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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 MARCH 31, 2001
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 0-24975
WEBMD CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-3236644
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
669 RIVER DRIVE, CENTER 2
ELMWOOD PARK, NEW JERSEY 07407-1361
(Address of principal executive offices)
(201) 703-3400
(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 April 9, 2001, there were 357,047,843 shares of the
Registrant's Common Stock outstanding.
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WEBMD CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2001
TABLE OF CONTENTS
PAGE
NUMBER
------
Cautionary Statement Regarding Forward-Looking Statements................. 3
Part I Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 2001
(unaudited) and
December 31, 2000........................................... 4
Unaudited Condensed Consolidated Statements of Operations
for the three months
ended March 31, 2001 and 2000............................... 5
Unaudited Condensed Consolidated Statements of Cash Flows
for the three months
ended March 31, 2001 and 2000............................... 6
Notes to Condensed Consolidated Financial Statements........ 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of
Operations.................................................. 14
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 33
Part II Other Information
Item 1. Legal Proceedings........................................... 34
Item 2. Changes in Securities and Use of Proceeds................... 34
Item 6. Exhibits and Reports on Form 8-K............................ 34
Signatures................................................................ 35
Exhibits.................................................................. E-1
2
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 18, 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 restructuring and integration efforts 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 new services or newly integrated services
- the inability to successfully deploy new applications or newly
integrated applications
- the inability to attract and retain qualified personnel
- outcome of pending litigation and claims
- 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 18 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
expressly disclaim any intent or obligation to update any forward-looking
statements to reflect subsequent events or circumstances.
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WEBMD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
2001 2000
----------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 559,167 $ 490,797
Short-term marketable securities....................... 81,401 --
Accounts receivable, net............................... 179,149 195,071
Current portion prepaid content, services and
distribution.......................................... 7,345 5,268
Assets held for sale................................... 214,556 214,556
Other current assets................................... 27,124 38,941
----------- -----------
Total current assets.............................. 1,068,742 944,633
Marketable securities....................................... 21,028 219,686
Property and equipment, net................................. 76,276 90,356
Prepaid content, services and distribution.................. 114,378 229,081
Intangible and other assets, net............................ 6,062,374 6,971,875
----------- -----------
$ 7,342,798 $ 8,455,631
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 20,293 $ 19,563
Accrued expenses....................................... 275,723 272,932
Deferred revenue....................................... 48,962 45,891
----------- -----------
Total current liabilities......................... 344,978 338,386
Other long-term liabilities................................. 4,057 15,260
Series B convertible redeemable preferred stock, $0.0001 par
value; 200 shares authorized; 100 shares issued and
outstanding............................................... 10,000 10,000
Stockholders' equity:
Series A convertible preferred stock; $0.0001 par
value; 213,000 shares authorized; 155,951 shares
issued and outstanding at December 31, 2000........... -- 710,746
Common stock, $0.0001 par value; March 31, 2001:
600,000,000 shares authorized; 362,340,511 shares
issued; December 31, 2000: 600,000,000 shares
authorized; 361,233,643 shares issued................. 36 36
Additional paid-in capital............................. 11,627,877 11,028,461
Treasury stock, 5,163,509 shares at cost............... (30,759) (30,759)
Unrealized gain on marketable securities............... 3,554 4,996
Deferred stock compensation............................ (100,558) (144,467)
Accumulated deficit.................................... (4,516,387) (3,477,028)
----------- -----------
Total stockholders' equity........................ 6,983,763 8,091,985
----------- -----------
$ 7,342,798 $ 8,455,631
=========== ===========
See notes to condensed consolidated financial statements.
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WEBMD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA, UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------
2001 2000
----------- ---------
Revenue(1).................................................. $ 184,491 $ 65,881
Costs and expenses:
Cost of operations..................................... 125,344 59,365
Development and engineering............................ 12,372 11,574
Sales, marketing, general and administrative........... 128,558 100,526
Depreciation, amortization and other................... 759,797 338,710
Restructuring and integration charge................... 208,683 --
Interest income, net................................... 10,904 12,829
----------- ---------
Net loss.................................................... $(1,039,359) $(431,465)
=========== =========
Basic and diluted net loss per common share................. $ (2.91) $ (2.47)
=========== =========
Weighted-average shares outstanding used in computing basic
and diluted net loss per common share..................... 356,806 175,041
=========== =========
------------------
(1) Includes revenue from related parties of $3,000 and $12,777 for the three
months ended March 31, 2001 and 2000, respectively.
See notes to condensed consolidated financial statements.
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WEBMD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------------
2001 2000
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(1,039,359) $ (431,465)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization of intangible assets..... 759,797 338,710
Amortization of non-cash deferred stock compensation
and other............................................. 30,011 1,158
Amortization of non-cash prepaid content, services and
distribution.......................................... 8,176 18,554
Non-cash portion of restructuring and integration
charge................................................ 185,498 --
Changes in operating assets and liabilities:
Accounts receivable.................................. 12,768 (12,294)
Prepaid content, services and distribution........... (12,592) 16,061
Other assets......................................... (5,229) (28,163)
Accounts payable..................................... 7 (22,575)
Accrued expenses..................................... 10,203 (1,037)
Deferred revenue..................................... 3,071 --
----------- ----------
Net cash used in operating activities............. (47,649) (121,051)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Redemptions of marketable securities........................ 119,000 --
Purchases of marketable securities.......................... -- (42,500)
Purchases of property and equipment......................... (5,840) (5,666)
Cash received in business combinations...................... -- 1,662
----------- ----------
Net cash provided by (used in) investing
activities...................................... 113,160 (46,504)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of repurchase
and issuance costs........................................ 2,859 1,036,951
----------- ----------
Net cash provided by financing activities......... 2,859 1,036,951
----------- ----------
Net increase in cash and cash equivalents................... 68,370 869,396
Cash and cash equivalents at beginning of period............ 490,797 291,286
----------- ----------
Cash and cash equivalents at end of period.................. $ 559,167 $1,160,682
=========== ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Issuance of common stock for asset purchases................ $ -- $ 372,737
=========== ==========
Issuance of preferred stock for asset purchases............. $ -- $ 629,000
=========== ==========
See notes to condensed consolidated financial statements.
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WEBMD CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
WebMD Corporation (the "Company") was incorporated in December 1995 and
commenced operations in January 1996, as Healtheon Corporation. In May 1998, the
Company merged with ActaMed Corporation ("ActaMed") in a transaction accounted
for as a pooling of interests. In November 1999, the Company completed the
acquisitions of WebMD, Inc., MedE America Corporation ("MedE America") and
Greenberg News Networks, Inc. ("Medcast") and changed its name from Healtheon
Corporation to Healtheon/WebMD Corporation. In January 2000, the Company
completed its acquisition of Kinetra LLC ("Kinetra"). In May 2000, the Company
completed its acquisition of Envoy Corporation ("Envoy"). In September 2000, the
Company completed its acquisitions of Medical Manager Corporation ("Medical
Manager"), CareInsite, Inc. ("CareInsite") and OnHealth Network Company
("OnHealth") and changed its name from Healtheon/WebMD Corporation to WebMD
Corporation. All financial information has been presented to reflect the
combined operations of the Company and ActaMed for all years presented and the
WebMD, Inc., MedE America, Medcast, Envoy, Medical Manager, CareInsite and
OnHealth acquisitions for the period subsequent to each respective acquisition
date.
BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements have been
prepared by 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 months ended March 31, 2001
are not necessarily indicative of the results to be expected for any subsequent
period or for the entire year ending December 31, 2001. 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.
These unaudited condensed consolidated financial statements and notes
included herein should be read in conjunction with the Company's audited
consolidated financial statements and notes for the year ended December 31,
2000, which were included in our annual report on Form 10-K filed with the
Securities and Exchange Commission.
REVENUE RECOGNITION
The Company provides a range of transaction and information services and
technology solutions for participants across the entire continuum of healthcare,
including physicians and other healthcare providers, payers, patients and
suppliers. The revenue associated with these solutions provided by the Company
are aggregated into four primary product groupings as follows:
THREE MONTHS ENDED
MARCH 31,
------------------
2001 2000
-------- -------
Transaction services........................................ $ 97,518 $31,521
Physician services.......................................... 65,098 6,782
Portal services............................................. 19,911 21,419
Other....................................................... 1,964 6,159
-------- -------
$184,491 $65,881
======== =======
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WEBMD CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue recognized from arrangements deemed to be non-monetary exchanges of
our products and services for customer products and services totaled
approximately $6,916 during the three months ended March 31, 2001, and $3,080
during the three months ended March 31, 2000. Revenue from these exchanges is
recorded at the fair value of the products and services provided or received,
whichever is more clearly evident.
Revenue from related parties consist of revenues for services provided to
News Corporation for the three months ended March 31, 2001 and revenue for
services provided to News Corporation, Microsoft and UnitedHealth Group for the
three months ended March 31, 2000. Revenue from UnitedHealth Group ceased being
considered from a related party in January 2000 when the Chairman and Chief
Executive Officer of UnitedHealth Group resigned from our board of directors.
Revenue from News Corporation ceased being considered from a related party as of
February 15, 2001 when News Corporation surrendered the Company's Series A
convertible preferred stock.
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 RELATIONSHIPS
NEWS CORPORATION
Pursuant to an agreement signed and publicly announced in December 1999 and
closed in January 2000, the Company entered into a strategic relationship with
News Corporation. On December 29, 2000, this strategic alliance was revised by
the parties. On February 15, 2001, the Company completed all transactions
related to its revised strategic relationship with News Corporation. The
original relationship and the revised relationship are each described below.
Original strategic relationship
The financial terms of the strategic relationship included $700,000 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 the Company of 50% interests in The Health Network, a
health-focused cable network, and thehealthnetwork.com. The Company issued an
aggregate of 155,951 shares of Series A preferred stock, convertible into
21,282,645 shares of the Company's common stock. In addition, affiliates of News
Corporation purchased 2,000,000 shares of the Company's common stock for an
aggregate purchase price of $100,000 in cash.
New strategic relationship
The Company retained the right to receive $205,000 in domestic media
services from News Corporation over ten years and will continue to provide
content for use across News Corporation's media properties for the next four
years. News Corporation transferred its 50% interest in the international joint
venture to the Company and was relieved of its commitment to provide any future
capital to the international joint venture and its commitment to provide any
international media services. The Company transferred its interest in The Health
Network to News Corporation. The Company was also relieved of all future capital
commitments to The Health Network. In connection with the revisions to the
relationship, News Corporation surrendered 155,951 shares of WebMD's Series A
Convertible Preferred Stock. The Company granted to News Corporation a warrant
to acquire 3,000,000 shares of its common stock at an exercise price of $15 per
share.
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9
WEBMD CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MICROSOFT
The Company originally entered into a strategic relationship with Microsoft
in May 1999. On March 22, 2001, the Company and Microsoft executed a non-binding
letter of intent with respect to a new relationship. In April 2001, the Company
and Microsoft entered into definitive agreements to implement the new
relationship, which is effective as of January 1, 2001. The original
relationship and the new relationship are each described below.
Original strategic relationship
Under the terms of the original strategic relationship, the Company has
been developing, hosting and maintaining on its servers a health channel for MSN
and was required to pay Microsoft an aggregate of $162,000 in carriage fees for
the distribution of that content. In addition, Microsoft and the Company each
committed co-marketing funds of $50,000 over the first two years of the term.
Microsoft was required to remit to the Company 100% of the net revenue over
the term of the agreement from banner and other advertising and e-commerce
transactions generated on the health channel or advertising that Microsoft
placed on WebMD.com each year during the term until the Company received an
amount equal to that year's carriage fees, including guaranteed minimum amounts
of $22,500 in each of the first two years of the term, and was required to share
revenue equally after that. The Company was required to pay Microsoft a 25%
commission on the portion of the revenue received up to the annual guaranteed
minimum amounts for all advertisements placed by Microsoft. The Company
recognized this advertising revenue when Microsoft notified the Company that
advertisements had been placed on the health channel and billed by Microsoft,
not based on the guaranteed minimum amounts.
Microsoft agreed to sponsor up to 5.0 million subscriber months to the
Company's physician Web site for $29.95 per month over the term of the
agreement. The Company was required to pay a $5 per month commission on all
subscriptions placed by Microsoft.
The Company was required to share with Microsoft 50% of net revenue from
banner and other advertising on its physician Web site generated by sponsored
subscriptions until Microsoft received the amount it had incurred for its
sponsored subscriptions. Thereafter, the Company was required to share 25% of
this revenue with Microsoft. In addition, the Company was required to share with
Microsoft 15% of its net revenue from e-commerce transactions and additional
services not included in the basic subscription to the Company's physician Web
site generated by these sponsored subscriptions.
New strategic relationship
To implement the new relationship, the Company and Microsoft entered into
two definitive agreements. Under the first agreement: (i) the Company has agreed
to adopt the PocketPC, Windows 2000 and SQL Server 2000 as the development
platform for ULTIA, the Company's new handheld solution for physicians, which
operates on a wireless LAN and integrates with the physician's practice
management system; (ii) the Company has agreed to make Intergy, its new
physician practice management system, available to run on Windows 2000 and SQL
Server 2000; (iii) Microsoft has agreed to provide performance-based funding
tied to the roll-outs of ULTIA and Intergy; (iv) the Company has agreed to
continue to transition the WebMD.com portal to Windows 2000 and SQL Server 2000
when the Company makes additional investments in its portal; and (v) Microsoft
has agreed to provide consulting services, support and other resources in
connection with these undertakings. The amount of the performance-based funding
to be received by the Company pursuant to the Agreement will be determined based
on the number of physicians to whom Microsoft software is deployed in connection
with deployments of ULTIA and Intergy. The Company will be obligated to pay
agreed upon fees to Microsoft to license such software from Microsoft. The term
of this agreement is scheduled to expire
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WEBMD CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
on December 31, 2004. This agreement is subject to termination by either party
beginning May 18, 2001 in the event that the parties have not reached agreement
on terms for an Application Services Agreement (ASP Agreement) and related
documents to govern deployments by the Company of Microsoft software on an ASP
basis. This agreement is also subject to mutual agreement on certain
technology-related requirements.
