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WebMD Health 10-Q 2007 Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-Q/A
Commission file number: 0-51547
WEBMD HEALTH CORP.
(212) 624-3700
(Registrant’s 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 is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large
accelerated filer” in
Rule 12b-2
of the Exchange Act.
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act.)
Yes o No þ
As of August 7, 2006, the Registrant had
7,954,584 shares of Class A Common Stock and
48,100,000 shares of Class B Common Stock outstanding.
TABLE OF CONTENTS
Table of Contents
WebMD Health Corp. (the “Company”) is filing this
Amendment No. 1 to its Quarterly Report on
Form 10-Q
for the quarterly period ended June 30, 2006, originally
filed with the Securities and Exchange Commission on
August 9, 2006, to amend and restate its consolidated
financial statements for the three and six month periods ended
June 30, 2006 and 2005.
The Company identified an error in its accounting for non-cash
income tax expense and related deferred taxes. The error relates
to the tax impact of goodwill arising from certain business
combinations which is amortized as an expense for tax purposes
over 15 years but is not amortized to expense for financial
reporting purposes since the adoption of SFAS No. 142
“Goodwill and Other Intangible Assets” as of
January 1, 2002. The Company recorded a deferred income tax
expense and a deferred tax liability related to the
tax-deductible goodwill. However, in preparing the financial
statements, the Company incorrectly netted the deferred tax
liability resulting from the amortization of tax deductible
goodwill against deferred tax assets (primarily relating to the
Company’s net operating loss carryforwards) and provided a
valuation allowance on the net asset balance. Because the
deferred tax liability has an indefinite life, it should not
have been netted against deferred tax assets with a definite
life when determining the required valuation allowance. As a
result, the Company did not record the appropriate valuation
allowance and related deferred income tax expense. The deferred
tax liability described above will remain on the balance sheet
of the Company indefinitely unless there is an impairment of
goodwill for financial reporting purposes or the related
business entity is disposed of through a sale or otherwise.
The error resulted in an understatement of deferred income tax
benefit and an overstatement of the related deferred tax
liability and an overstatement of net loss in the amount of
$1.4 million for the six months ended June 30, 2006
and $329 thousand for the six months ended June 30,
2005, in the Company’s financial statements. The correction
had no effect on the Company’s revenue, pre-tax operating
results, total assets, cash flow or liquidity for any period.
A summary of the effects of this change on the consolidated
balance sheets as of June 30, 2006 and December 31,
2005, and the consolidated statements of operations for the
three and six month periods ended June 30, 2006 and 2005
and cash flows for the six month periods ended June 30,
2006 and 2005 is included in Note 12, “Restatement of
Consolidated Financial Statements” located in the Notes to
Consolidated Financial Statements elsewhere in this Quarterly
report.
The following information has been updated to give effect to the
restatement:
Part I
Item 1 —
Financial Statements
Item 2 —
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Table of Contents
FINANCIAL INFORMATION
WEBMD
HEALTH CORP.
(In thousands, except share and per share data)
See accompanying notes.
Table of Contents
WEBMD
HEALTH CORP.
(In thousands, except per share data, unaudited)
See accompanying notes.
Table of Contents
WEBMD
HEALTH CORP.
(In thousands, unaudited)
See accompanying notes.
Table of Contents
WEBMD
HEALTH CORP.
(In thousands, except share and per share data, unaudited)
WebMD Health Corp. (the “Company”) is a Delaware
corporation that was incorporated on May 3, 2005. The
Company completed an initial public offering (“IPO”)
of Class A Common Stock on September 28, 2005. The
Company’s Class A Common Stock has traded on the
Nasdaq National Market under the symbol “WBMD” since
September 29, 2005 and now trades on the Nasdaq Global
Select Market. Prior to the date of the IPO, the Company was a
wholly-owned subsidiary of Emdeon Corporation
(“Emdeon”) and its consolidated financial statements
had been derived from the consolidated financial statements and
accounting records of Emdeon, principally representing the WebMD
segment, using the historical results of operations, and
historical basis of assets and liabilities of the WebMD related
businesses. Since the completion of the IPO, the Company is a
majority-owned subsidiary of Emdeon, which currently owns 85.8%
of the equity of the Company. Management believes the
assumptions underlying the consolidated financial statements are
reasonable. However, the consolidated financial statements
included herein may not necessarily reflect the Company’s
results of operations, financial position and cash flows in the
future or what its results of operations, financial position and
cash flows would have been had the Company been a stand-alone
company during the periods presented.
The Company’s consolidated financial statements have been
restated to correct the previously reported income tax provision
which is more fully described in Note 12, “Restatement
of Consolidated Financial Statements”.
Transactions between the Company and Emdeon have been identified
in the consolidated financial statements as transactions with
Emdeon (see Note 3).
The unaudited consolidated financial statements of the Company
have been prepared by management and reflect all adjustments
(consisting of only normal recurring adjustments) that, in the
opinion of management, are necessary for a fair presentation of
the interim periods presented. The results of operations for the
three and six months ended June 30, 2006 are not
necessarily indicative of the operating results to be expected
for any subsequent period or for the entire year ending
December 31, 2006. Certain information and footnote
disclosures normally included in financial statements prepared
in accordance with U.S. generally accepted accounting
principles (“GAAP”) have been condensed or omitted
under the Securities and Exchange Commission’s rules and
regulations.
The unaudited consolidated financial statements and notes
included herein should be read in conjunction with a) the
Company’s audited consolidated financial statements and
notes for the year ended December 31, 2005, and b) the
Company’s audited consolidated financial statements and
notes for the year ended December 31, 2006 as amended to
reflect the restatement discussed above, which were included in
the Company’s Annual Reports on Form 10-K for each
period filed with the Securities and Exchange Commission.
The timing of the Company’s revenue is affected by seasonal
factors. Advertising and sponsorship revenue within the Online
Services segment are seasonal, primarily as a result of the
annual budget approval process of the advertising and
sponsorship clients of the public portals. This portion of the
Company’s revenue is usually the lowest in the first
quarter of each calendar year, and increases during each
consecutive quarter throughout the year. The Company’s
private portal licensing revenue is historically highest in the
second half of the year as new customers are typically added
during this period in conjunction with their annual open
Table of Contents
WEBMD
HEALTH CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
enrollment periods for employee benefits. Finally, the annual
distribution cycle within the Publishing and Other Services
segment results in a significant portion of the Company’s
revenue in this segment being recognized in the second and third
quarter of each calendar year.
The preparation of financial statements in conformity with
U.S. GAAP requires management to make certain estimates and
assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. The Company bases
its estimates on historical experience, current business
factors, and various other assumptions that the Company believes
are necessary to consider to form a basis for making judgments
about the carrying values of assets and liabilities and
disclosure of contingent assets and liabilities. The Company is
subject to uncertainties such as the impact of future events,
economic and political factors and changes in the Company’s
business environment; therefore, actual results could differ
from these estimates. Accordingly, the accounting estimates used
in the preparation of the Company’s financial statements
will change as new events occur, as more experience is acquired,
as additional information is obtained and as the Company’s
operating environment changes. Changes in estimates are made
when circumstances warrant. Such changes in estimates and
refinements in estimation methodologies are reflected in
reported results of operations; if material, the effects of
changes in estimates are disclosed in the notes to the
consolidated financial statements. Significant estimates and
assumptions by management affect: revenue recognition, the
allowance for doubtful accounts, the carrying value of prepaid
advertising, the carrying value of long-lived assets (including
goodwill and intangible assets), the amortization period of
long-lived assets (excluding goodwill), the carrying value,
capitalization and amortization of software and Web site
development costs, the provision and benefit for income taxes
and related deferred tax accounts, certain accrued expenses and
contingencies, share-based compensation to employees and
transactions with Emdeon.
Basic and diluted net loss per common share are presented in
conformity with SFAS No. 128, “Earnings Per
Share.” In accordance with SFAS No. 128, basic
loss per common share has been computed using the
weighted-average number of shares of common stock outstanding
during the periods presented.
The Company has excluded all outstanding stock options and
restricted stock from the calculation of diluted loss per common
share because all such securities are anti-dilutive for the
periods presented. The total number of shares excluded from the
calculation of diluted loss per share was 5,285,423 and
5,233,631 for the three and six months ended June 30, 2006,
respectively.
The Company excludes sales and use tax from revenue in the
consolidated statements of operations.
In July 2006, the Financial Accounting Standard Board
(“FASB”) issued FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes,”
(“FIN 48”), which clarifies the accounting for
uncertainty in income taxes recognized in the financial
statements in accordance with FASB Statement No. 109,
“Accounting for Income Taxes.” The interpretation
prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. It also
provides guidance on derecognizing, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. The provisions of FIN 48 are effective for
fiscal years beginning after December 15, 2006. The Company
is currently evaluating the impact, if any, that this new
standard will have on the Company’s results of operations,
financial position or cash flows.
Table of Contents
WEBMD
HEALTH CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Certain reclassifications have been made to the prior period
financial statements to conform to the current year presentation.
On January 1, 2006, the Company adopted
SFAS No. 123, “(Revised 2004): Share-Based
Payment” (“SFAS 123R”), which replaces
SFAS No. 123, “Accounting for Stock-Based
Compensation” (“SFAS 123”) and supersedes
APB Opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB 25”). SFAS 123R
requires all share-based payments to employees, including grants
of employee stock options, to be recognized as compensation
expense over the service period (generally the vesting period)
in the consolidated financial statements based on their fair
values. The Company elected to use the modified prospective
transition method and as a result prior period results were not
restated. Under the modified prospective transition method,
awards that were granted or modified on or after January 1,
2006 are measured and accounted for in accordance with
SFAS 123R. Unvested stock options and restricted stock
awards that were granted prior to January 1, 2006 will
continue to be accounted for in accordance with SFAS 123,
using the same grant date fair value and same expense
attribution method used under SFAS 123, except that all
awards are recognized in the results of operations over the
remaining vesting periods. The impact of forfeitures that may
occur prior to vesting is also estimated and considered in the
amount recognized for all stock-based compensation beginning
January 1, 2006. The impact of the adoption of
SFAS 123R on the Company’s results of operations for
the three and six months ended June 30, 2006 was
approximately $5,800 and $11,500, respectively.
