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This excerpt taken from the WBMD 10-Q filed May 10, 2007. Risks
Related to Our Relationship with Emdeon
We
continue to be dependent on Emdeon to provide us with services
required by us for the operation of our business
Some of the administrative services we require 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 economies
of scale.
The
concentrated ownership of our common stock by Emdeon and certain
corporate governance arrangements prevent our other stockholders
from influencing significant corporate decisions
We have two classes of common stock:
Emdeon owns 100% of our Class B Common Stock, which
represents approximately 84.6% of our outstanding common stock.
These Class B shares collectively represent 96.5% 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. Accordingly, either in its capacity
as a stockholder or through its control of our Board of
Directors, Emdeon is able to control all key decisions regarding
our company, including mergers or other business combinations
and acquisitions, dispositions of assets, future issuances of
our common stock or other securities, the incurrence of debt by
us, the payment of dividends on our common stock (including the
frequency and the amount of dividends that would be payable on
our common stock, a substantial majority of which Emdeon owns)
and amendments to our certificate of incorporation and bylaws.
Further, as long as Emdeon and its subsidiaries (excluding our
company and our subsidiaries) continue to beneficially own
shares representing at least a majority of the votes entitled to
be cast by the holders of our outstanding voting stock, it may
take actions required to be taken at a meeting of stockholders
without a meeting or a vote and without prior notice to holders
of our Class A Common Stock. In addition, Emdeon’s
controlling interest may discourage a change of control that the
holders of our Class A Common Stock may favor. Any of these
provisions could be used by Emdeon for its own advantage to the
detriment of our other stockholders and our company. This in
turn may have an adverse effect on the market price of our
Class A Common Stock.
The
interests of Emdeon may conflict with the interests of our other
stockholders
We cannot assure you that the interests of Emdeon will coincide
with the interests of the other holders of our common stock. For
example, Emdeon could cause us to make acquisitions that
increase the amount of our indebtedness or outstanding shares of
common stock or sell revenue-generating assets. Also, Emdeon or
its directors and officers may allocate to Emdeon or its other
affiliates corporate opportunities that could have
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been directed to us. So long as Emdeon continues to own shares
of our common stock with significant voting power, Emdeon will
continue to be able to strongly influence or effectively control
our decisions.
Some of
our directors, officers and employees may have potential
conflicts of interest as a result of having positions with or
owning equity interests in Emdeon
Martin J. Wygod, in addition to being Chairman of the Board of
our company, is Chairman of the Board of Emdeon. Some of our
other directors, officers and employees also serve as directors,
officers or employees of Emdeon. In addition, some of our
directors, officers and employees own shares of Emdeon’s
common stock. Furthermore, because our officers and employees
have participated in Emdeon’s equity compensation plans and
because service at our company will, so long as we are a
majority-owned subsidiary of Emdeon, qualify those persons for
continued participation and continued vesting of equity awards
under Emdeon’s equity plans, many of our officers and
employees and some of our directors hold, and may continue to
hold, options to purchase Emdeon’s common stock and shares
of Emdeon’s restricted stock.
These arrangements and ownership interests or cash- or
equity-based awards could create, or appear to create, potential
conflicts of interest when directors or officers who own
Emdeon’s stock or stock options or who participate in
Emdeon’s benefit plans are faced with decisions that could
have different implications for Emdeon than they do for us. We
cannot assure you that the provisions in our restated
certificate of incorporation will adequately address potential
conflicts of interest or that potential conflicts of interest
will be resolved in our favor.
We are
included in Emdeon’s consolidated tax return and, as a
result, both we and Emdeon may use each other’s net
operating loss carryforwards
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 the sales in 2006 of its Business
Services and 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.
If
certain transactions occur with respect to our capital stock or
Emdeon’s capital stock, we may be unable to utilize our net
operating loss carryforwards and tax credits to reduce our
income taxes
As of December 31, 2006, we had net operating loss
carryforwards of approximately $247 million for federal
income tax purposes and federal tax credits of approximately
$2.0 million residing within the WebMD legal entities. If
certain transactions occur with respect to our capital stock or
Emdeon’s capital stock, including issuances, redemptions,
recapitalizations, exercises of options, conversions of
convertible debt, purchases or sales by 5%-or-greater
shareholders and similar transactions, that result in a
cumulative change of more than 50% of the ownership of our
capital stock, taking into account indirect changes in ownership
of our stock as a result of changes in ownership in or
Emdeon’s capital stock, over a three-year period (including
a period commencing prior to the IPO), as determined under rules
prescribed by the U.S. Internal Revenue Code and applicable
Treasury regulations, an annual limitation would be imposed with
respect to our ability to
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utilize our net operating loss carryforwards and federal tax
credits against any taxable income that we achieve in future
periods. Emdeon is not subject to any contractual obligation to
retain any of its Class B Common Stock. Moreover, there can
be no assurance that limitations on the use of our net operating
loss carryforwards and federal tax credits will not occur as a
result of changes in the ownership of Emdeon’s capital
stock (which changes may be beyond the control of us and Emdeon).
We are
included in Emdeon’s consolidated group for federal income
tax purposes and, as a result, may be liable for any shortfall
in Emdeon’s federal income tax payments
We will be included in the Emdeon consolidated group for federal
income tax purposes as long as Emdeon continues to own 80% of
the total value of our capital stock. By virtue of its
controlling ownership and our tax sharing agreement with Emdeon,
Emdeon effectively controls all our tax decisions. Moreover,
notwithstanding the tax sharing agreement, federal tax law
provides that each member of a consolidated group is jointly and
severally liable for the group’s entire federal income tax
obligation. Thus, to the extent Emdeon or other members of the
group fail to make any federal income tax payments required of
them by law, we would be liable for the shortfall. Similar
principles generally apply for income tax purposes in some
state, local and foreign jurisdictions.
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