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| HLTH > SEC Filings for HLTH > Form 10-Q on 10-Nov-2008 | All Recent SEC Filings |
10-Nov-2008
Quarterly Report
This Item 2 contains forward-looking statements with respect to possible events, outcomes or results that are, and are expected to continue to be, subject to risks, uncertainties and contingencies, including those identified in this Item. See "Forward-Looking Statements" on page 3.
Overview
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 to provide an understanding of our results of operations, financial condition and changes in financial condition. Our MD&A is organized as follows:
• Introduction. This section provides a general description of our company, a brief discussion of our operating segments, a description of the termination of our proposed merger with WHC, a description of pending transactions and other recent transactions, other significant developments and trends, and a discussion on how our business is impacted by seasonality.
• Critical Accounting Policies and Estimates. This section discusses those accounting policies that both are considered important to our financial condition and results of operations, and require us to exercise subjective or complex judgments in making estimates and assumptions. In addition, all of our significant accounting policies, including our critical accounting policies, are summarized in Note 1 to the Consolidated Financial Statements contained in our Current Report on Form 8-K filed with the SEC on June 27, 2008.
• Recent Accounting Pronouncements. This section provides a summary of the most recent authoritative accounting standards and guidance that have either been recently adopted or may be adopted in the future.
• Results of Operations and Results of Operations by Operating Segment. These sections provide our analysis and outlook for the significant line items on our consolidated statements of operations, as well as other information that we deem meaningful to understand our results of operations on both a company-wide and a segment-by-segment basis.
• Liquidity and Capital Resources. This section provides an analysis of our liquidity and cash flows and discussions of our contractual obligations and commitments, as well as our outlook on our available liquidity as of September 30, 2008.
• Factors That May Affect Our Future Financial Condition or Results of Operations. This section describes circumstances or events that could have a negative effect on our financial condition or results of operations, or that could change, for the worse, existing trends in some or all of our businesses. The factors discussed in this section are in addition to factors that may be described elsewhere in this Quarterly Report.
In this MD&A, dollar amounts are in thousands, unless otherwise noted.
Introduction
Our Company
HLTH Corporation is a Delaware corporation that was incorporated in December 1995 and commenced operations in January 1996 as Healtheon Corporation. We changed our name to Healtheon/WebMD Corporation in November 1999, to WebMD Corporation in September 2000, to Emdeon Corporation in October 2005 and to HLTH Corporation in May 2007. Our common stock began trading on the Nasdaq National Market under the symbol "HLTH" on February 11, 1999 and now trades under that symbol on the Nasdaq Global Select Market.
As of September 30, 2008, we owned 83.1% of the aggregate amount of outstanding shares of WebMD Health Corp. (which we refer to as WHC) Class A Common Stock (after accounting for the impact of certain WHC shares to be issued pursuant to the purchase agreement for the acquisition of Subimo, LLC) and Class B
Common Stock and, accordingly, our consolidated financial statements reflect the minority shareholders' 16.9% share of equity and net income (loss) of WHC.
HLTH's 48% ownership in EBS Master LLC (which we refer to as EBSCo) was accounted for under the equity method through February 8, 2008, the date of the sale of our investment in EBS Master LLC. See "- Other Recent Transactions - Sale of EBSCo" below.
Segments
As a result of our intentions to sell our Porex segment and due to the sale of our ViPS segment, see "- Pending Transactions" and "- Other Recent Transactions" below, our remaining operating segments are WebMD Online Services and WebMD Publishing and Other Services (which we refer to together, as our WebMD Segments or, sometimes, as WebMD). The following is a description of each of our operating segments and our corporate segment:
• WebMD Online Services. This segment owns and operates both public and private online portals. The public portals enable consumers to become more informed about healthcare choices and assist them in playing an active role in managing their health. The public portals also enable physicians and other healthcare professionals to improve their clinical knowledge and practice of medicine, as well as their communication with patients. The public portals generate revenue primarily through the sale of advertising and sponsorship products, including continuing medical education (which we refer to as CME) services. Our sponsors and advertisers include pharmaceutical, biotechnology, medical device and consumer products companies. Through our private portals for employers and health plans, we provide information and services that enable their employees and members, respectively, to make more informed benefit, treatment and provider decisions. We also provide related services for use by such employees and members, including lifestyle education and personalized telephonic health coaching. We generate revenue from our private portals through the licensing of these portals to employers and health plans either directly or through distributors, as well as through the fees charged for our coaching services. We also distribute online content and services to other entities and generate revenue from these arrangements through the sale of advertising and sponsorship products and content syndication fees. We also provide e-detailing promotion and physician recruitment services for use by pharmaceutical, medical device and healthcare companies.
