<PAGE> 1
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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, 2000
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 000-24975
------------------------
WEBMD CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-3236644
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
400 THE LENOX BUILDING
3399 PEACHTREE ROAD, NE
ATLANTA, GEORGIA 30326
(Address of principal executive offices)
(404) 495-7600
(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 November 7, 2000, there were 360,722,004 shares of the
Registrant's Common Stock outstanding.
--------------------------------------------------------------------------------
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<PAGE> 2
WEBMD CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
Part I Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 30,
2000 (unaudited) and December 31, 1999.................... 4
Unaudited Condensed Consolidated Statements of Operations
for the three and nine months ended September 30, 2000 and
1999...................................................... 5
Unaudited Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 2000 and 1999..... 6
Notes to Condensed Consolidated Financial Statements........ 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 15
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 38
Part II Other Information.
Item 4. Submission of Matters to a Vote of Security Holders......... 39
Item 6. Exhibits and Reports on Form 8-K............................ 40
Signatures.................................................. 41
</TABLE>
2
<PAGE> 3
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains both historical and
forward-looking statements. All statements other than statements of historical
fact are, or may be deemed to be, forward-looking statements within the meaning
of section 27A of the Securities Act of 1933, as amended, and section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
are not based on historical facts, but rather reflect management's current
expectations concerning future results and events. These forward-looking
statements generally can be identified by use of statements that include phrases
such as "believe," "expect," "anticipate," "intend," "plan," "foresee,"
"likely," "will" or other similar words or phrases. Similarly, statements that
describe our objectives, plans or goals are or may be forward-looking
statements. These forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements to be different from any future results, performance and
achievements expressed or implied by these statements.
In addition to the risk factors described in "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Factors That May
Affect Future Results of Operations" beginning on page 20, the following
important risks and uncertainties could affect future results, causing these
results to differ materially from those expressed in our forward-looking
statements:
- the expected benefits from our recent mergers and our integration plan
not being fully realized or not being realized within the expected time
frames
- the failure to achieve sufficient levels of physician utilization and
market acceptance of our services
- the inability to quickly and successfully deploy our applications
- the inability to attract and retain qualified personnel
- general economic, business or regulatory conditions affecting the
Internet and healthcare communications industries being less favorable
than expected.
These factors and the risk factors described in "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Factors That
May Affect Future Results of Operations" beginning on page 20 are not
necessarily all of the important factors that could cause actual results to
differ materially from those expressed in any of our forward-looking statements.
Other unknown or unpredictable factors also could have material adverse effects
on our future results. The forward-looking statements included in this quarterly
report on Form 10-Q are made only as of the date of this quarterly report. We do
not have any obligation to publicly update any forward-looking statements to
reflect subsequent events or circumstances.
The information contained in this quarterly report also should be read in
conjunction with the consolidated financial statements and notes thereto for the
year ended December 31, 1999 included in our annual report on Form 10-K as filed
with the Securities and Exchange Commission.
3
<PAGE> 4
PART 1
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WEBMD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 603,155 $ 291,286
Accounts receivable, net.................................. 212,661 51,511
Assets held for sale...................................... 255,526 --
Other current assets...................................... 49,717 20,808
----------- ----------
Total current assets.................................... 1,121,059 363,605
Marketable securities....................................... 214,660 --
Property and equipment, net................................. 95,646 48,384
Prepaid content and services................................ 421,777 273,038
Intangible assets, net...................................... 7,933,304 3,547,559
Other assets................................................ 203,063 9,876
----------- ----------
$ 9,989,509 $4,242,462
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 35,912 $ 77,288
Accrued liabilities....................................... 270,074 62,841
Deferred revenue.......................................... 44,092 4,891
Current portion of capital lease obligations.............. 4,088 2,281
----------- ----------
Total current liabilities............................... 354,166 147,301
Deferred taxes and other long-term liabilities.............. 171,743 121,489
Series B convertible redeemable preferred stock, $0.0001 par
value; 200 shares authorized; 100 shares issued and
outstanding at September 30, 2000......................... 10,000 --
Stockholders' equity:
Preferred stock, $0.0001 par value; 5,000,000 shares
authorized:
Series A convertible preferred stock; 213,000 shares
authorized; 155,951 shares issued and outstanding at
September 30, 2000.................................... 629,000 --
Common stock, $0.0001 par value; 600,000,000 shares
authorized; 359,070,371 shares and 153,569,296 shares
issued and outstanding at September 30, 2000 and
December 31, 1999, respectively......................... 36 15
Additional paid-in capital................................ 11,112,596 4,370,166
Deferred stock compensation............................... (159,918) (5,089)
Accumulated deficit....................................... (2,128,114) (391,420)
----------- ----------
Total stockholders' equity.............................. 9,453,600 3,973,672
----------- ----------
$ 9,989,509 $4,242,462
=========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
WEBMD 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,
--------------------- -----------------------
2000 1999 2000 1999
--------- -------- ----------- --------
<S> <C> <C> <C> <C>
Revenue(1).................................. $ 151,247 $ 28,653 $ 318,202 $ 68,906
Costs and expenses:
Cost of operations........................ 108,903 20,282 246,462 53,714
Development and engineering............... 18,975 6,612 45,233 20,867
Sales and marketing....................... 99,393 8,255 268,886 18,610
General and administrative................ 38,572 5,858 93,741 15,290
Depreciation and amortization............. 597,728 5,119 1,352,866 15,214
Restructuring charges..................... 44,881 -- 44,881 --
Loss on investments....................... 39,602 -- 39,602 --
Interest income, net...................... 9,882 364 36,775 1,546
--------- -------- ----------- --------
Net loss.................................... $(786,925) $(17,109) $(1,736,694) $(53,243)
========= ======== =========== ========
Basic and diluted net loss per common
share..................................... $ (3.17) $ (0.24) $ (8.41) $ (0.79)
========= ======== =========== ========
Weighted-average shares outstanding used in
computing basic and diluted net loss per
common share.............................. 247,873 70,596 206,462 67,723
========= ======== =========== ========
</TABLE>
---------------
(1) Includes revenue from related parties of $14,189 and $7,912 for the three
months ended September 30, 2000 and 1999, respectively, and $37,237 and
$28,184 for the nine months ended September 30, 2000 and 1999, respectively.
See note 4.
See notes to condensed consolidated financial statements.
5
<PAGE> 6
WEBMD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2000 1999
----------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(1,736,694) $(53,243)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization of intangible assets..... 1,352,866 15,650
Amortization of non-cash stock compensation............ 42,172 6,300
Amortization of non-cash prepaid content and
services.............................................. 62,832 --
Non-cash portion of restructuring charge............... 14,078 --
Loss on investments.................................... 39,602 --
Changes in operating assets and liabilities:
Accounts receivable.................................. (49,684) (14,581)
Other assets......................................... (15,776) (8,184)
Accounts payable..................................... (49,327) 2,946
Accrued liabilities.................................. 8,782 11,184
Deferred revenue..................................... 1,967 80
----------- --------
Net cash used in operating activities............. (329,182) (39,848)
----------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments and marketable
securities............................................. -- (16,353)
Maturities and redemptions of short-term investments and
marketable securities.................................. -- 31,180
Change in restricted cash................................. (7,685) 867
Purchases of long-term investments........................ (49,600) --
Purchases of property and equipment....................... (22,351) (11,625)
Cash paid in business combinations, net of cash
received............................................... (226,018) --
----------- --------
Net cash provided by (used in) investing
activities...................................... (305,654) 4,069
----------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable and line of credit borrowings... -- (1,213)
Proceeds from issuance of common stock, net of repurchase
and issuance costs..................................... 951,460 44,781
Principal payments of capital lease obligations........... (4,755) (2,056)
----------- --------
Net cash provided by financing activities......... 946,705 41,512
----------- --------
Net increase in cash and cash equivalents................... 311,869 5,733
Cash and cash equivalents at beginning of period............ 291,286 19,389
----------- --------
Cash and cash equivalents at end of period.................. $ 603,155 $ 25,122
=========== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Equipment acquired under capital leases................... $ 215 $ 983
=========== ========
Issuance of common stock for asset purchases.............. $ 4,733,220 $ 11,000
=========== ========
Issuance of preferred stock for asset purchases........... $ 639,000 $ --
=========== ========
Deferred compensation related to options granted.......... $ 197,003 $ 6,261
=========== ========
Conversion of convertible preferred stock to common
stock.................................................. $ -- $ 46,101
=========== ========
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE> 7
WEBMD CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements have been
prepared by our 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, 2000 are not necessarily indicative of the results to be expected
for any subsequent period or for the entire year ending December 31, 2000.
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.
On September 12, 2000, we changed our name to WebMD Corporation.
We operate within a single operating segment and to date have derived
nearly all of our revenue from within the United States.
These unaudited condensed consolidated financial statements and notes
included herein should be read in conjunction with our audited consolidated
financial statements and notes for the year ended December 31, 1999, which were
included in our annual report on Form 10-K filed with the Securities and
Exchange Commission.
REVENUE RECOGNITION
Revenue recognized from arrangements deemed to be nonmonetary exchanges of
our products and services for customer products and services totaled
approximately $6,221 and $15,522 during the three and nine months ended
September 30, 2000, respectively, with no revenue of this type recognized during
the three and nine months ended September 30, 1999. Revenue from these exchanges
is recorded at the fair value of the products and services provided or received,
whichever is more clearly evident.
RECLASSIFICATIONS
Certain reclassifications have been made to the financial statements to
conform with the current year presentation. These reclassifications had no
effect on previously reported financial position or results of operations.
2. BUSINESS COMBINATIONS AND STRATEGIC PARTNERSHIPS
2000 ACQUISITIONS AND STRATEGIC PARTNERSHIPS
On January 10, 2000, we entered into a marketing and services agreement
with Medic Computer Systems, Inc., a provider of healthcare information systems
to integrated delivery networks, management service organizations, managed care
organizations, hospitals, physician practices and home healthcare agencies. This
agreement provides for the integration of Medic's practice management systems
and certain of our company's applications. In connection with this agreement, we
issued to Medic a warrant to purchase approximately 4.4 million shares of our
common stock. The warrant vests over a four-year period subject to the
performance by Medic of goals described in the agreement. The agreement also
provides for additional warrants to be issued to Medic upon the achievement by
Medic of goals described in the agreement.
On January 26, 2000, we completed the transactions contemplated by our
strategic alliance agreement with The News Corporation Limited, Fox
Entertainment Group, Inc. and certain of their affiliates, which are referred to
collectively as News Corporation. Under this strategic partnership, News
Corporation became one of our minority stockholders. The financial terms of the
strategic partnership include $700,000
7
<PAGE> 8
WEBMD CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in media branding services by News Corporation, comprised of $400,000
domestically and $300,000 internationally over 10 years; a $100,000 cash
investment commitment by News Corporation in an international joint venture; a
$60,000 five-year licensing agreement for syndication of WebMD daily broadcast
content; and the transfer to us of 50% interests in The Health Network, a
health-focused cable network, and thehealthnetwork.com.
We issued an aggregate of 155,951 shares of Series A preferred stock, which
shares vote on an as-if-converted basis with our common stock, in consideration
for those assets listed above. Assuming conversion of all of the shares of
Series A preferred stock, the holders of these shares will receive approximately
21.3 million shares of our common stock. These shares are subject to
restrictions on their sale for three years from the date of the initial issuance
of the Series A preferred stock. In addition, affiliates of News Corporation
purchased 2.0 million shares of our common stock for an aggregate purchase price
of $100,000 in cash.
On January 31, 2000, we completed our acquisition of Kinetra LLC, a joint
venture between Electronic Data Systems Corporation and Eli Lilly and Company
and a provider of health information networks and e-commerce services. The total
purchase consideration was approximately $291,538, comprised of the issuance of
approximately 7.4 million shares of our common stock with an aggregate fair
value of $286,288, $5,250 of acquisition costs and a nominal amount of cash in
exchange for all of the membership interests of Kinetra. The acquisition was
accounted for using the purchase method of accounting, and the total goodwill
recorded in connection with the purchase was approximately $284,000, which is
being amortized over three years. The preliminary values, totaling approximately
$49,000, assigned to Kinetra's customer lists, trademarks, acquired technology
and other intangible assets were determined by management.