Under the second agreement, the Company will program the majority of the
MSN health channel, and the Company and MSN will share revenues derived from
advertising, sponsorship and e-commerce on the MSN health channel site, with the
Company receiving 100% of revenues up to an agreed upon annual threshold (or
until an agreed upon maximum for the contract period is reached) and 60%
thereafter. The Company will no longer pay carriage fees to Microsoft. The term
of this agreement is scheduled to expire on June 30, 2004.
As a result of the execution of these agreements, Microsoft is no longer
responsible for funding the sponsorship of subscriptions to the Company's
physician portal, and WebMD is no longer required to share with Microsoft
revenue generated by physician usage of the Company's healthcare portals.
Additionally, the Company will no longer be required to pay Microsoft carriage
fees for the distribution of content.
KINETRA
On January 31, 2000, the Company completed its acquisition of Kinetra, a
provider of health information networks and e-commerce services. The total
purchase consideration was approximately $291,538, comprised primarily of common
stock. The acquisition was accounted for using the purchase method of
accounting.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information gives effect to the
acquisitions of Kinetra, 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.
THREE MONTHS
ENDED
MARCH 31, 2000
--------------
Total revenue............................................... $ 183,636
=========
Net loss.................................................... $(895,586)
=========
Basic and diluted net loss per share........................ $ (2.55)
=========
3. RESTRUCTURING AND INTEGRATION CHARGE
In the third quarter of 2000, the Company's board of directors approved a
restructuring and integration plan, with the objective of eliminating
duplication and redundancies as a result of the acquisitions made by the Company
since November 1999 and consolidating the Company's operational infrastructure
into a common platform to more efficiently serve its customers.
Additionally, as part of the Company's restructuring and integration
efforts, the Company also undertook a review of its existing strategic
relationships in light of several criteria, including strategic relevance to
both the Company and its partners, potential conflicts with other agreements as
a result of the numerous acquisitions made by the Company, profitability and
impact on future revenue streams. As a result of this process, the Company has
been and is in discussions with several of its partners in an effort to redefine
the relationships in a manner that better serves the needs of each party. These
discussions have resulted in
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11
WEBMD CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
revisions to some strategic relationships. It is possible that, as a result of
continuing discussions, additional relationships may be revised or terminated,
which may result in additional restructuring charges. During calendar year 2000,
the Company's restructuring and integration efforts resulted in the
identification and notification of approximately 1,100 employees whose positions
with the Company were to be terminated primarily as a result of eliminating
duplicate functions within the combined company, the identification of duplicate
facilities to be vacated and the restructuring of several strategic
relationships including those with News Corporation and DuPont.
The Company's restructuring and integration efforts continued during the
three months ended March 31, 2001. In connection with these efforts, a charge
was recorded in the quarter ended March 31, 2001 of $208,683, which consists of:
(i) $138,039 relating to the restructuring of our strategic relationships
primarily associated with Microsoft, of which $133,500 represented non-cash
charges related to the write-off of intangible assets associated with the
Company's original Microsoft agreement recorded as part of the Company's
acquisition of WebMD, Inc. in 1999, (ii) personnel-related costs of $63,463, of
which $51,998 represented non-cash stock option compensation charges primarily
related to the resignation of certain employees pursuant to the applicable
employment and separation arrangements, with the remaining personnel-related
charge relating to severance and outplacement services for approximately 350
additional employees that the company identified and notified of termination
during the three months ended March 31, 2001, (iii) facilities charges of
$1,985, comprised of future lease obligations and lease cancellation penalties
related to vacating additional facilities identified during the quarter ended
March 31, 2001, (iv) $5,196 of integration costs, consisting of employee
retention arrangements related to exit activities.
Integration costs are recorded as expense in the period in which they
arise.
The following table presents cash activity in the restructuring and
integration related accrual through the quarter ended March 31, 2001:
SEVERANCE FACILITIES OTHER TOTAL
--------- ---------- ------- --------
Balance at December 31, 2000..................... $ 8,599 $35,843 $ 8,683 $ 53,125
Accruals......................................... 11,465 1,985 9,736 23,186
Cash payments.................................... (6,467) (1,273) (4,982) (12,722)
------- ------- ------- --------
Balance at March 31, 2001........................ $13,597 $36,555 $13,437 $ 63,589
======= ======= ======= ========
4. STOCKHOLDERS' EQUITY
On March 29, 2001, the Company announced a stock buy-back program. Under
the program, the Company may use up to $50,000 to purchase shares of its common
stock from time to time beginning on April 2, 2001, subject to market
conditions.
5. ASSETS HELD FOR SALE
In connection with the acquisition of Medical Manager and the related
integration and consolidation of the Company's acquired businesses, its board of
directors approved management's plan to dispose of Porex Corporation and its
other plastics and filtration technologies subsidiaries, referred to
collectively as Porex. Porex Corporation was a wholly owned subsidiary of
Medical Manager prior to the completion of the 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. The disposition is expected to be completed in 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 other current assets. Any difference between the actual
and expected net proceeds will result in an adjustment of goodwill unless there
is a difference caused by a post-acquisition event.
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12
WEBMD CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Activity in net assets held for sale from the acquisition date to March 31,
2001 is as follows:
Allocation of purchase price................................ $204,356
Estimated net income through disposition.................... 10,200
--------
Balance at March 31, 2001................................... $214,556
========
Porex had net income of $2,613 for the quarter ended March 31, 2001 and net
income of $5,369 from the acquisition date to March 31, 2001. Porex's results of
operations and cash flows have been excluded from the consolidated statement of
operations for the quarter ended March 31, 2001.
6. MARKETABLE SECURITIES
All highly liquid marketable securities with an original maturity from date
of purchase of three months or less are considered to be cash equivalents.
Management determines the appropriate classification of its investments in debt
securities at the time of purchase and re-evaluates such determinations at each
balance sheet date. Debt securities are classified as held-to-maturity when the
Company has the positive intent and ability to hold the securities to maturity.
Debt securities that the Company does not have the intent or ability to hold to
maturity are classified as available-for-sale. Available-for-sale securities are
carried at fair value as of the balance sheet date. At March 31, 2001, the
Company's investments consisted principally of U.S. Treasury Notes and Federal
Agency Notes. These investments, which had an aggregate market value of $108,405
and a cost of $104,851, were classified as available-for-sale. Unrealized gains
on these securities were $3,554 at March 31, 2001.