Prior to January 1, 2006, the Company accounted for
stock-based employee compensation using the intrinsic value
method under the recognition and measurement principles of
APB 25, and related interpretations. In accordance with
APB 25, the Company did not recognize stock-based
compensation expense with respect to options granted with an
exercise price equal to the market value of the underlying
common stock on the date of grant. As a result, the recognition
of stock-based compensation expense was generally limited to the
expense related to restricted stock awards. Additionally, all
restricted stock awards and stock options granted prior to
January 1, 2006 had graded vesting, and the Company valued
these awards and recognized actual and pro-forma expense, with
respect to restricted stock awards and stock options, as if each
vesting portion of the award was a separate award. This resulted
in an accelerated attribution of compensation expense over the
vesting period. As permitted under SFAS 123R, the Company
began using a straight-line attribution method beginning
January 1, 2006, for all options and restricted stock
awards granted on or after January 1, 2006, but will
continue to apply the accelerated attribution method for the
remaining unvested portion of any awards granted prior to
January 1, 2006.
The Company has various stock compensation plans under which
directors, officers and other eligible employees receive awards
of options to purchase the Company’s Class A Common
Stock and Emdeon Common Stock and restricted shares of the
Company’s Class A Common Stock and Emdeon’s
Common Stock. The following sections of this note summarize the
activity for each of these plans.
Emdeon
Plans
Emdeon had an aggregate of 7,079,117 shares of Emdeon
Common Stock available for future grants to all of Emdeon
employees under various stock compensation plans (the
“Emdeon Plans”) at June 30, 2006.
Generally, options under the Emdeon Plans vest and become
exercisable ratably over a three-to five-year period based on
their individual grant dates subject to continued employment on
the applicable vesting dates. The majority of options granted
under the Emdeon Plans expire within ten years from the date of
grant. Options are granted at prices not less than the fair
market value of Emdeon’s Common Stock on the date of
Table of Contents
WEBMD
HEALTH CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
grant. The following table summarizes activity for the Emdeon
Plans relating to the Company’s employees for the six
months ended June 30, 2006:
The fair value of each option granted is estimated on the date
of grant using the Black-Scholes option pricing model and using
the assumptions also noted in the following table. Expected
volatility is based on implied volatility from traded options of
Emdeon’s Common Stock combined with historical volatility
of Emdeon’s Common Stock. Prior to January 1, 2006,
only historical volatility was considered. The expected term
represents the period of time that options are expected to be
outstanding following their grant date, and was determined using
historical exercise data. The risk-free rate is based on the
U.S. Treasury yield curve for periods equal to the expected
term of the options on the grant date.
Emdeon Restricted Stock consists of shares of Emdeon Common
Stock which have been awarded to the Company’s employees.
The grants are restricted such that they are subject to
substantial risk of forfeiture and to restrictions on their sale
or other transfer by the employee until they vest. Generally,
Emdeon Restricted Stock awards vest ratably over a three to five
year period from their individual award dates subject to
continued employment on the applicable vesting dates. The
following table summarizes the activity of non-
Table of Contents
WEBMD
HEALTH CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
vested Emdeon Restricted Stock relating to the Company’s
employees during the six months ended June 30, 2006:
Proceeds received by Emdeon from the exercise of options to
purchase Emdeon Common Stock were $3,610 and $7,932 during the
three and six months ended June 30, 2006, respectively, and
$8,409 and $11,293 during the three and six months ended
June 30, 2005, respectively. The intrinsic value related to
the exercise of these stock options as well as the fair value of
shares of Emdeon Restricted Stock that vested was $2,077 and
$6,334 during the three and six months ended June 30, 2006,
respectively, and $9,653 and $14,572 during the three and six
months ended June 30, 2005, respectively, which is
currently deductible for tax purposes. However, these tax
benefits were not realized due to the Company’s net
operating loss carryforwards.
WebMD
Plan
During September 2005, the Company adopted the 2005 Long-Term
Incentive Plan (the “Company’s Plan”). The
maximum number of shares of the Company’s Class A
Common Stock that may be subject to options or restricted stock
awards under the Company’s Plan is 7,130,574, subject to
adjustment in accordance with the terms of the Company’s
Plan. The Company had an aggregate of 1,678,272 shares of
Class A Common Stock available for grant under the
Company’s Plan at June 30, 2006.
Generally, options under the Company’s Plan vest and become
exercisable ratably over a four-year period based on their
individual grant dates subject to continued employment on the
applicable vesting dates. The options granted under the
Company’s Plan expire within ten years from the date of
grant. Options are granted at prices not less than the fair
market value of the Company’s Class A Common Stock on
the date of grant. The following table summarizes activity for
the Company’s Plan during the six months ended
June 30, 2006:
Table of Contents
WEBMD
HEALTH CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The fair value of each option granted is estimated on the date
of grant using the Black-Scholes option pricing model and using
the assumptions noted in the following table. Expected
volatility is based on implied volatility from traded options of
stock of comparable companies combined with historical stock
price volatility of comparable companies. The expected term
represents the period of time that options are expected to be
outstanding following their grant date, and was determined using
historical exercise data. The risk-free rate is based on the
U.S. Treasury yield curve for periods equal to the expected
term of the options on the grant date.
The Company’s Restricted Stock consists of shares of the
Company’s Class A Common Stock which have been awarded
to employees. The grants are restricted such that they are
subject to substantial risk of forfeiture and to restrictions on
their sale or other transfer by the employee until they vest.
Generally, the Company’s Restricted Stock awards vest
ratably over a four year period from their individual award
dates subject to continued employment on the applicable vesting
dates. The following table summarizes the activity of non-vested
Company Restricted Stock during the six months ended
June 30, 2006:
In addition, at the time of the IPO, the Company issued shares
of its Class A Common Stock to each non-employee director
with a value equal to their annual board and committee
retainers. The Company recorded $85 and $170 of stock-based
compensation expense during the three and six months ended
June 30, 2006 in connection with these issuances.
Emdeon’s Employee Stock Purchase Plan (“ESPP”)
allows eligible employees of the Company the opportunity to
purchase shares of Emdeon Common Stock through payroll
deductions, up to 15% of a participant’s annual
compensation with a maximum of 5,000 shares available per
participant during each purchase period. The purchase price of
the stock is 85% of the fair market value on the last day of
each purchase period. Emdeon Common Stock was issued to the
Company’s employees under Emdeon’s ESPP. During the
three and six months ended June 30, 2006,
29,953 shares of Emdeon Common Stock were issued to the
Company’s employees under Emdeon’s ESPP. During the
three and six months ended June 30, 2005,
23,036 shares of Emdeon Common Stock were issued to the
Company’s employees under Emdeon’s ESPP.
Table of Contents
WEBMD
HEALTH CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes the components and classification
of stock-based compensation expense:
No tax benefits were attributed to the stock-based compensation
expense because a valuation allowance was maintained for
substantially all net deferred tax assets. As of June 30,
2006, approximately $5,419 and $32,664 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 1.06 years and
1.82 years, related to the Emdeon Plans, and the
Company’s Plan, respectively.
The following table summarizes pro forma net loss and net loss
per common share as if the Company had applied the fair value
recognition provisions of SFAS 123, to stock-based employee
compensation for the three and six months ended June 30,
2005:
In connection with the IPO in September 2005, the Company
entered into a number of agreements with Emdeon governing the
future relationship of the companies, including a Services
Agreement, a Tax Sharing
Table of Contents
WEBMD
HEALTH CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Agreement and an Indemnity Agreement. These agreements cover a
variety of matters, including responsibility for certain
liabilities, including tax liabilities, as well as matters
related to Emdeon providing the Company with administrative
services, such as payroll, accounting, tax, employee benefit
plan, employee insurance, intellectual property, legal and
information processing services.
On January 31, 2006, the Company entered into additional
agreements with Emdeon in which both parties agreed to support
each other’s product development and marketing efforts of
specific product lines for agreed upon fees as defined in the
agreements. The new agreements cover a term of five years.
On February 15, 2006, the Tax Sharing Agreement was amended
to provide that Emdeon will compensate the Company for any use
of the Company’s net operating losses that may result from
certain extraordinary transactions, as defined in the Tax
Sharing Agreement, including a sale by Emdeon of its Business
Services and Practice Services operating segments.
Revenue: The Company sells certain of its
products and services to Emdeon businesses. These amounts are
included in revenue during the three and six months ended
June 30, 2006. The Company charges Emdeon rates comparable
to those charged to third parties for similar products and
services.
Advertising Expense: The Company allocated
costs to Emdeon in 2005 based on its utilization of the
Company’s advertising services. The Company no longer
allocates any advertising expense to Emdeon, or other businesses
of Emdeon, related to any advertising that promotes the WebMD
brand. The Company’s portion of the advertising services
utilized is included in sales and marketing expense within the
accompanying consolidated statements of operations, and is
reported net of amounts charged to Emdeon.
Corporate Services: The Company is charged a
services fee (the “Services Fee”) for costs related to
corporate services provided by Emdeon. The services that Emdeon
provides include certain administrative services, including
payroll, accounting, tax planning and compliance, employee
benefit plans, legal matters and information processing. In
addition, the Company reimburses Emdeon for an allocated portion
of certain expenses that Emdeon incurs for outside services and
similar items, including insurance fees, outside personnel,
facilities costs, professional fees, software maintenance fees
and telecommunications costs. Emdeon has agreed to make the
services available to the Company for up to 5 years
following the IPO. These expense allocations were determined on
a basis that Emdeon and the Company consider to be a reasonable
assessment of the costs of providing these services, exclusive
of any profit margin. The basis the Company and Emdeon used to
determine these expense allocations required management to make
certain judgments and assumptions. These cost allocations are
reflected in the table below under the caption “Corporate
services — shared services allocation”. Prior to
the IPO, the Services Fee also included costs identified for
dedicated employees managed centrally by Emdeon for certain of
its functions across all of its segments. This portion of the
Services Fee charged for dedicated employees included a charge
for their salaries, plus an overhead charge for these employees
calculated based on a pro rata portion of their salaries to
total salaries within the function. The amount reflected in the
table below under the caption “Corporate
services — specific identification” reflects the
costs for these employees through their date of transfer. The
Services Fee is reflected in general and administrative expense
within the accompanying consolidated statements of operations.
Healthcare Expense: The Company is charged for
its employees’ participation in Emdeon’s healthcare
plans. Healthcare expense is charged based on the number of
total employees of the Company and reflects Emdeon’s
average cost of these benefits per employee. Healthcare expense
is reflected in the accompanying consolidated statements of
operations in the same expense captions as the related salary
costs of those employees.