On May 26, 2000, we completed our acquisition of Envoy Corporation, a
provider of electronic data interchange, or EDI, and transaction processing
services to participants in the healthcare market, from Envoy's parent,
Quintiles Transnational Corp. The total purchase consideration was approximately
$2,440,240, comprised of a $400,000 cash payment, 35.0 million shares of our
common stock having an aggregate value of $2,022,781 and an estimated $17,459 in
acquisition costs. Quintiles issued to us a warrant to purchase up to 10.0
million shares of Quintiles common stock at $40.00 per share, which is
exercisable for four years. Stock received by Quintiles in the transaction is
subject to restrictions on sale for one to two years from the date of issuance.
The acquisition was accounted for using the purchase method of accounting and
resulted in goodwill of $2,151,131, which is being amortized over three years.
The preliminary values, totaling approximately $223,300, assigned to Envoy's
customer lists, trademarks, acquired technology and other intangible assets were
determined by management.
On September 12, 2000, we completed our acquisition of Medical Manager
Corporation, a provider of physician practice management systems in the U.S.,
and its publicly traded subsidiary CareInsite, Inc., a developer of an
Internet-based healthcare e-commerce network that links physicians, suppliers
and patients. We exchanged 2.5 shares of our common stock for each share of
Medical Manager common stock, 1.3 shares of our common stock for each share of
CareInsite common stock and one share of our newly created Series B preferred
stock for each share of CareInsite preferred stock. The total purchase
consideration for Medical Manager and CareInsite was approximately $3,004,582,
comprised of the issuance of 134.6 million shares of our common stock having an
aggregate value of $2,136,884, the issuance of 100 shares of our Series B
convertible redeemable preferred stock with a value of $10,000, the assumption
of options and warrants with an aggregate fair value of $829,308 and estimated
acquisition costs of $28,390. Both acquisitions were accounted for using the
purchase method of accounting and, accordingly, the purchase prices were
allocated to the tangible and intangible assets acquired and the liabilities
assumed on the basis of their respective fair values on the acquisition date.
The total goodwill recorded in connection with the purchases of Medical Manager
and CareInsite was $2,354,967 and is being amortized over three years. The
preliminary values, totaling approximately $54,000, assigned to
8
<PAGE> 9
WEBMD CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Medical Manager's and CareInsite's customer lists, trademarks, acquired
technology and other intangible assets were determined by management.
On September 12, 2000, we also completed our acquisition of OnHealth
Network Company, a source of consumer-oriented health and wellness information,
products and services on the web. We exchanged 0.189435 shares of our common
stock for each share of OnHealth common stock. The total purchase consideration
was approximately $363,011, comprised of $25,000 in loans made by us to
OnHealth, approximately 4.7 million shares of our common stock having an
aggregate fair value of $287,267, the assumption of options and warrants with an
aggregate fair value of $46,893 and estimated acquisition costs of $3,850. The
acquisition was accounted for using the purchase method of accounting and,
accordingly, the purchase price was allocated to the tangible and intangible
assets acquired and the liabilities assumed on the basis of their respective
fair values on the acquisition date as determined by management. The total
preliminary goodwill recorded in connection with the purchase was $374,634 and
is being amortized over three years.
1999 MERGERS AND ACQUISITIONS
On November 12, 1999, we merged with WebMD, Inc., a provider of web-based
solutions for the administrative, communications and information needs of
healthcare professionals and the healthcare informational needs of consumers. We
exchanged 1.796 shares of our common stock for each share of WebMD, Inc. capital
stock. The total purchase consideration was approximately $3,659,921. The
acquisition was accounted for using the purchase method of accounting and,
accordingly, the purchase price was allocated to the tangible and intangible
assets acquired and the liabilities assumed on the basis of their respective
fair values on the acquisition date. The total goodwill recorded in connection
with the purchase was $2,944,804 and is being amortized over three years. The
values, totaling approximately $196,307, assigned to WebMD, Inc.'s customer
lists, trademarks, acquired technology and other intangible assets were
determined by management.
On November 12, 1999, we acquired MedE America Corporation, a provider of
healthcare transaction services for hospitals, pharmacies, physicians, dentists,
payers and pharmacy benefit managers. We exchanged 0.7494 shares of our common
stock for each share of MedE America common stock. The total purchase
consideration was approximately $417,292. The acquisition was accounted for
using the purchase method of accounting and, accordingly, the purchase price was
allocated to the tangible and intangible assets acquired and the liabilities
assumed on the basis of their respective fair values on the acquisition date.
The total goodwill recorded in connection with the purchase was $324,983 and is
being amortized over four years. The values, totaling approximately $105,545,
assigned to MedE America's customer lists, trademarks and acquired technology
and other intangible assets were determined by management.
On November 12, 1999, we acquired Greenberg News Networks, Inc., which is
referred to as Medcast, an Internet-based medical news and information service.
We exchanged 2,692,501 shares of our common stock and approximately $2,336 in
cash for all Medcast outstanding capital stock. The total purchase consideration
was approximately $112,953. The acquisition was accounted for using the purchase
method of accounting and, accordingly, the purchase price was allocated to the
tangible and intangible assets acquired and the liabilities assumed on the basis
of their respective fair values on the acquisition date. The total goodwill
recorded in connection with the purchase was approximately $109,755 and is being
amortized over three years. The values, totaling $17,700, assigned to Medcast's
customer lists, trademarks and acquired technology and other intangible assets
were determined by management.
9
<PAGE> 10
WEBMD CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information gives effect to the
acquisitions of WebMD, Inc., MedE America, Medcast, Envoy, Medical Manager,
CareInsite and OnHealth, including the amortization of goodwill and other
intangible assets, as if they had occurred as of the beginning of each period
presented. The information is provided for illustrative purposes only and is not
necessarily indicative of the operating results that would have occurred if the
transactions had been consummated at the dates indicated, nor is it necessarily
indicative of future operating results of the combined company and should not be
construed as representative of these amounts for any future periods. All of our
other business combinations were not material to our financial statements.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
Revenue........................................... $ 606,399 $ 388,743
=========== ===========
Net loss.......................................... $(2,796,225) $(2,615,716)
=========== ===========
Basic and diluted net loss per share.............. $ (7.86) $ (8.26)
=========== ===========
</TABLE>
3. RESTRUCTURING CHARGES
In the third quarter of 2000, our board of directors approved a
restructuring plan to consolidate offices and data centers, to reduce marketing
and promotional expenses and to substantially eliminate redundancies that were
created in the combination of WebMD with recently acquired companies Envoy,
Medical Manager, CareInsite and OnHealth. In connection with this plan, we
recorded restructuring-related charges of $44,881. We expect execution of the
plan to be complete by the end of 2001.
We recorded personnel-related restructuring costs of $12,796 relating to
severance and outplacement services for approximately 600 employees that we
identified and notified of termination, principally as a result of eliminating
duplicate functions within our combined company.
We recorded facilities charges of $28,198, comprised of $14,120 of future
lease obligations and lease cancellation penalties and $14,078 of non-cash fixed
asset write-offs related to vacating duplicate facilities.
RESTRUCTURING ACCRUAL ACTIVITY
The following table presents activity in the restructuring-related accrual
during the three months ended September 30, 2000:
<TABLE>
<CAPTION>
SEVERANCE FACILITIES OTHER TOTAL
--------- ---------- ------ -------
<S> <C> <C> <C> <C>
Initial balance.............................. $12,796 $14,120 $3,887 $30,803
Cash payments................................ (1,293) -- -- (1,293)
------- ------- ------ -------
Balance at September 30, 2000................ $11,503 $14,120 $3,887 $29,510
======= ======= ====== =======
</TABLE>
4. RELATED PARTY TRANSACTIONS
Revenue from related parties for the three and nine months ended September
30, 2000 includes advertising revenue, content license and carriage fees and
subscription and e-commerce revenue pursuant to revenue-sharing and fixed-fee
agreements primarily with the related parties discussed below. WebMD, Inc.
entered into an agreement with Microsoft Corporation in March 1999 and upon the
completion of our WebMD, Inc. merger in November 1999, Microsoft became a
related party. In January 2000, we completed the transactions contemplated by
our strategic alliance with News Corporation, at which time News Corporation
became a related party.
10
<PAGE> 11
WEBMD CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MICROSOFT
For the three and nine months ended September 30, 2000, we recognized
$7,875 and $22,687, respectively, in carriage fees as sales and marketing
expense under the terms of our five-year strategic alliance with Microsoft. For
the three and nine month periods ended September 30, 2000, we recognized $4,000
and $5,117, respectively, of advertising revenue for advertising placed on
Microsoft's health channels and no revenue related to advertising placed by
Microsoft on our web site. For the three and nine month periods ended September
30, 2000, we recorded revenue of $5,632 and $12,091, respectively, related to
subscriptions to our physician web site which were sponsored by Microsoft. These
amounts have been recorded net of commissions. For the three and nine month
periods ended September 30, 2000, we amortized $9,000 and $27,000, respectively,
as sales and marketing expense related to the $180,000 value assigned to the
Microsoft strategic agreement. At September 30, 2000 and December 31, 1999,
accounts receivable from Microsoft were $14,516 and $9,030, respectively.
NEWS CORPORATION
Pursuant to our strategic alliance entered into with News Corporation in
January 2000, we will provide daily, health-related content to News Corporation
for an aggregate of $60,000 in licensing fees over a five-year term. Revenue
recognized from this agreement and from other services provided to News
Corporation totaled $3,000 and $10,500 for the three and nine months ended
September 30, 2000, respectively. At September 30, 2000, accounts receivable
from News Corporation was $5,000.
UNITEDHEALTH GROUP
Revenue from related parties includes revenue attributable to UnitedHealth
Group of $1,283 and $10,593 for the nine months ended September 30, 2000 and
1999, respectively. In January 2000, the Chairman and Chief Executive Officer of
UnitedHealth Group resigned from our board of directors, and at that date,
UnitedHealth Group ceased to be a related party.
SMITHKLINE LABS
Revenue from related parties for the nine months ended September 30, 1999
includes revenue attributable to SmithKline Labs of $17,591. In August 1999,
SmithKline Labs was sold to a company that is not our stockholder, and at that
date, SmithKline Labs ceased to be a related party.
5. STOCKHOLDERS' EQUITY
On January 26, 2000, as part of our strategic alliance with News
Corporation, we issued convertible preferred stock that is convertible into
approximately 21.3 million shares of common stock and sold 2.0 million shares of
common stock to affiliates of News Corporation. See note 2.
On January 27, 2000, Janus Capital Corporation, through its managed mutual
funds, invested $930,000 in exchange for 15.0 million shares of our common stock
at $62.00 per share in a private transaction.
On January 31, 2000, we completed our acquisition of Kinetra, issuing 7.4
million shares of common stock for all of the membership interests of Kinetra.
See note 2.
On May 26, 2000, we completed our acquisition of Envoy, issuing 35.0
million shares of common stock for the stock portion of the purchase price. See
note 2.
On June 20, 2000, we granted to Envoy employees options to purchase
approximately 7.9 million shares of common stock with an exercise price of $4.23
per share. Deferred stock compensation of $79,577 is being amortized over the
vesting period of these options.
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WEBMD CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In May through July 2000, we granted to certain of our executives options
to purchase approximately 1.4 million shares of common stock with exercise
prices ranging from $2.00 per share to $9.06 per share. Deferred compensation of
$14,175 is being amortized over the vesting period of these options.
On September 12, 2000, we completed our acquisitions of Medical Manager,
CareInsite and OnHealth, issuing 102.3 million, 32.3 million and 4.7 million
shares of our common stock to the stockholders of Medical Manager, CareInsite
and OnHealth, respectively, and 100 shares of our newly created Series B
preferred stock to one stockholder of CareInsite. See note 2.
6. ASSETS HELD FOR SALE
As we announced on September 28, 2000, our board of directors approved
management's plan to dispose of Porex Corporation and our other plastics and
filtration technologies subsidiaries, which are referred to collectively as
Porex. Porex was a wholly owned subsidiary of Medical Manager prior to the
completion of our acquisition of Medical Manager on September 12, 2000. See note
2. Porex designs, manufactures and distributes porous and solid plastic
components and products used in life sciences, healthcare, industrial and
consumer applications. We plan to explore various divestiture alternatives in
consultation with our financial advisors. The disposition is expected to be
completed by June 2001. The expected net proceeds and the cash flows of Porex
until sold were allocated to net assets held for sale in the allocation of the
Medical Manager purchase price and is included in the line item "other current
assets" on our balance sheets. Any difference between the actual and expected
amounts will result in an adjustment of goodwill unless there is a difference
caused by a post-acquisition event.