7. NET LOSS PER COMMON SHARE
Basic net loss per common share and diluted net loss per common share are
presented in conformity with Statement of Financial Accounting 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.
The Company has excluded all convertible redeemable preferred stock,
convertible preferred stock, warrants, outstanding stock options and shares
subject to repurchase by the Company from the calculation of diluted loss per
common share because all such securities are anti-dilutive for the periods
presented. The total number of shares excluded from the calculation of diluted
net loss per share was 162,420,000 shares at March 31, 2001 and 81,500,000
shares at March 31, 2000. These shares do not give effect to securities with
exercise prices in excess of market and the number of shares which could be
repurchased with the proceeds received from the exercise of such securities.
8. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." The
Company is required to adopt SFAS No. 133 for the year ending December 31, 2001.
SFAS No. 133 establishes methods of accounting for derivative financial
instruments and hedging activities related to those instruments as well as other
hedging activities. Derivatives that are not designated as part of a hedging
relationship must be adjusted to fair value through income. If the derivative is
a hedge, depending on the nature of the hedge, the effective portion of the
hedge's change in fair value is either offset against the change in fair value
of the hedged asset, liability or firm commitment through income or held in
equity until the hedged item is recognized in income. The ineffective portion of
a hedge's change in fair value is immediately recognized in income.
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WEBMD CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company adopted SFAS No. 133 effective January 1, 2001. The impact of
adopting SFAS No. 133 was not significant.
9. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company and its subsidiaries are
involved in various claims and legal proceedings. While the ultimate resolution
of these matters, including those discussed in our 2000 annual report on Form
10-K under the heading "Legal Proceedings," has yet to be determined, the
Company does not believe that their outcome will have a material adverse effect
on our financial position.
10. SUBSEQUENT EVENTS
On May 8, 2001, the Company entered into an agreement, dated as of May 9,
2001, for a strategic alliance with America Online, Inc. ("AOL"). The term of
the agreement is three years. Under the agreement, the Company will be the
primary provider of healthcare content, tools and services for use on AOL
properties that include AOL, AOL.com, CompuServe and Netscape.com. In addition,
the Company will create a co-branded personalized health service for AOL that
will feature the Company's personalized news, health assessment and monitoring
tools, communities and newsletters, integrated with AOL's calendaring and
reminders. The Company and AOL intend, through the co-branded services, to
provide users with the ability to communicate with their health plans,
physicians, pharmacies and other providers. The Company and AOL will share
revenue from advertising (whether or not related to healthcare), commerce and
programming on the health channels of the AOL properties and on the co-branded
service, with the Company receiving 80% of revenues up to an agreed upon annual
threshold and 60% thereafter. The Company will not make any cash payments for
carriage fees to AOL. In connection with the strategic alliance, WebMD issued to
AOL a warrant to purchase 2,408,908 shares of WebMD common stock at an exercise
price of $9.25 per share.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
WebMD Corporation is a Delaware corporation that was incorporated in
December 1995 and commenced operations in January 1996 as Healtheon Corporation.
Our common stock has traded on the Nasdaq National Market under the symbol
"HLTH" since February 11, 1999. In November 1999, Healtheon completed mergers
with WebMD, Inc., MedE America and Medcast. Following these mergers, Healtheon
changed its name to Healtheon/WebMD Corporation. Healtheon/WebMD completed
acquisitions of Kinetra and Envoy in January 2000 and May 2000, respectively. On
September 12, 2000, Healtheon/WebMD completed mergers with Medical Manager,
CareInsite and OnHealth and changed its name to WebMD Corporation.
As a result of the completion of these transactions, our core business
encompasses the following products and services:
- Transaction services. We offer value-added solutions designed to
increase productivity for both providers and payers, to speed healthcare
reimbursements and to improve communications among healthcare
participants. From simple point-of-service devices to fully integrated
transaction processing applications and Internet solutions, we offer a
full suite of products and services to automate key business and
clinical functions.
- Physician services. We develop and market integrated physician practice
management systems, including administrative, financial and clinical
applications, under The Medical Manager(R) brand.
- Portal services. We offer a variety of services for advertisers,
sponsors, consumers, physicians and physician office managers through
our online distribution channels and the online and offline distribution
channels of our strategic partners.
In the third quarter of 2000, our board of directors approved a
restructuring and integration plan, with the objective of eliminating
duplication and redundancies as a result of all the acquisitions made by us
since November 1999 and consolidating our operational infrastructure into a
common platform to more efficiently serve our customers.
As part of our restructuring and integration efforts, we also undertook a
review of our existing strategic relationships in light of several criteria,
including strategic relevance to both us and our partners, potential conflicts
with other agreements as a result of the numerous acquisitions made by us,
profitability and impact on future revenue streams. As a result of this process,
we have been and are in discussions with several of our partners in an effort to
redefine the relationships in a manner that better serves the needs of each
party. These discussions have resulted in revisions to some strategic
relationships. It is possible that, as a result of continuing discussions,
additional relationships may be revised or terminated, which may result in
additional restructuring charges.
In connection with our restructuring and integration efforts, we recorded
restructuring and integration charges of $208.7 million, of which $185.5 million
were non-cash charges, in the quarter ended March 31, 2001. As we continue our
consolidation and integration efforts, we are likely to incur additional costs
relating to asset impairments and write-offs, severance, employee retention
arrangements related to exit activities, moving and relocations that will be
expensed according to the applicable accounting guidelines. We expect our
restructuring and integration efforts will continue during 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 merger with
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. We expect to
complete the disposition later this year. Accordingly, our consolidated
statements of operation and consolidated statement of cash flows exclude the
results of Porex.
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RESULTS OF OPERATIONS
The following discussion includes a comparison of the March 31, 2001
results of operations to the March 31, 2000 results on both an actual and pro
forma basis. The pro forma information gives effect to the acquisitions of
Kinetra, Envoy, Medical Manager, CareInsite and OnHealth, including the
amortization of goodwill and other intangible assets, as if they had occurred at
the beginning of the 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.
Revenue. Total revenues were $184.5 million for the three months ended
March 31, 2001 compared to $65.9 million for the three months ended March 31,
2000. Transaction service, physician service, portal service and other revenues
were 53%, 35%, 11%, and 1%, respectively, of total revenues for the three months
ended March 31, 2001 compared to 48%, 10%, 33%, and 9%, respectively, of total
revenues for the three months ended March 31, 2000. Transaction service revenues
were $97.5 million for the three months ended March 31, 2001 compared to $31.5
million for the three months ended March 31, 2000. The increase in transaction
service revenues was primarily attributable to the acquisition of Kinetra in
January 2000, the acquisition of ENVOY in May 2000 and the acquisition of
CareInsite in September 2000. Physician service revenues were $65.1 million for
the three months ended March 31, 2001 compared to $6.8 million for the three
months ended March 31, 2000. The increase in physician service revenue was
primarily attributable to the acquisition of Medical Manager in September 2000
offset in part by the elimination of revenues related to the sponsorship of
physician subscriptions to the Company's physician portal as a result of the
termination the agreement with DuPont in December 2000 and the new arrangement
with Microsoft which was effective as of January 1, 2001. Portal service
revenues were $19.9 million for the three months ended March 31, 2001 compared
to $21.4 million for the three months ended March 31, 2000. The decrease in
portal service revenues was primarily attributable to the termination of the
agreement with DuPont in December 2000, the new arrangement with News
Corporation agreed to in December 2000 and the impact of the softness in the
market for internet advertising on us and certain of our carriage partners.
