<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 333-70553
--------------------------------
HEALTHEON CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 94-3236644
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4600 PATRICK HENRY DRIVE
SANTA CLARA, CALIFORNIA 95054
(Address of principal executive offices)
(408) 876-5000
(Registrant's telephone number, including area code)
--------------------------------
Check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [X] NO [ ]
As of October 29, 1999, there were 72,150,568 shares of the Registrant's Common
Stock outstanding.
================================================================================
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- --------------------------------------------------------------------------------
HEALTHEON CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 1999
INDEX
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998....................................... 3
Condensed Consolidated Statements of Operations for the three and
nine months ended September 30, 1999 and 1998............... 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1999 and 1998.................... 5
Notes to Condensed Consolidated Financial Statements........... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................... 9
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk..... 22
PART II OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K............................... 23
Signatures..................................................... 24
</TABLE>
2
<PAGE> 3
- --------------------------------------------------------------------------------
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
HEALTHEON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................... $ 25,122 $ 19,389
Short-term investments ........................ 2,601 17,428
Accounts receivable, net ...................... 22,535 7,954
Other current assets .......................... 2,951 706
--------- ---------
Total current assets ....................... 53,209 45,477
Property and equipment, net ...................... 20,040 12,285
Intangible assets, net ........................... 19,817 19,868
Other assets ..................................... 7,382 2,310
--------- ---------
$ 100,448 $ 79,940
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable ................................. $ -- $ 1,213
Accounts payable .............................. 8,124 5,178
Accrued compensation .......................... 5,443 2,424
Accrued liabilities ........................... 12,676 4,559
Current portion of capital lease obligations .. 2,126 2,295
Deferred revenue .............................. 1,954 1,874
--------- ---------
Total current liabilities .................. 30,323 17,543
Capital lease obligations, net of current portion 2,080 2,984
Stockholders' equity:
Convertible preferred stock, at amounts paid in -- 46,101
Common stock .................................. 7 5
Additional paid-in capital .................... 231,385 123,670
Deferred stock compensation ................... (6,676) (6,935)
Accumulated deficit ........................... (156,671) (103,428)
--------- ---------
Total stockholders' equity ................. 68,045 59,413
--------- ---------
$ 100,448 $ 79,940
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
HEALTHEON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue (1) ............................... $ 28,653 $ 12,578 $ 68,906 $ 33,231
Operating costs and expenses:
Cost of operations (1) .................. 20,282 12,515 53,714 29,361
Development and engineering ............. 6,612 4,400 20,867 12,399
Sales and marketing ..................... 8,255 2,157 18,610 5,676
General and administrative .............. 5,858 2,436 15,290 10,548
Depreciation and amortization ........... 5,119 4,686 15,214 10,690
--------- --------- --------- ---------
Total operating costs and expenses .... 46,126 26,194 123,695 68,674
--------- --------- --------- ---------
Loss from operations ...................... (17,473) (13,616) (54,789) (35,443)
Interest income ........................... 459 197 1,895 834
Interest expense .......................... (95) (110) (349) (361)
Dividends on ActaMed's convertible
redeemable preferred stock .............. -- -- -- (890)
--------- --------- --------- ---------
Net loss .................................. $ (17,109) $ (13,529) $ (53,243) $ (35,860)
========= ========= ========= =========
Basic and diluted net loss per common share $ (0.24) $ (0.26) $ (0.79) $ (1.24)
========= ========= ========= =========
Weighted average shares outstanding used in
computing basic and diluted net loss per
common share ............................ 70,596 51,538 67,723 28,934
========= ========= ========= =========
</TABLE>
(1) Includes revenue to related parties of $7,912 and $4,950 and cost of
operations associated with revenue to related parties of $7,461 and $4,703
for the three months ended September 30, 1999 and 1998, and revenue related
to related parties of $28,184 and $14,320 and cost of operations associated
with revenue to related parties of $24,953 and $11,094 for the nine months
ended September 30, 1999 and 1998. See note 3.
See notes to condensed consolidated financial statements.
4
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HEALTHEON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................. $(53,243) $(35,860)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ...................... 21,950 15,538
Dividends on ActaMed's convertible redeemable
preferred stock.................................. -- 890
Changes in operating assets and liabilities:
Accounts receivable .............................. (14,581) (1,819)
Other assets ..................................... (8,184) (162)
Accounts payable ................................. 2,946 2,580
Accrued liabilities .............................. 11,184 3,964
Deferred revenue ................................. 80 996
-------- --------
Net cash used in operating activities .......... (39,848) (13,873)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments .................. (16,353) (4,341)
Maturities of short-term investments ................. 31,180 8,775
Cash paid in business combination .................... -- (652)
Decrease in restricted cash .......................... 867 --
Purchases of property and equipment .................. (11,625) (5,071)
-------- --------
Net cash provided by (used in) investing
activities...................................... 4,069 (1,289)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (payments) on line of credit borrowings ..... (1,213) (2,010)
Proceeds from issuance of preferred stock ............ -- 2,034
Proceeds from issuance of common stock, net of
issuance costs.................................. 44,781 3,725
Payments on note receivable from officer ............. -- 349
Principal payments of capital lease obligations ...... (2,056) (914)
-------- --------
Net cash provided by financing activities ...... 41,512 3,184
-------- --------
Net increase (decrease) in cash and cash equivalents .... 5,733 (11,978)
Cash and cash equivalents at beginning of period ........ 19,389 16,504
-------- --------
Cash and cash equivalents at end of period .............. $ 25,122 $ 4,526
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ........................................ $ 356 $ 379
======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Equipment acquired under capital leases .............. $ 983 $ 2,278
======== ========
Issuance of common stock for assets purchased ........ $ 11,000 $ 4,900
======== ========
Issuance of convertible redeemable preferred stock for
assets purchased .................................. $ -- $ 2,800
======== ========
Deferred compensation related to options granted ..... $ 6,261 $ 4,083
======== ========
Issuance of common stock for business combination .... $ -- $ 8,320
======== ========
Conversion of convertible preferred stock and
convertible redeemable preferred stock to common
stock ............................................. $ 46,101 $ 94,119
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
HEALTHEON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited condensed consolidated financial statements have been prepared
by Healtheon's management and reflect all 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 nine months ended
September 30, 1999 are not necessarily indicative of the results to be expected
for any subsequent quarter or for the entire year ending December 31, 1999.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted under the Securities and Exchange Commission's
rules and regulations. A condensed consolidated statement of comprehensive loss
has not been presented because the components of comprehensive loss are not
material.
Healtheon derives its revenue from a single operating segment, healthcare
transaction and information services delivered over the Internet, private
intranets or other networks and from development and consulting contracts
related to these services. In addition, we manage the information technology
operations of some of our customers. Healtheon's operations outside of the
United States are not significant, and to date we have derived nearly all of our
revenue from within the United States. Assets located outside of the United
States are insignificant at September 30, 1999.
These unaudited condensed consolidated financial statements and notes
included herein should be read in conjunction with Healtheon's audited
consolidated financial statements and notes for the year ended December 31, 1998
which were included in our Annual Report on Form 10-K filed with the Securities
and Exchange Commission.
Revenue Recognition
Healtheon earns revenue from services and services to related parties, both
of which include providing access to our network-based services and performing
development and consulting services, and from licensing software. Services
revenue also includes revenue from the management and operation of customers'
information technology, or IT, infrastructure. We earn network-based services
revenue from fixed fee subscription arrangements, which is recognized ratably
over the term of the applicable agreement, and from arrangements that are priced
on a per-transaction or per-user basis, which is recognized as the services are
performed. Revenue from development projects is recognized on a
percentage-of-completion basis or as such services are performed, depending on
the terms of the contract. Revenue from consulting services and revenue from the
management and operation of customers' IT infrastructure is recognized as the
services are performed. Cash received in excess of revenue recognized relating
to such services has been recorded as deferred revenue in the accompanying
condensed consolidated balance sheets. Revenue from services to related parties
consists of services revenue attributable to UnitedHealth Group and SmithKline
Labs prior to August 16, 1999. On August 16, 1999, SmithKline Labs was sold by
Smith Kline Beecham to Quest Diagnostics, Inc, at which time SmithKline Labs
ceased to be a related party. To date, we have derived no significant revenue
from brokers, value-added resellers or systems integrators.