Activity in net assets held for sale from the acquisition date to September
30, 2000 is as follows:
<TABLE>
<S> <C>
Allocation of purchase price................................ $245,326
Estimated net income through disposition.................... 10,200
--------
Balance at September 30, 2000............................... $255,526
========
</TABLE>
Porex had net income of $1,200 from the acquisition date to September 30,
2000, which was excluded from our condensed consolidated statements of
operations for the three months ended September 30, 2000.
7. MARKETABLE SECURITIES
We determine the appropriate classification of our investments in debt
securities at the time of purchase and re-evaluate such determinations at each
balance sheet date. Debt securities are classified as held-to-maturity when we
have the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are carried at cost, net of unamortized premium or
discount. At September 30, 2000, our investments consisted principally of U.S.
Treasury notes and federal agency notes.
8. NET LOSS PER COMMON SHARE
We report earnings per share in accordance with Statement of Financial
Account Standards No. 128, "Earnings Per Share" (SFAS No. 128). Under SFAS No.
128, basic net income per share is computed by dividing net income by the
weighted-average number of common shares outstanding for the period. Diluted net
income per share reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into common
stock.
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<PAGE> 13
WEBMD CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents the calculation of basic and diluted net loss
per common share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- -----------------------
2000 1999 2000 1999
--------- -------- ----------- --------
<S> <C> <C> <C> <C>
Net loss.................................... $(786,925) $(17,109) $(1,736,694) $(53,243)
========= ======== =========== ========
Basic and diluted:
Weighted-average shares of common stock
outstanding............................... 247,873 71,529 206,708 68,751
Less: Weighted-average common shares subject
to repurchase............................. -- (933) (246) (1,028)
--------- -------- ----------- --------
Weighted-average shares used in computing
basic and diluted net loss per common
share..................................... 247,873 70,596 206,462 67,723
========= ======== =========== ========
Basic and diluted net loss per common
share..................................... $ (3.17) $ (0.24) $ (8.41) $ (0.79)
========= ======== =========== ========
</TABLE>
We have excluded all convertible redeemable preferred stock, convertible
preferred stock, warrants, outstanding stock options and shares subject to
repurchase by us from the calculation of diluted net loss per common share
because inclusion of such securities would be anti-dilutive for the periods
presented. The total number of shares on an as-converted basis excluded from the
calculation of diluted loss per share was approximately 192.3 million shares at
September 30, 2000 and 17.1 million shares at September 30, 1999.
9. RECENTLY ADOPTED ACCOUNTING STANDARDS
In March 2000, the FASB issued Interpretation No. 44 (FIN No. 44),
"Accounting for Certain Transactions Involving Stock Compensation, an
interpretation of APB Opinion No. 25." FIN No. 44 became effective July 1, 2000
and provides guidance for applying APB Opinion No. 25 "Accounting for Stock
Issued to Employees." We adopted FIN No. 44 on July 1, 2000 and applied its
guidance to the September 12, 2000 acquisitions of Medical Manager, CareInsite
and OnHealth, resulting in deferred compensation of approximately $103,250,
which is reflected in stockholders' equity.
In March 2000, the Emerging Issues Task Force (EITF) of the FASB reached a
consensus on Issue No. 00-2, "Accounting for Web Site Development Costs" which
provides guidance on when to capitalize versus expense costs incurred to develop
a web site. The consensus is effective for web site development costs in
quarters beginning after June 30, 2000. Adoption of Issue No. 00-2 had no
material impact on our financial position or results of operations.
Effective January 1, 2001, adoption of FASB Statement 133, "Accounting for
Derivative Instruments and Hedging Activities" is required. We do not expect
adoption of Statement 133 to have a material impact on our financial position or
results of operations.
10. COMMITMENTS AND CONTINGENCIES
In September 1999, CareInsite entered into a four-year strategic alliance
with America Online, Inc. for CareInsite to be AOL's exclusive provider of a
comprehensive suite of services that connect AOL and CompuServe members and
visitors to AOL's web-based brands, Netscape, AOL.COM and Digital City to
physicians, health plans, pharmacy benefit managers, covered pharmacies and
labs. Under the financial
13
<PAGE> 14
WEBMD CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
terms of the arrangement, CareInsite has agreed to make $30,000 of guaranteed
payments to AOL over three years. CareInsite made the first payment of $10,000
in September 1999. The remaining $20,000 is due over the next two years. Due to
the completion of the merger with WebMD, AOL has the right to terminate its
strategic alliance with CareInsite, in which case the remaining guaranteed
payments due to AOL under the agreement shall become immediately payable.
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<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We were incorporated in December 1995 and commenced operations in January
1996 as Healtheon Corporation. In November 1999, Healtheon Corporation completed
mergers with WebMD, Inc., MedE America and Medcast. Following the closings of
these mergers, we changed our name to Healtheon/ WebMD Corporation and launched
our integrated web site. We completed our acquisitions of Kinetra and Envoy in
January 2000 and May 2000, respectively. On September 12, 2000, we completed our
mergers with Medical Manager, CareInsite and OnHealth, and we changed our name
to WebMD Corporation. For a more complete description of these transactions, see
note 2 to the condensed consolidated financial statements in this quarterly
report.
As a result of the completion of these transactions, our core business now
encompasses:
- providing services to facilitate connectivity and healthcare transactions
among physicians, payers, patients and other healthcare industry
participants
- providing comprehensive physician practice management information systems
to independent physicians, independent practice associations, management
service organizations, physician practice management organizations and
other providers of healthcare services in the U.S.
- providing Internet-based content, applications and services to
physicians, consumers, payers and other healthcare organizations
RECENT EVENTS
Restructuring
As previously announced, our board of directors has approved an integration
plan that was developed in connection with the combination of our business with
those of Envoy, Medical Manager, CareInsite and OnHealth. The first phase of
this plan includes a consolidation of offices and data centers and reduction in
marketing and promotional expenses, the result of which we believe will
substantially eliminate the redundancies that resulted from these business
combinations. We anticipate total annualized savings of approximately $260
million to be realized by the fourth quarter of 2001 resulting from the first
phase of the integration plan. We expect that the integration plan will result
in the elimination of approximately 1,100 jobs by the end of calendar year 2001.
We are taking a pre-tax restructuring charge of $44.9 million in the quarter
ending September 30, 2000. As a result of the execution of this phase of the
integration plan, we expect to incur additional costs relating to moving and
relocations that will be expensed as incurred in accordance with applicable
accounting guidelines.
As previously announced, the next phase in our restructuring plan will be
the rationalization of our current products and strategic relationships in light
of our near- and long-term objectives. We have identified relationships that
represent approximately $130 million in revenue that are currently being
evaluated. These relationships are being reviewed in light of several criteria,
including profitability, strategic relevance and the impact of future new
revenue opportunities available to us. It is possible that some of these
relationships may be revised or terminated, which may result in restructuring
charges in future quarters. We are currently engaged in discussions with
strategic partners and customers in an effort to redefine our relationships. We
cannot provide any assurance that these discussions will not result in some of
these relationships being terminated and we believe that it is likely that the
revenue we can expect to receive from some of these relationships may be less
than was contemplated at the time these relationships were entered into.
We anticipate that we will have additional restructuring and integration
charges as a result of the rationalization of our products and relationships.
The amount of these charges is dependent on the conclusion of discussions with
our strategic partners. We expect to record additional non-recurring charges in
the quarter ending December 31, 2000 relating to the resignation of some of our
executives. The charge
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<PAGE> 16
will be predominately non-cash and relates to treatment of stock options
pursuant to existing employment arrangements with these executives.
Divestiture of plastics business
We announced on September 28, 2000 that we will divest our plastics and
filtration technologies subsidiaries, which were acquired when we merged with
Medical Manager. We plan to explore various divestiture alternatives in
consultation with our financial advisors.
Relocation of corporate offices
Our board of directors has approved the relocation of our corporate offices
to the New York Metropolitan area. We anticipate additional restructuring and
integration charges related to this relocation.
Election of directors
On November 13, 2000, we announced that our board of directors elected Paul
A. Brooke and Herman Sarkowsky as members of our board to fill two vacancies
resulting from recent director resignations. Mr. Brooke, who will serve as a
Class II director with a term that continues until our annual meeting of
stockholders in 2003, is the former Global Head of Healthcare Research and
Strategy at Morgan Stanley and is currently the general partner of PMSV
Partners, L.P., a private investment firm, a venture partner of MPM Bioventures,
a venture capital firm specializing in the healthcare industry, and an advisory
director to Morgan Stanley Dean Witter and Skyline Partners. Mr. Sarkowsky, who
will serve as a Class III director with a term that continues until our annual
meeting of stockholders in 2001, is President of Sarkowsky Investment
Corporation, a private investment company. Mr. Sarkowsky also served as a
director of Medical Manager and its predecessor, Synetic, Inc., from 1989 until
Medical Manager's merger with us.
RESULTS OF OPERATIONS
Revenue
For the three and nine months ended September 30, 2000, total revenue
increased to $151.2 million and $318.2 million, respectively, from $28.7 million
and $68.9 million for the three and nine months ended September 30, 1999,
respectively. The increases are due primarily to the revenue sources that were
acquired in our 1999 and 2000 business combinations. Transaction revenue, which
consists primarily of revenue from EDI and healthcare transaction processing
services, comprised 55% of total revenue for the three months ended September
30, 2000 compared to 42% for the same period of the prior year. This increase
primarily relates to the additional revenue from our acquisition of Envoy in May
2000. Physician services revenue, which consists primarily of revenue from
physician practice management systems and subscriptions to our physician web
site WebMD Practice, comprised 19% of total revenue for the three months ended
September 30, 2000 compared to 0% for the same period of the prior year. This
increase primarily relates to the additional revenue from our acquisition of
Medical Manager from the September 12, 2000 acquisition date and the addition of
WebMD Practice subscription revenue from our November 1999 WebMD, Inc. merger.
Portal services revenue, which consists primarily of online advertising,
carriage fees and e-commerce revenue acquired in our WebMD, Inc. merger,
comprised 17% of total revenue for the three months ended 2000 as compared to 0%
for the same period of the prior year. Other products and services revenue
comprised 9% of total revenue for the three months ended September 30, 2000 as
compared to 58% for the same period of the prior year. This decrease reflects
the phasing out of some of our non-core product offerings.
Revenue from related parties, which consists primarily of services provided
to Microsoft and News Corporation for the three and nine months ended September
30, 2000 and of services provided to UnitedHealth Group and SmithKline Labs for
the same period of the prior year, increased to $14.2 million for the three
months ended September 30, 2000 from $7.9 million for the three months ended
September 30, 1999, and increased from $28.2 million for the nine months ended
September 30, 1999 to
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<PAGE> 17
$37.2 million for the nine months ended September 30, 2000. The increase was
primarily due to increases in subscription and third-party advertising revenue
through our Microsoft strategic alliance and from health-related content
licensed to News Corporation. Revenue from SmithKline Labs ceased being related
party revenue in August 1999 when SmithKline Labs was sold to Quest Diagnostics,
which is not our stockholder, and revenue from UnitedHealth Group ceased being
related party revenue in January 2000 when the Chairman and Chief Executive
Officer of UnitedHealth Group resigned from our board of directors.
Cost of Operations
For the three and nine months ended September 30, 2000, cost of operations,
which consists primarily of costs to operate and maintain our networks and costs
related to providing services, increased to $108.9 million and $246.5 million,
respectively, from $20.3 million and $53.7 million for the three and nine months
ended September 30, 1999, respectively. The increase resulted primarily from
increased personnel and network operations costs, costs to acquire exclusive
arrangements to provide consumer healthcare-related content to other web sites
and other costs required to support the increased services. Of the increase,
$72.7 million and $150.1 million relate to expenses incurred by the companies
acquired in the 1999 and 2000 business combinations for the three and nine
months ended September 30, 2000, respectively.
Development and Engineering
Development and engineering expense consists primarily of salaries paid to
engineering personnel, fees paid to outside contractors and consultants,
facilities expenses and maintenance of capital equipment used in the development
process. For the three and nine months ended September 30, 2000, development and
engineering expense increased to $19.0 million and $45.2 million, respectively,
from $6.6 million and $20.9 million for the three and nine months ended
September 30, 1999, respectively. The increase is attributable to the increase
in the number of engineers engaged in the development of our applications and
services. Of the increase, $6.8 million and $15.3 million relate to expenses
incurred by the companies acquired in the 1999 and 2000 business combinations
for the three and nine months ended September 30, 2000, respectively.