Other revenues were $2.0 million for the three months ended March 31, 2001
compared to $6.2 million for the three months ended March 31, 2000. The decrease
in other revenues is primarily attributable to our decision during calendar year
2000 to exit our information technology consulting and outsourcing
relationships.
Total revenues were $184.5 million for the three months ended March 31,
2001, compared to $183.6 million on a pro forma basis for the three months ended
March 31, 2000. Transaction service, physician service, portal service and other
revenues were 53%, 35%, 11%, and 1%, respectively, of total revenues for the
three months ended March 31, 2001 compared to 49%, 34%, 13% and 4%,
respectively, of total revenues on a pro forma basis for the three months ended
March 31, 2000. Transaction service revenues increased $7.5 million for the
three months ended March 31, 2001 compared to $90.0 million on a pro forma basis
for the three months ended March 31, 2000. The increase in transaction service
revenues was primarily attributable to an increase in the volume of electronic
transactions processed. Physician service revenues increased $2.8 million for
the three months ended March 31, 2001 compared to $62.3 million on a pro forma
basis for the three months ended March 31, 2000. The increase in physician
service revenue was primarily attributable to higher sales of practice
management systems offset in part by the elimination of revenues related to the
sponsorship of physician subscriptions to the Company's physician portal as a
result of the termination the agreement with DuPont in December 2000 and the new
arrangement with Microsoft which was effective as of January 1, 2001. Portal
service revenues decreased $3.5 million for the three months ended March 31,
2001 compared to $23.4 million on a pro forma basis for the three months ended
March 31, 2000. The decrease in portal service revenues was primarily
attributable to the termination of the agreement with DuPont in December 2000,
the new arrangement with News Corporation agreed to in December 2000 and the
impact of the softness in the market for internet advertising on us and certain
of our carriage partners. Other revenues decreased $5.9 million for the three
months ended March 31, 2001 compared to $7.9 million on a pro forma basis for
the three months ended March 31, 2000. The decrease in other revenues is
primarily attributable to
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our decision during calendar year 2000 to exit our information technology
consulting and outsourcing relationships.
Revenue from related parties consist of revenues for services to News
Corporation and Microsoft for the three months ended March 31, 2001 and revenue
for services provided to News Corporation, Microsoft and UnitedHealth Group for
the three months ended March 31, 2000. Revenue from related parties was $3
million for the three months ended March 31, 2001 compared to $12.8 million for
the three months ended March 31, 2000. The decrease was primarily attributable
to the new arrangement with Microsoft, which was effective January 1, 2001.
Revenue from UnitedHealth Group ceased being considered from a related party in
January 2000 when the Chairman and Chief Executive Officer of UnitedHealth Group
resigned from our board of directors. Revenue from News Corporation ceased being
considered from a related party as of February 15, 2001 when News Corporation
surrendered the Company's Series A convertible preferred stock.
Cost of Operations. Cost of operations primarily consists of the expenses
associated with maintaining our networks and providing products and services.
Cost of operations was $125.3 million for the three months ended March 31, 2001
compared to $59.4 million for the three months ended March 31, 2000. The
increase is primarily attributable to the cost of operations associated with the
companies acquired during calendar year 2000. Cost of operations represented
67.9% of revenues for the three months ended March 31, 2001 compared to 90.1% of
revenues for the three months ended March 31, 2000. This decrease in cost of
operations as a percentage of total revenues is a result of the impact of the
companies acquired during calendar year 2000.
Cost of operations increased $5.2 million for the three months ended March
31, 2001 compared to $120.1 million on pro forma basis for the three months
ended March 31, 2000. Cost of operations represented 67.9% of revenues for the
three months ended March 31, 2001 compared to 65.4% of revenues on a pro forma
basis for the three months ended March 31, 2000. This increase in cost of
operations as a percentage of revenues is primarily due to changes in the mix of
product revenues.
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. Development and engineering expense
increased to $12.4 million for the three months ended compared to $11.6 million
for the three months ended March 31, 2000. This increase is primarily due to the
costs associated with the companies acquired in calendar year 2000, offset in
part by the impact of cost reductions resulting from our restructuring and
integration efforts.
Development and engineering expense decreased $12.3 million for the three
months ended March 31, 2001 compared to $24.7 million on a pro forma basis for
the three months ended March 31, 2000. This decrease is a result of the
elimination of costs as a result of our restructuring and integration efforts
relating to the companies acquired during calendar year 2000.
Sales, marketing, general and administrative. Sales, marketing, general
and administrative expense consists primarily of advertising, product and brand
promotion, salaries and related expenses for sales, administrative, finance,
legal, human resources and executive personnel. Sales, marketing, general and
administrative expense was $128.6 million for the three months ended March 31,
2001 compared to $100.5 million for the three months ended March 31, 2000. This
increase is primarily attributed to the companies acquired in calendar year 2000
offset in part by the elimination of costs as a result of our restructuring and
integration efforts. Included in sales, marketing, general and administrative
costs are amortization of non-cash prepaid content, services and distribution
expenses of $8.2 million and $18.6 million for the three months ended March 31,
2001 and March 31, 2000, respectively. Also included is amortization of non-cash
deferred stock compensation expense of $30.1 million and $1.2 million for the
three months ended March 31, 2001 and March 31, 2000, respectively.
Sales, marketing, general and administrative expense decreased $54.3
million for the three months ended March 31, 2001 compared to $182.9 million on
a pro forma basis for the three months ended March 31, 2000. This decrease is
primarily a result of the elimination of costs as a result of our restructuring
and integration efforts relating to the companies acquired during calendar year
2000.
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Depreciation, amortization and other. Depreciation, amortization and other
expense was $759.8 million for the three months ended March 31, 2001 compared to
$338.7 million for the three months ended March 31, 2000. The increase was
primarily attributable to the amortization of intangible assets related to the
companies acquired during calendar year 2000, which are being amortized over
expected lives of one to five years.
Restructuring and integration charge. In September 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. During calendar year 2000, the Company's
restructuring and integration efforts resulted in the identification and
notification of approximately 1,100 employees whose positions with the Company
were to be terminated primarily as a result of eliminating duplicate functions
within the combined company, the identification of duplicate facilities to be
vacated and the restructuring of several strategic relationships including those
with News Corporation and DuPont.