During 1997, we entered into agreements with two customers to manage and
operate their current and expanding IT operations, to develop a suite of
specific Internet-based commercial software applications and to assist these
customers in migrating from their current IT operating environment to these new
applications. We utilize our own personnel, certain outside contractors and
certain personnel and facilities of the customers that are leased under contract
terms to use for these services. The cost of these leased customer personnel and
facilities is included as a part of the total costs of the IT and development
services that we bill to the customers. We recognized revenue for the IT
services of approximately $4,580,000 and $3,611,000 in the three months ended
September 30, 1999 and 1998, and $13,860,000 and $10,915,000 in the nine months
ended September 30, 1999 and 1998. We recognized revenue for the development
services of approximately $2,567,000 and $2,276,000 in the three months ended
September 30, 1999 and 1998, and $5,809,000 and $4,772,000 in the nine months
ended September 30, 1999 and 1998. Revenue recognized for IT services included
$3,157,000 and $9,478,000 in the three and nine months ended
6
<PAGE> 7
September 30, 1999 and $2,688,000 and $8,775,000 in the three and nine months
ended September 30, 1998 related to leased personnel and facilities. These
amounts were also included in cost of operations for the respective periods.
We recognize revenue from license fees when a noncancellable license
agreement has been signed with a customer, the software product covered by the
license agreement has been delivered, there are no uncertainties surrounding
product acceptance, there are no significant future performance obligations, the
license fees are fixed and determinable and collection of the license fees is
considered probable. Our products do not require significant customization. In
the third quarter of 1999 we licensed this technology to a customer for $6.0
million, which was recorded in revenue in the third quarter of 1999. We do not
currently anticipate that we will earn a material amount of revenue from
software licenses in the foreseeable future.
Concentration of Revenue and Credit Risk
Healtheon currently derives a substantial portion of its consolidated
revenue from a few large customers, two of which are related parties (see Note
3). Four customers each accounted for more than 10% of Healtheon's revenues
during the nine months ended September 30, 1999, and together accounted for
approximately 70% of our total revenues during that period. We believe that the
concentration of credit risk in our trade receivables, with respect to our
limited customer base, is substantially mitigated by our credit evaluation
process. We do not require collateral. To date, our bad-debt write-offs have not
been significant.
Net Loss per Common Share
The following table presents the calculation of basic and diluted net loss
per common share (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss ...................................... $(17,109) $(13,529) $(53,243) $(35,860)
======== ======== ======== ========
Basic and diluted:
Weighted-average shares of common stock
outstanding................................ 71,529 53,168 68,751 30,389
Less: Weighted-average common shares subject
to repurchase.............................. (933) (1,630) (1,028) (1,455)
-------- -------- -------- --------
Weighted-average shares used in computing basic
and diluted net loss per common share ....... 70,596 51,538 67,723 28,934
======== ======== ======== ========
Basic and diluted net loss per common share ... $ (0.24) $ (0.26) $ (0.79) $ (1.24)
======== ======== ======== ========
</TABLE>
We have excluded all convertible redeemable preferred stock, convertible
preferred stock, warrants, outstanding stock options and shares subject to
repurchase by Healtheon from the calculation of diluted net loss per common
share because all such securities are anti-dilutive for the periods presented.
The total number of shares excluded from the calculations of diluted loss per
share was approximately 17,153,000 at September 30, 1999 and 12,688,000 at
September 30, 1998.
Reclassifications
Certain reclassifications have been made to the financial statements to
conform with the current year's presentation.
2. SERVICES AGREEMENT WITH SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC.
In January 1999, Healtheon and SmithKline Beecham Clinical Laboratories,
Inc., or SmithKline Labs, entered into a services agreement under which
Healtheon will provide certain electronic laboratory results delivery services
to approximately 20,000 provider sites, in addition to the sites currently
served through the SCAN service. In addition, in January 1999, the two companies
completed an asset purchase agreement under which Healtheon purchased certain
assets currently used by SmithKline Labs to provide these laboratory results
delivery services in exchange for $2,000,000 in cash and 1,833,333 shares of
Healtheon's common stock with a value of $11,000,000.
7
<PAGE> 8
Of the total purchase price, $9,137,000 was allocated to intangible assets in
the accompanying condensed consolidated balance sheet, which are being amortized
over five years.
3. RELATED PARTY TRANSACTIONS
Revenue from services to related parties consists of revenue attributable to
two customers who are significant stockholders of Healtheon. Receivables due
from these related parties included in accounts receivable on the condensed
consolidated balance sheets were approximately $3,360,000 at December 31, 1998.
In August 1999, one of these parties was sold to a company which is not a
significant stockholder of Healtheon. At September 30, 1999 accounts receivable
from the remaining related party was approximately $1,679,000.
4. STOCKHOLDERS' EQUITY
From January 1, 1999 through February 10, 1999, the date of our initial
public offering, Healtheon granted to employees options to purchase common stock
and issued shares of common stock under restricted stock purchase agreements
equal to a total of 4,107,625 shares of common stock at exercise or purchase
prices ranging from $3.55 to $5.85 per share. During 1999, we have recorded
additional deferred stock compensation of $6,261,000 with regard to these
grants.
On February 10, 1999, Healtheon completed its initial public offering. We
sold 5,750,000 shares of common stock to the public and realized net proceeds of
approximately $41,398,000.
5. MERGERS
On April 21, 1999 we announced that we have entered into an agreement to
acquire MEDE America Corporation ("MEDE AMERICA"), a leading provider of
healthcare transaction solutions for pharmacies, hospitals, physicians,
dentists, payers and pharmacy benefits managers (PBMs). Under the terms of the
agreement, Healtheon will exchange 0.7494 shares of common stock for each share
of MEDE AMERICA stock. The transaction is preliminarily valued at approximately
$387.0 million. The acquisition, which is being accounted for using the purchase
method of accounting, closed on November 12, 1999 after shareholder approval.
On May 20, 1999, we announced that we have entered into an agreement to
merge with WebMD, Inc. ("WebMD"), a leading provider of integrated Web-based
solutions for the administrative, communications and information needs of
healthcare professionals and the healthcare information needs of consumers.
Under the terms of the agreement, Healtheon will exchange 1.796 shares of common
stock for each share of WebMD stock. The transaction is preliminarily valued at
approximately $3,662.1 million. The merger, which is being accounted for using
the purchase method of accounting, closed on November 12, 1999 after shareholder
approval.
On June 30, 1999, we entered into an agreement to acquire Greenberg News
Networks, Inc., owners of Medcast Networks ("Medcast"), a leading Internet-based
medical news and information service. Pursuant to the Agreement and Plan of
Merger, Medcast shareholders will receive approximately $2.3 million cash and
approximately 2.6 million shares of Healtheon common stock. The transaction is
preliminarily valued at approximately $115.4 million. The acquisition, which is
being accounted for using the purchase method of accounting, closed on November
12, 1999 after shareholder approval.
8
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- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
FORWARD LOOKING STATEMENTS
Except for historical information, this Report contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These forward-looking
statements involve risks and uncertainties, including, among other things,
statements regarding our anticipated costs and expenses, revenue mix, product
and service development, relationships with strategic partners and plans for
addressing Year 2000 issues. These forward-looking statements include, among
others, those statements including the words "expects," "anticipates,"
"intends," "believes" and similar language. Our actual results may differ
materially from those projected in the forward-looking statements. Factors that
might cause or contribute to such differences include, but are not limited to,
those discussed in the section "--Factors That May Affect Future Results of
Operations." You should carefully review the risks described in other documents
we file from time to time with the Securities and Exchange Commission, including
our Annual Report on Form 10-K for the year ended December 31, 1998 and the
Registration Statement on Form S-4 filed by Healtheon/WebMD Corporation on June
16, 1999, as amended. You are cautioned not to place undue reliance on the
forward-looking statements, which speak only as of the date of this Quarterly
Report on Form 10-Q. We undertake no obligation to publicly release any
revisions to the forward-looking statements or reflect events or circumstances
after the date of this document.
