts,
certain accrued expenses, contingencies, litigation and related
legal accruals and the value attributed to employee stock
options and other stock-based awards.
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Critical
Accounting Policies
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, content
syndication and distribution 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 the Company
substantially completes its contractual deliverables as
determined by the applicable agreements.
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For contracts that contain multiple deliverables that were
entered into prior to January 1, 2011, revenue is allocated
to each deliverable based on its relative fair value determined
using vendor-specific objective evidence (VSOE). 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 to the extent VSOE exists for the
undelivered elements. In instances where fair value does not
exist for the undelivered elements, the entire consideration is
recognized over the period that the last element is delivered.
Contracts that contain multiple deliverables that were entered
into subsequent to January 1, 2011 are subject to
Accounting Standards Update
No. 2009-13
Multiple-Deliverable Revenue Arrangements (ASU
2009-13).
ASU 2009-13
requires the allocation of revenue to each deliverable of
multiple-deliverable revenue arrangements, based on the relative
selling price of each deliverable. It also changes the level of
evidence of selling price required to separate deliverables by
allowing a Company to make its best estimate of the standalone
selling price of deliverables when more objective evidence of
selling price is not available.
We adopted ASU
2009-13 on a
prospective basis for arrangements entered into or materially
modified on or subsequent to January 1, 2011. Beginning
January 1, 2011, pursuant to the guidance of ASU
2009-13,
when a sales arrangement contains multiple deliverables, we
allocate revenue to each deliverable based on relative selling
price. The selling price for a deliverable is based on VSOE if
available, third-party evidence (TPE) if VSOE is not
available, or best estimate of selling price if neither VSOE nor
TPE is available. We then recognize revenue on each deliverable
in accordance with our revenue recognition policies over the
period that delivery occurs. VSOE of selling price is based on
the price charged when the deliverable is sold separately. In
determining VSOE, we require that a substantial majority of the
selling prices fall within a reasonable range based on
historical pricing trends for specific products and services.
TPE is based on competitor prices of similar deliverables when
sold separately. We are generally not able to determine TPE of
selling price as we are unable to reliably determine what
competitors selling prices are for comparable services,
combined with the fact that our services often contain unique
features and customizations such that comparable services do not
exist. The determination of best estimate of selling price is a
judgmental process that considers multiple factors including,
but not limited to, recent selling prices and related
discounting practices for each service, market conditions,
customer classes, sales channels and other factors.
As a result of the adoption of ASU
2009-13,
revenue for the three months ended March 31, 2011 was
approximately $1,800 higher than the revenue that would have
been recorded under the previous accounting standards. This
resulted from services that were provided or partially provided
during the three months ended March 31, 2011, for certain
deliverables of our multiple deliverable arrangements which we
would have previously deferred the related revenue under the
previous accounting standards. During the three months ended
March 31, 2011, we assigned value to these deliverables
using our best estimate of selling price, and recognized revenue
as they were delivered. The multiple deliverable arrangements
that were impacted by ASU
2009-13
related to our public portal revenues and the services
underlying such arrangements are generally delivered over
periods of twelve months or less. We are not able to reasonably
estimate the effect of adopting ASU
2009-13 on
future periods as the impact will vary based on many factors
including, but not limited to, the quantity and size of new or
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materially modified multiple-deliverable arrangements entered
into, as well as the nature of the various services contained
within those arrangements and the time periods over which those
services are 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 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 2010.
|
|
|
|
Fair Value of Investments in Auction Rate Securities
(ARS). 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 these 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, substantially 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 develop.
Additionally, approximately one-half of the auction rate
securities we held were, during 2009, either downgraded below
AAA or placed on watch status by one or more of the
major credit rating agencies.
|
During the periods that we held them, 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 included (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 considered both the credit quality
for each individual ARS and the market liquidity for these
investments. Additionally, effective April 1, 2009, we
adopted new authoritative guidance which required us to separate
losses associated with our ARS into two categories, the portion
of the loss which is considered credit loss and the portion of
the loss which is due to other factors. As discussed above,
certain of the auction rate securities we held were, during
2009, downgraded below AAA by one or more of the major credit
rating agencies. These revised credit ratings were a significant
consideration in determining the estimated credit loss
associated with our ARS.