Sales and Marketing
Sales and marketing expense consists primarily of salaries, commissions and
related expenses for sales, account management and marketing personnel, as well
as expenses for marketing programs and trade shows. For the three and nine
months ended September 30, 2000, sales and marketing expense increased to $99.4
million and $268.9 million, respectively, from $8.3 million and $18.6 million
for the three and nine months ended September 30, 1999, respectively. Sales and
marketing expense includes non-cash media and branding expenses primarily
provided by Microsoft and News Corporation of $23.6 million and $62.8 million
for the three and nine months ended September 30, 2000, respectively. The
increase is primarily attributable to the growth in advertising and promotion
costs incurred to increase awareness of our WebMD brand. Of the increase, $85.4
million and $233.0 million relate to expenses incurred by the companies acquired
in the 1999 and 2000 business combinations for the three and nine months ended
September 30, 2000, respectively.
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, costs of general insurance
and other internal control systems costs. For the three and nine months ended
September 30, 2000, general and administrative expense increased to $38.6
million and $93.7 million, respectively, from $5.9 million and $15.3 million for
the three and nine months ended September 30, 1999, respectively. The increase
primarily relates to increased personnel costs and facilities expenses added in
connection with the 1999 and 2000 business combinations. Of the increase, $36.9
million and $80.0 million
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<PAGE> 18
relate to expenses incurred by the companies acquired in the 1999 and 2000
business combinations for the three and nine months ended September 30, 2000,
respectively. General and administrative expenses include the amortization of
deferred stock compensation which increased to $15.4 million and $42.2 million
for the three and nine months ended September 30, 2000 from $2.1 million and
$6.3 million for the three months ended September 30, 1999, respectively.
Depreciation and Amortization
For the three and nine months ended September 30, 2000, depreciation and
amortization increased to $597.7 million and $1,352.9 million, respectively,
from $5.1 million and $15.2 million for the three and nine months ended
September 30, 1999, respectively. The increase was due primarily to the
amortization of intangible assets acquired in the 1999 and 2000 business
combinations, which are being amortized over expected lives of one to five
years.
Restructuring Charge
During the three months ended September 30, 2000, our board of directors
approved a restructuring plan to consolidate offices and data centers, to reduce
marketing and promotional expenses and to substantially eliminate redundancies
that were created in the combination of WebMD with Envoy, Medical Manager,
CareInsite and OnHealth. In connection with this plan, a non-recurring
restructuring charge of $44.9 million was recorded.
Loss on Investments
We recorded a non-cash charge of $39.6 million to write down certain of our
investments in Internet-related companies to their fair market value as of
September 30, 2000. The charge reflects the decline in value of these
investments based upon both the financial conditions of and current market
conditions for the individual companies.
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. Net interest income increased to $9.9
million and $36.8 million for the three and nine months ended September 30,
2000, respectively, from $0.4 million and $1.5 million for the three and nine
months ended September 30, 1999, respectively. The increase was primarily due to
higher average cash balances resulting from the $930.0 million in net proceeds
received from the sale of our common stock to Janus in January 2000 and from
cash balances that were acquired in the 1999 and 2000 business combinations,
offset in part by the $400.0 million cash portion of our May 2000 acquisition of
Envoy.
LIQUIDITY AND CAPITAL RESOURCES
In January 2000, we raised $1.03 billion from the issuance of 15.0 million
shares of our common stock to Janus for $930.0 million, as well as our issuance
of 2.0 million shares of our common stock to affiliates of News Corporation for
$100.0 million in connection with our News Corporation strategic alliance. As of
September 30, 2000, we had approximately $817.8 million in cash, cash
equivalents and marketable securities, and working capital of $766.9 million.
In the third quarter of 2000, our board of directors approved a
restructuring plan to consolidate offices and data centers, to reduce marketing
and promotional expenses and to substantially eliminate redundancies that were
created in the combination of WebMD with Envoy, Medical Manager, CareInsite and
OnHealth. In connection with this plan, we recorded non-recurring
restructuring-related charges of $44.9 million. As we continue to implement
further phases of our integration plan, we expect to incur additional costs
relating to moving and relocations that will be expensed as incurred in
accordance with applicable accounting guidelines. Additionally, we are
evaluating many of the business relationships that we currently have in place.
It is possible that some of these relationships may be revised or terminated,
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which may result in additional restructuring charges in future quarters. We
expect execution of the plan to be complete by the end of 2001.
As we announced on September 28, 2000, our board of directors approved
management's plan to dispose of Porex, which we acquired in our acquisition of
Medical Manager on September 12, 2000. Porex designs, manufactures and
distributes porous and solid plastic components and products used in life
sciences, healthcare, industrial and consumer applications. WebMD plans to
explore various divestiture alternatives in consultation with our financial
advisors. The disposition is expected to be completed by June 2001. The expected
net proceeds and the cash flows of Porex until sold were allocated to assets
held for sale in the allocation of the Medical Manager purchase price and is
included in the line item "other current assets" on our balance sheets. Any
difference between the actual and expected amounts will result in an adjustment
of goodwill unless there is a difference caused by a post-acquisition event.
Cash used in operating activities was $329.2 million for the nine months
ended September 30, 2000 compared to $39.8 million for the first nine months of
1999. The cash used during these periods was primarily attributable to net
operating losses, offset in part by depreciation and amortization. Our losses
were principally related to increased sales and marketing expenses incurred to
promote the WebMD brand and increased development and engineering expenses
incurred to improve our product offerings and develop new applications and
content.
Cash used in investing activities was $305.7 million for the nine months
ended September 30, 2000 compared to cash provided by investing activities of
$4.1 million for the first nine months of 1999. We used $400 million to fund the
cash portion of our acquisition of Envoy in May 2000, offset by cash acquired in
the 2000 business combinations.
Cash provided by financing activities was $946.7 million for the nine
months ended September 30, 2000, primarily related to the net proceeds received
from our sale of common stock to Janus and affiliates of News Corporation. For
the first nine months of 1999, cash provided by financing activities of $41.5
million, related primarily to the net proceeds of our initial public offering of
$41.4 million.
As of September 30, 2000, we did not have any material commitments for
capital expenditures. Our principal commitments at September 30, 2000 consisted
of obligations under operating and capital leases and guaranteed payments under
our strategic agreements.
At September 30, 2000, we estimated that we will make the following
aggregate guaranteed payments under our current strategic relationships in each
calendar year noted:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AMOUNT
----------------------- -------------
<S> <C>
2000........................................................ $97.3 million
2001........................................................ 74.8 million
2002........................................................ 59.8 million
2003........................................................ 41.4 million
2004........................................................ 11.3 million
</TABLE>
We have agreed to share some of our transaction processing, advertising,
carriage fee and e-commerce revenue, net of specified costs applicable to the
particular revenue category, with Microsoft and E.I. du Pont de Nemours &
Company for their sponsorship of physician subscriptions to WebMD Practice and
with several physician practice management system vendors who have agreed to
promote our services to their physician customers. This revenue sharing applies
only to the extent the revenue is derived from Microsoft- or DuPont-sponsored
physicians or from physicians subscribing to the particular vendor's practice
management system. The percentage of revenue shared varies from contract to
contract and based on the type of revenue generated.
We may enter into additional promotional arrangements with current and
future strategic partners that may require us to pay consideration in amounts
that significantly exceed the amounts we are required to pay under our current
arrangements. These guaranteed payments and promotional and other arrangements
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<PAGE> 20
may require us to share revenue or incur significant expenses. We cannot give
assurances that we will generate sufficient revenue from these arrangements to
offset these expenses, in particular after we share some of our net revenue with
our strategic partners. Failure to do so could have a material adverse effect on
us.
With the investments by Janus and affiliates of News Corporation and the
cash and marketable securities acquired in the Medical Manager and CareInsite
mergers, we believe that we will have sufficient cash resources to meet our
presently anticipated working capital and capital expenditure requirements for
at least the next 12 months. However, we expect to incur operating losses until
the end of 2001 and 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 need to raise additional funds to support expansion, develop new or enhanced
applications and services, respond to competitive pressures, acquire
complementary businesses or technologies or take advantage of unanticipated
opportunities. If required, we may raise such additional funds through public or
private debt or equity financing, strategic relationships or other arrangements.
There can be no assurance that such financing will be available on acceptable
terms, if at all, or that such financing will not be dilutive to our
stockholders.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
WE HAVE INCURRED AND MAY CONTINUE TO INCUR SUBSTANTIAL LOSSES
We began operations in January 1996 and have incurred net losses from
operations in each fiscal period since our inception. As of September 30, 2000,
we had accumulated net losses of approximately $2.1 billion. In addition, we may
invest heavily in infrastructure development, applications development and sales
and marketing in order to deploy our services to a growing number of potential
customers and strategic partners. Moreover, the purchase price of our recent and
any future acquisitions will be amortized over the useful lives of the tangible
and intangible assets. As of September 30, 2000, we had approximately $8.0
billion of unamortized goodwill and other intangible assets reflected on our
financial statements as a result of previous acquisitions.
Although we anticipate significant synergies and growth opportunities
resulting from our recent acquisitions and elimination of duplicative costs
currently being incurred by us, we cannot give you assurances that these
synergies, growth opportunities or cost savings will be achieved in the amounts
or time frames currently anticipated. Failure to realize these benefits may
adversely affect our ability to achieve profitability.
OUR BUSINESS MODEL IS UNPROVEN, AND WE MAY NOT ACHIEVE FAVORABLE OPERATING
RESULTS
Our business model is evolving, and our revenue and profit potential is
unproven. We currently derive a significant portion of our revenue from
non-Internet network services, management and consulting services and management
and operation of some of our customers' information technology infrastructures.
We intend to try to migrate provider and payer customers to our Internet-based
transaction services, to build our online physician subscriber base, to increase
traffic to our web site and to generate e-commerce revenue from the sale of
healthcare products or services over the Internet. However, the provision of
services over the Internet to the healthcare industry is a developing business
that is inherently riskier than businesses in industries where companies have
established operating histories. If our Internet-based services do not achieve
or sustain broad market acceptance among participants in the healthcare
industry, our business, results of operations and financial condition could be
significantly harmed, and we may never achieve favorable operating results.
OUR QUARTERLY OPERATING RESULTS MAY VARY, WHICH COULD AFFECT THE MARKET PRICE OF
OUR COMMON STOCK
Our operating results have varied on a quarterly basis during our limited
operating history, and we expect to experience significant fluctuations in
future quarterly operating results. These fluctuations have
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been and may in the future be caused by numerous factors, many of which are
outside of our control, including, but not limited to:
- market acceptance of and demand for our products and services
- our ability to attract and retain payer and provider customers and
subscribers
- expenses relating to acquisitions and strategic partnerships
- usage of the Internet and our ability to maintain and increase traffic on
our web site
- our ability to continue to develop and extend our brand
- our ability to effectively integrate the operations and technologies of
acquired businesses with our operations
- introduction and timing of new products and services or enhancements by
us or our competitors
- capacity constraints and dependencies on computer infrastructure
- economic conditions affecting the Internet or healthcare industries
- general economic conditions.
Fluctuations in our quarterly results could adversely affect the market
price of our common stock in a manner unrelated to our long-term operating
performance. We will base our expense levels in part upon our expectations
concerning future revenue, and these expense levels will be relatively fixed in
the short term. If we have lower revenue, we may not be able to reduce spending
in the short term in response. Any shortfall in revenue would have a direct
impact on our results of operations. As a result, we believe that
period-to-period comparisons of our results of operations will not necessarily
be meaningful and should not be relied upon as an indicator of future
performance. For these and other reasons, it is likely that in some future
quarter or quarters we may not meet the earnings estimates of securities
analysts or investors, which could materially and adversely affect our stock
price.
OUR STOCK PRICE HAS BEEN VOLATILE IN THE PAST AND MAY CONTINUE TO BE VOLATILE
Changes in the market price of our common stock may result from among other
things:
- quarter-to-quarter variations in operating results
- operating results being less than analysts' estimates
- changes in analysts' earnings estimates
- announcements of new technologies, products and services or pricing
policies by us or our competitors
- announcements of acquisitions or strategic partnerships by us or our
competitors
- developments in existing customer or strategic relationships
- actual or perceived changes in our business strategy
- sales of large amounts of our common stock
- changes in market conditions in the Internet and healthcare industries
- changes in prospects for healthcare reform
- changes in general economic conditions
- fluctuations in the securities markets in general.
In addition, the trading price of Internet and healthcare information
technology stocks in general, and our common stock in particular, has
experienced extreme price and volume fluctuations in recent months.