The following discussion also should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended December
31, 1998 included in our Annual Report on Form 10-K as filed with the Securities
and Exchange Commission.
OVERVIEW
Healtheon is pioneering the use of the Internet to simplify workflows,
decrease costs and improve the quality of patient care throughout the healthcare
industry. Healtheon's Virtual Healthcare Network, or VHN, solution enables the
secure exchange of information among a wide array of disparate healthcare
information systems and provides a framework for a broad range of healthcare
transactions.
Because Healtheon has recently begun operations, it is difficult to evaluate
our business and prospects. Our revenue and income potential is unproven and our
business model is still emerging. Our historical financial information is of
limited value in projecting our future operating results because of our limited
operating history as a combined organization and the emerging nature of our
markets. We have lost money since we began operations and, as of September 30,
1999, we had an accumulated deficit of $156.7 million. We plan to invest heavily
in acquisitions, infrastructure development, applications development and sales
and marketing. As a result, we expect that we will continue to lose money
through 1999 and we may never achieve or sustain profitability.
Healtheon has developed strategic relationships with healthcare industry
leaders, including UnitedHealth Group, SmithKline Labs, Brown & Toland and Beech
Street. These four companies each accounted for over 10% of our total revenue in
the nine months ended September 30, 1999. We expect that a small number of
customers will continue to account for a substantial portion of our revenue for
the foreseeable future. The loss of one or more of our significant customers, or
a decline in the volume of business generated by these customers, could have a
material adverse effect on our business, financial condition and results of
operations.
On April 21, 1999 we announced that we have entered into an agreement to
acquire MEDE America Corporation ("MEDE AMERICA"), a leading provider of
healthcare transaction solutions for pharmacies, hospitals, physicians,
dentists, payers and pharmacy benefits managers (PBMs). Under the terms of the
agreement, Healtheon will exchange 0.7494 shares of common stock for each share
of MEDE AMERICA stock. The transaction is preliminarily valued at approximately
$387.0 million. The acquisition, which is being accounted for using the purchase
method of accounting, closed on November 12, 1999 after shareholder approval.
9
<PAGE> 10
On May 20, 1999, we announced that we have entered into an agreement to
merge with WebMD, Inc. ("WebMD"), a leading provider of integrated Web-based
solutions for the administrative, communications and information needs of
healthcare professionals and the healthcare information needs of consumers.
Under the terms of the agreement, Healtheon will exchange 1.796 shares of common
stock for each share of WebMD stock. The transaction is preliminarily valued at
approximately $3,662.1 million. The merger, which is being accounted for using
the purchase method of accounting, closed on November 12, 1999 after shareholder
approval.
On June 30, 1999, we entered into an agreement to acquire Greenberg News
Networks, Inc., owners of Medcast Networks ("Medcast"), a leading Internet-based
medical news and information service. Pursuant to the Agreement and Plan of
Merger, Medcast shareholders will receive approximately $2.3 million cash and
approximately 2.6 million shares of Healtheon common stock. The transaction is
preliminarily valued at approximately $115.4 million. The acquisition, which is
being accounted for using the purchase method of accounting, closed on November
12, 1999 after shareholder approval.
When above transactions are consummated, the purchase price of these
transactions will be amortized over the useful lives of the tangible and
intangible assets. We currently anticipate that this amortization will cause us
to incur significant net losses for the next several years, and expect to incur
increasing net operating losses and negative cash flows for the foreseeable
future and may never reach profitability.
RESULTS OF OPERATIONS
Revenue
Healtheon earns revenue from services that include providing access to our
network-based services, including fixed fee and transaction based services, and
performing development and consulting services, including the management and
operation of customers' IT infrastructure, and from licensing software.
Customers may purchase some or all of Healtheon's applications and services and
the customer relationship may evolve from utilizing development and consulting
services to utilizing transaction and subscription-based services. Healtheon
earns network-based services revenue from fixed fee subscription arrangements,
which revenue is recognized ratably over the term of the applicable agreement,
and from arrangements that are priced on a per-transaction or per-user basis,
which revenue is recognized as the services are performed. Revenue from
development projects is recognized on a percentage-of-completion basis or as the
services are performed, depending on the terms of the contract. Revenue from
consulting services and revenue from the management and operation of customers'
IT infrastructure is recognized as the services are performed. Cash received in
excess of revenue recognized relating to these services has been recorded as
deferred revenue. At September 30, 1999, we had deferred revenue of
approximately $2.0 million.
Total revenue increased to $28.7 million and $68.9 million in the three and
nine months ended September 30, 1999 from $12.6 million and $33.2 million in the
three and nine months ended September 30, 1998. Revenue from the services
agreements with UnitedHealth and SmithKline Labs increased to $7.9 million and
$28.2 million in the three and nine months ended September 30, 1999, compared to
$5.0 million and $14.3 million in the three and nine months ended September 30,
1998. Increased transaction-based services under the UnitedHealth Group
Agreement, and additional revenue from the January 1999 services agreement with
SmithKline Labs, which was phased in during the first quarter of 1999,
contributed to the significant increases in revenue.
The UnitedHealth Group agreement has a five-year term. However, the
agreement provides that two years after the date of the agreement, which was
signed on April 4, 1996, the parties will agree on new prices that are
competitive with the marketplace. On October 24, 1999, Healtheon and
UnitedHealth Group extended their agreement through December 31, 2004. The new
agreement makes Healtheon UnitedHealth Group's preferred electronic gateway for
its providers, vendors and clearinghouses to process administrative and
financial transactions. The Company expects the new agreement to expand the
number of United HealthGroup contracted physicians who use Healtheon's services,
and increase the number of transactions that Healtheon processes for
UnitedHealth Group over the term of the agreement. The new agreement also
establishes new prices that will reduce the rates paid by UnitedHealth Group on
a prospective basis. The services agreements with SmithKline Labs also each have
a five-year term. However, the December 1997 Services Agreement provides that
the parties will negotiate new rates as of January 1, 2001 and every two years
thereafter. Under the terms of the Services Agreement, the renegotiated rates
10
<PAGE> 11
must be competitive with the marketplace and must be no higher than the lowest
fees charged by Healtheon to similar customers.
In December 1996, through a subsidiary, Healtheon entered into an agreement
to license its newly granted patent to International Business Machines
Corporation ("IBM"). IBM agreed to pay $4.8 million over a four-year period,
$1.0 million in December 1996 and the remaining balance in 48 equal monthly
installments commencing in January 1997. Additionally, we issued IBM a five-year
warrant to purchase 282,522 shares of our common stock at a price of $7.97 per
share. Because of the extended payment terms and the subsidiary's contentious
relationship with IBM, we concluded collection was not assured and, accordingly,
we were recognizing this revenue as the proceeds were collected. In January
1999, we announced an enhanced relationship with IBM, where both parties agreed
to jointly market and sell each company's products to their healthcare
customers. In June, 1999 we amended the agreement with IBM such that the
remaining payment stream was discounted by 10.5% ($149,000) in exchange for
immediate payment of the revised balance due, resulting in the recognition of
the remaining deferred revenue. In the third quarter of 1999 we licensed this
technology to a customer for $6.0 million, which was recorded in revenue in the
third quarter of 1999. As a result of these licenses, we recognized revenue of
$6.0 million and $7.5 million in the three and nine months ended September 30,
1999, compared to $0.2 million and $0.6 million in the three and nine months
ended September 30, 1998. We do not currently anticipate that we will earn a
material amount of revenue from software licenses in the foreseeable future.