Table of Contents
WEBMD
HEALTH CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Stock-Based Compensation Expense: Stock-based
compensation expense is related to stock option issuances and
restricted stock awards of Emdeon’s Common Stock that have
been granted to certain employees of the Company. Stock-based
compensation expenses are allocated on a specific employee
identification basis. The expense is reflected in the
accompanying consolidated statements of operations in the same
expense captions as the related salary costs of those employees.
The allocation of stock-based compensation expense related to
Emdeon’s Common Stock is recorded as additional paid-in
capital.
The following table summarizes the allocations reflected in the
Company’s consolidated financial statements:
On June 13, 2006, the Company acquired Summex Corporation
(“Summex”), a provider of health and wellness programs
that include online and offline health risk assessments,
lifestyle education and personalized telephonic health coaching.
The total purchase consideration for Summex was
approximately $30,191, comprised of $29,691 in cash, net of
the cash acquired, and $500 of estimated acquisition costs. In
addition, the Company has agreed to pay up to an additional
$10,000 in cash over a two-year period if certain financial
milestones are achieved. The acquisition was accounted for using
the purchase method of accounting and, accordingly, the purchase
price was allocated to the tangible and intangible assets
acquired and the liabilities assumed on the basis of their
respective fair values. In connection with the preliminary
allocation of the purchase price and intangible asset
valuations, goodwill of $21,786 and intangible assets subject to
amortization of $8,500 were recorded. The goodwill and
intangible assets recorded will not be deductible for tax
purposes. The intangible assets are comprised of $4,000 relating
to customer relationships with estimated useful lives of three
years and $4,500 relating to acquired technology with an
estimated useful life of five years. The results of operations
of Summex have been included in the financial statements of the
Company from June 13, 2006, the closing date of the
acquisition, and are included in the Online Services segment.
On January 17, 2006, the Company acquired eMedicine.com,
Inc. (“eMedicine”), a privately held online publisher
of medical reference information for physicians and other
healthcare professionals. The total purchase consideration for
eMedicine was approximately $25,382, comprised of $24,682 in
cash, net of cash acquired, and $700 of estimated acquisition
costs. The acquisition was accounted for using the purchase
method of accounting and, accordingly, the purchase price was
allocated to the tangible and intangible assets acquired and the
liabilities assumed on the basis of their respective fair
values. In connection with the preliminary allocation of the
purchase price and intangible asset valuation, goodwill of
$18,228 and an intangible asset subject to amortization of
$9,000 were recorded. The goodwill and intangible asset recorded
will not be deductible for tax purposes. The intangible asset
recorded was content with an estimated useful life of three
years. The results of operations of eMedicine have been included
in the financial statements of the
Table of Contents
WEBMD
HEALTH CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Company from January 17, 2006, the closing date of the
acquisition, and are included in the Online Services segment.
On December 2, 2005, the Company acquired the assets of and
assumed certain liabilities of Conceptis Technologies, Inc.
(“Conceptis”), a privately held Montreal-based
provider of online and offline medical education and promotion
aimed at physicians and other healthcare professionals. The
total purchase consideration for Conceptis was approximately
$19,859, comprised of $19,256 in cash and $603 of estimated
acquisition costs. The acquisition was accounted for using the
purchase method of accounting and, accordingly, the purchase
price was allocated to the tangible and intangible assets
acquired and the liabilities assumed on the basis of their
respective fair values. In connection with the preliminary
allocation of the purchase price and intangible asset valuation,
goodwill of $14,717 and intangible assets subject to
amortization of $6,140 were recorded. The goodwill and
intangible assets recorded will be deductible for tax purposes.
The intangible assets recorded were $1,900 relating to content
with an estimated useful life of two years, $3,300 relating to
acquired technology with an estimated useful life of three years
and $940 relating to a trade name with an estimated useful life
of ten years. The results of operations of Conceptis have been
included in the financial statements of the Company from
December 2, 2005, the closing date of the acquisition, and
are included in the Online Services and the Publishing and Other
Services segments.
On March 14, 2005, the Company acquired HealthShare
Technology, Inc. (“HealthShare”), a privately held
company that provides online tools that compare the cost and
quality measures of hospitals for use by consumers, providers
and health plans. The total purchase consideration for
HealthShare was approximately $29,985, comprised of $29,533 in
cash, net of cash acquired, and $452 of acquisition costs. The
acquisition was accounted for using the purchase method of
accounting and, accordingly, the purchase price was allocated to
the tangible and intangible assets acquired and the liabilities
assumed on the basis of their respective fair values. In
connection with the allocation of the purchase price, goodwill
of $24,611 and intangible assets subject to amortization of
$8,500 were recorded. The goodwill and intangible assets
recorded will not be deductible for tax purposes. The intangible
assets are comprised of $7,500 relating to customer
relationships with estimated useful lives of five years and
$1,000 relating to acquired technology with an estimated useful
life of three years. The results of operations of HealthShare
have been included in the financial statements of the Company
from March 14, 2005, the closing date of the acquisition,
and are included in the Online Services segment.
The following table summarizes the tangible and intangible
assets acquired, the liabilities assumed and the consideration
paid for each acquisition:
The following unaudited pro forma financial information for the
six months ended June 30, 2006 and 2005 gives effect to the
acquisitions of Summex, eMedicine, Conceptis and HealthShare,
including the
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WEBMD
HEALTH CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
amortization of intangible assets, as if they had all occurred
on January 1, 2005. The information is provided for
illustrative purposes only and is not necessarily indicative of
the operating results that would have occurred if the
transactions had been consummated at the date indicated, nor is
it necessarily indicative of future operating results of the
combined companies, and should not be construed as
representative of these results for any future period.
In May 2001, Emdeon entered into an agreement for a strategic
alliance with Time Warner, Inc. (“Time Warner”). Under
the agreement, the Company is the primary provider of healthcare
content, tools and services for use on certain America Online
(“AOL”) properties. The Company and AOL share certain
revenue from advertising, commerce and programming on the health
channels of the AOL properties and on a co-branded service
created for AOL by the Company. The original term of the
agreement was for three years expiring in May 2004. The Company
had the right to extend the original agreement for an additional
three-year term under certain circumstances. The Company
exercised its right to extend the contract term until May 2007.
Under the terms of the extension, the Company is entitled to
share in revenue and is guaranteed a minimum of $12,000 during
each year of the renewal term for its share of advertising
revenue. Included in revenue was $1,936 and $3,689 during the
three and six months ended June 30, 2006 and $2,063 and
$4,200 during the three and six months ended June 30, 2005
related to sales to third parties of advertising and sponsorship
on the AOL health channels, primarily sold through the
Company’s sales organization. Also included in revenue for
the three and six months ended June 30, 2006 was revenue of
$1,258 and $2,813 during the three and six months ended
June 30, 2006 and $1,805 and $3,048 during the three and
six months ended June 30, 2005 related to the guarantee
discussed above.
In connection with a strategic relationship with News
Corporation that Emdeon entered into in 2000 and amended in
2001, Emdeon received rights to an aggregate of $205,000 in
advertising services from News Corporation to be used over ten
years expiring in 2010 in exchange for equity securities issued
by Emdeon. In September 2005, the rights to these advertising
services were contributed to the Company in connection with the
IPO. The amount of advertising services received in any contract
year is based on the current market rates in effect at the time
the advertisement is placed. Additionally, the amount of
advertising services that can be used in any contract year is
subject to contractual limitations. The advertising services
were recorded at fair value determined using a discounted cash
flow methodology. The remaining portion of these advertising
services is included in prepaid advertising in the accompanying
consolidated balance sheets. Also, as part of the same
relationship the Company licensed its content to News
Corporation for use across News Corporation’s media
properties for four years, ending in January 2005, for cash
payments totaling $12,000 per contract year.
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WEBMD
HEALTH CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In 2004, the Company entered into an agreement with Fidelity
Human Resources Services Company LLC (“FHRS”) to
integrate the Company’s private portals products into the
services FHRS provides to its clients. FHRS provides human
resources administration and benefits administration services to
employers. The Company recorded revenue of $1,766 and $3,393
during the three and six months ended June 30, 2006 and
$601 and $1,097 during the three and six months ended
June 30, 2005, respectively. Included in accounts
receivable as of June 30, 2006 and 2005 was $341 and $530,
respectively, related to the FHRS agreement.
The Company provides health information services to consumers,
physicians, healthcare professionals, employers and health plans
through the Company’s public and private online portals and
health-focused publications. The Company’s two operating
segments are:
The performance of the Company’s business is monitored
based on earnings (loss) before interest, taxes, depreciation,
amortization and other non-cash items. Other non-cash items
include non-cash advertising expense and non-cash stock-based
compensation expense. Corporate and other overhead functions are
allocated to segments on a specifically identifiable basis or
other reasonable method of allocation. The Company considers
these allocations to be a reasonable reflection of the
utilization of costs incurred. The Company does not disaggregate
assets for internal management reporting and, therefore, such
information is not presented. There are no inter-segment revenue
transactions.
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WEBMD
HEALTH CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Summarized financial information for each of the Company’s
operating segments and a reconciliation to net loss are
presented below:
The following disclosure of the estimated fair value of
financial instruments is made in accordance with the
requirements of SFAS No. 107, “Disclosures about
Fair Value of Financial Instruments.” The estimated fair
values have been determined using available market information.
However, considerable judgment is required in interpreting
market data to develop estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the
amounts that the Company could realize in a current market
exchange. The use of different market assumptions
and/or
estimation methodologies may have a material effect on the
estimated fair value amounts.
The gross unrealized losses related to short-term investments
are primarily due to a decrease in the fair value of debt
securities as a result of an increase in interest rates during
the three and six months ended June 30, 2006. The Company
has determined that the gross unrealized losses on its
short-term investments at June 30, 2006 are temporary in
nature. The Company reviews its investment portfolio to identify
and evaluate
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WEBMD
HEALTH CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
investments that have indications of possible impairment.
Factors considered in determining whether a loss is temporary
include the length of time and extent to which fair value has
been less than the cost basis, the financial condition and
near-term prospects of the investee, credit quality and the
Company’s ability to hold the investment for a period of
time sufficient to allow for any anticipated recovery in market
value.
The amortized cost and estimated fair value by maturity of
securities are shown in the following table:
Comprehensive loss is comprised of net loss and other
comprehensive income (loss). Other comprehensive income (loss)
includes certain changes in equity that are excluded from net
loss, such as changes in unrealized gains (losses) on
available-for-sale
marketable securities. The Company has foreign assets in foreign
locations and recorded $7 of foreign exchange translation
adjustment was recorded during the three and six months ended
June 30, 2006. The following table presents the components
of comprehensive loss:
The foreign currency translation gains and unrealized gains
(losses) on securities are not currently adjusted for income
taxes as a full valuation allowance has been recorded against
all net deferred tax assets.