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These fluctuations often may be unrelated or disproportionate to the operating
performance of these companies. Any negative change in the public's perception
of the prospects of these companies, as well as other broad market and industry
factors, may result in decreases in the price of our common stock.
OUR BUSINESS WILL SUFFER IF WE FAIL TO SUCCESSFULLY INTEGRATE ACQUIRED
BUSINESSES AND TECHNOLOGIES
We have in the past acquired, and may in the future acquire, businesses,
technologies, services, product lines or content databases. For example, we
completed our mergers with WebMD, Inc., MedE America and Medcast in November
1999, our mergers with Kinetra in January 2000 and Envoy in May 2000 and our
mergers with Medical Manager, CareInsite and OnHealth in September 2000. In
order to achieve the potential benefits of these transactions, we must operate
as a combined organization utilizing common information and communication
systems, operating procedures, financials controls and human resource practices.
We are in the process of integrating and consolidating the operations, products
and services, technologies and personnel of these companies and have previously
announced that our board of directors has approved an integration plan that
includes in its first phase a consolidation of offices and data centers and
reduction in marketing and promotional expenses, the result of which we believe
will substantially eliminate redundancies created by our recent mergers. In
connection with this integration plan, we have taken a pre-tax restructuring
charge of $44.9 million in the quarter ending September 30, 2000. We also expect
to incur additional costs relating to moving and relocations that will be
expensed as incurred in accordance with applicable accounting guidelines. See
note 3 to the condensed consolidated financial statements in this quarterly
report. The successful integration of the acquired businesses into our
operations is critical to our future performance.
The amount and timing of the benefits of the restructuring contemplated by
the integration plan and the success of the contemplated integration and
rationalization of our businesses are subject to significant risks and
uncertainties. These risks and uncertainties include, but are not limited to,
those relating to:
- centralization and consolidation of financial, operational and
administrative functions
- elimination of duplicative costs
- integration of platforms, networks and service centers
- ability to cross-sell products and services to payers and providers with
which we have established relationships and those with which acquired
companies have established relationships
- integration of healthcare transaction processing services not currently
offered via the Internet with our Internet-based platform
- the loss of key personnel
- diversion of management's attention from other ongoing business concerns
- potential conflicts in payer, provider, strategic partner, sponsor or
advertising relationships
- coordination of organizations that are geographically diverse and have
different business cultures
- compliance with regulatory requirements.
We cannot guarantee that any acquired businesses will be successfully
integrated with our operations in a timely manner, or at all. Failure to
successfully integrate acquired businesses or to achieve operating synergies,
revenue enhancements or cost savings could have a material adverse effect on our
business, financial condition and results of operation.
Integrating any additional acquired organizations and technologies in the
future could be expensive, time consuming and may strain our resources.
Integrating any future acquisitions would be subject to the same challenges,
risks and uncertainties as our current integration plan, as described above. In
particular, additional acquisitions could divert management's attention from
other business concerns and expose us 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 relationships with
payers,
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providers and strategic partners if any acquired companies have relationships
with competitors of these payers, providers and strategic partners.
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 revenue or
earnings to justify our investment in, or expenses related to, these
acquisitions or that any synergies will develop.
SALES OF LARGE AMOUNTS OF OUR SHARES AND THE LAPSE OF TRANSFER RESTRICTIONS
COULD ADVERSELY AFFECT PREVAILING STOCK PRICES
Sales of substantial amounts of our common stock in the public market, or
the perception that these sales may occur, could materially and adversely affect
the prevailing market prices for our common stock and make it more difficult for
us to raise capital through the sale of equity or equity-related securities in
the future. Substantial amounts of our outstanding common stock will become
freely transferable after contractual and legal transfer restrictions lapse.
We currently have an aggregate of approximately 382 million shares of
common stock outstanding, including the approximately 21.3 million shares
issuable upon conversion of the shares of our Series A preferred stock
outstanding as of September 30, 2000. Of these shares, approximately 307 million
shares are freely tradable without restrictions or further registration under
the Securities Act, unless owned by our "affiliates," as that term is defined in
Rule 144 under the Securities Act, or former affiliates of Medical Manager,
CareInsite or OnHealth. The remaining approximately 75 million shares of common
stock outstanding are subject to contractual restrictions on transfer as
described below.
As a result of the contractual restrictions, and subject to the provisions
of Rule 144 and 144(k), each described below, additional shares are or will be
available for sale in the public market as follows:
- 35.0 million shares of our common stock held by Quintiles as a result of
our acquisition of Envoy are subject to contractual transfer restrictions
until May 26, 2002, except that up to one-third of these shares may be
sold in the public market without contractual restriction at any time
after May 26, 2001 and up to two-thirds of these shares may be sold in
the public market without contractual restriction at any time after
November 26, 2001.
- 155,951 shares of our Series A preferred stock held by affiliates of News
Corporation, and the 21,282,645 shares of common stock into which the
shares of Series A preferred stock are convertible, are subject to
contractual transfer restrictions until the earlier of one year after a
change of control of WebMD, which did not occur as a result of any
transactions to date, the liquidation, dissolution or winding up of
WebMD, or January 26, 2003. Upon the lapse of these contractual
restrictions, the shares would be transferable pursuant to Rule 144 or
upon exercise of News Corporation's registration rights. An additional
2.0 million shares of common stock owned by affiliates of News
Corporation are not subject to contractual transfer restrictions and will
be eligible for sale, subject to the volume, manner of sale and reporting
requirements of Rule 144, after January 26, 2001. These 2.0 million
shares of common stock and, after the lapse of the contractual
restrictions, the 21,282,645 shares of common stock underlying the Series
A preferred stock may also be sold pursuant to News Corporation's
registration rights, if not previously sold pursuant to Rule 144 or
another exemption from registration under the Securities Act, which would
result in these shares becoming eligible for sale in the public market
without restriction immediately upon the effectiveness of such
registration.
- 17.1 million shares of our common stock held by Cerner Corporation are
subject to contractual restrictions on transfer until September 15, 2001,
except that Cerner may effect:
- transfers in connection with a merger, consolidation or sale of all or
substantially all of Cerner's assets in which the surviving
corporation or purchaser agrees to be bound by the provisions of a
voting agreement entered into with WebMD
- sales of up to 25% of the shares subject to transfer restrictions
beginning December 11, 2000
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- sales of up to an additional 25% of the shares subject to transfer
restrictions commencing on March 15, 2001.
- Approximately 850,000 shares of our common stock issued to former holders
of CareInsite common stock in our merger with CareInsite are subject to
contractual restrictions on transfer. Approximately 278,000 of these
shares will no longer be subject to these restrictions after November
2000 and the balance will no longer be subject to these restrictions
after May 2001.
- 100 shares of our Series B preferred stock held by AOL are convertible
into shares of our common stock after March 2002. In the event that AOL
elects to convert the 100 shares of Series B preferred stock, it would
receive 263,960 shares of our common stock and a warrant exercisable for
an additional 263,960 shares at $37.88 per share. None of these shares of
our common stock will be eligible for sale prior to March 2002.
The shares of our common stock issued to or held by any person who is our
affiliate are subject to restrictions on transfer. Persons who may be deemed to
be affiliates include individuals or entities that control, are controlled by,
or are under common control with WebMD and may include some officers and
directors, as well as principal stockholders. Affiliates may not sell their
shares of our common stock except pursuant to:
- an effective registration statement under the Securities Act covering the
resale of those shares,
- an exemption under Rule 144 under the Securities Act, or
- any other applicable exemption under the Securities Act.
In general, under Rule 144 as currently in effect, a person who has
beneficially owned restricted shares of our common stock for at least one year,
or an affiliate who beneficially owns shares of our common stock, would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which equals
approximately 3.6 million shares based on the approximately 360.7 million
shares currently outstanding, or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
WebMD.
Under Rule 144(k), a person who is not one of our affiliates at any time
during the three months preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years including the holding period
of any prior owner other than an affiliate, is entitled to sell such shares
without complying with the manner of sale, public information, volume limitation
or notice provisions of Rule 144. Therefore, unless otherwise restricted, these
may be sold immediately.
Under an exemption available under Rule 145(d) under the Securities Act,
sales of shares of our common stock issued in our mergers with Medical Manager,
CareInsite and OnHealth to persons who were affiliates of those companies are
subject to volume limitations until September 12, 2001. The amount of those
shares that each such affiliate of Medical Manager, CareInsite or OnHealth can
sell is limited to the same volume that would be permitted, under Rule 144, for
sales by our affiliates, as described above. These volume restrictions apply
unless the shares are sold pursuant to an effective registration statement or
another applicable exemption under the Securities Act.
In addition, we have outstanding warrants exercisable for or other rights
to purchase approximately 45.5 million shares of our common stock, of which
warrants to acquire 7.8 million shares are subject to vesting conditions.
Generally, the shares of our common stock issued upon exercise of these warrants
will also be restricted securities and may not be sold in the absence of
registration other than in accordance with Rule 144 or another exemption from
registration under the Securities Act. Approximately 28.0
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million shares of our common stock issuable upon the exercise of these warrants
may also be sold pursuant to registration rights, which would result in such
shares becoming eligible for sale in the public market without restriction
immediately upon the effectiveness of a registration.
We have filed registration statements registering 139,480,020 shares of
common stock reserved for issuance under our stock option plans, in addition to
the warrants described above. Persons acquiring these shares upon exercise of
their options, whether or not they are affiliates, will be permitted to resell
their shares in the public market without regard to the Rule 144 holding period.
ACQUISITIONS AND STRATEGIC RELATIONSHIPS COULD RESULT IN THE DILUTION OF OUR
STOCKHOLDERS
We expect to pay for some of our future acquisitions and strategic
relationships, if any, by issuing additional common stock, which could dilute
our stockholders. Future acquisitions could also result in the incurrence of
debt, contingent liabilities or amortization expenses related to goodwill and
other intangible assets, any of which could harm our business. Future
acquisitions may require us to obtain additional equity or debt financing, which
may not be available on favorable terms or at all. Even if available, the
financing may be dilutive. We cannot guarantee that these acquisitions or
strategic relationships will generate or result in sufficient revenue or
earnings to justify the dilution which could occur.
WE EXPECT TO DEVOTE SIGNIFICANT RESOURCES TO INTEGRATING APPLICATIONS THAT ARE
NOT INTERNET-ENABLED
Some of our applications, including Envoy's EDI transaction processing
services, were acquired by us and are not Internet-enabled. We intend to
integrate many of these applications, as well as the applications that we
recently acquired upon completion of the Medical Manager, CareInsite and
OnHealth mergers, with our Internet-based platform and WebMD Practice and WebMD
Health products and to consolidate our transaction networks. Integrating these
applications and platforms may be expensive and may divert our attention from
other activities.
MANAGING OUR GROWTH MAY STRAIN ADMINISTRATIVE, TECHNICAL AND FINANCIAL RESOURCES
We have rapidly and significantly expanded our operations recently and
expect to continue to do so. Our growth has been accomplished primarily through
acquisitions. We expect that future growth may also be accomplished through
internal expansion. This past and future growth has placed and will continue to
place a significant strain on our managerial, operational, financial and other
resources. If we are unable to respond to and manage this 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 completing the
integration of our accounting and management information systems following our
acquisitions. We could experience interruptions to our internal information
systems while we transition to new systems. We cannot guarantee that our
systems, procedures and controls will be adequate to support expansion of our
operations.
OUR ABILITY TO GENERATE REVENUE WILL SUFFER IF WE DO NOT QUICKLY EXPAND OUR
SUITE OF APPLICATIONS AND SERVICE OFFERINGS
We currently offer a limited number of applications on our Internet-based
platform and some of our service offerings, including wireless portal services,
are not fully developed or launched. We must quickly introduce new applications
and services and improve the functionality of our existing services in a timely
manner in order to attract and retain subscribers and consumers and payer and
provider customers. We expect that our advertising revenue will be dependent on
the level of usage of our services by subscribers and consumers, and believe
that levels of usage will not increase unless we improve functionality of our
service offerings and increase payer connectivity.
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We rely on a combination of internal development, strategic relationships,
licensing and acquisitions to develop these applications and services. Each of
our applications, regardless of how it was developed, must be integrated and
customized to operate with the existing legacy computer systems of payer and
provider customers and our platform. We are currently in the process of
migrating many of our acquired applications and products and services to our
Internet-based platform. Developing, integrating and customizing these
applications and services will be time consuming, and these applications and
services may never achieve market acceptance, which could also cause our
business to suffer.