Cost of Operations
Cost of operations consist of costs related to services Healtheon provides
to customers and costs associated with the operation and maintenance of our
networks. These costs include salaries and related expenses for consulting and
development personnel, network operations personnel and customer support
personnel; telecommunication costs; maintenance of network equipment; a portion
of facilities expenses; and leased personnel and facilities costs. Given
Healtheon's limited operating history, changes in revenue mix, limited history
of Internet-based network services, recent investments in personnel,
amortization of infrastructure investments and evolving business model, we
believe that analysis of historical cost of operations as a percentage of
revenue is not meaningful. We anticipate that our total cost of operations will
increase in absolute dollars in the future.
Cost of operations increased to $20.3 million and $53.7 million in the three
and nine months ended September 30, 1999 from $12.5 million and $29.4 million in
the three and nine months ended September 30, 1998. These increases resulted
mainly from higher personnel and network operations costs required to support
the increased service revenues.
Development and Engineering
Development and engineering expense, which excludes development expenses
that are included in cost of operations, consists primarily of salaries and
related expenses associated with the development of applications and services.
Expenses include compensation paid to engineering personnel, fees to outside
contractors and consultants, a portion of facilities expenses and the
maintenance of capital equipment used in the development process. We believe our
success is partially dependent upon our ability to introduce new applications in
several healthcare markets in a relatively short period of time. Accordingly,
Healtheon intends to continue recruiting and hiring experienced engineering
personnel and to continue making other investments in development and
engineering. We expect that development and engineering expenses will continue
to increase in absolute dollars. Currently, all development and engineering
expenses are expensed as incurred.
Development and engineering expense was $6.6 million and $20.9 million in
the three and nine months ended September 30, 1999 and $4.4 million and $12.4
million in the three and nine months ended September 30, 1998. The increases
were the result of a significant increase in the number of engineers engaged in
the development of our applications and services.
Sales and Marketing
Sales and marketing expense consists primarily of salaries and related
expenses for sales, account management, marketing, commissions and costs and
expenses for marketing programs and trade shows. We anticipate that sales,
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general and administrative expenses will continue to increase in absolute
dollars as we add sales and marketing personnel and increase our marketing and
promotional activities.
Sales and marketing expense increased to $8.3 million and $18.6 million in
the three and nine months ended September 30, 1999 from $2.2 million and $5.7
million in the three and nine months ended September 30, 1998. This increase
resulted primarily from salaries and related support costs for added sales and
marketing personnel and programs to support our revenue growth.
General and Administrative
General and administrative expense consists primarily of salaries and
related expenses for administrative, finance, legal, human resources and
executive personnel, fees for professional services, and costs of accounting and
internal control systems to support our operations. We anticipate that general
and administrative expenses will continue to increase in absolute dollars as we
add administrative personnel and incur costs related to being a public company,
such as directors' and officers' liability insurance premiums and professional
fees.
General and administrative expense increased to $5.9 million and $15.3
million in the three and nine months ended September 30, 1999 from $2.4 million
and $10.5 million in the three and nine months ended September 30, 1998. The
amortization of deferred stock compensation included in general and
administrative expense was $1.8 million and $6.0 million in the three and nine
months ended September 30, 1999, compared to $0.9 million and $2.1 million in
the comparable periods of the prior year. Substantially all of the remainder of
the increase resulted from salaries and related support costs for added
administrative personnel and executive management.
Deferred stock compensation represents the difference between the purchase
or exercise price of certain restricted stock and stock option grants and the
deemed fair value of Healtheon's common stock at the time of those grants.
Healtheon recorded deferred stock compensation of $6.3 million in the first nine
months of 1999, $8.2 million in the full year of 1998 and $2.7 million in the
full year of 1997. The unamortized deferred stock compensation balance at
September 30, 1999 was $6.7 million. The deferred stock compensation balance is
being amortized based on a graded vesting method over the vesting period,
generally four years, of the option or restricted stock grants. Amortization is
estimated to total $1.6 million during the remainder of 1999, $3.3 million in
2000, $1.4 million in 2001 and $0.4 million for 2002.
Depreciation and Amortization
Depreciation expense and amortization of intangible assets was $5.1 million
and $15.2 million in the three and nine months ended September 30, 1999 and $4.7
million and $10.7 million in the three and nine months ended September 30, 1998.
Property and equipment is being depreciated over the estimated useful lives of
the related assets, generally three to seven years. All of the intangible assets
are being amortized over an expected lives of two to five years. The increases
resulted primarily from the technology rights acquired with the January 1999
services agreement with SmithKline Labs and the acquisition of Metis LLC in
August 1998, as well as the increase in property and equipment to support
overall growth. Amortization charges are estimated to be $11.8 million in total
in 1999, $10.0 million in 2000, $3.4 million in 2001, $1.8 million in both 2002
and 2003 and $.2 million in 2004 assuming no impairment of the remaining
unamortized intangible asset balances and no additional acquisitions of
intangible assets. In addition, we will amortize significant amounts of goodwill
and other intangible assets in connection with future acquisitions (see Note 5 -
Mergers), which will materially increase our operating expenses in future
periods.
Interest Income and Expense
Interest income has been derived primarily from cash investments. Interest
expense results primarily from our borrowings and from capitalized lease
obligations for equipment purchases. Interest income was $1.9 million in the
first nine months of 1999 and $0.8 million in the first nine months of 1998. The
increase for the 1999 period was due to higher average cash balances resulting
from the proceeds of our $46.1 million preferred stock financing in October 1998
and the net proceeds of $41.4 million from our initial public offering in
February 1999.
Dividends on ActaMed's Convertible Redeemable Preferred Stock
Healtheon acquired ActaMed in a transaction accounted for as a
pooling-of-interests in May 1998. Because dividends on ActaMed's convertible
redeemable preferred stock were cumulative whether declared or not, ActaMed
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accrued the dividends on a quarterly basis. Dividends of $0.9 million were
charged against income in the consolidated statements of operations in the first
quarter of 1998. None of the dividends were paid, and, in conjunction with
approving the acquisition of ActaMed by Healtheon, ActaMed's preferred
stockholders waived their right to receive the dividends, which totaled $7.5
million at the time of the acquisition. The ActaMed preferred stockholders
received an aggregate of 17.3 million shares of Healtheon common stock in
exchange for their ActaMed convertible redeemable preferred stock.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
On November 12, 1999, Healtheon completed merger with WebMD, Inc., MEDE
AMERICA and Greenberg News Networks, Inc. ("Medcast"). We will face additional
risks to our business as a result of these acquisitions. We encourage you to
carefully read the registration statement, including risks identified under the
caption "Risk Factors," for a more thorough discussion of the acquisition and
the risks facing the combined company.
HEALTHEON HAS INCURRED AND WILL CONTINUE TO INCUR SUBSTANTIAL LOSSES
Healtheon began operations in January 1996 and has incurred net losses from
operations in each fiscal period since its inception. As of September 30, 1999,
we had accumulated losses of approximately $156.7 million. In addition, we
currently intend to invest heavily in acquisitions, infrastructure development,
applications development and sales and marketing in order to extend our services
to a growing number of potential customers and partners.
When the WebMD merger, the MEDE AMERICA merger and the Medcast merger
occurs, the purchase price of these acquisitions will be amortized over the
useful life of the tangible and intangible assets. We currently anticipate that
this amortization will cause Healtheon/WebMD to incur significant net losses for
the next several years. We expect that Healtheon/WebMD will incur increasing net
operating losses and negative cash flows for the foreseeable future and may
never be profitable.
THE BUSINESS OF PROVIDING SERVICES OVER THE INTERNET IS DIFFICULT TO EVALUATE
AND THE HEALTHEON BUSINESS MODEL IS UNPROVEN
Because Healtheon recently began operations, it is difficult to evaluate our
business and prospects. Our revenue and income potential is unproven and our
business model is emerging. We may never achieve favorable operating results or
profitability.