During the three months ended March 31, 2001, the Company's restructuring
and integration efforts continued. In connection with these efforts, a charge
was recorded in the quarter ended March 31, 2001 of $208.7 million, which
consists of:
- $138.0 million relating to the restructuring of strategic relationships
primarily associated with Microsoft, of which $133.5 million represented
non-cash charges related to the write-off of intangible assets
associated with the Company's original Microsoft agreement recorded as
part of the Company's acquisition of WebMD, Inc. in 1999,
- personnel-related costs of $63.5 million, of which $52.0 million
represented non-cash stock option compensation charges primarily related
to the resignation of certain employees pursuant to the applicable
employment and separation arrangements, with the remaining
personnel-related charge relating to severance and outplacement services
for approximately 350 additional employees that the company identified
and notified of termination during the three months ended March 31,
2001,
- facilities charges of $2.0 million, comprised of future lease
obligations and lease cancellation penalties related to vacating
additional facilities identified during the three months ended March 31,
2001,
- $5.2 million of integration costs, consisting of employee retention
arrangements related to exit activities, moving and relocation expenses,
as well as outside professional fees related to the integration of our
business.
We expect that our restructuring and integration efforts, including the
consolidation of our operational infrastructure into a common platform, will
result in further cost reductions during 2001.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2001, we had approximately $661.6 million in cash, cash
equivalents and marketable securities, and working capital of $723.8 million.
In September 2000, our board of directors approved a restructuring and
integration plan, with the objective of eliminating duplication and redundancies
as a result of all the acquisitions made by us since November 1999 and
consolidating our operational infrastructure into a common platform to more
efficiently serve our customers. As part of our restructuring and integration
efforts, we also undertook a review of our existing strategic relationships in
light of several criteria, including strategic relevance to both us and our
partners, potential conflicts with other agreements as a result of the numerous
acquisitions made by us, profitability, and impact on future revenue streams. As
a result of this process, we have been and are in discussions with several of
our partners in an effort to redefine the relationships in a manner that better
serves the needs of each party. These discussions have resulted in revisions to
some strategic relationships. It is possible that, as a result of continuing
discussions, additional relationships may be revised or terminated, which may
result in additional restructuring charges.
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,
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manufactures and distributes porous and solid plastic components and products
used in life sciences, healthcare, industrial and consumer applications. The
disposition is expected to be completed in 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 are 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 $47.6 million for the three months
ended March 31, 2001 compared to $121.1 million for the three months ended March
31, 2000. The cash used during these periods was primarily attributable to net
operating losses, offset in part by depreciation and amortization.
Cash provided by investing activities was $113.2 million for the three
months ended March 31, 2001 primarily related to $119.0 million of net proceeds
from the redemption of marketable securities.
Cash provided by financing activities was $2.9 million for the three months
ended March 31, 2001, primarily related to the net proceeds from the exercise of
stock options.
As of March 31, 2001, we did not have any material commitments for capital
expenditures. We had entered into agreements that provided for us to make
aggregate guaranteed payments in the following estimated amounts, net of
sublease income, under operating and capital leases and our strategic
relationships:
YEAR ENDED DECEMBER 31, AMOUNT
----------------------- -------------
2001....................................................... $61.3 million
2002....................................................... 54.0 million
2003....................................................... 23.6 million
2004....................................................... 13.1 million
2005....................................................... 9.3 million
Thereafter................................................. 71.5 million
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
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.
We believe that we will have sufficient cash resources to meet our
presently anticipated working capital and capital expenditure requirements,
including the capital requirements related to the roll-out of our handheld
solution in 2001, for at least the next 12 months. However, we expect to incur
losses before restructuring and integration charges, depreciation, amortization
and other non-cash items, until the end of 2001. Our future liquidity and
capital requirements will depend upon numerous factors, including the success of
the integration of our businesses, our existing and new applications and service
offerings, competing technologies and market developments, potential future
acquisitions and additional repurchases of our common stock. We may need to
raise additional funds to support expansion, develop new or enhanced
applications and services, respond to competitive pressures, acquire
complimentary 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
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
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mergers with Medical Manager, CareInsite and OnHealth in September 2000. In
September 2000, our board of directors approved a restructuring and integration
plan, with the objective of eliminating duplication and redundancies as a result
of the acquisitions made by us since November 1999 and of consolidating our
operational infrastructure. We are in the process of integrating and
consolidating the operations, products and services, technologies and personnel
of these companies. In connection with our restructuring and integration
efforts, we recorded restructuring and integration charges of $452.9 million, of
which $380.0 million were non-cash charges, in the year ended December 31, 2000
and of $208.7 million, of which $185.5 million were non-cash charges, in the
quarter ended March 31, 2001. As we continue our consolidation and integration
efforts, we are likely to incur additional costs relating to asset impairments
and write-offs, severance, stay bonuses, moving and relocations that will be
expensed according to the applicable accounting guidelines. We expect our
restructuring and integration efforts will continue during 2001. For additional
information regarding our restructuring and integration efforts, see
"Restructuring and integration charge" on page 17 and 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 our restructuring and integration
efforts 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
- ability to cross-sell products and services to payers and providers with
which we have established relationships and those with which the
acquired companies have established relationships
- 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 operations.
Integrating any additional acquired organizations and technologies in the
future could also be expensive and time consuming and may strain our resources
and would be subject to the same challenges, risks and uncertainties as our
current integration efforts, as described above.
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 successful strategic relationships. We have entered into strategic
relationships with leading online and media distribution and healthcare
partners. Successful strategic relationships are an important means to increase
the number of transactions processed over our network, generate traffic on our
Web site and capitalize on additional distribution and revenue opportunities. As
previously announced, we have been renegotiating some of the strategic
relationships we currently have in place and some of these relationships have
been modified or terminated. It is possible that additional relationships may be
modified or terminated. We expect that we will face intensified competition for
strategic relationships.
Disputes with strategic partners and customers may be resolved unfavorably
to us and may harm our relationships. Some of our strategic partners have
initiated or threatened to initiate litigation or other dispute resolution
mechanisms regarding alleged breaches of our agreements and other claims.
Similarly, in some cases, we have initiated or threatened to initiate litigation
or other dispute resolution mechanisms when we believed our partner or customer
is in breach of its obligations, if we have been unable to resolve the dispute
through negotiations. We cannot provide assurance that these disputes will be
resolved in our favor or, even if
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resolved in our favor, that we will be able to preserve the benefits we expected
to achieve from our relationships with those partners, which could adversely
affect our financial position and results of operations.
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 have agreed to share
some of our revenue with some of our strategic partners and, in some cases, to
make guaranteed payments to our strategic partners. We may enter into additional
arrangements with current or future strategic partners that require us to share
revenue, make guaranteed payments or incur other significant expenses. We cannot
give assurances that we will generate sufficient revenue from our arrangements
with strategic partners to offset all required payments and expenses. Failure to
do so could have a material adverse effect on our financial condition or results
of operations.