Our ARS were classified as Level 3 assets as their
valuation, including the portion of their valuation attributable
to credit losses, required substantial judgment and estimation
of factors that were not currently observable in the market due
to the lack of trading in the securities. If different
assumptions were used for the various inputs to the valuation
approach including, but not limited to, assumptions involving
the estimated lives of the ARS holdings, the estimated cash
flows over those estimated lives, and the estimated discount
rates applied to those cash flows, the estimated fair value of
those investments could have been significantly higher or lower
than the fair value we determined. In connection with the sale
of our ARS on April 20, 2010, we retained an option (which
we refer to as the ARS Option), for a period of two years:
(a) to repurchase from the purchaser the same principal
34
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. During
2010, we recognized an aggregate gain of $14,712 related to the
ARS Option, and received cash proceeds of $10,467 during the
period from April 20, 2010 through December 31, 2010.
During the first quarter of 2011, we recorded an aggregate gain
of $14,060 related to the ARS Option and we received cash
proceeds of $5,240. The value of the ARS Option as of
March 31, 2011 is estimated to be $13,065 and has been
classified as a Level 3 asset as its valuation requires
substantial judgment. The historical redemption activity of the
specific ARS underlying the ARS Option was the most significant
assumption used to determine an estimated value of the ARS
Option. We are required to reassess the value of this ARS Option
at each reporting period, and any changes in value will be
recorded within the statement of operations in future periods.
See Note 5 in the Notes to the Consolidated Financial
Statements included elsewhere in this Quarterly Report for
additional information regarding our ARS Option.
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|
|
|
|
Stock-Based Compensation. Stock-based
compensation expense for all share-based payment awards granted
is determined based on the grant-date fair value. The grant date
fair value for stock options is estimated using the
Black-Scholes Option Pricing Model. We recognize these
compensation costs net of an estimated forfeiture rate on a
straight-line basis over the requisite service period of the
award, which is generally the vesting term of the share-based
payment awards. As of March 31, 2011, there was
approximately $79.6 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 2.7 years, related
to our stock-based compensation plans.
|
|
|
|
Deferred Taxes. Our deferred tax assets are
comprised primarily of net operating loss carryforwards and
federal tax credits. These net operating loss carryforwards and
federal tax credits 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 (benefit).
|
35
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 March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
$
|
|
|
%(a)
|
|
|
$
|
|
|
%(a)
|
|
|
Revenue
|
|
$
|
131,609
|
|
|
|
100.0
|
|
|
$
|
108,030
|
|
|
|
100.0
|
|
Cost of operations
|
|
|
48,449
|
|
|
|
36.8
|
|
|
|
42,994
|
|
|
|
39.8
|
|
Sales and marketing
|
|
|
32,294
|
|
|
|
24.5
|
|
|
|
28,407
|
|
|
|
26.3
|
|
General and administrative
|
|
|
22,821
|
|
|
|
17.3
|
|
|
|
18,809
|
|
|
|
17.4
|
|
Depreciation and amortization
|
|
|
6,424
|
|
|
|
4.9
|
|
|
|
7,015
|
|
|
|
6.5
|
|
Interest income
|
|
|
16
|
|
|
|
|
|
|
|
3,409
|
|
|
|
3.2
|
|
Interest expense
|
|
|
3,141
|
|
|
|
2.4
|
|
|
|
5,139
|
|
|
|
4.8
|
|
Loss on convertible notes
|
|
|
|
|
|
|
|
|
|
|
3,727
|
|
|
|
3.4
|
|
Gain (loss) on investments
|
|
|
14,060
|
|
|
|
10.7
|
|
|
|
(28,848
|
)
|
|
|
(26.7
|
)
|
Other expense, net
|
|
|
53
|
|
|
|
|
|
|
|
298
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax provision (benefit)
|
|
|
32,503
|
|
|
|
24.7
|
|
|
|
(23,798
|
)
|
|
|
(22.0
|
)
|
Income tax provision (benefit)
|
|
|
12,958
|
|
|
|
9.8
|
|
|
|
(20,008
|
)
|
|
|
(18.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
19,545
|
|
|
|
14.9
|
|
|
$
|
(3,790
|
)
|
|
|
(3.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Amounts may not add due to rounding.