OUR QUARTERLY OPERATING RESULTS MAY VARY, WHICH COULD AFFECT THE MARKET
PRICE OF OUR COMMON STOCK
Fluctuations in our quarterly results could affect the market price of our
common stock in a manner unrelated to our long-term operating performance. We
expect to increase activities and spending in substantially all of our
operational areas and will base our expense levels in part upon our expectations
concerning future revenue and these expense levels are relatively fixed in the
short-term. If we have lower revenue, we may not be able to reduce our spending
in the short-term in response. Any shortfall in revenue would have a direct
impact on our results of operations. For these and other reasons, we may not
meet the earnings estimates of securities analysts or investors and our stock
price could suffer.
WE RELY ON STRATEGIC RELATIONSHIPS TO GENERATE REVENUE
Our ability to generate revenues will suffer if we cannot establish and
maintain strategic relationships
We must establish and maintain strategic relationships with leaders in a
number of healthcare and Internet industry segments. Currently, we receive a
significant amount of our revenues from four strategic partners. UnitedHealth
Group, SmithKline Labs, which was recently acquired by Quest Diagnostics, Inc.,
Brown & Toland and Beech Street each accounted for more than 10% of Healtheon's
revenues for the nine months ended September 30, 1999, and together accounted
for approximately 70% of Healtheon's revenues for the same time period. We may
not be able to establish commercial acceptance of our platform applications and
services if we lose any of our strategic relationships, fail to obtain
modifications of exiting relationships, or fail to establish additional
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relationships, or if our strategic partners fail to actively pursue additional
business relationships and partnerships with us.
We may compete with potential strategic partners
Entering into strategic relationships is complicated because some of our
current and future partners may decide to compete with us and some strategic
relationships may put us in competition with existing strategic partners or
customers. In addition, we may not be able to maintain or establish
relationships with key participants in the healthcare and Internet industries if
we have established relationships with competitors of these key participants.
Consequently, it is important that we are perceived as independent of any
particular customer or partner. Moreover, many potential partners may resist
working with us until our applications and services have been successfully
introduced and have achieved market acceptance.
OUR ABILITY TO GENERATE REVENUE WILL SUFFER IF WE DO NOT QUICKLY EXPAND OUR
SUITE OF APPLICATIONS
We currently offer a limited number of applications on our platform and we
must quickly introduce new applications in several healthcare segments. We do
not have the internal resources and specialized healthcare expertise to develop
all these applications independently. Consequently, we must rely on a
combination of internal development, strategic relationships, licensing and
acquisitions to develop these applications. Each of our applications, regardless
of how it was developed, must be integrated and customized to operate with
existing customer legacy computer systems and our platform. Developing,
integrating and customizing these applications will be expensive and time
consuming, and these applications may never achieve market acceptance, which
could also cause our business to suffer.
WE WILL FACE TECHNICAL, OPERATIONAL AND STRATEGIC CHALLENGES THAT MAY
PREVENT US FROM SUCCESSFULLY INTEGRATING HEALTHEON, WEBMD, MEDE AMERICA AND
MEDCAST
The mergers with WebMD, MEDE AMERICA and Medcast, and resulting
reorganizations, involve risks related to the integration and management of
acquired technology, operations and personnel. The integration of Healtheon,
WebMD, MEDE AMERICA and Medcast will be a complex, time consuming and expensive
process and may disrupt our business if not completed in a timely and efficient
manner. Following the mergers, we must operate as a combined organization
utilizing common information and communication systems, operating procedures,
financial controls and human resources practices. We may encounter substantial
difficulties, costs and delays involved in the proposed integrations, including:
- potential incompatibility of business cultures
- perceived adverse changes in business focus
- potential conflicts in sponsor, advertising or content relationships
- the loss of key employees and diversion of the attention of management
from other ongoing business concerns
Following the completion of the mergers, Healtheon/WebMD intends to develop
and launch an integrated web site and product offering that utilizes the
majority of the companies' products and services, including Healtheon's
Internet-based information and transaction platform, WebMD's brand awareness,
marketing strategy and strategic relationships, MEDE AMERICA'S base of
healthcare providers and payer institutions and Medcast's daily medical news.
Healtheon/WebMD cannot guarantee that the integrated web site will be
successfully launched in a timely manner, if at all.
OUR BUSINESS WILL SUFFER IF WE FAIL TO SUCCESSFULLY INTEGRATE ANY ACQUIRED
TECHNOLOGIES AND COMPANIES IN THE FUTURE
Integrating any newly acquired organizations and technologies in the future
could be expensive, time consuming and may strain our resources. Future
acquisitions could divert management's attention from other business concerns
and expose it to unforeseen liabilities or risks associated with entering new
markets. In addition, we may lose key employees while integrating these new
companies. We may also lose our current customers if any acquired companies have
relationships with our competitors' customers. Consequently, we may not be
successful in integrating acquired businesses or technologies and may not
achieve anticipated revenue and cost benefits. We also cannot guarantee that
these acquisitions will result in sufficient revenues or earnings to justify our
investment in, or
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expenses related to, these acquisitions or that any synergies will develop. The
healthcare industry is consolidating and Healtheon expects that it will face
intensified competition for acquisitions, especially from larger, better-funded
organizations. If we fail to execute our acquisition strategy successfully for
any reason, our business will suffer significantly.
FUTURE STOCK ISSUANCES WILL DILUTE OUR STOCKHOLDERS AND COULD RESULT IN
ADVERSE ACCOUNTING CONSEQUENCES
We intend to pay for some of our acquisitions and branding and advertising
services by issuing additional common stock and this would dilute our
stockholders. We may also use cash to buy companies or technologies, and it may
need to incur debt to pay for these acquisitions. Acquisition financing may not
be available on favorable terms or at all. In addition, we may be required to
amortize significant amounts of goodwill and other intangible assets in
connection with future acquisitions, which would materially increase our
operating expenses.
OUR BUSINESS WILL SUFFER IF WE FAIL TO MANAGE OUR GROWTH
We have rapidly and significantly expanded our operations and expect to
continue to do so. This growth has placed, a significant strain on our
managerial, operational, financial and other resources and is expected to
continue to strain our resources. If we are unable to respond to and manage our
expected growth, then the quality of our services and our results of operations
could be materially adversely affected.
Our current information systems, procedures and controls may not continue to
support our operations and may hinder our ability to exploit the market for
healthcare applications and services. We are in the process of evaluating our
accounting and management information systems and anticipate that we may
implement new systems within the next twelve months. We could experience
interruptions to our business while we transition to new systems. We cannot
guarantee that our systems, procedures and control will be adequate to support
expansion of our operations.
OUR BUSINESS WILL SUFFER IF COMMERCIAL USERS DO NOT ACCEPT INTERNET SOLUTIONS
Our business model depends on the adoption of Internet solutions by
commercial users. Our ability to generate revenues could suffer dramatically if
Internet solutions are not accepted or not perceived to be effective. The
Internet may not prove to be a viable commercial marketplace for a number of
reasons, including:
- inadequate development of the necessary infrastructure for communication
speed, access and server reliability
- security and confidentiality concerns relating to conducting
transactions over the Internet
- lack of development of complementary products, such as high-speed modems
and high-speed communication lines
- delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity
The Internet infrastructure may be unable to support the demands placed on
it by continued growth and use of the Internet. The adoption of Internet
solutions by healthcare participants will require the acceptance of a new way of
conducting business and exchanging information. The healthcare industry, in
particular, relies on legacy systems that may be unable to benefit from our
Internet-based platform. To maximize the benefits of our platform, healthcare
participants must be willing to allow sensitive information to be stored in our
databases. We can process transactions for healthcare participants that maintain
information on their own proprietary databases. However, the benefits of our
connectivity and sophisticated information management solution are limited under
these circumstances. Customers using legacy and client-server systems may refuse
to adopt new systems when they have made extensive investment in hardware,
software and training for older systems.