The changes in the carrying amount of goodwill for the year
ended December 31, 2005 and the six months ended
June 30, 2006 are as follows:
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WEBMD
HEALTH CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Intangible assets subject to amortization consist of the
following:
Amortization expense was $2,596 and $5,034 during the three and
six months ended June 30, 2006 and $2,042 and $3,335 during
the three and six months ended June 30, 2005. Aggregate
amortization expense for intangible assets is estimated to be:
On May 24, 2005, a lawsuit was filed by Dr. Ari
Weitzner individually, and as a class action, under the
Telephone Consumer Protection Act (or TCPA), in the
U.S. District Court, Eastern District of New York against
National Physicians Datasource LLC (or NPD), one of the
Company’s subsidiaries. The lawsuit claims that faxes
allegedly sent by NPD, which publishes The Little Blue
Book, were sent in violation of the TCPA. The lawsuit
potentially seeks damages in excess of $5,000. The Court had
temporarily stayed the lawsuit pending resolution of relevant
issues in a related case. On February 21, 2006, the Court
lifted the stay. The parties are currently conducting discovery.
The Company expects to oppose certification as a class action
when discovery on that matter is completed.
On July 19, 2006, the Company entered into a definitive
agreement to acquire the interactive medical education,
promotion and physician recruitment businesses of Medsite, Inc.
The purchase price is $41,000 in cash. This acquisition is
expected to close during the third quarter of 2006 and will be
included in the Online Services segment.
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WEBMD
HEALTH CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
On August 8, 2006, Emdeon announced the sale of its Emdeon
Practice Services segment for $565,000 in cash. Emdeon expects
the closing to occur in September 2006, subject to
satisfaction of customary closing conditions. Emdeon expects to
recognize a taxable gain on the sale of its Emdeon Practice
Services segment and expects to utilize a portion of its federal
net operating loss (“NOL”) carryforwards to offset the
gain on this transaction. Under the tax sharing agreement
between Emdeon and the Company, the Company will be reimbursed
for any of its NOL carryforwards utilized by Emdeon in this
transaction at the current federal statutory rate of 35%. Emdeon
currently estimates that the amount of the Company’s NOL
carryforwards utilized in this transaction will be approximately
$240,000 to $260,000 resulting in a cash reimbursement to the
Company of $84,000 to $91,000. The amount of the utilization of
the Company’s NOL carryforwards and related reimbursement
is based on various assumptions and will not be finalized until
the filing of Emdeon’s 2006 consolidated tax return.
The Company identified an error in its accounting for non-cash
income tax expense and related deferred taxes. The error relates
to the tax impact of goodwill arising from certain business
combinations which is amortized as an expense for tax purposes
over 15 years but is not amortized to expense for financial
reporting purposes since the adoption of SFAS No. 142
“Goodwill and Other Intangible Assets” as of
January 1, 2002. The Company recorded a deferred income tax
expense and a deferred tax liability related to the
tax-deductible goodwill. However, in preparing the financial
statements, the Company incorrectly netted the deferred tax
liability resulting from the amortization of tax deductible
goodwill against deferred tax assets (primarily relating to the
Company’s net operating loss carryforwards) and provided a
valuation allowance on the net asset balance. Because the
deferred tax liability has an indefinite life, it should not
have been netted against deferred tax assets with a definite
life when determining the required valuation allowance. As a
result, the Company did not record the appropriate valuation
allowance and related deferred income tax expense. The deferred
tax liability described above will remain on the balance sheet
of the Company indefinitely unless there is an impairment of
goodwill for financial reporting purposes or the related
business entity is disposed of through a sale or otherwise.
The error resulted in an understatement of deferred income tax
benefit and an overstatement of the related deferred tax
liability and an overstatement of net loss in the amount of
$1,413 for the six months ended June 30, 2006 and $329 for
the six months ended June 30, 2005, in the Company’s
financial statements. The correction had no effect on the
Company’s revenue, pre-tax operating results, total assets,
cash flow or liquidity for any period.
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WEBMD
HEALTH CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The effects of this change on the consolidated balance sheets as
of June 30, 2006 and December 31, 2005, and the
consolidated statements of operations for the three and six
month periods ended June 30, 2006 and 2005 and cash flows
for the six month periods ended June 30, 2006 and 2005 are
summarized as follows:
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WEBMD
HEALTH CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
22
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This Item 2 contains forward-looking statements with
respect to possible events, outcomes or results that are, and
are expected to continue to be, subject to risks, uncertainties
and contingencies, including those identified in this Item. See
“Forward-Looking Statements”.
The following information has been adjusted to reflect the
restatement of our financial statements to correct the
previously reported income tax provision, which is more fully
described in the “Explanatory Note” on page 1 and
Note 12, “Restatement of Consolidated Financial
Statements” located in the Notes to Consolidated Financial
Statements elsewhere in this Quarterly report.
Management’s discussion and analysis of financial condition
and results of operations, or MD&A, is provided as a
supplement to the consolidated financial statements and notes
thereto included elsewhere in this Quarterly Report and is
intended to provide an understanding of our results of
operations, financial condition and changes in financial
condition. Our MD&A is organized as follows:
In this MD&A, dollar amounts are in thousands, unless
otherwise noted.
Our
Company
We are a leading provider of health information services to
consumers, physicians and other healthcare professionals,
employers and health plans. We have organized our business into
two operating segments as follows:
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Acquisition of eMedicine.com, Inc. On
January 17, 2006, we acquired eMedicine.com, Inc.
(“eMedicine”), a privately held online publisher of
medical reference information for physicians and other
healthcare professionals. The total purchase consideration for
eMedicine was approximately $25,382, comprised of $24,682 in
cash, net of cash acquired, and $700 of estimated acquisition
costs. The results of operations of eMedicine have been included
in our financial statements from January 17, 2006, the
closing date of the acquisition, and are included in the Online
Services segment.
Acquisition of Summex Corporation. On
June 13, 2006, we acquired Summex Corporation
(“Summex”), a provider of health and wellness programs
that include online and offline health risk assessments,
lifestyle education and personalized telephonic health coaching.
The Summex programs complement the online health and benefits
platform that we provide to employers and health plans.
Summex’s team of professional health coaches work
one-on-one
with employees and plan members to change high-risk behaviors
that lead to illness and high medical costs. The total purchase
consideration for Summex was approximately $30,191, comprised of
$29,691 in cash, net of cash acquired, and $500 of estimated
acquisition costs. In addition, the Company has agreed to pay up
to an additional $10,000 in cash over a two-year period if
certain financial milestones are achieved. The results of
operations of Summex will be included in our financial
statements from June 13, 2006, the closing date of the
acquisition, and are included in the Online Services segment.
Acquisition of Medsite. On July 19, 2006,
we entered into an agreement to acquire the interactive medical
education, promotion and physician recruitment businesses of
Medsite, Inc. (“Medsite”) for a purchase price of
$41,000 in cash. Medsite provides
e-detailing
services for pharmaceutical, medical device and healthcare
companies, including program development, targeted recruitment
and online distribution and delivery. Medsite leverages its
proprietary physician database for online recruitment and
participation into its programs. The results of operations of
Medsite will be included in the Online Services segment upon
closing, which is expected during the third quarter of 2006.
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Use of the Internet by Consumer 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. As consumers are required to assume
greater financial responsibility for rising healthcare costs,
the Internet serves as a valuable resource by providing them
with immediate access to searchable 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 of this
amount is currently spent on online services. We believe that
these companies, who comprise the majority of our advertisers
and sponsors, 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.
Changes in Health Plan Design; Health Management
Initiatives. While overall healthcare costs have
been rising at a rapid annual rate, employers’ costs of
providing healthcare benefits to their employees have been
increasing at an even faster rate. In response to these
increases, employers are seeking to shift a greater portion of
healthcare costs onto their employees and to redefine
traditional health benefits. Employers and health plans want to
motivate their members and employees to evaluate their
healthcare decisions more carefully in order to be more
cost-effective. As employers continue to implement high
deductible and consumer-directed healthcare plans (referred to
as CDHPs) and related Health Savings Accounts (referred to as
HSAs) to achieve these goals, we believe that we will be able to
attract more employers and health plans to use our private
online portals. In addition, health plans and employers have
begun to recognize that encouraging the good health of their
members and employees not only benefits the members and
employees but also has financial benefits for the health plans
and employers. Accordingly, many employers and health plans have
been enhancing health management programs and taking steps to
provide healthcare information and education to employees and
members, including through online services. We believe that we
are well positioned to benefit from these trends because our
private portals provide the tools and information employees and
plan members need in order to make more informed decisions about
healthcare provider, benefit and treatment options.
The timing of our revenue is affected by seasonal factors.
Advertising and sponsorship revenue within our Online Services
segment is seasonal, primarily due to the annual budget approval
process 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. Our private portal
licensing revenue is historically higher in the second half of
the year as new customers are typically added during this period
in conjunction with their annual open enrollment periods for
employee benefits. Finally, the annual distribution cycle within
our Publishing and Other Services segment results in a
significant portion of our revenue in this segment being
recognized in the second and third quarter of each calendar
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.
Our MD&A is based upon our unaudited consolidated financial
statements and notes to unaudited consolidated financial
statements, which were prepared in conformity with
U.S. generally accepted accounting
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principles. The preparation of the unaudited consolidated
financial statements requires us to make estimates and
assumptions that affect the amounts reported in the unaudited
consolidated financial statements and accompanying notes. We
base our estimates on historical experience, current business
factors, and various other assumptions that we believe are
necessary to consider to form a basis for making judgments about
the carrying values of assets and liabilities and disclosure of
contingent assets and liabilities. We are subject to
uncertainties such as the impact of future events, economic and
political factors, and changes in our business environment;
therefore, actual results could differ from these estimates.
Accordingly, the accounting estimates used in preparation of our
financial statements will change as new events occur, as more
experience is acquired, as additional information is obtained
and as our operating environment changes. Changes in estimates
are made when circumstances warrant. Such changes in estimates
and refinements in estimation methodologies are reflected in
reported results of operations; if material, the effects of
changes in estimates are disclosed in the notes to our unaudited
consolidated financial statements.