|
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,
Website operations costs, non-capitalized Website 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.
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.
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. Our principal non-cash expenses 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.
36
The following table is a summary of our non-cash expenses
included in the respective statements of operations captions:
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|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Stock-based compensation expense included in:
|
|
|
|
|
|
|
|
|
Cost of operations
|
|
$
|
2,103
|
|
|
$
|
1,789
|
|
Sales and marketing
|
|
|
2,391
|
|
|
|
2,193
|
|
General and administrative
|
|
|
5,319
|
|
|
|
3,855
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
9,813
|
|
|
$
|
7,837
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31, 2011 and 2010
The following discussion is a comparison of our results of
operations on a consolidated basis for the three months ended
March 31, 2011 and 2010.
Revenue
Our total revenue increased 21.8% to $131,609 from $108,030 in
the prior year period. 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 $48,449 for the three months ended March 31,
2011 from $42,994 in the prior year period. As a percentage of
revenue, cost of operations was 36.8% for the three months ended
March 31, 2011, compared to 39.8% for the prior year
period. Included in cost of operations in the three months ended
March 31, 2011 was non-cash expense related to stock-based
compensation of $2,103 compared to $1,789 in the prior year
period. Cost of operations excluding such non-cash expense was
$46,346 or 35.2% of revenue for the three months ended
March 31, 2011, compared to $41,205 or 38.1% of revenue for
the prior year period. The increase in absolute dollars was
primarily attributable to an increase of approximately $6,626 of
Website operations expense associated with the delivery of our
advertising and sponsorship arrangements and increased traffic
to our Web sites, and a decrease of approximately $1,571 in
development and distribution expense. The decrease as a
percentage of revenue, excluding the non-cash expenses discussed
above, for the three months ended March 31, 2011 compared
to the prior year period, was primarily due to our ability to
achieve the increase in revenue without incurring a proportional
increase in operations expense.
Sales and Marketing. Sales and marketing
expense increased to $32,294 for the three months ended
March 31, 2011 from $28,407 in the prior year period. As a
percentage of revenue, sales and marketing expense was 24.5% in
the 2011 quarter, compared to 26.3% in the 2010 quarter.
Included in sales and marketing expense was non-cash expense
related to stock-based compensation of $2,391 and $2,193 in the
first quarters of 2011 and 2010, respectively. Sales and
marketing expense, excluding such non-cash expenses, was $29,903
or 22.7% of revenue for the three months ended March 31,
2011, compared to $26,214 or 24.3% of revenue for the prior year
period. The increase in absolute dollars was primarily
attributable to an increase in compensation related costs due to
increased staffing. The decrease as a percentage of revenue,
excluding the non-cash expenses discussed above, for 2011
compared to 2010 was primarily due to our ability to achieve the
increase in revenue without incurring a proportional increase in
sales and marketing expense.
General and Administrative. General and
administrative expense increased to $22,821 for the three months
ended March 31, 2011, from $18,809 in the prior year
period. As a percentage of revenue, general and administrative
expense was 17.3% in the three months ended March 31, 2011,
compared to 17.4% in the prior year period. Included in general
and administrative expense in the first quarters of 2011 and
2010 was non-cash stock-based compensation expense of $5,319 and
$3,855, respectively. The increase in non-cash stock-based
compensation expense was primarily due to certain stock options
and restricted stock awards that were
37
granted after March 31, 2010, for which there was no
comparable expense in the 2010 quarter. General and
administrative expense, excluding such non-cash expense, was
$17,502 or 13.3% of revenue for the three months ended
March 31, 2011, compared to $14,954 or 13.8% of revenue for
the prior year period. The decrease in general and
administrative expense as a percentage of revenue, excluding the
non-cash expense discussed above, for the three months ended
March 31, 2011 compared to the prior year period, was
primarily due to our ability to achieve the increase in revenue
without incurring a proportional increase in general and
administrative expense.