• WebMD Publishing and Other Services. This segment provides offline products and services, including: The Little Blue Book, a physician directory; and WebMD the Magazine, a consumer-targeted publication that WebMD distributes free of charge to physician office waiting rooms. We generate revenue from sales of The Little Blue Book directories and advertisements in those directories, and sales of advertisements in WebMD the Magazine. Until December 31, 2007, we published ACP Medicine and ACS Surgery: Principles of Practice, its medical reference textbooks. We sold this business in 2007 and it has now been reflected as a discontinued operation in our financial statements. The WebMD Publishing and Other Services segment complements the WebMD Online Services segment and extends the reach of the WebMD brand and our influence among health-involved consumers and clinically-active physicians.
• Corporate. Corporate includes personnel costs and other expenses related to functions that are not directly managed by one of our segments, or by the ViPS and Porex businesses which are reflected within discontinued operations. The personnel costs include executive personnel, legal, accounting, tax, internal audit, risk management, human resources and certain information technology functions. Other corporate costs and expenses include professional fees including legal and audit services, insurance, costs of leased property and facilities, telecommunication costs and software maintenance expenses. Corporate expenses are net of $838 and $2,572 for the three and nine months ended September 30, 2008, respectively, and $845 and $2,470 for the three and nine months ended September 30, 2007, respectively, which are costs allocated to WebMD for services provided by the Corporate segment. In connection with the sale of our Emdeon Business Services (which we refer to as EBS) and Emdeon Practice Services (which we refer to as EPS) segments during the second half of 2006 and the sale of
our ViPS segment during the three months ended September 30, 2008, we entered into transition services agreements whereby we provided EBSCo, Sage Software, Inc. (which we refer to as Sage Software) and ViPS certain administrative services, including payroll, accounting, purchasing and procurement, tax, and human resource services, as well as information technology support. Additionally, EBSCo provides us certain administrative services, including telecommunication infrastructure and management services, data center support and purchasing and procurement services. Some of the services provided by EBSCo to HLTH are, in turn, used to fulfill HLTH's obligations to provide transition services to Sage Software. These services are provided through the Corporate segment, and the related transition services fees we charge to EBSCo, Sage Software and ViPS, net of the fee we pay to EBSCo, are also included in the Corporate segment, which were intended to approximate the cost of providing these services. The transition services agreement with Sage Software was terminated on December 31, 2007 and, therefore, net transition services fees are for services related to EBSCo and ViPS for the three and nine months ended September 30, 2008.
Termination of Proposed Merger with WHC
On October 19, 2008, pursuant to the terms of a termination agreement (which we refer to as the Termination Agreement), HLTH and WHC mutually agreed, in light of recent turmoil in financial markets, to terminate the Agreement and Plan of Merger, dated as of February 20, 2008, between HLTH and WHC, as amended by Amendment No. 1, dated as of May 6, 2008, and Amendment No. 2, dated as of September 12, 2008 (which we refer to as the Merger Agreement). The Merger Agreement resulted from negotiations between HLTH and a Special Committee of the Board of Directors of WHC during late 2007 and early 2008. HLTH's Board of Directors had initiated the process leading to the entry into the Merger Agreement with WHC because it believed that the primary reason of many of the holders of HLTH Common Stock for owning those shares was HLTH's controlling interest in WHC and that the value of HLTH's other businesses was not adequately reflected in the trading price of HLTH Common Stock. In connection with the entry by HLTH and WHC into the Merger Agreement, the HLTH Board made a determination to divest Porex and ViPS (which divestitures were not, however, dependent on the merger occurring). See "- Pending Transactions - Proposed Divestiture of Porex" and "- Other Recent Transactions - ViPS Sale" below. The decisions relating to the divestitures of ViPS, Porex and HLTH's 48% interest in EBS (see "- Other Recent Transactions - Sale of EBSCo" below) were based on the corporate strategic considerations described above and not the performance of, or underlying business conditions affecting, the respective businesses.