WE ARE DEPENDENT ON STRATEGIC RELATIONSHIPS TO GENERATE SOME OF OUR REVENUE
Our ability to generate revenue will suffer if we cannot establish and
maintain strategic relationships
We must establish and maintain successful strategic relationships with
leaders in a number of healthcare and Internet industry segments. We have
entered into strategic relationships with leading online and media distribution
and healthcare partners. Our strategic relationships are critical to our success
because we believe that these relationships will enable us to enhance our brand,
increase the number of transactions processed over our platform, generate
traffic on our web site and capitalize on additional distribution and revenue
opportunities. As previously announced, we are evaluating many of the business
relationships we currently have in place. It is possible that some of these
relationships may be modified or terminated. See note 3 to the condensed
consolidated financial statements in this quarterly report. We expect that we
will face intensified competition for strategic relationships. We may not be
able to establish commercial acceptance of our platform, applications and
services unless we can establish and maintain successful strategic relationships
in the future.
We share revenue with our strategic partners and will incur significant
expense in connection with our strategic relationships, and this expense may
exceed the net revenue these relationships generate
We intend to use a significant amount of cash to fund branding and
advertising, including promotional arrangements with our strategic partners. We
have agreed to share some of our transaction processing, advertising, carriage
fee and e-commerce revenues with some of our strategic partners. For more
information regarding these arrangements, see "Liquidity and Capital Resources"
on page 18. We cannot give you assurances that we will generate sufficient
revenue from our current or future arrangements to offset related expenses, in
particular after we share some of our net revenue with our strategic partners.
Failure to do so could have a material adverse effect on our financial condition
or results of operations.
We invest in some of our strategic partners, many of which are in early
stages of development
We have made equity investments in some of our strategic partners. In many
instances, these investments are in the form of illiquid securities of private
companies engaged in e-Health and are made in conjunction with the parties
entering into a strategic agreement. Typically, these strategic partners enter
into agreements that obligate them to purchase advertising or other services
from us. These companies are typically in an early stage of development and may
be expected to incur substantial losses and may not generate sufficient revenue
to pay the advertising and e-commerce fees due us. In addition, due to recent
market volatility, some of these companies may alter any plans to go public, and
others that have gone public may experience significant decreases in the trading
prices of their common stock, adversely affecting the value of our investments.
We have granted exclusive rights to strategic partners
We have agreed that some of our strategic partners will be our exclusive
providers of some of our applications and content. For example, we have entered
into strategic agreements with e-commerce companies to be our exclusive partners
supplying online pharmacy services and medical supplies and to be our exclusive
providers of various categories of content and services. These agreements may
limit our access to other applications and content we might otherwise be able to
make available to subscribers and consumers or to payer and provider customers.
Our inability to offer other applications and content could
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cause our business to suffer. In addition, we have granted exclusive rights to
strategic partners which restrict our ability to pursue some business
opportunities. For example, in connection with our acquisition of Envoy from
Quintiles, we granted to Quintiles the exclusive license to use some of the
de-identified data available to us by virtue of our transaction services and
some exclusive rights in the pharmaceutical market.
RELATIONSHIPS WITH CUSTOMERS AND STRATEGIC PARTNERS MAY CONFLICT
We have developed and rely upon important relationships with payers,
providers, practice management system vendors and strategic partners, some of
which may involve conflicting contractual rights, including conflicts which may
result from our recent acquisitions. For example, in January and February 2000,
we entered into strategic alliances with three practice management system
vendors that compete with Medical Manager. As a result of our acquisition of
Medical Manager, we may lose relationships with some customers and strategic
partners, who may then establish relationships with our competitors. In
addition, we may not be able to maintain or establish relationships with key
participants in the healthcare and Internet industries if any of the companies
we acquired had already established relationships with competitors of these key
participants.
For example, we have entered into a five-year strategic alliance with
Microsoft pursuant to which we develop, host, maintain on our servers and
provide content for the health channels on MSN, MSNBC and WebTV. Similarly,
CareInsite has entered into a strategic alliance with America Online, Inc.,
pursuant to which CareInsite is AOL's exclusive provider of a comprehensive
suite of services that connect AOL and CompuServe members and visitors to AOL's
web-based brands Netscape, AOL.COM and Digital City, to physicians, health
plans, pharmacy benefit managers, covered pharmacies and labs. As a result of
the recent completion of the Medical Manager and CareInsite mergers, Microsoft
will be able to terminate its strategic alliance with us if we and Microsoft are
unable to resolve conflicts that may arise as a result of these mergers. We are
currently working with Microsoft to identify and resolve any conflicts that
result from these mergers. If these potential conflicts cannot be resolved,
however, Microsoft could terminate the strategic alliance at any time after the
end of November 2000. Similarly, as a result of these mergers, AOL will be able
to terminate its strategic alliance with CareInsite, as a result of which
guaranteed payments of approximately $20.0 million due to AOL will accelerate.
We cannot assure you that the conflicts arising under either of these strategic
alliances as a result of these mergers will be resolved. If either or both
strategic alliances are terminated, and we are unable to replace the terminated
alliance with a comparable one, we could experience a material decrease in
revenue.
If contractual or relationship conflicts cannot be resolved, we could lose
the benefits of some of our relationships with payers, providers or strategic
partners. Losses of any significant relationships could harm our business or
results of operations.
THE PROPOSED DISPOSITION OF OUR PLASTICS AND FILTRATION TECHNOLOGIES BUSINESS
MAY NOT BE COMPLETED IN THE MANNER EXPECTED OR AT ALL
If our proposed disposition of Porex Corporation and our other plastics and
filtration technologies subsidiaries, which are referred to collectively as
Porex, fails to be completed, is not completed in a timely manner or does not
provide us with the proceeds anticipated, we may not be able to execute
strategies that are important to our continued growth as planned. We cannot
guarantee that the disposition of this business will be successfully completed
in the manner expected, or at all. Failure to successfully complete this
proposed disposition as anticipated or to complete it in a timely manner could
have a material adverse effect on our business, financial condition and results
of operations.
OUR ABILITY TO GENERATE REVENUE WILL SUFFER IF WE CANNOT ATTRACT AND RETAIN
SUBSCRIBERS
We must attract and retain subscribers to WebMD Practice, our physician
portal, in order to generate subscription revenue. In addition, our ability to
generate advertising revenue and transaction revenue will be dependent on the
number of subscribers and level of usage by those subscribers of our
Internet-based
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services, including our administrative transaction and clinical information
services. We cannot guarantee that we will be able to attract new or retain
existing subscribers. In particular, we cannot guarantee that we will retain
subscribers whose subscriptions are initially paid for by our strategic partners
once those subscribers are required to pay for their subscriptions themselves or
that these subscribers will actually use our services.
IF WE ARE UNABLE TO GENERATE SIGNIFICANT ADVERTISING REVENUE, OUR FUTURE RESULTS
OF OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED
We derive a portion of our revenue from advertising activities. Advertising
revenue is generally derived from short-term advertising contracts in which we
typically guarantee a minimum number of impressions or pages to be delivered
over a specified period of time for a fixed fee. Advertising revenue may also
include barter transactions, which are exchanges by us of advertising space on
our web site for goods and services from strategic partners and which might not
generate any cash receipts.
The Internet advertising market is new and rapidly evolving, and no
standards have been widely accepted to measure its effectiveness as compared to
traditional media advertising. If no standards develop, existing advertisers may
not continue their current level of Internet advertising, and advertisers that
have traditionally relied on other advertising media may be reluctant to
advertise on the Internet. Moreover, filter software programs that limit or
prevent advertising from being delivered to a web user's computer are available.
Widespread adoption of this software could adversely affect the commercial
viability of Internet advertising. Our business would be adversely affected if
the market for Internet advertising fails to develop or develops more slowly
than expected.
Various pricing models are used to sell advertising on the Internet. It is
difficult to predict which, if any, will emerge as the industry standard,
thereby making it difficult to project our future advertising rates and revenue.
The level of traffic on our web site is likely to be a factor in determining
advertising rates. We cannot predict whether our subscribers whose subscriptions
are paid for by our strategic partners will actually use our services. In
addition, there can be no assurances that we will continue to generate
significant revenue from our advertising activities.
LENGTHY SALES AND IMPLEMENTATION CYCLES FOR OUR APPLICATIONS COULD ADVERSELY
AFFECT OUR ABILITY TO GENERATE REVENUE
A key element of our strategy is to market our solutions directly to large
healthcare organizations. We will be unable to control many of the factors that
will influence the buying decisions of these organizations. 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 payer and provider 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 we 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.
OUR BUSINESS WILL SUFFER IF HEALTHCARE INDUSTRY PARTICIPANTS DO NOT ACCEPT
INTERNET SOLUTIONS
Our business model depends on the adoption of Internet solutions by
providers, payers, patients and other healthcare industry participants. Our
ability to generate revenue could suffer dramatically if Internet solutions are
not accepted or not perceived to be effective.
The adoption of Internet solutions by healthcare participants will require
the acceptance of a new way of conducting business and exchanging information.
To maximize the benefits of our platform, healthcare
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participants must be willing to allow sensitive information to be stored in our
databases and to conduct healthcare transactions over the Internet. There can be
no assurance that healthcare participants will accept Internet solutions in a
timely manner or at all.
FAILURE TO CONTINUE TO EXPAND AND ADAPT OUR PLATFORM TO ACCOMMODATE INCREASED
USAGE COULD MAKE IT DIFFICULT TO SUCCESSFULLY IMPLEMENT OUR INTERNET-BASED
SERVICES
To successfully implement our Internet-based services, we must continue to
expand and adapt our platform and transaction networks to accommodate additional
users, increased transaction volumes and changing customer requirements. Our
infrastructure may not accommodate increased use while maintaining acceptable
overall performance. To date, we have processed a limited number and variety of
Internet-based transactions. In addition, our Internet-based products and
services have only been used by a limited number of physicians and healthcare
consumers. An unexpectedly large increase in the volume of traffic on our web
site, the number of physicians using WebMD Practice or transactions processed
over our networks may require us to expand and further upgrade our platform.
This expansion could be expensive and could divert our attention from other
activities.
PERFORMANCE PROBLEMS WITH OUR SYSTEMS COULD DAMAGE OUR BUSINESS
Our payer and provider customer satisfaction and our business could be
harmed if we or our customers experience system delays, failures or loss of
data. We currently process our payer and provider transactions and data at our
facilities and rely on a data center operated by a third party to perform
transaction processing for Envoy's EDI business, other than real-time EDI
transaction processing. This data center is located in Tampa, Florida and is
operated by Verizon Data Services, with whom Envoy has contracted for these
processing services. We assumed this contract upon our acquisition of Envoy.
Envoy relies primarily on this facility to process batch claims and other
medical EDI transaction sets. Envoy's contract with Verizon requires Verizon to
maintain continuous processing capability and a "hot site" disaster recovery
system. We have a contingency plan for emergencies with our systems; however, we
have limited backup facilities to process information if these facilities are
not functioning. The occurrence of a major catastrophic event or other system
failure at any of our facilities or at the Verizon facility could interrupt data
processing or result in the loss of stored data, which could have an adverse
impact on our business. While we have general liability insurance that we
believe is adequate, including coverage for errors and omissions, we may not be
able to maintain this insurance on reasonable terms in the future. In addition,
our insurance may not be sufficient to cover large claims and our insurer could
deny coverage on claims. If we are liable for an uninsured or underinsured claim
or if our premiums increase significantly, our financial condition could be
materially harmed.
PERFORMANCE PROBLEMS WITH THE SYSTEMS OF OUR 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 disruptions or
interruptions in service due to the failure or delay in the transmission or
receipt of this information. In addition, our customers who utilize our
web-based services depend on Internet service providers, online service
providers and other web site operators for access to our web 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 users
of and advertisers and sponsors on our web site 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. We retain confidential information, including patient health
information in our processing centers. We may be required to expend significant
capital and other resources to protect against security breaches or to alleviate
problems caused
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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 these facilities and infrastructure
remain secure and are perceived by the marketplace to be secure. Despite the
implementation of security measures, this infrastructure may be vulnerable to
physical break-ins, computer viruses, programming errors, attacks by third
parties or similar disruptive problems.
OUR BUSINESS IS DEPENDENT ON THE DEVELOPMENT AND MAINTENANCE OF THE INTERNET
INFRASTRUCTURE
Our ability to deliver our Internet-based services is dependent on the
development and maintenance of the infrastructure of the Internet by third
parties. This includes maintenance of a reliable network backbone with the
necessary speed, data capacity and security, as well as timely development of
complimentary products such as high-speed modems, for providing reliable
Internet access and services. The Internet has experienced, and is likely to
continue to experience, significant growth in the number of users and the amount
of traffic. If the Internet continues to experience increased numbers of users,
increased frequency of use, or more complex requirements, the Internet
infrastructure may be unable to support the demands placed on it. In addition,
the performance of the Internet may be harmed by increased users or more complex
requirements.