Depreciation and Amortization. Depreciation
and amortization expense was $6,424 for the three months ended
March 31, 2011, compared to $7,015 in the same period last
year. The decrease over the prior year period included a $420
decrease in amortization expense resulting from certain
intangible assets becoming fully amortized.
Interest Income. Interest income decreased to
$16 for the three months ended March 31, 2011 from $3,409
in the same period last year. The decrease resulted from a
decrease in the average rates of return during 2011.
Interest Expense. Interest expense was $3,141
for the three months ended March 31, 2011, compared to
$5,139 in the same period last year. Interest expense in the
2011 and 2010 quarters included non-cash interest expense of
$516 and $2,257, respectively. The 2010 quarter amount related
to the amortization of the debt discount for our
31/8% Notes
and the amortization of the debt issuance costs for our
31/8% Notes
and our 1.75% Notes. The 2011 quarter amounts relate to the
amortization of the debt issuance costs for our 2.50% Notes
and our 2.25% Notes. The decrease in interest expense is a
result of lower debt outstanding during the 2011 quarter when
compared to the 2010 quarter due to the repurchases and
conversions of our
31/8% Notes
and our 1.75% Notes over these periods and the
2.50% Notes and 2.25% Notes only being outstanding for
a portion of the 2011 quarter.
Gain (Loss) on Investments. On April 20,
2010, we sold our holdings of ARS for an aggregate of $286,399.
See Introduction Background
Information on Certain Transactions and Other Significant
Developments Auction Rate Securities for
additional information. 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. During the three months ended March 31, 2011 we
recorded a gain on investments of $14,060 related to adjustments
in the value of our ARS Option.
Other Expense, Net. Other expense, net was $53
in the three months ended March 31, 2011, compared to other
expense, net of $298 in the three months ended March 31,
2010. Included in other expense, net was $53 and $476 for the
three months ended March 31, 2011 and 2010, respectively,
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
and $178 for the three months ended March 31, 2010 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 was $12,958 for the three months ended March 31,
2011, compared to an income tax benefit of $20,008 for the three
months ended March 31, 2010. Included in the income tax
benefit for the three months ended March 31, 2010 is a
deferred tax benefit of approximately $22,000 primarily related
to the reversal of income tax valuation allowance attributable
to the sale of our investments in ARS.
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
38
other items or Adjusted EBITDA. Due to the
fact that Adjusted EBITDA is a non-GAAP measure, we have also
included a reconciliation from Adjusted EBITDA to net income
(loss).
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
Public portal advertising and sponsorship
|
|
$
|
110,363
|
|
|
$
|
86,257
|
|
Private portal services
|
|
|
21,246
|
|
|
|
21,773
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
131,609
|
|
|
$
|
108,030
|
|
|
|
|
|
|
|
|
|
|
Earnings before interest, taxes, non-cash and other items
(Adjusted EBITDA)
|
|
$
|
37,858
|
|
|
$
|
25,657
|
|
Interest, taxes, non-cash and other items
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
16
|
|
|
|
3,409
|
|
Interest expense
|
|
|
(3,141
|
)
|
|
|
(5,139
|
)
|
Income tax (provision) benefit
|
|
|
(12,958
|
)
|
|
|
20,008
|
|
Depreciation and amortization
|
|
|
(6,424
|
)
|
|
|
(7,015
|
)
|
Non-cash stock-based compensation
|
|
|
(9,813
|
)
|
|
|
(7,837
|
)
|
Loss on convertible notes
|
|
|
|
|
|
|
(3,727
|
)
|
Gain (loss) on investment
|
|
|
14,060
|
|
|
|
(28,848
|
)
|
Other expense, net
|
|
|
(53
|
)
|
|
|
(298
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
19,545
|
|
|
$
|
(3,790
|
)
|
|
|
|
|
|
|
|
|
|
The following discussion is a comparison of the results of
operations for our two groups of revenue and our Adjusted EBITDA
for the three months ended March 31, 2011 and 2010.