The termination of the Merger Agreement was by mutual agreement of the companies and was unanimously approved by the Board of Directors of each of the companies and by a special committee of independent directors of WHC. The Boards determined that both HLTH, as controlling stockholder of WHC, and the public stockholders of WHC would benefit from WHC continuing as a publicly-traded subsidiary with no long-term debt and approximately $340,000 in cash and investments. The Boards concluded that, by terminating the merger, HLTH and WHC would retain financial flexibility and be in a position to pursue potential acquisition opportunities expected to be available to companies with significant cash resources in a period of financial market uncertainty.
The Termination Agreement maintains HLTH's obligation, under the terms of the Merger Agreement, to pay the expenses of WHC incurred in connection with the merger. Under the Termination Agreement, HLTH and WHC have also agreed to amend the Amended and Restated Tax Sharing Agreement, dated as of February 15, 2006, between them (which we refer to as the Tax Sharing Agreement) so that, for tax years beginning after December 31, 2007, HLTH will no longer be required to reimburse WHC for use of net operating loss (which we refer to as NOL) carryforwards attributable to WebMD that may result from certain extraordinary transactions by HLTH. The Tax Sharing Agreement has not, other than with respect to certain extraordinary transactions by HLTH, required either HLTH or WHC to reimburse the other party for any net tax savings realized by the consolidated group as a result of the group's utilization of WHC's or HLTH's NOL carryforwards during the period of consolidation, and that will continue following the amendment. The Termination Agreement also provided for HLTH to assign to WHC the Amended and Restated Data License Agreement, dated as of February 8, 2008, among HLTH, EBSCo and certain affiliated companies.
Pending Transactions
Pending Tender Offer. On October 27, 2008, we commenced a tender offer to purchase up to 80,000,000 shares of our common stock at a price of $8.80 per share (which we refer to as the Pending Tender Offer). The Pending Tender Offer is expected to be completed in November 2008, subject to a number of terms and conditions. Under the Merger Agreement, holders of HLTH Common Stock would have received merger consideration consisting of 0.1979 shares of WHC Common Stock and approximately $6.63 in cash (subject to increase up to $6.89 per share in cash in certain circumstances). In deciding to make the Pending Tender Offer, our Board of Directors considered that, following the termination of the Merger Agreement, some holders of HLTH common stock might wish to have the opportunity to sell some or all of their holdings for cash. In addition, our Board of Directors believes that investing in our shares through the Pending Tender Offer is an attractive use of our cash and investments on hand and an efficient means to provide value to our stockholders. The Pending Tender Offer represents an opportunity for us to return capital to our stockholders who elect to tender their shares. Additionally, stockholders who do not participate in the Pending Tender Offer will automatically increase their relative percentage interest in us and our future operations at no additional cost to them. We anticipate that we will pay for the shares tendered in the Pending Tender Offer and all expenses applicable to the Pending Tender Offer from cash and investments on hand. The Pending Tender Offer is not conditioned upon the receipt of financing.
Proposed Divestiture of Porex. On February 21, 2008, we announced our intention to divest our Porex segment. As a result of our intention to divest this segment and our expectation that the divestiture would be completed within one year, we reflected this segment as a discontinued operation within the consolidated financial statements contained elsewhere in this Quarterly Report.
Pending Acquisition of Marketing Technology Solutions Inc. On September 15, 2008, WHC announced that it had entered into a definitive agreement to acquire QualityHealth.com and its owner, Marketing Technology Solutions Inc. (which we refer to as MTS). MTS provides on-line performance-based marketing and media programs directed at pharmaceutical and other healthcare related advertisers. The purchase price for MTS is $50,000 in cash, payable at closing, and WHC has agreed to pay up to an additional $25,000 in cash if certain performance thresholds are achieved relating to calendar year 2009.
Other Recent Transactions
ViPS Sale. On February 21, 2008, we announced our intention to divest our ViPS segment. On June 3, 2008, we entered into a stock purchase agreement for the sale of our ViPS segment to an affiliate of General Dynamics Corporation. On July 22, 2008, we completed the sale of our ViPS business (which we refer to as the ViPS Sale). The purchase price was approximately $224,842 in cash, which reflects the effect of a preliminary estimate of the amount of a customary working capital adjustment to the contractual purchase price of $225,000 in cash. We have reflected ViPS as a discontinued operation within the consolidated financial statements contained elsewhere in this Quarterly Report.
Sale of EBSCo. On February 8, 2008, we entered into a Securities Purchase Agreement and simultaneously completed the sale of our 48% minority ownership interest in EBSCo (which we refer to as the 2008 EBSCo Sale) for $575,000 in cash to an affiliate of General Atlantic LLC and affiliates of Hellman & Friedman, LLC.