We evaluate our estimates on an ongoing basis, including those
related to revenue recognition, the allowance for doubtful
accounts, the carrying value of prepaid advertising, the
carrying value of long-lived assets (including goodwill and
intangible assets), the amortization period of long-lived assets
(excluding goodwill), the carrying value, capitalization and
amortization of software and Web site development costs, the
provision for income taxes and related deferred tax accounts,
certain accrued expenses and contingencies, share-based
compensation to employees and transactions with Emdeon.
We believe the following reflects our critical accounting
policies and our more significant judgments and estimates used
in the preparation of our unaudited consolidated financial
statements:
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In connection with our IPO in September 2005, we entered into a
number of agreements with Emdeon governing the future
relationship of the companies, including a Services Agreement, a
Tax Sharing Agreement and an Indemnity Agreement. These
agreements cover a variety of matters, including responsibility
for certain liabilities, including tax liabilities, as well as
matters related to Emdeon providing us with administrative
services, such as payroll, accounting, tax, employee benefit
plan, employee insurance, intellectual property, legal and
information processing services.
On January 31, 2006, we entered into additional agreements
with Emdeon in which both parties agreed to support each
other’s product development and marketing efforts of
specific product lines for agreed upon fees as defined in the
agreements. The new agreements cover a term of five years.
On February 15, 2006, the Tax Sharing Agreement was amended
to provide that Emdeon will compensate us for any use of our net
operating losses that may result from certain extraordinary
transactions, as defined in the Tax Sharing Agreement, including
a sale by Emdeon of its Business Services and Practice Services
operating segments.
Revenue: We sell certain of our products and
services to Emdeon businesses. These amounts are included in
revenue during the three and six months ended June 30,
2006. We charge Emdeon rates comparable to those charged to
third parties for similar products and services.
Advertising Expense: We allocated costs to
Emdeon in 2005 based on its utilization of our advertising
services. We no longer allocate any advertising expense to
Emdeon, or other businesses of Emdeon, related to any
advertising that promotes the WebMD brand. Our portion of the
advertising services utilized is included in sales and marketing
expense within the accompanying consolidated statements of
operations, and is reported net of amounts charged to Emdeon.
Charges from Emdeon to the Company:
Corporate Services: We are charged a services
fee (the “Services Fee”) for costs related to
corporate services provided to us by Emdeon. The services that
Emdeon provides include certain administrative services,
including payroll, accounting, tax planning and compliance,
employee benefit plans, legal matters and information
processing. In addition, we reimburse Emdeon for an allocated
portion of certain expenses that Emdeon incurs for outside
services and similar items, including insurance fees, outside
personnel, facilities costs, professional fees, software
maintenance fees and telecommunications costs. Emdeon has agreed
to make the services available to us for up to 5 years
following the IPO. These expense allocations were determined on
a basis that we and Emdeon consider to be a reasonable
assessment of the cost of providing these services, exclusive of
any profit margin. The basis we and Emdeon used to determine
these expense allocations required management to make certain
judgments and assumptions. These cost allocations are reflected
in the table
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below under the caption “Corporate services —
shared services allocation”. Prior to the IPO, the Services
Fee also included costs identified for dedicated employees
managed centrally by Emdeon for certain of its functions across
all of its segments. This portion of the Services Fee charged
for dedicated employees included a charge for their salaries,
plus an overhead charge for these employees calculated based on
a pro rata portion of their salaries to total salaries within
the function. The amount reflected in the table below under the
caption “Corporate services — specific
identification” reflects the costs for these employees
through their date of transfer. The Services Fee is reflected in
general and administrative expense within our consolidated
statements of operations.
Healthcare Expense: We are charged for our
employees’ participation in Emdeon’s healthcare plans.
Healthcare expense is charged based on the number of our total
employees and reflects Emdeon’s average cost of these
benefits per employee. Healthcare expense is reflected in the
accompanying consolidated statements of operations in the same
expense captions as the related salary costs of those employees.
Stock-Based Compensation Expense: Stock-based
compensation expense is related to stock option issuances and
restricted stock awards of Emdeon’s Common Stock that have
been granted to certain of our employees. Stock-based
compensation expense is allocated on a specific employee
identification basis. The expense is reflected in our
consolidated statements of operations in the same expense
captions as the related salary costs of those employees. The
allocation of stock-based compensation expense related to
Emdeon’s Common Stock is recorded as additional paid-in
capital.
The following table summarizes the allocations reflected in our
consolidated financial statements:
In July 2006, the Financial Accounting Standard Board
(“FASB”) issued FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes,”
(“FIN 48”), which clarifies the accounting for
uncertainty in income taxes recognized in the financial
statements in accordance with FASB Statement No. 109,
“Accounting for Income Taxes.” The interpretation
prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. It also
provides guidance on derecognizing, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. The cumulative effect of applying FIN 48 should
be reported as an adjustment to retained earnings at the
beginning of the period in which it is adopted. The provisions
of FIN 48 are effective for fiscal years beginning after
December 15, 2006. We are currently evaluating the impact,
if any, that this new standard will have on our results of
operations, financial position or cash flows.
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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:
Revenue is derived from our two business segments: Online
Services and Publishing and Other Services. Our Online Services
segment derives revenue from advertising, sponsorship (including
online CME services), content syndication and distribution, and
licenses of private online portals to employers, healthcare
payers and others. Our Publishing and Other Services segment
derives revenue from sales of, and advertising in, our physician
directories, subscriptions to our professional medical reference
textbooks, and advertisements in WebMD the Magazine. As a
result of the acquisition of the assets of Conceptis, we also
generate revenue from in-person medical education programs.
Our customers include pharmaceutical, biotechnology, medical
device and consumer products companies, as well as employers and
health plans. Our customers also include physicians and other
healthcare providers who buy our physician directories and
reference textbooks.
Cost of operations consists of costs related to services and
products we provide to customers and costs associated with the
operation and maintenance of our public and private portals.
These costs relate to editorial and production, Web site
operations, non-capitalized Web site development costs, and
costs related to the production and distribution of our
publications. These costs consist of expenses related to
salaries and related expenses, non-cash stock-based
compensation, creating and licensing content,
telecommunications, leased properties, printing and
distribution, and non-cash advertising expenses.
Sales and marketing expense consists primarily of advertising,
product and brand promotion, salaries and related expenses, and
non-cash stock-based compensation. These expenses include items
related to salaries and related expenses of account executives,
account management and marketing personnel, costs and expenses
for marketing programs, and fees for professional marketing and
advertising services. Also included in sales and marketing
expense are the non-cash advertising expenses discussed below.
General and administrative expense consists primarily of
salaries, non-cash stock-based compensation and other
salary-related expenses of administrative, finance, legal,
information technology, human resources and executive personnel.
These expenses include costs of general insurance and costs of
accounting and internal control systems to support our
operations, a services fee for our portion of certain expenses
shared across all segments of Emdeon.
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Our discussions throughout this MD&A reference certain
non-cash expenses. The following is a summary of our principal
non-cash expenses:
The following table is a summary of our non-cash expenses
included in the respective statements of operations captions.
Three
and Six Months Ended June 30, 2006 and 2005
The following discussion is a comparison of our results of
operations on a consolidated basis for the three and six months
ended June 30, 2006 and 2005.
Our total revenue increased 38.1% and 42.7% to $56,612 and
$106,663 in the three and six months ended June 30, 2006,
respectively, from $40,979 and $74,740 during the same periods
last year. The acquisitions completed in 2006 and 2005
contributed $5,872 and $12,843 to the increases in revenue for
the three and six months ended June 30, 2006, respectively.
Online Services accounted for $12,714 and $26,637 or 81.3% and
83.4% of the revenue increase for the three and six months ended
June 30, 2006, respectively. Publishing and Other Services
accounted for the remaining increase of $2,919 and $5,286 in the
three and six months ended June 30, 2006, respectively.
Cost of Operations. Cost of operations
increased to $25,716 and $50,426 in the three and six months
ended June 30, 2006, respectively, from $18,616 and $33,511
during the same periods last year. As a percentage of revenue,
cost of operations were 45.4% and 47.3% in the three and six
months ended June 30,
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2006, respectively, compared to 45.4% and 44.8% in the same
periods last year. Included in cost of operations in 2006 were
non-cash expenses of $2,432 and $4,749 during the three and six
months ended June 30, 2006, respectively, compared to $276
and $378 during the same periods last year. The increases in
non-cash expenses during the three and six month periods
compared to last year were primarily related to stock-based
compensation expense as a result of the adoption of
SFAS 123R. Cost of operations excluding non-cash expense
was $23,284 and $45,677 in the three and six months ended
June 30, 2006, respectively, or 41.1% and 42.8% of revenue,
compared to $18,340 and $33,133, or 44.8% and 44.3% during the
same periods last year. The increases in absolute dollars for
both periods were primarily attributable to increases in
compensation related costs due to higher staffing levels and
outside personnel expenses relating to our Web site operations
and development, increased costs associated with creating and
licensing our content and expenses relating to our acquisitions.
Additionally, the three and six months ended June 30, 2005
included approximately $700 of severance costs. The decrease as
a percentage of revenue was primarily due to our ability to
achieve the increase in revenue without incurring a proportional
increase in cost of operations expenses.
Sales and Marketing. Sales and marketing
expense increased to $16,932 and $32,469 in the three and six
months ended June 30, 2006, respectively, from $12,141 and
$23,129 in the same periods last year. Included in sales and
marketing expense were non-cash expenses related to advertising
of $1,189 and $2,794 in the three and six months ended
June 30, 2006, respectively, a decrease from $1,446 and
$3,197 in the same periods last year. Non-cash advertising
expense declined during the three and six month periods compared
to 2005 due to lower utilization of our prepaid advertising
inventory. Also included in sales and marketing expense were
non-cash expenses related to stock-based compensation expense of
$1,524 and $3,012 in the three and six months ended
June 30, 2006, respectively, compared to $27 and $182 in
the same periods last year. The increases in non-cash expenses
during the three and six month periods compared to last year
were primarily related to stock-based compensation expense as a
result of the adoption of SFAS 123R. Additionally, the
three and six months ended June 30, 2005 included
approximately $250 of severance costs. Sales and marketing
expense, excluding non-cash expenses, was $14,219 and $26,663 or
25.1% and 25.0% of revenue in the three and six months ended
June 30, 2006, respectively, compared to $10,668 and
$19,750, or 26.0% and 26.4% of revenue in the same periods last
year. The increases in absolute dollars during the three and six
months ended June 30, 2006 compared to 2005 was primarily
attributable to increases in compensation related costs due to
increased staffing and sales commissions related to higher
revenue and to expenses related to our acquisitions. The
decrease as a percentage of revenue 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 $12,565 and $24,455 in the
three and six months ended June 30, 2006, respectively,
from $8,665 and $15,205 in the same periods last year. Included
in general and administrative expense during the three and six
months ended June 30, 2006 was non-cash stock-based
compensation expense of $3,055 and $6,258, respectively,
compared to $0 and $226 in the same periods last year. The
increase in non-cash stock-based compensation expense was
primarily due to the adoption of SFAS 123R. General and
administrative expense, excluding non-cash expenses, was $9,510
and $18,197 or 16.8% and 17.1% of revenue in the three and six
months ended June 30, 2006, respectively, compared to
$8,665 and $14,979, or 21.1% and 20.0% of revenue in the same
periods last year. The increases in absolute dollars for both
periods were primarily attributable to higher staffing levels
and increased expenses related to our acquisitions and public
company related costs. Additionally, the three and six months
ended June 30, 2005 included a charge of $2,200 related to
the resignation of our former CEO and the recruitment of our
Executive Vice President of Product and Programming and Chief
Technology Officer. The decrease as a percentage of revenue was
primarily due to our ability to achieve the increases in revenue
without incurring a proportional increase in general and
administrative expense.