Public Portal Advertising and
Sponsorship. Public portal advertising and
sponsorship revenue was $110,363 in the three months ended
March 31, 2011, an increase of $24,106 or 27.9% from the
three months ended March 31, 2010. The increase in public
portal advertising and sponsorship revenue was primarily
attributable to an increase in the number and average size of
unique sponsored programs on our sites, including both brand
sponsorship and educational programs. Approximately $1,800 of
the increase was related to the adoption of a new revenue
recognition standard that impacts the timing of revenue related
to multiple deliverable revenue arrangements. For a more
detailed description of the impact of this new accounting
guidance, see Critical Accounting Estimates
and Policies Critical Accounting
Policies Revenue Recognition. In general,
pricing remained relatively stable for our advertising and
sponsorship programs and was not a significant source of the
revenue increase.
Private Portal Services. Private portal
services revenue was $21,246 in the three months ended
March 31, 2011, a decrease of $527 or 2.4% from 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. As of March 31, 2011, we also had
approximately 121 customers who purchase stand-alone decision
support services from us, compared to 131 customers at
March 31, 2010.
Adjusted EBITDA. Adjusted EBITDA increased to
$37,858 or 28.8% of revenue in the three months ended
March 31, 2011 from $25,657 or 23.7% of revenue in the
prior year period. This increase as a percentage of revenue was
primarily due to higher revenue, specifically related to the
increase in the 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
39
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 March 31, 2011, we had $1,065,383 of cash and cash
equivalents, and working capital of $1,069,649. 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 in the first quarter of
2011 was $25,485, which related to consolidated net income of
$19,545, adjusted for the gain on investments of $14,060, for
the non-cash income tax provision of $4,798 related to deferred
income taxes, and other non-cash expenses of $16,753, which
include depreciation and amortization expense, non-cash interest
expense and non-cash stock-based compensation expense.
Additionally, changes in operating assets and liabilities
resulted in a cash use of $1,551, primarily due to cash used by
a decrease in accrued liabilities of $7,642 and a decrease in
deferred revenue of $219 offset by cash provided as a result of
a decrease in accounts receivable of $5,688 an decrease in
prepaid and other assets of $622.
Cash provided by operating activities from our continuing
operations in the first quarter of 2010 was $27,447, which
related to consolidated net loss of $3,790, adjusted for the
losses on investments and convertible notes aggregating $32,575,
for the non-cash income tax benefit of $21,463 related to
deferred income taxes, and other non-cash expenses of $16,942,
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 $3,183, primarily due to cash provided by
an increase in deferred revenue of $21,665 offset by cash used
as a result of a decrease in accrued expenses and other
long-term liabilities of $14,224, an increase in accounts
receivable of $2,429 and an increase in prepaid expenses of
$1,829.
Cash provided by investing activities was $391 in the first
quarter of 2011, compared to cash used by investing activities
of $44 in the first quarter of 2010. We received $5,240 related
to our ARS Option in the first quarter of 2011 compared to the
receipt of $4,500 related to the sales of available for sale
securities in the 2010 period. We used $4,849 in connection with
purchases of property and equipment in the first quarter of 2011
compared to $3,114 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 provided by financing activities was $639,148 in the first
quarter of 2011, compared to cash used in financing activities
from our continuing operations of $28,722 in the first quarter
of 2010. Cash provided by financing activities in the 2011
period principally related to the issuance of $400,000 aggregate
principal amount 2.50% Notes and $400,000 aggregate
principal amount 2.25% Notes. After deducting the related
issuance costs, the issuance of our 2.50% Notes and
2.25% Notes resulted in an aggregate cash inflow of
$774,745. Other sources of cash during the first quarter of 2011
include $10,220 of proceeds received from the exercise of stock
options and $7,355 of a tax benefit on stock-based awards. Cash
used in financing activities in the 2011 period principally
related to $150,000 used for the repurchase of our Common Stock
and $3,172 used for withholding taxes on stock-based awards.