Sale of ACP Medicine and ACS Surgery. As of December 31, 2007, through our WebMD Publishing and Other Services segment, WHC entered into an Asset Sale Agreement and completed the sale of certain assets and certain liabilities of our medical reference publications business, including the publications ACP Medicine and ACS Surgery: Principles and Practice (which we collectively refer to as the ACS/ACP Business). ACP Medicine and ACS Surgery are official publications of the American College of Physicians and the American College of Surgeons, respectively. WebMD received net cash proceeds of $2,809, consisting of $1,734 received during the three months ended March 31, 2008 and the remaining $1,075 to be received in the quarter ending December 31, 2008. WebMD incurred approximately $800 of professional fees and other expenses associated with the sale of the ACS/ACP Business. In connection with the sale, WebMD recognized a gain of $3,394 as of December 31, 2007. The decision to divest ACS/ACP Business was made because management determined that it was not a good fit with WebMD's core business.
Other Significant Developments and Trends
Auction Rate Securities; Non-Recourse Credit Facilities. We hold investments in auction rate securities (which we refer to as ARS) backed by student loans, 97% of which are guaranteed under the Federal Family Education Loan Program (FFELP), and all had credit ratings of AAA or Aaa when purchased. Historically, the fair value of our ARS holdings approximated face value due to the frequent auction periods, generally every 7 to 28 days, which provided liquidity to these investments. However, since February 2008, virtually all auctions involving these securities have failed. The result of a failed auction is that these ARS holdings will continue to pay interest in accordance with their terms at each respective auction date; however, liquidity of the securities will be limited until there is a successful auction, the issuer redeems the securities, the securities mature or until such time as other markets for these ARS holdings develop. During the three months ended March 31, 2008, we concluded that the estimated fair value of the ARS holdings no longer approximated the face value due to the lack of liquidity.
As of March 31, 2008, we concluded the fair value of our ARS holdings was $302,842 (of which $141,044 related to WHC), compared to a face value of $362,950 (of which $168,450 related to WHC). The impairment in value, or $60,108 (of which $27,406 related to WHC), was considered to be other-than-temporary and, accordingly, was recorded as an impairment charge within the statement of operations during the three months ended March 31, 2008. During the three and nine months ended September 30, 2008, we received $5,100 (of which $2,000 relates to WHC) and $7,900 (of which $3,700 relates to WHC), respectively, associated with the partial redemption of certain of our ARS holdings which represented 100% of their face value. During the three months ended June 30, 2008 and September 30, 2008, we reduced the carrying value of our ARS holdings by $3,019 and $8,897, respectively. We assessed these declines in fair market value to be temporary as they resulted from fluctuations in interest rate assumptions and, therefore, recorded these declines as an unrealized loss in our stockholders' equity. As a result of the above activity, as of September 30, 2008, the total face value of our ARS holdings was $355,800, of which $165,500 relates to WHC, compared to a fair value of $284,408, of which $132,848 relates to WHC.
HLTH and WHC have each entered into a non-recourse credit facility (which we refer to as the Credit Facilities) with Citigroup that is secured by their respective ARS holdings (including, in some circumstances, interest payable on the ARS holdings), that will allow HLTH and WHC to borrow up to 75% of the face amount of the ARS holdings pledged as collateral under the respective Credit Facilities. The Credit Facilities are each governed by a loan agreement, dated as of May 6, 2008, containing customary representations and warranties of the borrower and certain affirmative covenants and negative covenants relating to the pledged collateral. Under each of the loan agreements, the borrower and the lender may, in certain circumstances, cause the pledged collateral to be sold, with the proceeds of any such sale required to be applied in full immediately to repayment of amounts borrowed.
No borrowings have been made under either of the Credit Facilities to date. HLTH and WHC can each make borrowings under their respective Credit Facilities until May 2009. The interest rate applicable to such borrowings will be one-month LIBOR plus 250 basis points. Any borrowings outstanding under the respective Credit Facilities after March 2009 become demand loans, subject to 60 days notice, with recourse only to the pledged collateral.
We continue to monitor the market for ARS as well as the individual ARS holdings we own. We may be required to record additional losses in future periods if the fair value of our ARS holdings deteriorates further.