PERFORMANCE PROBLEMS WITH OUR SYSTEMS COULD DAMAGE OUR BUSINESS
Our customer satisfaction and our business could be harmed if we or our
customers experience any system delays, failures or loss of data. We currently
process substantially all of our customer transactions and data at our
facilities in Santa Clara, California and Atlanta, Georgia. Although we have
safeguards for emergencies, we do not have backup facilities to process
information if either of these facilities is not functioning. The occurrence of
a major catastrophic
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event or other system failure at either the Santa Clara or the Atlanta facility
could interrupt data processing or result in the loss of stored data.
PERFORMANCE PROBLEMS WITH OUR SYSTEMS SERVICE AND CONTENT PROVIDERS COULD
HARM OUR BUSINESS
We depend on service and content providers to provide information and data
feeds on a timely basis. Our web site could experience distributions or
interruptions in service due to the failure or delay in the transmission or
receipt of this information. In addition, our customers depend on Internet
service providers, online service providers and other web site operators for
access to our web site. 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 customers, strategic partners, advertisers or
sponsors and, if sustained or repeated, could reduce the attractiveness of our
services.
IF OUR SYSTEMS EXPERIENCE SECURITY BREACHES OR ARE OTHERWISE PERCEIVED TO BE
INSECURE, OUR REPUTATION WILL SUFFER
A material security breach could damage our reputation or result in
liability to us. We retain confidential customer and patient information in our
processing centers. We may be required to spend significant capital and other
resources to protect against security breaches or to alleviate problems caused
by breaches. Any well-publicized compromise of Internet security could deter
people from using the Internet or from conducting transactions that involve
transmitting confidential information, including confidential healthcare
information. Therefore, it is critical that our facilities and infrastructure
remain secure and that our facilities and infrastructure are perceived by the
marketplace to be secure. Despite the implementation of security measures, our
infrastructure may be vulnerable to physical break-ins, computer viruses,
programming errors, attacks by third parties or similar disruptive problems.
OUR BUSINESS WILL BE HARMED IF WE ARE UNSUCCESSFUL IN RESPONDING TO RAPID
TECHNOLOGY CHANGES IN OUR MARKET
Healthcare information exchange and transaction processing is a relatively
new and evolving market. The pace of change in our markets is rapid and there
are frequent new product introductions and evolving industry standards. We may
be unsuccessful in responding to technological developments and changing
customer needs. In addition, our applications and services offerings may become
obsolete due to the adoption of new technologies or standards.
OUR PLATFORM INFRASTRUCTURE AND OUR SCALABILITY ARE NOT PROVEN AND IT MAY
FAIL TO RESPOND TO NEW GROWTH
So far, we have processed a limited number and variety of transactions over
our platform. Similarly, a limited number of healthcare participants use our
platform. Our systems may not accommodate increased use while maintaining
acceptable overall performance. We must continue to expand and adapt our network
infrastructure to accommodate additional users, increased transaction volumes
and changing customer requirements. This expansion and adaptation will be
expensive and will divert our attention from other activities.
OUR REVENUES ARE CONCENTRATED IN A FEW CUSTOMERS, AND OUR ABILITY TO
GENERATE REVENUE WOULD SUFFER IF WE LOST ANY OF THESE CUSTOMERS
We expect that we will generate a significant portion of our revenue from a
small number of customers for the next few years. If we do not generate as much
revenue from these customers as we expect, or if we lose any of these customers,
our revenue will be significantly reduced which would harm our business.
Currently, we receive a substantial majority of our revenue from four customers.
UnitedHealth Group, SmithKline Labs which was recently acquired by Quest
Diagnostics, Inc., Brown & Toland and Beech Street each accounted for over 10%
and together accounted for approximately 70% of our total revenue in the nine
months ended September 30, 1999. In addition, these four customers each
accounted for over 10% and together accounted for approximately 87% of our total
revenue in the full year of 1998. As of September 30, 1999, UnitedHealth Group
owned approximately 12% of our stock.
LENGTHY SALES AND IMPLEMENTATION CYCLES FOR OUR SOLUTIONS COULD ADVERSELY
AFFECT OUR REVENUE GROWTH
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A key element of our strategy is to market our solutions directly to large
healthcare organizations. We are unable to control many of the factors that will
influence our customers' buying decisions. We expect that the sales and
implementation process will be lengthy and will involve a significant technical
evaluation and commitment of capital and other resources by our customers. The
sale and implementation of our solutions are subject to delays due to our
customers' internal budgets and procedures for approving large capital
expenditures and deploying new technologies within their networks.
We will need to expend substantial resources to integrate our applications
with the existing legacy and client-server architectures of large healthcare
organizations. We have limited experience in integrating our applications with
large, complex architectures, and it may experience delays in the integration
process. These delays would, in turn, delay our ability to generate revenue from
these applications and could adversely affect our results of operations.
WE FACE SIGNIFICANT COMPETITION
The market for healthcare information services is intensely competitive,
rapidly evolving and subject to rapid technological change. Many of our
competitors have greater financial, technical, product development, marketing
and other resources than we have. These organizations may be better known and
have more customers than us. Many of our competitors have announced or
introduced Internet strategies that will compete with our applications and
services. We may be unable to compete successfully against these organizations.
We have many competitors, including:
- healthcare information software vendors, including McKesson HBOC and
Shared Medical Systems Corporation
- healthcare electronic data interchange companies, including ENVOY
Corporation and National Data Corporation
- large information technology consulting service providers, including
Andersen Consulting, International Business Machines Corporation and
Electronic Data Systems Corporation
We expect that major software information systems companies and others
specializing in the healthcare industry will offer competitive applications or
services. Some of our large customers may also compete with us. Our reputation
and brand name could be adversely affected if we experience difficulties in
introducing new services, if our services are not accepted by users, if we are
required to discontinue existing services or if our services do not function
properly.
OUR BUSINESS COULD BE ADVERSELY AFFECTED AS A RESULT OF POLITICAL,
REGULATORY, ECONOMIC OR OTHER CHANGES IN THE HEALTHCARE INDUSTRY
The healthcare industry is highly regulated and is subject to changing
political, economic and regulatory influences. These factors affect the
purchasing practices and operation of healthcare organizations. Changes in
current healthcare financing and reimbursement systems could cause us to make
unplanned modifications of applications or services, or result in delays or
cancellations of orders or in the revocation of endorsement of our applications
and services by healthcare participants. Federal and state legislatures have
periodically considered programs to reform or amend the U.S. healthcare system
at both the federal and state level. These programs may contain proposals to
increase governmental involvement in healthcare, lower reimbursement rates or
otherwise change the environment in which healthcare industry participants
operate. Healthcare industry participants may respond by reducing their
investments or postponing investment decisions, including investments in our
applications and services. We do not know what effect any proposals would have
on our business.
THE TREND TOWARD CONSOLIDATION IN THE HEALTHCARE INDUSTRY COULD LEAD TO
LOWER OPERATING MARGINS
Many healthcare providers are consolidating to create integrated healthcare
delivery systems with greater market power. These providers may try to use their
market power to negotiate price reductions for our applications and services. If
we were forced to reduce our prices, our operating margins would decrease. As
the healthcare industry consolidates, competition for customers will become more
intense and the importance of acquiring each customer will become greater.
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GOVERNMENT REGULATION COULD ADVERSELY AFFECT OUR BUSINESS
Our business is subject to government regulation. Existing as well as new
laws and regulations could adversely affect our business. Laws and regulations
may be adopted with respect to the Internet or other on-line services covering
issues such as:
- user privacy
- pricing
- content
- copyrights
- distribution
- characteristics and quality of products and services
Regulation regarding patient confidentiality
The applicability to the Internet of existing laws in various jurisdictions
governing issues such as property ownership, sales and other taxes, libel and
personal privacy is uncertain and may take years to resolve. Demand for our
applications and services may be affected by additional regulation of the
Internet. For example, until recently current Health Care Financing
Administration guidelines prohibited transmission of Medicare eligibility
information over the Internet.
We are subject to extensive regulation relating to the confidentiality and
release of patient records. Additional legislation governing the distribution of
medical records has been proposed at both the state and federal level. It may be
expensive to implement security or other measures designed to comply with any
new legislation. Moreover, we may be restricted or prevented from delivering
patient records electronically.