We have invested 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 were made in
conjunction with the parties entering into a strategic agreement. Typically,
these strategic partners entered 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 have
altered their plans to go public, and others that have gone public have
experienced or may experience significant decreases in the trading prices of
their common stock, adversely affecting the value of our investments. Some of
these companies may go out of business before we are able to sell 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 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 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. As a result of conflicts or perceived
conflicts resulting from our acquisitions or our business plans and strategic
initiatives, we may lose relationships with, or be subject to litigation by,
some other customers and strategic partners, who may then establish
relationships with our competitors. For example, InfoCure, a practice management
system vendor whose products compete with The Medical Manager products, has
initiated litigation against us, alleging breach of contract, tortious
interference with business relations and other claims. We are currently in the
process of negotiating new arrangements with Medic, another practice management
system vendor, that would replace prior arrangements and better serve the needs
of each party. However, we cannot provide assurance that these negotiations will
be successful. If these negotiations are not successful, there could be
litigation or other proceedings that arise out of the relationship or its
termination. Some of our other customers and strategic partners have initiated
or threatened to initiate litigation or other dispute resolution mechanisms to
enforce rights they purport to have as a result of conflicts with our other
relationships or with our business plans or strategic initiatives, or their
belief that these conflicts exist. We cannot provide assurance that these
disputes will be resolved in our favor or, even if resolved in our favor, that
we will be able to preserve the benefits we expected to receive from our
relationships with those partners. 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.
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If contractual or relationship conflicts or other issues 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.
Our ability to generate revenue could suffer if we do not offer new
applications and services
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.
We currently offer a limited number of applications on our Internet-based
platform and some of our service offerings, including our handheld solution, are
not fully developed or launched. We must introduce new applications and services
and improve the functionality of our existing services in a timely manner in
order to attract and retain customers.
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
integrating acquired applications and products and services. 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.
New or newly integrated products and services will not become profitable
unless they achieve sufficient levels of physician penetration and market
acceptance
There can be no assurance that physicians will accept new or newly
integrated products and services from us, including the products and services we
are developing to integrate our transaction services and portal services into
their office workflow, such as our handheld solution. Even physicians who are
already our customers may not purchase new or newly integrated products or
services, especially when they are initially offered. Physicians using our
existing products and services may refuse to adopt new or newly integrated
products and services when they have made extensive investments in hardware,
software and training relating to those existing products and services.
Similarly, other healthcare participants may not accept new or newly integrated
products and services from us developed for their use. In addition, there can be
no assurance that any pricing strategy that we implement for any such products
and services will be economically viable or acceptable to the target markets.
Failure to achieve broad penetration in target markets with respect to new or
newly integrated products and services could have a material adverse effect on
our business prospects.
Achieving market acceptance for new or newly integrated products and
services is likely to require substantial marketing efforts and expenditure of
significant funds to create awareness and demand by participants in the
healthcare industry. In addition, deployment of new or newly integrated products
may require the use of additional resources for training our existing sales
force and customer service personnel and for hiring and training additional
salespersons and customer service personnel. There can be no assurance that the
revenue opportunities from new or newly integrated products and services will
justify amounts spent for their development, marketing and roll-out.
Our business model for providing Internet-based services is unproven, and we
may not achieve profits from this business
Our business model for providing Internet-based services is evolving, and
our revenue and profit potential from these services is unproven. We intend to:
- offer provider and payer customers our Internet-based transaction
services, to the extent that is appropriate to their needs
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- integrate these transaction services with our Medical Manager practice
management systems and similar systems provided by others
- build usage of our portal services by consumers, physicians and
physician officer managers
- generate e-commerce revenue from the sale of healthcare products or
services of our strategic partners and other suppliers 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 and there can be
no assurance that our initiatives in this area will be profitable.
We may not be able to generate significant advertising revenue from our portal
services
We derive a portion of our revenue from advertising on our Web site and
other Web sites that license our content. 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. Demand for Internet advertising in general
has, during the first quarter of 2001, been weaker than in recent quarters and
there can be no assurance that such demand will return to the levels seen
previously. 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 and other Web sites that license our
content is likely to be a factor in determining advertising rates.
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 processes 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.
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
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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 EDI
transaction processing, other than real-time EDI transaction processing. This
data center is located in Tampa, Florida and is operated by Verizon Data
Services, with whom we have contracted for these processing services. We rely
primarily on this facility to process batch claims and other batch medical EDI
transaction sets. Our contract with Verizon requires Verizon to maintain
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.
If our systems or the Internet experience security breaches or are otherwise
perceived to be insecure, our business could 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. It is critical that these facilities and
infrastructure remain secure and be perceived by the marketplace as secure. We
may be required to expend significant capital and other resources to protect
against security breaches or to alleviate problems caused by breaches. 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. In addition, any well-publicized
compromise of Internet security, whether or not related to our own operations,
could damage our Internet-based businesses.
Performance problems with the systems of our service and content providers
could disrupt our Web site
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.
Our Internet-based services are dependent on the development and maintenance
of the Internet infrastructure and the adoption of broadband connections by
physician offices
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
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condition could be materially harmed if the Internet is not available to us for
the delivery of our services and products.
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.
Some of our services require a continuous broadband connection between the
physician's office and our data center and/or the Internet. The availability of
broadband connectivity varies widely from location to location and even within a
single geographic area, due to factors such as the distance of a site from the
central switching office. The future availability of broadband connections is
unpredictable and is not within our control. While we expect that many physician
office locations will remain without ready access to broadband connectivity for
some period of time, we cannot predict how long that will be. Accordingly, the
lack of these broadband connections will continue to place limitations on the
number of sites that are able to utilize our Internet-based services and the
revenue we can expect to generate from those services.
Our Internet 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 Internet
transactions over our platforms. Similarly, a limited number of healthcare
participants use these Internet 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.
Our business could be adversely affected if we cannot attract and retain key
personnel
Our future operating results 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.
We face significant competition for our products and services
The markets in which we operate are intensely competitive, continually
evolving and subject to rapid technological change. We have many competitors,
including:
- healthcare information system vendors, including physician practice
management system vendors
- transaction processing companies, including those providing EDI and/or
Internet-based services and those providing services through other
means, such as paper and fax
- large information technology consulting service providers
- online services, portals or Web sites targeted to the healthcare
industry, healthcare consumers and/or physicians generally
- consortiums of health insurance companies and of pharmacy benefit
managers that have announced that they are developing Web-based
transaction services for use by their members and other potential
customers
- publishers and distributors of traditional offline media, including
those targeted to healthcare professionals, many of which have
established or may establish Web sites
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- 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 also compete, in some cases, with alliances formed by the above
competitors, including alliances that are intended to allow the participants to
pursue a strategy similar to our strategy of integrating transaction processing
capabilities and portal services with physician practice management systems.