The Internet has experienced a variety of outages and other delays as a
result of damages to portions of its infrastructure, and it could face outages
and delays in the future. These outages and delays could reduce the level of
Internet usage as well as the availability of the Internet to us for delivery of
our Internet-based services. In addition, the Internet could lose its viability
due to delays in the development or adoption of new standards and protocols to
handle increased levels of activity or due to increased governmental regulation.
The infrastructure and complimentary products or services necessary to make the
Internet a viable commercial marketplace for the long-term may not be developed
successfully or in a timely manner. Our financial condition could be materially
harmed if the Internet is not available to us for the delivery of our services
and products.
OUR BUSINESS WILL BE HARMED IF WE ARE UNSUCCESSFUL IN RESPONDING TO RAPID
TECHNOLOGY CHANGES IN OUR MARKETS
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 SCALABILITY ARE NOT PROVEN, AND WE MAY NOT BE
ABLE TO ADEQUATELY ACCOMMODATE INCREASED FUNCTIONALITY OR USAGE
To date, we have processed a limited number and variety of transactions
over our platforms. Similarly, a limited number of healthcare participants use
these platforms. 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 payer and provider customer requirements. This expansion and
adaptation may be expensive and may divert our attention from other activities.
WE FACE SIGNIFICANT COMPETITION FOR OUR PRODUCTS AND SERVICES
Healthcare transaction and information services
The market for healthcare transaction and 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 us. These organizations may be better known
and have more customers than us. Many of our competitors have also announced or
introduced
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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
- healthcare EDI companies
- large information technology consulting service providers
- online services or web sites targeted to the healthcare industry,
physicians and healthcare consumers generally
- publishers and distributors of traditional offline media, including those
targeted to healthcare professionals, many of which have established or
may establish web sites
- general purpose consumer online services and portals and other
high-traffic web sites which provide access to healthcare-related content
and services
- public sector and non-profit web sites that provide healthcare
information without advertising or commercial sponsorships
- vendors of healthcare information, products and services distributed
through other means, including direct sales, mail and fax messaging.
We expect that major software information systems companies and others
specializing in the healthcare industry will offer competitive applications or
services. In addition, some of our existing and potential payer and provider
customers and strategic partners may also compete with us. For example, in April
2000, it was reported that a consortium of six health insurance companies may
join together to develop an online project which links insurers, doctors and
patients. If this consortium decides to proceed with its plans to allow patients
to enroll in health plans and choose doctors online while also taking care of
administrative tasks such as processing payment claims, it could compete with
us.
In addition, some payers currently offer electronic data transmission
services to healthcare providers that establish a direct link between the
provider and the payer, bypassing third-party EDI service providers such as us.
Any significant increase in the utilization of direct links between healthcare
providers and payers could have a material adverse effect on our business and
results of operations.
Practice management information systems business
As a result of our recent merger with Medical Manager, we now own and
operate Medical Manager Health Systems. The market for practice management
systems such as The Medical Manager practice management system is highly
competitive. Medical Manger Health Systems' competitors vary in size and in the
scope and breadth of the products and services that they offer. Medical Manager
Health Systems competes with different companies in each of its target markets.
Many of Medical Manager Health Systems' competitors have greater financial,
development, technical, marketing and sales resources than Medical Manager
Health Systems. In addition, other entities not currently offering products and
services similar to those offered by Medical Manager Health Systems, including
claims processing organizations, hospitals, third-party administrators,
insurers, healthcare organizations and others, may enter markets in which
Medical Manager Health Systems competes. We cannot assure you that future
competition will not have a material adverse effect on Medical Manager Health
Systems', and thus our, results of operations, financial condition or business.
HEALTHCARE REGULATION COULD ADVERSELY AFFECT OUR BUSINESS
The healthcare industry is highly regulated and is subject to changing
political, regulatory and other influences. These factors affect the purchasing
practices and operation of healthcare organizations. Federal and state
legislatures have periodically considered programs to reform or amend the U.S.
healthcare
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<PAGE> 32
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.
HIPAA transaction standards
On August 17, 2000, the U.S. Department of Health and Human Services, or
DHHS, published final regulations to govern electronic transactions involving
health information. These regulations constitute part of the administrative
simplification provisions of the Health Insurance Portability and Accountability
Act of 1996, or HIPAA. This rule is commonly referred to as the transaction
standards rule.
The rule establishes standards for eight of the most common healthcare
transactions by reference to technical standards promulgated by recognized
standards publishing organizations. Under the new standards, any party
transmitting or receiving health transactions electronically will send and
receive data in a single format, rather than the large number of different data
formats currently used. Healthcare providers, healthcare clearinghouses and
large health plans must comply by October 16, 2002, while small health plans are
given an additional year.
The transaction standards are applicable to that portion of our business
involving the processing of healthcare transactions among physicians, payers,
patients and other healthcare industry participants. The transaction standards
also are applicable to many of our customers and to our relationships with those
customers. We intend to comply with the transaction standards by their effective
date. This compliance may require modifications to some of our products and
services. We believe that we are well-positioned to effectuate these changes and
to facilitate compliance efforts of our customers and strategic partners.
However, there can be no assurance that we will be able to do so or that we will
be able to take advantage of any business opportunities that implementation of
the transaction standards may provide to us.
Regulation regarding confidentiality and privacy of patient information
Numerous state and federal laws govern the collection, dissemination, use,
access to and confidentiality of patient health information. Many states have
laws and regulations that protect the confidentiality of medical records or
medical information. The adoption of privacy laws at a state or federal level
could impose operational requirements on our business and affect the manner in
which we use and transmit patient information and the cost of doing so.
In addition to the transaction standards discussed above, DHHS has proposed
regulations that would impose substantial requirements on entities that
electronically store or transmit individually identifiable health information.
The proposed regulations, among other things, would require these entities to
use the information only in a highly restricted manner, to establish safeguards
with regard to security, access and use of the information, to obtain consent
from the individual in some instances, to restrict the manner in which the
information is used by other parties, and to provide access to individuals to
inspect and correct the information. We do not know whether, or in what form,
the proposed regulations will be enacted. However, if similar regulations are
finally enacted, they may require us to change our platform and services in a
costly and cumbersome manner and restrict the manner in which we transmit and
use the information.
For additional information, see "-- Regulation of the Internet could
adversely affect our business" on page 34.
Regulation of healthcare relationships
There are federal and state laws that govern patient referrals, physician
financial relationships and inducements to beneficiaries of federal healthcare
programs. The federal anti-kickback law prohibits any person or entity from
offering, paying, soliciting or receiving anything of value, directly or
indirectly, for
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<PAGE> 33
the referral of patients covered by Medicare, Medicaid and other federal
healthcare programs or the leasing, purchasing, ordering or arranging for or
recommending the lease, purchase or order of any item, good, facility or service
covered by these programs. The anti-kickback law is broad and may apply to some
of our activities. Penalties for violating the anti-kickback law include
imprisonment, fines and exclusion from participating, directly or indirectly, in
Medicare, Medicaid and other federal healthcare programs. Many states also have
similar anti-kickback laws that are not necessarily limited to items or services
for which payment is made by a federal healthcare program. We carefully review
our practices with regulatory experts to ensure that we comply with all
applicable laws. However, the laws in this area are both broad and vague and it
is often difficult or impossible to determine precisely how the laws will be
applied, particularly to new services similar to ours. Any determination by a
state or federal regulatory agency that any of our practices violate any of
these laws could subject us to civil or criminal penalties and require us to
change or terminate some portions of our business.
We currently provide billing services and intend to provide repricing
services to providers and, therefore, may be subject to state and federal laws
that govern the submission of claims for medical expense reimbursement. These
laws generally prohibit an individual or entity from knowingly presenting or
causing to be presented a claim for payment from Medicare, Medicaid or other
third party payers that is false or fraudulent, or is for an item or service
that was not provided as claimed. These laws also provide civil and criminal
penalties for noncompliance. We have designed our current transaction services
and will design any future services to place the responsibility for compliance
with these laws on provider customers. However, we cannot guarantee that state
and federal agencies will regard billing errors processed by us as inadvertent
and not in violation of these laws. In addition, 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.
Regulation by the U.S Food and Drug Administration
The Food and Drug Administration, or the FDA, has jurisdiction under the
1976 Medical Device Amendments to the Federal Food, Drug and Cosmetic Act, or
the FDA Act, to regulate computer products and software as medical devices if
they are intended for use in the diagnosis, cure, mitigation, treatment or
prevention of disease in humans. The FDA has issued a final rule under which
manufacturers of medical image storage devices and related software are required
to submit to the FDA premarket notification applications, which are each
referred to in this document as a 510(k) application, and otherwise comply with
the requirements of the FDA Act applicable to medical devices. We have attempted
to design our services so that our computer applications and software are not
considered to be medical devices. However, the FDA may take the position that
our services are subject to FDA regulation. In addition, we may expand our
services in the future to areas that subject us to FDA regulation. For example,
Medical Manager Health Systems is distributing in the U.S. a medical image
management device, which is referred to in this document as the "image module,"
which was cleared by the FDA on April 4, 1997 and is manufactured by a third
party in accordance with specifications set forth in the cleared 510(k)
application. Medical Manager Health Systems has created an interface between The
Medical Manager practice management system and the image module and is marketing
the interface and the image module as the Document Image Module System. We
believe that the addition of our practice management system to the image module
does not change the image module's intended use or significantly change the
safety or efficacy of the product to the extent that a new 510(k) application is
required. The FDA is currently reviewing its policy for the regulation of
computer software, and there is a risk that The Medical Manager software could
in the future become subject to some or all of the above requirements. Except
with respect to Porex, we have no experience in complying with FDA regulations.
We believe that complying with FDA regulations may be time consuming, burdensome
and expensive and could delay our introduction of new applications or services.
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Regulation of transaction services
State and federal statutes and regulations governing transmission of claims
may affect our operations. For example, Medicaid rules require some processing
services and eligibility verification to be maintained as separate and distinct
operations. We believe that our practices are in compliance with applicable
state and federal laws.
These laws, though, are complex and changing, and the government may take
positions that are inconsistent with our practices.
Professional regulation
The practice of most healthcare professions requires licensing under
applicable state law. In addition, the laws in some states prohibit business
entities from practicing medicine, which is referred to as the prohibition
against the corporate practice of medicine. We have attempted to structure our
web site, strategic relationships and other operations to avoid violating these
state licensing and professional practice laws. A state, however, may determine
that some portion of our business violates these laws and may seek to have us
discontinue those portions or subject us to penalties or licensure requirements.
We employ and contract with physicians who provide only medical information to
consumers, and we have no intention to provide medical care or advice. We do not
maintain professional liability insurance because we believe we are not a
healthcare provider. Any determination that we are a healthcare provider and
acted improperly as a healthcare provider may result in liability for which we
are not insured.
REGULATION OF THE INTERNET COULD ADVERSELY AFFECT OUR BUSINESS
Laws and regulations may be adopted with respect to the Internet or other
online services covering user privacy, patient confidentiality and other issues,
including:
- pricing
- content
- copyrights and patents
- distribution
- characteristics and quality of products and services.
We cannot predict whether these laws will be adopted and how they will
affect our business.
Internet user privacy has become an issue both in the U.S. and abroad.
Whether and how existing privacy or consumer protection laws in various
jurisdictions apply to the Internet is uncertain and may take years to resolve.
Any legislation or regulations of this nature could affect the way we conduct
our business, particularly in our collection or use of personal information, and
could harm our business. Further, activities on or using the Internet have come
under increased scrutiny, including increased investigation in the healthcare
arena by the Federal Trade Commission, or FTC, and heightened media attention.
While we believe we are in compliance with all existing applicable laws, with
our third party contractual commitments and with our published privacy
commitments, government inquiries could divert management's attention from other
matters and create unfavorable publicity.
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 us or third parties, including
content providers, medical advisors or users. We could also be subject to
liability for content that may be accessible through our web site or third party
web sites linked from our web site 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
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<PAGE> 35
these claims could be expensive and time consuming and could divert management's
attention away from operating the business.