Emerging standards required by healthcare laws
Legislation currently being considered at the federal level could affect our
business. For example, the Health Insurance Portability and Accountability Act
of 1996 mandates the use of standard transactions, standard identifiers,
security and other provisions by the year 2000. We are designing our platform
and applications to comply with these proposed regulations; however, until these
regulations become final, they could change, which could cause us to use
additional resources and lead to delays in order to revise our platform and
applications. In addition, our success depends on other healthcare participants
complying with these regulations.
Possible federal and state healthcare regulation
Both federal and state laws prohibit the offer, payment or receipt of
remuneration to induce referrals to entities providing healthcare services or
goods. Although the applicability of these laws to our services is unclear, a
state or federal regulatory agency may allege that our relationship with one or
more of our strategic partners that deliver healthcare services or goods violate
any of these laws. In the event that this determination is made, we could be
subjected to fines and other costs and could be required to revise or terminate
that portion of our business.
Possible regulation by the U.S. Food and Drug Administration:
Some computer applications and software are considered medical devices and
are subject to regulation by the United States Food and Drug Administration, or
the FDA. We do not believe that our current applications or services are subject
to FDA regulation. We may expand our application and service offerings into
areas that subject us to FDA regulation. We have no experience in complying with
FDA regulations. We believe that complying with FDA regulations would be time
consuming, burdensome and expensive and could delay our introduction of new
applications or services.
WE MAY FACE LIABILITIES DUE TO ERRORS IN OUR PRODUCTS
Many of our strategic relationships and services agreements involve
providing critical information technology services to our clients' businesses.
Providing these services is complex because our clients have complex computing
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system environments. If we fail to meet our clients' expectations, our
reputation could suffer and we could be liable for damages. In addition, patient
care could suffer and we could be liable if our systems fail to deliver correct
information in a timely manner. Our insurance may not protect us from this risk.
Finally, we could become liable if confidential information is disclosed
inappropriately.
Many of our contracts limit our liability arising from our errors; however,
these provisions may not be enforceable and may not protect us from liability.
Although Healtheon and our customers will test our applications, they may
contain defects or result in system failures that could cause the failure to
deliver correct information in a timely manner. Patients of Healtheon's
physician customers could be harmed if information critical to their proper care
is not delivered in a timely manner or if incorrect information is delivered.
Our insurance may not protect us from this risk.
THIRD PARTIES MAY BRING CLAIMS AGAINST US AS A RESULT OF CONTENT PROVIDED ON
OUR WEB SITE, WHICH MAY BE EXPENSIVE AND TIME CONSUMING TO DEFEND
We could be subject to third party claims based on the nature and content of
information supplied on our web site by ourselves or by third parties, including
content providers, medical advisors or users. If third persons were able to
penetrate our network security or otherwise misappropriate our users' personal
information our reputation could be damaged and we could be subject to
liability. We could also be subject to liability for content that may be
accessible through out Web sites linked from our Web sites or through content
and information that may be posted by users in chat rooms or bulletin boards.
Even if these 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 operating the business.
OUR PROPRIETARY TECHNOLOGY MAY BE SUBJECTED TO INFRINGEMENT CLAIMS OR MAY BE
INFRINGED UPON
Our intellectual property is important to our business. We could be subject
to intellectual property infringement claims as the number of our competitors
grows and the functionality of our applications overlaps with competitive
offerings. These claims, even if not meritorious, could be expensive and divert
our attention from operating our company. If we become liable to third parties
for infringing their intellectual property rights, we would be required to pay a
substantial damage award and to develop non-infringing technology, obtain a
license or cease selling the applications that contain the infringing
intellectual property. We may be unable to develop non-infringing technology or
obtain a license on commercially reasonable terms, or at all. In addition, we
may not be able to protect against misappropriation of our intellectual
property. Third parties may infringe upon our intellectual property rights, we
may not detect this unauthorized use and we may be unable to enforce our rights.
OUR BUSINESS WILL BE ADVERSELY AFFECTED IF WE CANNOT ATTRACT AND RETAIN KEY
PERSONNEL.
Our future operating results will substantially depend on our officers and
other key employees to manage changing business conditions and to improve our
technical, administrative, financial and reporting systems. We need to attract,
integrate, motivate and retain additional highly skilled technical people. In
particular, we need to attract experienced professionals capable of developing,
selling and installing complex healthcare information systems. We face intense
competition for these people. Our executive management team, including W.
Michael Long, our Chief Executive Officer, is critical to our success. We do not
maintain key person life insurance for anyone.
LIQUIDITY AND CAPITAL RESOURCES
In February 1999, Healtheon completed the initial public offering of its
common stock and realized net proceeds from the offering of approximately $41.4
million. Prior to the offering, Healtheon had funded its operations since
inception primarily through the private placement of equity securities, through
which we had raised net proceeds of $106.2 million through December 31, 1998. We
have also financed our operations through equipment lease financing and bank
borrowings. As of September 30, 1999, we had outstanding equipment lease
liabilities of $4.2 million. As of September 30, 1999, we had approximately
$27.7 million of cash, cash equivalents and short-term investments.
19
<PAGE> 20
Cash used in operating activities was $39.8 million in the nine months ended
September 30, 1999 compared to $13.9 million in the nine months ended September
30, 1998. The cash used during these periods was primarily attributable to net
losses. These losses were principally related to increased expenses as described
more fully above in "Results of Operations."
Investments in property and equipment, excluding equipment acquired under
capital leases or through the issuance of common stock, were $11.6 million in
the nine months ended September 30, 1999 and $5.1 million in the nine months
ended September 30, 1998. In the first nine months of 1999, Healtheon used $16.4
million of cash to purchase short-term investments and realized $31.2 million in
cash from maturities of its short-term investments. In the first nine months of
1998, Healtheon used $4.3 million of cash to purchase short-term investments and
realized $8.8 million in cash from maturities of its short-term investments.
Cash provided by financing activities was $41.5 million in the nine months
ended September 30, 1999, primarily from the net proceeds of our initial public
offering of $41.4 million, as well as proceeds from exercises of employee stock
options, partially offset by payments totaling $3.3 million on capital lease
obligations and line of credit borrowings. Financing activities provided $3.2
million of cash in nine months ended September 30, 1998, resulting primarily
from proceeds from the issuance of preferred and common stock, offset in part by
payments on capital lease obligations and line of credit borrowings.
As of September 30, 1999, we did not have any material commitments for
capital expenditures. Our principal commitments at September 30, 1999 consisted
of obligations under operating leases and capital leases.
We currently anticipate that our available cash resources and credit
facilities will be sufficient to meet our presently anticipated working capital,
capital expenditure and business expansion requirements through the end of the
year. However, 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. With the completion of the merger with WebMD we
will have, on a combined basis, sufficient cash resources to meet our needs for
at least the next twelve months. Our future liquidity and capital requirements
will depend upon numerous factors, including the success of our existing and new
application and service offerings and competing technological and market
developments. We may be required to raise additional funds through public or
private financing, strategic relationships or other arrangements. There can be
no assurance that additional funding, if needed, will be available on terms
acceptable to us, or at all.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are unable
to distinguish between twentieth century dates and twenty-first century dates.
As a result, many companies' software and computer systems may need to be
upgraded or replaced to comply with these "Year 2000" requirements. Healtheon's
business is dependent on the operation of numerous systems that could
potentially be impacted by Year 2000 related problems. Those systems include,
among others: hardware and software systems used by Healtheon to deliver
services to our customers, including Healtheon's proprietary software systems as
well as hardware and software supplied by third parties; communications
networks, such as the Internet and private intranets, which Healtheon depends on
to provide electronic transactions to our customers; the internal systems of our
customers and suppliers; the hardware and software systems Healtheon uses
internally in the management of our business; and non-information technology
systems and services Healtheon uses in our business, such as telephone systems
and building systems.