Depreciation and Amortization. Depreciation
and amortization expense increased to $4,013 and $7,542 in the
three and six months ended June 30, 2006, respectively,
from $3,019 and $5,252 in the same periods last year. The
increase over the prior year period was primarily due to
amortization of intangible assets relating to the Summex,
eMedicine, Conceptis and HealthShare acquisitions as well as the
increase in depreciation expense relating to capital
expenditures in 2005 and 2006.
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Interest Income. Interest income of $1,468 and
$2,916 for the three and six months ended June 30, 2006
relates to our investment of excess cash including a portion of
the proceeds from our IPO in U.S. Treasury Notes and
auction rate securities.
Income Tax Provision/Benefit. The income tax
benefit of $293 and $1,401, for the three and six months ended
June 30, 2006, respectively, compared to a benefit or $113
and $177 for the three and six months ended June 30, 2005,
respectively, includes expense and benefits related to federal,
state and other jurisdictions including deferred tax expense
related to a portion of our goodwill that is deductible for tax
purposes.
Results
of Operations by Operating Segment
We monitor the performance of our business based on earnings
(loss) before interest, taxes, depreciation, amortization and
other non-cash items. Other non-cash items include non-cash
advertising expense and non-cash stock-based compensation
expense. Corporate and other overhead functions are allocated to
segments on a specifically identifiable basis or other
reasonable method of allocation. We consider these allocations
to be a reasonable reflection of the utilization of costs
incurred. We do not disaggregate assets for internal management
reporting and, therefore, such information is not presented.
There are no inter-segment revenue transactions.
The following table presents the results of our operations for
each of our operating segments and a reconciliation to net loss:
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The following discussion is a comparison of the results of
operations for our two operating segments for the three and six
months ended June 30, 2006 and 2005.
Online Services. Revenues were $49,619 and
$94,697 for the three and six months ended June 30, 2006,
respectively, an increase of $12,714 and $26,637 or 34.5% and
39.1% from the same periods in the prior year. Advertising and
sponsorship revenue increased $9,563 or 35.9% and $19,536 or
39.5% for the three and six months ended June 30, 2006,
respectively, compared to the same periods last year. The
acquisitions of Conceptis and eMedicine contributed $3,828 and
$7,446 of advertising and sponsorship revenue for the three and
six months ended June 30, 2006, respectively. The increase
in advertising and sponsorship revenue was primarily
attributable to an increase in the number of brands and
sponsored programs promoted on our sites as well as the
acquisitions of Conceptis in December 2005 and eMedicine in
January 2006. Including the Conceptis and eMedicine
acquisitions, the number of such programs grew to approximately
400 compared to approximately 275 last year. Licensing revenue
increased $4,065 or 49.3% and $9,702 or 69.1% for the three and
six months ended June 30, 2006, respectively, compared to
the same periods last year. This increase was due to an increase
in the number of companies using our private portal platform to
82 from 66 last year. Additionally, the acquisition of Summex
contributed $290 in licensing revenue for the three and six
months ended June 30, 2006. HealthShare revenue was $492
from March 14, 2005 through March 31, 2005.
HealthShare pre-acquisition revenue for the period from
January 1, 2005 to March 13, 2005 was $1,824. Content
syndication and other revenue declined to $1,096 and 1,972
during the three and six months ended June 30, 2006,
respectively, from $2,010 and $4,573 during the same periods
last year.
Our Online Services earnings before interest, taxes,
depreciation, amortization and other non-cash items was $9,006
and $16,867 or 18.2% and 17.8% of revenue, respectively,
compared to $3,974 and $7,793 or 10.8% and 11.5% of revenue in
the same periods last year. This increase as a percentage of
revenue was primarily due to higher revenue from the increase in
number of brands and sponsored programs in our public portals as
well as the increase in companies using our private online
portal without incurring a proportionate increase in overall
expenses, offset by a charge of approximately $3,150 during the
three and six months ended June 30, 2005 related to the
resignation of our former CEO and the recruitment of our
Executive Vice President of Product and Programming and Chief
Technology Officer.
Publishing and Other Services. Our Publishing
and Other Services revenue was $6,993 and $11,966 during the
three and six months ended June 30, 2006, respectively,
compared to $4,074 and $6,680 in the same periods last year. The
increase was primarily attributable to our acquisition of
Conceptis in December 2005, which contributed $1,700 and $3,148
in offline medical education revenue for the three and six month
ended June 30, 2006, respectively, higher revenue from
The Little Blue Book physician oriented offerings and to
our introduction of WebMD the Magazine in April 2005.
Our Publishing and Other Services income (loss) before interest,
taxes, depreciation, amortization and other non-cash items was
$593 and ($741) during the three and six months ended
June 30, 2006, compared to ($668) and ($915) during the
same periods last year. These changes were primarily
attributable to a change in mix of revenues to higher margin
products compared to the same periods last year.
As of June 30, 2006, we had $104,275 of cash and cash
equivalents and short-term investments. Our working capital as
of June 30, 2006 was $97,325. Our working capital is
affected by the timing of each period end in relation to items
such as payments received from customers and payments made to
vendors, 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 during the six months
ended June 30, 2006 was $28,259, primarily as a result of
our earnings before interest, taxes, depreciation, amortization
and other non-cash items of $16,126 and sources of cash from
changes in working capital of $9,229. Sources of cash from
changes in working capital were due to an increase in deferred
revenue of $9,984 and reductions in accounts receivable of
$4,221, partially offset by uses of cash due to decreases in
other assets of $2,945 and decreases in accrued expenses and
other long-term liabilities of $1,364. Cash provided by
operating activities during the six months
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ended June 30, 2005 was $13,362 which was primarily due to
earnings before interest, taxes, depreciation, amortization and
other non-cash items of $6,878 and sources of cash from changes
in working capital of $6,636. Sources of cash from changes in
working capital were due to increases in deferred revenue of
$4,587 and accrued expenses and other long-term liabilities of
$2,032.
Cash used in investing activities during the six months ended
June 30, 2006 was $99,343, which primarily related to net
purchases of
available-for-sale
securities of $21,000, the acquisition of Summex and eMedicine
and investments in property and equipment primarily to enhance
our technology platform. Cash flow used in investing activities
was $44,819 during the six months ended June 30, 2005,
which primarily related to the acquisition of HealthShare and
the build-out of our new corporate offices in New York.
Cash provided by financing activities during the six months
ended June 30, 2005 principally related to net cash amounts
received from, or transferred to, Emdeon. Emdeon did not
transfer cash to us for financing activities during the six
months ended June 30, 2006.
Potential future cash commitments include $41,000 related to the
pending acquisition of MedSite in the third quarter of 2006, a
contingent consideration payment of up to $2,500 for RxList
which will be determined based on 2006 measurements, a $10,000
contingent consideration payment for Summex which will be
determined based on certain revenue thresholds during future
years and our anticipated 2006 capital expenditure requirements
for the full year which we currently estimate at approximately
$25,000 to $30,000. Our anticipated capital expenditures relate
to investments in our websites in order to enable us to service
future growth in unique users, page views and private portal
customers, to create new sponsorship areas for our customers, as
well as the relocation of our private portal business offices to
larger facilities in the latter half of 2006.
We believe that our available cash resources, future cash flow
from operations and cash reimbursements from Emdeon for their
utilization of our tax net operating loss carryforwards will
provide sufficient cash resources to meet the commitments
described above and to fund our currently anticipated working
capital and capital expenditure requirements for up to
twenty-four months. Our future liquidity and capital
requirements will depend upon numerous factors, including
retention of customers at current volume and revenue levels, our
existing and new application and service offerings, competing
technological and market developments, and potential future
acquisitions. In addition, our ability to generate cash flow is
subject to numerous factors beyond our control, including
general economic, regulatory and other matters affecting us and
our customers. We plan to continue to enhance the relevance of
our online services to our audience and sponsors and will
continue to invest in acquisitions, strategic relationships,
facilities and technological infrastructure and product
development. We intend to grow each of our existing businesses
and enter into complementary ones through both internal
investments and acquisitions. We may need to raise additional
funds to support expansion, develop new or enhanced applications
and services, respond to competitive pressures, acquire
complementary businesses or technologies or take advantage of
unanticipated opportunities. If required, we may raise such
additional funds through public or private debt or equity
financing, strategic relationships or other arrangements. We
cannot assure you that such financing will be available on
acceptable terms, if at all, or that such financing will not be
dilutive to our stockholders. Future indebtedness may impose
various restrictions and covenants on us that could limit our
ability to respond to market conditions, to provide for
unanticipated capital investments or to take advantage of
business opportunities.
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 Class A
Common Stock or securities we may issue in the future. The risks
and uncertainties described in this Quarterly Report are not the
only ones facing us. Additional risks and uncertainties that are
not currently known to us or that we currently believe are
immaterial may also adversely affect our business and operations.
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Risks
Related to Our Operations and Financial Performance
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:
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.
Attracting and retaining users of our public portals and clients
for our private portals requires us to continue to improve the
technology underlying those portals and to continue to develop
new and updated applications, features and services for those
portals. We rely on a combination of internal development,
strategic relationships, licensing and acquisitions to develop
our portals and related applications, features and services. Our
development
and/or
implementation of new technologies, applications, features and
services may cost more than expected, may take longer than
originally expected, may require more testing than originally
anticipated and may require the acquisition of additional
personnel and other resources. There can be no assurance that
the revenue opportunities from any new or updated technologies,
applications, features or services will justify the amounts
spent.