Directors & Officers Liability Insurance Coverage Litigation. On July 23, 2007, we commenced litigation (which we refer to as the Coverage Litigation) in the Court of Chancery of the State of Delaware in and for New Castle County against ten insurance companies in which we are seeking to compel the defendant companies (which we refer to collectively as the Defendants) to honor their obligations under certain directors and officers liability insurance policies (which we refer to as the Policies). We are seeking an order requiring the Defendants to advance and/or reimburse expenses that we have incurred and expect to continue to incur for the advancement of the reasonable defense costs of initially ten, and now eight, former officers and directors of our former EPS subsidiary who were indicted in connection with the previously disclosed investigation by the United States Attorney for the District of South Carolina (which we refer to as the
Investigation) described in Note 12, "Commitments and Contingencies" located in the Notes to the Consolidated Financial Statements elsewhere in this Quarterly Report. We subsequently settled with two of the insurance companies during January 2008, through which we received an aggregate amount of $14,625. This amount was included within (loss) income from discontinued operations in the accompanying statement of operations during the three months ended December 31, 2007 and is included within prepaid expenses and other current assets in our consolidated balance sheet as of December 31, 2007.
Pursuant to a stipulation among the parties, the Coverage Litigation was transferred on September 13, 2007 to the Superior Court of the State of Delaware in and for New Castle County. The Policies were issued to our company and to EPS, our former subsidiary, which is our co-plaintiff in the Coverage Litigation (which we refer to collectively as the Plaintiffs). EPS was sold in September 2006 to Sage Software and has changed its name to Sage Software Healthcare, Inc. (which we refer to as SSHI). In connection with our sale of EPS to Sage Software, we retained certain obligations relating to the Investigation and agreed to indemnify Sage Software and SSHI with respect to certain expenses in connection with the Investigation. We retained the right to assert claims and recover proceeds under the Policies on behalf of SSHI.
The Policies at issue in the Coverage Litigation consist of two separate groups of insurance policies. Each group of policies consists of several layers of coverage, with different insurers having agreed to provide specified amounts of coverage at various levels. The first group of policies was issued to EPS in the amount of $20,000 (which we refer to as the EPS Policies) and the second group of policies was issued to Synetic, Inc. (the former parent of EPS, which merged into HLTH) in the amount of $100,000, of which approximately $3,600 was paid by the primary carrier with respect to another unrelated matter (which we refer to as the Synetic Policies). As of September 30, 2008, $50,950 has been paid by insurance companies representing the EPS Policies and the Synetic Policies through a combination of payment under the terms of the Policies, payment under reservation of rights and settlement. Of this amount, $19,912 has been reimbursed by the insurance companies subsequent to the Court's order on July 31, 2008 (described in more detail below). We have deferred recognizing this amount as income given the fact that the Coverage Litigation is ongoing and accordingly this amount has been deferred on the balance sheet as of September 30, 2008 within liabilities of discontinued operations. As a result of these payments, we have exhausted our coverage under the EPS Policies and have remaining coverage under the Synetic Policies of approximately $60,000.
The carrier with the third level of coverage in the Synetic Policies filed a motion for summary judgment in the Coverage Litigation, which most of the carriers who have issued the Synetic policies joined, which sought summary judgment that any liability to pay defense costs should be allocated among the three sets of policies available to our company (including the policies with respect to which the Coverage Litigation relates and a third set of policies the issuers of which had not yet been named by our company) such that the Synetic Policies would only be liable to pay about $23,000 of the $96,400 total coverage available under such policies. We filed our opposition to the motion together with our motion for summary judgment against such carrier and several other carriers who have issued the Synetic Policies seeking to require such carriers to advance payment of the defense costs that we are obligated to pay while the Coverage Litigation is pending. On July 31, 2008 the Superior Court for the State of Delaware denied the motion filed by the carriers seeking allocation and granted HLTH's motion for partial summary judgment to enforce the duty of such carriers to advance and reimburse these costs. Pursuant to the Court's order the issuers of the Synetic Policies have been reimbursing us for our costs. Unless the carriers ultimately prevail in the Coverage Litigation or obtain an interim ruling from the court to the contrary, we expect to collect from the remaining carriers under the Synetic Policies who are subject to the Court's order the costs that it is obligated to pay subject to the limits of each carrier's policy. Our insurance policies provide that under certain circumstances, amounts advanced by the insurance companies in connection with the defense costs of the indicted individuals, may have to be repaid by us, although the $14,625 that we have received in settlement from certain carriers is not subject to being repaid. We have obtained an undertaking from each indicted individual pursuant to which, under certain circumstances, such individual has agreed to repay defense costs advanced on such individual's behalf.
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