Cash used in financing activities in the 2010 period principally
related to $22,565 used for the repurchase of our
31/8% Notes,
$13,345 used for the purchase of treasury stock and $22,449 used
for withholding taxes on stock-based awards. These uses of cash
were offset by proceeds of $28,224 received from the exercise of
stock options and $1,413 of a tax benefit on stock-based awards.
40
Included in our consolidated statements of cash flows are cash
flows used in operating activities of our discontinued
operations and include $142 and $9,276 in payments made in the
2011 and 2010 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.
Offsetting the 2010 payment above is the receipt of $1,043 of
reimbursements from our Director & Officer insurance
carriers.
Potential future uses of cash include repurchases of our Common
Stock and our anticipated 2011 capital expenditure requirements
for the full year, which we currently estimate to be up to
$35,000 and which relate to expansion of our facilities and
improvements that will be deployed across our public and private
portal Websites 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, we believe that our
available cash resources and future cash flow from operations
will provide sufficient cash resources to meet the cash
commitments of our Convertible Notes 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, implementation of new or updated application and service
offerings, competing technological and market developments and
potential future acquisitions. In addition, our ability to
generate cash flow is subject to numerous factors beyond our
control, including general economic, regulatory and other
matters affecting us and our customers. We plan to continue to
enhance our online services and to 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 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.
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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.
Our cash and money market investments, which approximate
$1.065 billion at March 31, 2011, are not subject to
changes in interest rates.
The 2.50% Notes and the 2.25% Notes have fixed
interest rates; therefore, changes in interest rates will not
impact our results of operations or financial position.
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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 March 31, 2011. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that
WebMDs disclosure controls and procedures were effective
as of March 31, 2011.
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 first quarter of 2011 that have materially affected,
or are reasonably likely to materially affect, WebMDs
internal control over financial reporting.
41
PART II
OTHER INFORMATION
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ITEM 1.
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Legal
Proceedings
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The information relating to legal proceedings contained in
Note 9 to the Consolidated Financial Statements included in
Part I, Item 1 of this Quarterly Report is
incorporated herein by this reference.
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 our Common Stock and
Convertible Notes or of securities that 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.
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
42
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 Websites that provide
health-related information, including both commercial sites and
not-for-profit
sites. We compete for advertisers and sponsors with:
health-related Websites; general purpose consumer Websites that
offer specialized health
sub-channels;
other high-traffic Websites 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.
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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 our brands, and events outside
of our control may have a negative effect on our brands. If we
are unable to maintain or enhance our brands, and do so in a
cost-effective manner, our business could be adversely affected.
Our
online businesses have a limited operating history
Our online businesses have a limited operating history and
participate in relatively new markets. These markets, and our
online businesses, have undergone significant changes during
their short history and can be expected to continue to change.
Many companies with business plans based on providing healthcare
information and related services through the Internet have
failed to be profitable and some have filed for bankruptcy 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,
43
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 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, including
internal approvals relating to compliance with the laws and
regulations applicable to the marketing of healthcare products.
Recently, we have seen a trend toward the lengthening of this
internal review process as it applies to our services for
pharmaceutical companies. 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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the timing of FDA 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 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
Websites to be as effective as other Websites 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.