The markets in which we operate are intensely competitive,
continually evolving and, in some cases, subject to rapid change.
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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.
Since there are no substantial barriers to entry into the
markets in which our public portals participate, we expect that
competitors will continue to enter these markets. For more
information about the competition we face, see
“Business — Competition” in our Annual
Report on
Form 10-K
for the year ended December 31, 2005.
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 brand. However, we may not be able to
successfully maintain or enhance awareness of our brands, and
events outside of our control may have a negative affect on our
brands. If we are unable to maintain or enhance awareness of our
brand, and in a cost-effective manner, our business could be
materially and adversely affected.
Our operating results have fluctuated significantly in the past
from quarter to quarter and may continue to do so in the future.
Our net losses from 2001 to 2003 totaled approximately
$2.6 billion. Our online businesses participate in
relatively new and rapidly evolving markets. Many companies with
business plans based on providing healthcare information through
the Internet have failed to be profitable and some have filed
for bankruptcy
and/or
ceased operations. Even if demand from users exists, we cannot
assure you that our business will be profitable.
In addition, our online businesses have a limited operating
history and participate in relatively new and rapidly growing
markets. These businesses have undergone significant changes
during their short history as a result of changes in the types
of services provided, technological changes, changes in market
conditions, and changes in ownership and management, and are
expected to continue to change for similar reasons.
Our business depends largely on the skills, experience and
performance of key members of our management team. We also
depend, in part, on our ability to attract and retain qualified
writers and editors, software developers and other technical
personnel and sales and marketing personnel. Competition for
qualified personnel in the healthcare information services and
Internet industries is intense. We cannot assure you that we
will be able to hire or retain a sufficient number of qualified
personnel to meet our requirements, or that we will be able to
do so at salary and benefit costs that are acceptable to us.
Failure to do so may have an adverse effect on our business.
Interest in our publications for physicians, such as The
Little Blue Book and ACP Medicine and ACS Surgery:
Principles and Practice, is based upon our ability to make
available
up-to-date
health content that
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meets the needs of our physician users. Although we have been
able to continue to update and maintain the physician practice
information that we publish in The Little Blue Book, if
we are unable to continue to do so for any reason, the value of
The Little Blue Book would diminish and interest in this
publication and advertising in this publication would be
adversely affected.
Similarly, our ability to maintain or increase the subscriptions
to ACP Medicine and ACS Surgery is based upon our
ability to make available
up-to-date
content which depends on our ability to retain qualified
physician authors and writers in the disciplines covered by
these publications. We cannot assure you that we will be able to
retain qualified physician editors or authors to provide and
review needed content at a reasonable cost. If we are unable to
provide content that attracts and retains subscribers,
subscriptions to these products will be reduced. In addition,
the American College of Physicians permits WebMD to use the ACP
name in the title of ACP Medicine and the American
College of Surgeons permits WebMD to use the name ACS in the
title of ACS Surgery: Principles and Practice. If we lose
the right to use the ACP or ACS name in our publications,
subscribers may find the publication less attractive and cease
to subscribe to these publications.
WebMD the Magazine was launched in April 2005 and, as a
result, has a very short operating history. We cannot assure you
that WebMD the Magazine will be able to attract and
retain advertisers to make this publication successful in the
long term.
The
timing of our advertising and sponsorship revenue may vary
significantly from quarter to quarter
Our advertising and sponsorship revenue, which accounted for
approximately 73% of our total Online Services segment revenue
for the three months ended June 30, 2006, may vary
significantly from quarter to quarter due to a number of
factors, not all of which are in our control, and any of which
may be difficult to forecast accurately. The majority of our
advertising and sponsorship contracts are for terms of
approximately four to 12 months. We have relatively few
longer term advertising and sponsorship contracts. We cannot
assure you that our current customers for these services will
continue to use our services beyond the terms of their existing
contracts or that they will enter into any additional contracts.
In addition, the time between the date of initial contact with a
potential advertiser or sponsor regarding a specific program and
the execution of a contract with the advertiser or sponsor for
that program may be lengthy, especially for larger contracts,
and may be subject to delays over which we have little or no
control, including as a result of budgetary constraints of the
advertiser or sponsor or their need for internal approvals.
Other factors that could affect the timing of our revenue from
advertisers and sponsors include:
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 12 months, but in some
cases has been longer. These sales may be subject to delays due
to a client’s internal procedures for approving large
expenditures and other factors beyond our control. 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.
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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 revenue is lower than expected, we may not be able to reduce
our short-term spending in response. Any shortfall in revenue
would have a direct impact on our results of operations.
Many administrative services required by us for the operation of
our business continue to be provided to us by Emdeon under a
Services Agreement. Under the Services Agreement, Emdeon
provides us with administrative services, including services
relating to payroll, accounting, tax planning and compliance,
employee benefit plans, legal matters and information
processing. As a result, we are dependent on our relationship
with Emdeon for these important services. We reimburse Emdeon
under agreed upon formulas that allocate to us a portion of
Emdeon’s aggregate costs related to those services. The
Services Agreement is for a term of up to five years, however,
we have the option to terminate these services, in whole or in
part, at any time we choose to do so, generally by providing,
with respect to specified services or groups of services,
60 days’ notice and, in some cases, paying a
termination fee of not more than $30,000 to cover the costs of
Emdeon relating to the termination.
The costs we are charged under the Services Agreement are not
necessarily indicative of the costs that we would incur if we
had to provide the services on our own or contract for them with
third parties on a stand-alone basis. With respect to most of
the services provided under the Services Agreement, we believe
that it is likely that it would cost us more to provide them or
contract for them on our own because we benefit from
Emdeon’s economies of scale as a larger corporation.
We will
be required to evaluate our internal control over financial
reporting under Section 404 of the Sarbanes-Oxley Act of
2002, and any adverse results from such evaluation or from the
evaluation that will be conducted by our auditors could result
in a loss of investor confidence in our financial reports and
have an adverse effect on our stock price
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002,
beginning with our Annual Report on
Form 10-K
for the fiscal year ending December 31, 2006, we will be
required to include a report by our management on our internal
control over financial reporting. Such report will contain,
among other matters, an assessment of the effectiveness of our
internal control over financial reporting as of the end of our
fiscal year, including a statement as to whether or not our
internal control over financial reporting is effective. This
assessment must include disclosure of any material weaknesses in
our internal control over financial reporting identified by
management. Such report must also contain a statement that our
auditors have issued an attestation report on management’s
assessment of such internal controls.
We are currently in the process of preparing to comply with
Section 404. We have some experience with documenting,
testing and evaluating internal control over financial reporting
because our business is a segment of Emdeon, which has already
been required to evaluate its internal control over financial
reporting under Section 404. However, we have not been
through this process for WebMD itself and, because WebMD is a
smaller company, certain of the materiality thresholds
applicable in WebMD’s internal control over financial
reporting will be lower than those applicable to Emdeon. In
addition, we have implemented financial reporting processes that
are separate from those of Emdeon, using different financial
reporting software than Emdeon uses. We will need to document,
test and evaluate our internal control over financial reporting
in connection with such implementation.
If our management identifies one or more material weaknesses in
our internal control over financial reporting as of
December 31, 2006, we will be unable to assert such
internal control is effective in our initial management report
on such internal control. If we are unable to make that
assertion (or if our auditors are unable to attest that our
management’s report is fairly stated or they are unable to
express an opinion on the
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effectiveness of our internal controls), investors could lose
confidence in the accuracy and completeness of our financial
reports, which could have an adverse effect on our stock price.
We have two classes of common stock:
Emdeon owns 100% of our Class B Common Stock, which
represents 85.8% of our outstanding common stock. These
Class B shares collectively represent 96.6% of the combined
voting power of our outstanding common stock. Given its
ownership interest, Emdeon is able to control the outcome of all
matters submitted to our shareholders for approval, including
the election of directors. This in turn may have an adverse
affect on the market price of our Class A Common Stock.
Due to provisions of the U.S. Internal Revenue Code and
applicable Treasury regulations relating to the manner and order
in which net operating loss carryforwards are utilized when
filing consolidated tax returns, a portion of our net operating
loss carryforwards may be required to be utilized by Emdeon
before Emdeon would be permitted to utilize its own net
operating loss carryforwards. Correspondingly, in some
situations, such as where Emdeon’s net operating loss
carryforwards were generated first, we may be required to
utilize a portion of Emdeon’s net operating loss
carryforwards before we would have to utilize our own net
operating loss carryforwards. Under our tax sharing agreement
with Emdeon, neither we nor Emdeon is obligated to reimburse the
other for the tax savings attributable to the utilization of the
other party’s net operating loss carryforwards, except that
Emdeon has agreed to compensate us for any use of our net
operating losses that may result from certain extraordinary
transactions, including a sale of its Business Services or
Practice Services operating segments. Accordingly, although we
may obtain a benefit if we are required to utilize Emdeon’s
net operating loss carryforwards, we may suffer a detriment to
the extent that Emdeon is required to utilize our net operating
loss carryforwards. The amount of each of our and Emdeon’s
net operating loss carryforwards that ultimately could be
utilized by the other party will depend on the timing and amount
of taxable income earned by us and Emdeon in the future, which
we are unable to predict. Correspondingly, we are not able to
predict whether we or Emdeon will be able to utilize our
respective net operating loss carryforwards before they expire
or whether there will be a net benefit to Emdeon or to us.
Most of our revenue is derived from the healthcare industry and
could be affected by changes affecting healthcare spending.
General reductions in expenditures by healthcare industry
participants could result from, among other things:
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We are particularly dependent on pharmaceutical, biotechnology
and medical device companies for our advertising and sponsorship
revenue. Our business will be adversely impacted if business or
economic conditions result in the reduction of purchases by our
customers if they decide not to renew their commitments or
decide to renew their commitments at lower levels. 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 segments of that
market we serve or are planning to serve. For example, use of
our products and services could be affected by:
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.
Although the substantial majority of the page view traffic to
The WebMD Health Network are from Web sites we own, some
are from Web sites owned by third parties that carry our content
and, as a result, our traffic may vary based on the amount of
traffic to Web sites of these third parties and other factors
outside our control. During the quarter ended June 30,
2006, third party Web sites accounted for approximately 7.7% of
its aggregate page views. In the event that any of our
relationships with our third party Web sites are terminated,
The WebMD Health Network’s user page view traffic
may be negatively affected, which may negatively affect our
results of operations.