Healtheon has reviewed the proprietary software systems Healtheon uses to
deliver services to our customers. Although we believe that our internally
developed applications and systems are designed to be Year 2000 compliant,
Healtheon utilizes third-party equipment and software that may not be Year 2000
compliant. In January 1999, Healtheon acquired certain electronic laboratory
connectivity devices from SmithKline Labs. SmithKline has warranted these
services to be Year 2000 compliant. Also, two systems acquired by ActaMed,
specifically SCAN and ProviderLink, which together accounted for approximately
42% of Healtheon's total revenue in 1998, will require modifications to become
Year 2000 compliant. Healtheon has released an updated version of SCAN which is
Year 2000 compliant and Healtheon is in the process of deploying the updated
version of SCAN to our customers. ProviderLink has two versions. The DOS version
was made Year 2000 compliant and is currently being deployed to
20
<PAGE> 21
Healtheon's DOS-based customers. The Internet version is being modified to be
Year 2000 compliant and Healtheon expects to begin deployment over the Internet
in the second half of 1999. In addition, Healtheon's SCAN product is installed
on approximately 5,150 Healtheon-owned workstations located in provider offices.
Many of these workstations are not Year 2000 compliant and Healtheon must
upgrade or replace them. Healtheon expects the costs of such upgrades or
replacements to be less than $1.0 million. However, Healtheon could experience
delays and cost overruns in the development of these upgrades, the upgrades
could contain defects and Healtheon could experience difficulties in getting our
installed base of physicians to implement these upgrades in a timely manner. If
Healtheon experiences these or other difficulties in developing and deploying
our Year 2000 upgrades, our revenues from SCAN, ProviderLink and electronic
laboratory delivery could be significantly reduced, which could have a material
adverse effect on Healtheon's business, financial condition and results of
operations. Failure of third-party or of Healtheon's equipment or software to
operate properly with regard to the Year 2000 and thereafter could require
Healtheon to incur unanticipated expenses to remedy any problems, which could
have a material adverse effect on Healtheon's business, financial condition and
results of operations. In certain of Healtheon's agreements, Healtheon warrants
that our applications and services are Year 2000 compliant. Failure of
Healtheon's applications and services to be Year 2000 compliant could result in
the termination of these agreements or in liability for damages, either of which
could have a material adverse effect on Healtheon's business, financial
condition and results of operations. Healtheon does not believe that the
expenditures to upgrade our internal systems and applications will have a
material adverse effect on our business, financial condition and results of
operations.
Furthermore, the success of Healtheon's efforts may depend on the success of
other healthcare participants in dealing with their Year 2000 issues. Many of
these organizations are not Year 2000 compliant, and the impact of widespread
customer failure on Healtheon's systems is difficult to determine. Customer
difficulties due to Year 2000 issues could interfere with healthcare
transactions or information, which might expose Healtheon to significant
potential liability. If client failures result in the failure of Healtheon's
systems, Healtheon's business, financial condition and results of operations
would be materially adversely affected. Furthermore, the purchasing patterns of
these customers or potential customers may be affected by Year 2000 issues as
companies expend significant resources to become Year 2000 compliant. The costs
of becoming Year 2000 compliant for current or potential customers may result in
reduced funds being available to purchase and implement Healtheon's applications
and services.
Healtheon, with the assistance of an independent consulting firm
specializing in Year 2000 issues, has completed a formal assessment of our Year
2000 exposure and is in the final stages of remediation of all our applications,
internal IT systems, and non-IT systems. It is estimated that 98% of the
remediation phase has been completed with the anticipated completion date in the
fourth quarter of 1999. Additionally, the final stage of Healtheon's Year 2000
overall project includes the development of business continuity plans which are
expected to be completed by the fourth quarter of 1999. An independent Year 2000
audit will also be performed with the objective of achieving Year 2000
certification by an industry leading expert group. However, Healtheon is unable
to make contingency plans for the failure of any significant number of the
computers constituting the Internet to properly process dates for the Year 2000
resulting in a system-wide slowdown or breakdown. Any failure by Healtheon to
address any unforeseen Year 2000 issue could adversely affect Healtheon's
businesses, financial condition and results of operations. Any interruption or
significant degradation of Internet operations, whether due to Year 2000
problems or otherwise, could harm Healtheon's business.
21
<PAGE> 22
- --------------------------------------------------------------------------------
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY
The primary objective of Healtheon's investment activities is to preserve
principal while at the same time maximizing the income we receive from our
investments without significantly increasing risk. Some of the securities that
we have invested in may be subject to market risk. This means that a change in
prevailing interest rates may cause the principal amount of the investment to
fluctuate. For example, if we hold a security that was issued with a fixed
interest rate at the then-prevailing rate and the prevailing interest rate later
rises, the principal amount of our investment will probably decline. To minimize
this risk, we maintain our portfolio of cash equivalents and short-term
investments in a variety of securities, including commercial paper, other
non-government debt securities and money market funds. In general, money market
funds are not subject to market risk because the interest paid on such funds
fluctuates with the prevailing interest rate. In addition, we invest in
relatively short-term securities. As of September 30, 1999, all of our
investments mature in less than one year.
The following table presents the amounts of our cash equivalents and
short-term investments that are subject to market risk by range of expected
maturity and weighted-average interest rates as of September 30, 1999. This
table does not include money market funds because those funds are not subject to
market risk.
<TABLE>
<CAPTION>
MATURING IN
-----------------------------
THREE MONTHS
THREE MONTHS TO FAIR
OR LESS ONE YEAR VALUE
------------ ------------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Included in cash and cash equivalents $ 21,225 NA $21,225
Weighted-average interest rate ..... 5.35%
Included in short-term investments ... $ -- $ 2,601 $ 2,601
Weighted-average interest rates .... NA 5.81%
</TABLE>
EXCHANGE RATE SENSITIVITY
Currently the majority of Healtheon's sales and expenses are denominated in
U.S. dollars and as a result we have experienced no significant foreign exchange
gains and losses to date. While we are conducting some transactions in foreign
currencies during 1999, we do not anticipate that foreign exchange gains or
losses will be significant. We have not engaged in foreign currency hedging
activities to date.
22
<PAGE> 23
- --------------------------------------------------------------------------------
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following exhibits are filed as part of this report:
27.01 Financial data schedule (EDGAR only)
(b) The following Reports on Form 8-K were filed during the quarter ended
September 30, 1999:
The Company filed a report on Form 8-K on July 8, 1999 regarding the
proposed acquisition of Greenberg News Networks, Inc.
23
<PAGE> 24
- --------------------------------------------------------------------------------
SIGNATURES
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities Exchange Act, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
HEALTHEON CORPORATION
Date: November 15, 1999 By: /s/ JOHN L. WESTERMANN III
----------------------------------------
John L. Westermann III
Vice President, Chief Financial Officer,
Secretary and Treasurer
24
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- ------------
<S> <C>
27.01 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Healtheon's
quarterly report on Form 10-Q for the quarter ended September 30, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1000
<CURRENCY> 1000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<EXCHANGE-RATE> 1 1
<CASH> 25,122 4,526
<SECURITIES> 2,601 866
<RECEIVABLES> 22,535 5,104
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 53,209 12,276
<PP&E> 36,497 18,799
<DEPRECIATION> 16,457 7,523
<TOTAL-ASSETS> 100,448 50,271
<CURRENT-LIABILITIES> 30,323 18,331
<BONDS> 0 0
0 0
0 0
<COMMON> 7 5
<OTHER-SE> 68,038 30,221
<TOTAL-LIABILITY-AND-EQUITY> 100,448 50,271
<SALES> 0 0
<TOTAL-REVENUES> 68,906 33,231
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 123,695 68,674
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 349 361
<INCOME-PRETAX> (53,243) (35,860)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (53,243) (35,860)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (53,243) (35,860)
<EPS-BASIC> (0.79) (1.24)
<EPS-DILUTED> (0.79) (1.24)
</TABLE>