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Increasingly,
individuals are using mobile devices to access the Internet and,
if we fail to capture a significant share of this portion of the
market for online health information services, our business
could be adversely affected
The number of people who access the Internet through mobile
devices has increased dramatically in the past few years,
including the number of physicians and other healthcare
professionals who do so. New devices and new platforms continue
to be developed and released. It is difficult to predict the
problems we may encounter in developing and maintaining versions
of our services for use on these devices and we may need to
devote significant resources to their creation, maintenance and
support. If we fail to capture a significant share of this
increasingly important portion of the market for online health
information services (including the market for information
services for physicians and other healthcare professionals), it
could adversely affect our business. In addition, even if demand
for our mobile applications exists and we achieve a significant
share of the market for mobile health information services, we
cannot assure you that we will be able to achieve significant
revenue or profits from these services.
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 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 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.
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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 Websites 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. In addition, in
certain markets outside of the U.S., we expect to provide some
of our online services directly to healthcare professionals and,
to a lesser extent, consumers. 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
46
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.
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
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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 Websites 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 Website operators for access to our
Websites. 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 Websites.
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 Websites, 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 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.
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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 system of healthcare insurance and benefits in the
U.S. 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 certain 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
49
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 regulations and interpretive guidance to
be issued before they will be fully implemented. Some provisions
do not apply to health plans that were in place when the Reform
Legislation was enacted and have not been substantially changed
since. 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, a number of states have
filed lawsuits challenging the constitutionality of certain
provisions of the Reform Legislation. As of May 9, 2011,
two federal courts have ruled that the requirement for
individuals to carry insurance is unconstitutional, while other
courts have upheld this provision, and the Supreme Court has
rejected a request for expedited review of one of the rulings
against the provision, suggesting that an extended appellate
process is likely. 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. 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
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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 to 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
state 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. 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
our customers and 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. Interpretations of the law have required
us to modify the HealthQuotient product and we could experience
increases in operational costs or decreases in demand for our
products.
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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
51
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 December
2010, following a series of workshops, the FTC issued a
preliminary staff report containing a proposed framework for
businesses and policymakers for online consumer privacy issues.
The U.S. Department of Commerce issued a similar draft
green paper on privacy issues. Both agencies expressed a
willingness to support legislation and the FTC favors
legislative solutions if it determines self-regulatory
approaches are not adequately protecting consumers. The FTC has
otherwise been active in investigating and entering into consent
decrees under its current unfair or deceptive trade practices
authority with companies because of their online privacy
practices. There is a possibility of legislation, regulations
and increased enforcement activities relating to privacy and
behavioral advertising. Some bills have been introduced in
Congress, and more are expected, that, if passed, could impose
substantial new regulations on online behavioral advertising
activities. We have privacy policies posted on our Websites 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. There has been an
increase in the number of private privacy-related lawsuits filed
against companies in recent months. 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
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member health information for employers or health plans, that
are business associates of covered entities. Currently, we are
bound by certain contracts and agreements to use and disclose
protected health information in a manner consistent with the
Privacy Standards and Security Standards. Beginning on
February 17, 2010, some provisions of the HIPAA Privacy and
Security Standards 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
Websites 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
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implementing these controls and procedures, supporters of CME
may interpret the regulations and requirements differently and
may implement varying procedures or requirements. These controls
and procedures:
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may discourage pharmaceutical companies from providing grants
for independent educational activities;
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may slow their internal approval for such grants;
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may reduce the volume of sponsored educational programs that
Medscape, LLC produces to levels that are lower than in the
past, thereby reducing revenue; and
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may require Medscape, LLC to make changes to how it offers or
provides educational programs, including CME.
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In addition, future changes to laws, regulations or
accreditation standards, or to the internal compliance programs
of supporters or potential supporters, may further discourage,
significantly limit, or prohibit supporters or potential
supporters from engaging in educational activities with
Medscape, LLC, or may require Medscape, LLC to make further
changes in the way it offers or provides educational activities.
Other
Risks Applicable to Our Company and to Ownership of Our
Securities
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.
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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.
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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 of the acquired
business;
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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.