OUR INTELLECTUAL PROPERTY MAY BE SUBJECT 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
management's attention from our operations. If we become liable to third parties
for infringing their intellectual property rights, we could be required to pay a
substantial damage award and to develop noninfringing technology, obtain a
license or cease selling the applications that contain the infringing
intellectual property. We may be unable to develop noninfringing 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. If
we do not detect any unauthorized use, 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 the ability of
our officers and key employees to manage changing business conditions and to
implement and improve our technical, administrative, financial control and
reporting systems. We need to attract, integrate, motivate and retain highly
skilled technical people. In particular, we need to attract and retain
experienced computer, engineering, marketing, management and other professionals
capable of developing, selling and installing complex healthcare information
systems. We face intense competition for these people.
OUR BUSINESS COULD BE ADVERSELY AFFECTED AS A RESULT OF OUR INTERNATIONAL
EXPANSION
One element of our strategic alliance with News Corporation is the
formation of WebMD International as a joint venture with News Corporation to
launch our services worldwide, other than in the U.S. and Japan. In addition, we
have formed an international joint venture in Japan with one of our strategic
partners. We have extremely limited experience in developing localized versions
of our products and services. WebMD International and any future international
ventures may not be successful in launching our services into foreign markets.
A MATERIAL PORTION OF OUR PRACTICE MANAGEMENT SYSTEMS BUSINESS IS DEPENDENT ON
PRINCIPAL PRODUCTS, AND WE ARE EXPOSED TO RISKS RELATED TO PROBLEMS WITH ANY OF
THESE PRODUCTS
Our physician practice management systems business currently derives a
significant percentage of its revenue from sales of The Medical Manager core
physician practice management system. As a result, any event adversely affecting
this core product could have a material adverse effect on our results of
operations, financial condition or business. Although we have experienced
increasing annual sales, on a pro forma basis, revenue associated with existing
products could decline as a result of several factors, including price
competition. Beginning in calendar year 2000, the physician practice management
system industry began to experience a slowdown in demand. This trend impacted
our operating results for the nine months, on a pro forma basis, ended September
30, 2000. We expect the trend towards lower operating results to continue for
the near term resulting, in part, from lower margin service revenues replacing
higher margin software upgrades, and from the previous acquisition of Physician
Computer Network, which business historically has experienced lower margins. We
intend to introduce new practice management software products at the end of
calendar year 2000, and we anticipate that demand for software products will
increase. We cannot assure you that we will continue to be successful in
marketing our current practice management products or any new or enhanced
practice management products.
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PROVISIONS OF OUR CHARTER, BYLAWS OR DELAWARE LAW MAY HAVE AN ANTI-TAKEOVER
EFFECT
Certain provisions of our certificate of incorporation and bylaws may
discourage an attempt to acquire control of WebMD. These provisions may render
the removal of one or all directors more difficult or deter or delay corporate
changes of control that our board of directors did not approve. The provisions
of our certificate of incorporation or bylaws that may have an anti-takeover
effect include the following:
- the board of directors is divided into three classes, as nearly equal in
size as possible, with staggered terms of office and with one class
elected annually
- the board is entitled to issue preferred stock in one or more series and
to fix the designations, preferences, powers and rights of the shares to
be included in each series
- directors may be removed only for cause by a majority of the shares
entitled to vote in the election of directors
- any vacancy on the board of directors may be filled only by a majority of
the directors remaining in office
- our bylaws require advance written notice by any stockholder who wishes
to make a board nomination or recommend other stockholder business
- only the board of directors, president or stockholders holding at least
10% of the outstanding shares are entitled to call a special meeting of
the stockholders
- no stockholder action can be taken by written consent.
UNTIL WE DISPOSE OF OUR PLASTIC AND FILTRATION TECHNOLOGIES BUSINESS, WE WILL BE
SUBJECT TO RISKS ASSOCIATED WITH THAT BUSINESS
Until the proposed disposition of our plastic and filtration technologies
business is completed, we will continue to operate that business and to be
subject to additional risks associated with that business.
We face significant competition for the products and services of our
plastic and filtration technologies business
Competition in our plastics and filtration technology business is
characterized by the introduction of competitive products at lower prices. We
believe that Porex's principal competitive strengths are its manufacturing
processes, quality control, relationships with its customers and distribution of
its proprietary healthcare products.
In the porous plastics area, Porex's competitors include other producers of
porous plastic materials as well as companies that manufacture and sell products
made from materials other than porous plastics which can be used for the same
purposes as Porex's products. In this area, Porex has several direct competitors
in the U.S., Europe and Asia. Porex's porous plastic pen nibs compete with felt
and fiber tips manufactured by a variety of suppliers worldwide. Other Porex
industrial products made of porous plastic compete, depending on the industrial
application, with porous metals, metal screens, fiberglass tubes, pleated paper,
resin-impregnated felt, ceramics and other substances and devices.
The market for Porex's injection molded solid plastic components and
products, including its medical products, is highly competitive and highly
fragmented. Porex's pipette tips and racks also compete with similar products
manufactured by domestic and foreign manufacturers. Porex's injection molding
and mold making services compete with services offered by several foreign and
domestic companies. The MEDPOR(R) Biomaterial products compete for surgical use
against autogenous and allograph materials and alloplastic biomaterials. Porex's
surgical drains and markers compete against a variety of products from several
manufacturers.
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Healthcare regulation could adversely effect our plastics and filtration
technologies business
Porex manufactures and distributes medical/surgical devices, such as
plastic and reconstructive surgical implants and tissue expanders, which are
subject to government regulations, under the FDA Act and additional regulations
promulgated by the FDA. Future healthcare products may also be subject to these
regulations and approval processes. Compliance with these regulations and the
process of obtaining approvals can be costly, complicated and time-consuming,
and we cannot assure you that these approvals will be granted on a timely basis,
if ever.
The nature of Porex's products expose it to product liability claims and
may make it difficult to get adequate insurance coverage
The products sold by Porex expose it to potential risk for product
liability claims, particularly with respect to Porex's life sciences, clinical,
surgical and medical products. We believe that Porex carries adequate insurance
coverage against product liability claims and other risks. We cannot assure you,
however, that claims in excess of Porex's insurance coverage will not arise. In
addition, Porex's insurance policies must be renewed annually. Although Porex
has been able to obtain adequate insurance coverage at an acceptable cost in the
past and believes that it is adequately indemnified for products manufactured by
others and distributed by it, we cannot assure you that in the future Porex will
be able to obtain this insurance at an acceptable cost or be adequately
protected by this indemnification.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
The primary objective of our 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 and marketable securities in a variety of securities, including
commercial paper, other non-government debt securities, money market funds and
highly liquid U.S. Treasury notes and federal agency notes.
EXCHANGE RATE SENSITIVITY
Currently the majority of our 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. We conduct only limited transactions in foreign
currencies, and we do not anticipate that foreign exchange gains or losses will
be significant in the foreseeable future. We have not engaged in foreign
currency hedging activities to date.
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PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our annual meeting of stockholders held on September 12, 2000, our
stockholders voted with respect to the following matters:
- To approve and adopt the agreement and plan of merger dated as of
February 13, 2000 between us and Medical Manager, as amended on June 18,
2000, the Medical Manager merger and the exchange of 2.5 shares of our
common stock for each outstanding share of Medical Manager common stock
<TABLE>
<S> <C>
Votes for: 157,913,829
Votes against: 421,249
Abstentions: 195,231
Broker non-votes: 58,471,010
</TABLE>
- To approve the issuance of 1.3 shares of our common stock for each
outstanding share of CareInsite common stock not owned by Medical Manager
or any of its affiliates in the CareInsite merger
<TABLE>
<S> <C>
Votes for: 157,752,064
Votes against: 556,281
Abstentions: 221,964
Broker non-votes: 58,471,010
</TABLE>
- To elect U. Bertram Ellis, Jr., Dennis B. Gillings and Charles G. V.
Stevens as Class II directors to serve three year terms ending in 2003
<TABLE>
<S> <C>
Votes for U. Bertram Ellis, Jr.: 202,666,863
Votes against U. Bertram Ellis, Jr.: 2,595,194
Votes for Dennis B. Gillings: 204,210,531
Votes against Dennis B. Gillings: 1,051,526
Votes for Charles G.V. Stevens: 204,217,765
Votes against Charles G. V. Stevens: 1,044,292
</TABLE>
- To approve an amendment to our certificate of incorporation to change our
corporate name from Healtheon/WebMD Corporation to WebMD Corporation
<TABLE>
<S> <C>
Votes for: 216,038,930
Votes against: 772,870
Abstentions: 189,519
Broker non-votes: 0
</TABLE>
- To adopt our 2000 long-term incentive plan, pursuant to which 5,000,000
shares of common stock will be reserved for issuance, which number will
be increased to 10,000,000 if the Medical Manager and CareInsite mergers
were completed on or prior to December 31, 2000
<TABLE>
<S> <C>
Votes for: 134,396,786
Votes against: 11,041,867
Abstentions: 1,352,394
Broker non-votes: 58,471,010
</TABLE>
- To amend our 1998 employee stock purchase plan, if the Medical Manager
and CareInsite merger were completed, to increase the number of shares of
common stock reserved for issuance under the
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<PAGE> 40
plan by 1,000,000 shares and to change the formula for annually
increasing the number of shares available to be issued under the plan
<TABLE>
<S> <C>
Votes for: 141,235,410
Votes against: 3,201,640
Abstentions: 2,353,997
Broker non-votes: 58,471,010
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits listed in the accompanying Exhibit Index on page 42 are filed
as part of this quarterly report.
(b) The following reports on Form 8-K were filed during the quarter ended
September 30, 2000:
- Report on Form 8-K filed on July 24, 2000, which the Registrant filed
when its name was "Healtheon/WebMD Corporation," pursuant to which the
Registrant filed copies of amendments to its merger agreements with
Medical Manager and CareInsite
- Report on Form 8-K filed on July 27, 2000, which the Registrant filed
when its name was "Healtheon/WebMD Corporation," pursuant to which the
Registrant filed certain historical financial statements in connection
with its acquisitions of Envoy, Medical Manager, CareInsite and
OnHealth
- Report on Form 8-K/A filed on August 9, 2000, which the Registrant
filed when its name was "Healtheon/WebMD Corporation," pursuant to
which the Registrant indicated where financial statements required to
be filed following completion of its acquisition of Envoy are filed
- Report on 8-K filed on August 16, 2000, which the Registrant filed
when its name was "Healtheon/WebMD Corporation," pursuant to which the
Registrant filed its earnings release for the quarter ended June 30,
2000
- Report on 8-K filed on August 18, 2000, which the Registrant filed
when its name was "Healtheon/WebMD Corporation," pursuant to which the
Registrant announced the termination by the Department of Justice of
the Hart-Scott-Rodino pre-merger waiting period in connection with the
Registrant's proposed acquisitions of Medical Manager and CareInsite
- Report on Form 8-K filed on September 13, 2000, which the Registrant
filed under its current name "WebMD Corporation," pursuant to which
the Registrant announced completion of its acquisitions of Medical
Manager, CareInsite and OnHealth and attached as exhibits the Tenth
Amended and Restated Certificate of Incorporation of the Registrant,
as amended, including Certificate of Designations of the Series A
Payment-in-Kind Preferred Stock of the Registrant and Certificate of
Designations of the Series B Convertible Redeemable Preferred Stock of
the Registrant, and the Amended and Restated Bylaws of the Registrant
- Report on Form 8-K filed on September 28, 2000, which the Registrant
filed under its current name "WebMD Corporation," pursuant to which
the Registrant announced the approval of an integration plan by its
board of directors
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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.
WEBMD CORPORATION
By: /s/ ANTHONY VUOLO
------------------------------------
Anthony Vuolo
Executive Vice President and Chief
Financial Officer
Date: November 14, 2000
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C> <C>
10.1 -- Employment Agreement dated September 8, 2000 between
Registrant and John L. Westermann III
10.2 -- Letter Agreement dated September 12, 2000 between Registrant
and W. Michael Long
10.3 -- Series B Preferred Stock Purchase Warrant, dated as of July
11, 1997, between the Registrant and W. Michael Long
(incorporated by reference to Registrant's Registration
Statement on Form S-8 (No. 333-47250))
10.4 -- 2000 Long-Term Incentive Plan (incorporated by reference to
Exhibit 10.1 to Registrant's Registration Statement on Form
S-4 (No. 333-39592))
10.5 -- WebMD Corporation Amended and Restated 1998 Employee Stock
Purchase Plan (incorporated by reference to Registrant's
Registration Statement on Form S-8 (No. 333-47250))
27.1 -- Financial data schedule (EDGAR only)
</TABLE>
42