Most of our advertising and sponsorship revenue has, in the
past, come from pharmaceutical, biotechnology and medical device
companies. During the past year, 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 a number of consumer products companies have
indicated an intent to increase the portion of their promotional
spending used on the Internet, we cannot assure you that these
advertisers and sponsors will find our consumer Web site to be
as effective as other Web sites or traditional media for
promoting their products and services. If we encounter
difficulties in competing with the other alternatives available
to consumer products companies, this portion of our business may
develop more slowly than we expect or may fail to develop.
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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 fail to meet expectations
that our clients have for them. 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 are error
free.
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 could be expensive and time consuming and could
divert management’s 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.
Our ability to deliver our Internet-based services is dependent
on the development and maintenance of the infrastructure of the
Internet by third parties. This includes maintenance of a
reliable network backbone with the necessary speed, data
capacity and security, as well as timely development of
complementary products such as high-speed modems, for providing
reliable Internet access and services. The Internet has
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.
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. These
outages and delays could reduce the level of Internet usage as
well as the availability of the Internet to us for delivery of
our Internet-based services. In addition, our customers who
utilize our Web-based services depend on Internet service
providers, online service providers and other Web site operators
for access to our Web sites. All of these providers have
experienced significant outages in the past and could experience
outages, delays and other difficulties in the future due to
system failures unrelated to our systems. Any significant
interruptions in our services or increases in response time
could result in a loss of potential or existing users of and
advertisers and sponsors on our Web sites and, if sustained or
repeated, could reduce the attractiveness of our services.
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 experience interruptions and
delays in services and availability from time to time. We rely
on internal systems as well as third party vendors, including
data center providers and bandwidth providers, to provide our
online services. We do not maintain redundant systems or
facilities for some of these services. In the event of a
catastrophic event at one of our data centers, we may experience
an extended period of system unavailability, which could
negatively impact our relationship with
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users and adversely affect our brand and our business. To
operate without interruption, both we and our service providers
must guard against:
Any disruption in the network access or co-location services
provided by these third party providers or any failure of or 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.
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.
We retain and transmit confidential information, including
personal health records, in the processing centers and other
facilities we use to provide online services. It is critical
that these facilities and infrastructure remain secure and be
perceived by the marketplace as secure. A security breach could
damage our reputation or result in liability. We may be required
to expend significant capital and other resources to protect
against security breaches and hackers or to alleviate problems
caused by breaches. Despite the implementation of security
measures, this infrastructure or other systems that we interface
with, including the Internet and related systems, may be
vulnerable to physical break-ins, hackers, improper employee or
contractor access, computer viruses, programming errors,
denial-of-service
attacks or other attacks by third parties or similar disruptive
problems. Any compromise of our security, whether as a result of
our own systems or the systems that they interface with, could
reduce demand for our services, and could subject us to legal
claims from our clients and users, including for breach of
contract or breach of warranty.
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WebMD has been built, in part, through a series of 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:
The issuance of additional equity or debt securities could:
We do not intend to seek securityholder approval for any such
acquisition or security issuance unless required by applicable
law, regulation or the terms of then existing securities.
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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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 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.
Risks
Related to the Legal and Regulatory Environment in Which We
Operate
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,
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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For more information regarding the risks that healthcare
regulation creates for our businesses, see
“Business — Government Regulation” in our
Annual Report on
Form 10-K
for the year ended December 31, 2005.
The Internet and its associated technologies are subject to
government regulation. Our failure, or the failure of our
business partners or third party providers, to accurately
anticipate the application of laws and regulations affecting our
products and services and the manner in which we deliver them,
or any other failure to comply with such laws and regulations,
could create liability for us, result in adverse publicity and
negatively affect our business. In addition, new laws and
regulations, or new interpretations of existing laws and
regulations, may be adopted with respect to the Internet or
other online services covering user privacy, patient
confidentiality, consumer protection and other issues, including
pricing, content, copyrights and patents, distribution and
characteristics and quality of products and services. We cannot
predict whether these laws or regulations will change or how
such changes will affect our business. For more information
regarding government regulation of the Internet to which we are
or may be subject, see “Business — Government
Regulation” in our Annual Report on
Form 10-K
for the year ended December 31, 2005.
Internet user privacy has become a major issue both in the
United States and abroad. We have privacy policies posted on our
Web sites that we believe comply with applicable laws requiring
notice to users about our information collection, use and
disclosure practices. However, whether and how existing privacy
and consumer protection laws in various jurisdictions apply to
the Internet is still uncertain and may take years to resolve.
Any legislation or regulation in the area of privacy of personal
information could affect the way we operate our Web sites and
could harm our business. Further, we cannot assure you that the
privacy policies and other statements on our Web sites or our
practices will be found sufficient to protect us from liability
or adverse publicity in this area.
Our CME activities are planned and implemented in accordance
with the Essential Areas and Policies of the Accreditation
Council for Continuing Medical Education, or ACCME, which
oversees providers of CME credit, and other applicable
accreditation standards. In September 2004, ACCME revised its
standards for commercial support of CME. The revised standards
are intended to ensure, among other things, that CME activities
of ACCME-accredited providers are independent of providers of
healthcare goods and services that fund the development of CME.
ACCME required accredited providers to implement these standards
by May 2005. Implementation has required additional disclosures
to CME participants about those in a position to
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influence content and other adjustments to the management and
operations of our CME programs. We believe we have modified our
procedures as appropriate to meet the revised standards.
However, we cannot be certain whether these adjustments will
ensure that we meet these standards or predict whether ACCME may
impose additional requirements.
In the event that ACCME concludes that we have not met its
revised standards relating to CME, we would not be permitted to
offer accredited ACCME activities to physicians and other
healthcare professionals, and we may be required, instead, to
use third parties to accredit such CME-related services on
Medscape from WebMD. In addition, any failure to maintain
our status as an accredited ACCME provider as a result of a
failure to comply with existing or new ACCME standards could
discourage potential sponsors from engaging in CME or education
related activities with us, which could have a material adverse
effect on our business.
CME activities may be subject to government regulation by the
FDA, the OIG, or HHS, the federal agency responsible for
interpreting certain federal laws relating to healthcare, and by
state regulatory agencies. During the past several years,
educational programs, including CME, directed toward physicians
have been subject to increased scrutiny to ensure that sponsors
do not influence or control the content of the program. In
response to governmental and industry initiatives,
pharmaceutical companies and medical device companies have been
developing and implementing internal controls and procedures
that promote adherence to applicable regulations and
requirements. In implementing these controls and procedures,
different clients may interpret the regulations and requirements
differently and may implement procedures or requirements that
vary from client to client. These controls and procedures:
In addition, future changes to existing regulations or to the
internal compliance programs of clients or potential clients,
may further discourage or prohibit clients or potential clients
from engaging in educational activities with us, or may require
us to make further changes in the way we offer or provide
educational programs.
Our intellectual property is important to our businesses. 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 believe that our non-patented
proprietary technologies and business processes are protected
under trade secret, contractual and other intellectual property
rights. However, those rights do not afford the statutory
exclusivity provided by patented processes. In addition, 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 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.
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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 management’s 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.
The law governing the validity and enforceability of online
agreements and other electronic transactions is evolving. We
could be subject to claims by third parties that the online
terms and conditions for use of our Web sites, including
disclaimers or limitations of liability, are unenforceable. A
finding by a court that these terms and conditions or other
online agreements are invalid could harm our business.
Consumers access health-related information through our online
services, including information regarding particular medical
conditions and possible adverse reactions or side effects from
medications. If our content, or content we obtain from third
parties, contains inaccuracies, it is possible that consumers,
employees, health plan members or others may sue us for various
causes of action. Although our Web sites contain terms and
conditions, including disclaimers of liability, that are
intended to reduce or eliminate our liability, the law governing
the validity and enforceability of online agreements and other
electronic transactions is evolving. We could be subject to
claims by third parties that our online agreements with
consumers and physicians that provide the terms and conditions
for use of our public or private portals are unenforceable. A
finding by a court that these agreements are invalid and that we
are subject to liability could harm our business and require
costly changes to our business.
We have editorial procedures in place to provide quality control
of the information that we publish or provide. However, we
cannot assure you that our editorial and other quality control
procedures will be sufficient to ensure that there are no errors
or omissions in particular content. Even if potential claims do
not result in liability to us, investigating and defending
against these claims could be expensive and time consuming and
could divert management’s 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 therefore harm our
reputation and business.
In connection with the restatement of our financial results,
which is more fully described in the Explanatory Note on
page 1 to this amended
Form 10-Q
and in Note 12 to our financial statements, under the
direction of our Chief Executive Officer and Chief Financial
Officer, we reevaluated our disclosure controls and procedures.
We identified a material weakness in our internal control over
financial reporting with respect to accounting for income taxes
relating to the treatment of tax deductible goodwill in the
determination of the deferred tax asset valuation allowance.
Solely as a result of this material weakness, we concluded that
our disclosure controls and procedures were not effective as of
June 30, 2006.
As of May 4, 2007 we implemented new procedures, including
improved documentation and analysis regarding the reversal
pattern of temporary differences between financial and tax
reporting. We believe these new procedures enable us to comply
with the requirements related to the accounting for deferred tax
asset valuation allowances. In so doing, management has
remediated the related internal control weakness. In connection
with this amended
Form 10-Q,
under the direction of our Chief Executive Officer and Chief
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Financial Officer, we have evaluated our disclosure controls and
procedures as currently in effect as of the date of this
amendment, including the remedial actions discussed above, and
we have concluded that, as of such date, our disclosure controls
and procedures are effective.
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, except for the
conversion by WebMD to new accounting software described below,
no changes in WebMD’s internal control over financial
reporting occurred during the second quarter of 2006 that have
materially affected, or are reasonably likely to materially
affect, WebMD’s internal control over financial reporting.
During the second quarter of 2006, WebMD implemented a planned
conversion to a new third party accounting software system
different than the one used by Emdeon and no longer relies on
related services that had been provided by Emdeon. As a result,
certain business processes and accounting procedures of WebMD
have changed. These changes were made in accordance with
WebMD’s plan to implement separate accounting systems from
those of Emdeon and not in response to any identified deficiency
or weakness in WebMD’s internal control over financial
reporting.
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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
Executive Vice President and
Chief Financial Officer
Date: May 10, 2007
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