56
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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 March 31,
2011 of equity securities that are registered by us pursuant to
Section 12 of the Exchange Act:
Issuer
Purchases of Equity Securities
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Total Number
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Total Number of Shares
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Approximate Dollar Value of Shares
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of Shares
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Average Price
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Purchased as Part of Publicly
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that May Yet Be Purchased Under
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Period
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Purchased(1)
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Paid per Share
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Announced Plans or Programs
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the Plans or
Programs(4)
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01/01/11 - 01/31/11
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1,925,672
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(2)
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$
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52.07
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$
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15,085,946
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02/01/11 - 02/28/11
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1,475
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$
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53.06
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$
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15,085,946
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03/01/11 - 03/31/11
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913,065
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(3)
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$
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57.37
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$
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15,085,946
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Total
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2,840,212
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$
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53.77
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(1)
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Includes the following number of
shares withheld from WebMD Restricted Common Stock that vested
during the respective periods in order to satisfy withholding
tax requirements related to the vesting of the awards: 5,182 in
January, 1,475 in February and 44,558 in March. 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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(2)
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Includes 1,920,490 shares
repurchased on January 5, 2011 with a portion of the net
proceeds from the sale of the Companys
2.50% Convertible Notes due 2018. The price paid for these
shares was equal to the closing price of WebMD Common Stock on
that date. For additional information see Notes 3 and 7 to
the Consolidated Financial Statements included in this Quarterly
Report.
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(3)
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Includes 868,507 shares
repurchased on March 8, 2011 with a portion of the net
proceeds from the sale of the Companys
2.25% Convertible Notes due 2016. The price paid for these
shares was equal to the closing price of WebMD Common Stock on
that date. For additional information see Notes 3 and 7 to
the Consolidated Financial Statements included in this Quarterly
Report.
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(4)
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In each period, $15,085,946 relates
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 7 to the Consolidated
Financial Statements included in this Quarterly Report.
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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.
57
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: May 10, 2011
58
EXHIBIT INDEX*
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Exhibit No.
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Description
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3
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.1
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Restated Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.1 to the
Registrants Registration Statement on
Form S-8
filed on October 23, 2009
(Reg.
No. 333-162651))
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3
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.2
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Amended and Restated By-laws of the Registrant (incorporated by
reference to Exhibit 3.2 to the Registrants
Registration Statement on
Form S-8
filed on October 23, 2009
(Reg.
No. 333-162651))
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4
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.1
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Indenture, dated as of January 11, 2011, between the
Registrant and The Bank of New York Mellon Trust Company,
N.A. (incorporated by reference to Exhibit 4.1 to Amendment
No. 1, filed on January 14, 2011, to the
Registrants Current Report on
Form 8-K
filed on January 11, 2011)
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4
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.2
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Form of 2.50% Convertible Note Due 2018 (included in
Exhibit 4.1)
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4
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.3
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Indenture, dated as of March 14, 2011, between the
Registrant and The Bank of New York Mellon Trust Company,
N.A. (incorporated by reference to Exhibit 4.1 to Amendment
No. 1, filed on March 15, 2011, to the
Registrants Current Report on
Form 8-K
filed on March 14, 2011)
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4
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.4
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Form of 2.25% Convertible Note Due 2016 (included in
Exhibit 4.3)
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31
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.1
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Rule 13a-14(a)/15d-14(a)
Certification of Chief Executive Officer of Registrant
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31
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.2
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Rule 13a-14(a)/15d-14(a)
Certification of Chief Financial Officer of Registrant
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32
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.1
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Section 1350 Certification of Chief Executive Officer of
Registrant
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32
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.2
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Section 1350 Certification of Chief Financial Officer of
Registrant
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99
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.1
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Explanation of Non-GAAP Financial Measures
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*
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XBRL Interactive Data File will be
filed by amendment to this Form 10-Q within 30 days of the
filing date of this Form 10-Q, as permitted by Rule
405(a)(2)(ii) of Regulation S-T.
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E-1