Major software and information systems companies, both with and without
healthcare companies as their partners, offer or have announced their intention
to offer products or services that are competitive with some of our solutions,
including wireless handheld solutions that will compete with ULTIA, our handheld
solution. In addition, some of our existing payer and provider customers and
some of our strategic partners may also compete with us or plan to do so or
belong to alliances that compete with us or plan to do so. For example, some
payers currently offer electronic data transmission services to healthcare
providers that establish a direct link between the provider and payer, bypassing
third party EDI service providers. 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.
Many of our competitors have greater financial, technical, product
development, marketing and other resources than we do. These organizations may
be better known than we are and have more customers than we do. We cannot
provide assurance that we will be able to compete successfully against these
organizations or any alliances they have formed or may form.
Our business may be subject to litigation
Our business and operations may subject us to claims, litigation and other
proceedings brought by private parties and governmental authorities. For
information regarding certain proceedings to which we are currently a party, see
the information under "Legal Proceedings" in our 2000 annual report on Form
10-K.
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 and agencies periodically consider programs to reform or revise the
U.S. healthcare system. 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 are unable to predict future proposals with any certainty or to
predict the effect they would have on our business.
Existing laws and regulations also could create liability, cause us to
incur additional cost and restrict our operations. Many healthcare laws are
complex, applied broadly and subject to interpretation by courts and other
governmental authorities. In addition, many existing healthcare laws and
regulations, when enacted, did not anticipate the methods of healthcare
e-commence and other products and services that we provide. However, these laws
and regulations may nonetheless be applied to our products and services. Our
failure, or the failure of our business partners, to accurately anticipate the
application of these healthcare laws, or other failure to comply, could create
liability for us, result in adverse publicity and negatively affect our
business.
HIPAA administrative simplification. Under the Health Insurance
Portability and Accountability Act of 1996, or HIPAA, Congress mandated a
package of interlocking administrative simplification rules to establish
standards and requirements for the electronic transmission of certain health
information. Five of these rules were published in proposed form in 1998, with
two of the five recently published in final form. The two rules published in
final form are Standards for Electronic Transactions, published August 17, 2000,
and
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Standards for Privacy of Individually Identifiable Health Information, published
December 28, 2000. These rules took effect on October 16, 2000 and April 14,
2001, respectively, with compliance required by healthcare providers, healthcare
clearinghouses and large health plans two years following the respective
effective dates. Small health plans are given an additional year to comply.
These rules apply to certain of our operations as well as the operations of many
of our customers. Compliance with these final rules will be costly and could
require complex changes in our systems.
HIPAA transaction standards. The HIPAA Standards for Electronic
Transactions rule is commonly referred to as the transaction standards rule.
This rule establishes format standards for eight of the most common healthcare
transactions, using technical standards promulgated by recognized standards
publishing organizations. These transactions include health claims, enrollment,
payment and eligibility. Under the new standards, any party transmitting or
receiving any of these eight health transactions electronically will send and
receive data in a single format, rather than the large number of different data
formats currently used.
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
compliance date. This compliance may require costly modifications to some of our
systems, 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 or our
customers or strategic partners 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.
Other regulation of transaction services. Other state and federal statutes
and regulations governing transmission of healthcare information may affect our
operations. For example, Medicaid rules require some processing services and
eligibility verification to be maintained as separate and distinct operations.
We carefully review our practices with regulatory experts in an effort to ensure
that we are in compliance with all applicable state and federal laws. These
laws, though, are complex and changing, and the courts and other governmental
authorities may take positions that are inconsistent with our practices.
HIPAA privacy standards. The HIPAA Standards for Privacy of Individually
Identifiable Health Information rule is commonly referred to as the privacy
standards rule. This rule establishes a set of basic national privacy standards
and fair information practices for the protection by health plans, healthcare
clearinghouses, healthcare providers and their business associates of
individually identifiable health information. Due to a technical error in the
delivery of the privacy standards rule to Congress, the effective date was
delayed until April 14, 2001, which also extends the compliance date for most
entities to April 14, 2003. Also, on February 28, 2001, the final privacy
standards rule was converted to a final rule with request for comments to permit
public comment for a limited period before the rule becomes effective. This
comment period did not further delay the effective date of the privacy standards
rule. However, U.S. Department of Health and Human Services Secretary Thompson
has stated publicly that his department intends to make or propose further
changes to that rule in the near future. The privacy standards rule applies to
the portions of our business that process healthcare transactions and provide
technical services to other participants in the healthcare industry. This rule
provides for civil and criminal liability for its breach and requires us, our
customers and our partners to use health information in a highly restricted
manner, to establish policies and procedures to safeguard the information, to
obtain individual consents in some cases, and to provide certain access rights
to individuals. This rule may require us to incur significant costs to change
our platform and services, may restrict the manner in which we transmit and use
the information, and may adversely affect our ability to generate revenue from
the provision of de-identified information to third parties. We are unable to
predict what changes to the privacy standards rule will be made in the future or
how those changes could affect our business.
Other regulation regarding confidentiality and privacy of patient
information. Numerous state and federal laws other than HIPAA govern the
collection, dissemination, use, access to and confidentiality of patient health
information. Many states are considering new laws and regulations that further
protect the
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confidentiality of medical records or medical information. These state laws are
not in all cases preempted by the HIPAA privacy standard and may be subject to
interpretation by various courts and other governmental authorities, thus
creating potentially complex compliance issues for us and our customers and
strategic partners. The definitions in the various state and federal laws
concerning what constitutes individually identifiable data sometimes differs and
sometimes is not provided, creating further complexity. In addition, determining
whether data has been sufficiently de-identified may require complex factual and
statistical analyses. The HIPAA privacy standards rule contains a restrictive
definition of de-identified information, which is information that is not
individually identifiable, that could create a new standard of care for the
industry. These other privacy laws at a state or federal level, or new
interpretations of these laws, could create liability for us, could impose
additional operational requirements on our business, could affect the manner in
which we use and transmit patient information and could increase our cost of
doing business. Claims of privacy breaches, even if we are not found liable,
could be expensive and time-consuming to defend and could result in adverse
publicity that could harm our business.
International data regulation. Other countries also have, or are
developing, their own laws governing the collection, use, storage and
dissemination of personal information or patient data. These laws could create
liability for our international operations, impose additional operations
requirements or restrictions on our business, affect the manner in which we use
or transmit data and increase our cost of doing business.
Consumer protection regulation. The Federal Trade Commission, or FTC, and
many state attorneys general are applying federal and state consumer protection
laws to require that the online collection, use and dissemination of data, and
the presentation of Web site content, comply with certain standards for notice,
choice, security and access. Courts may also adopt these developing standards.
In many cases, the specific limitations regarding these standards are subject to
interpretation by courts and other governmental authorities. We believe that we
are in compliance with these consumer protection standards, but a determination
by a state or federal agency or court that any of our practices do not meet
these standards could result in liability and adversely affect our business. New
interpretations of these standards could also require us to incur additional
costs and restrict our business operations.
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 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 or our
relationships with our customers, advertisers or strategic partners. 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 in an effort 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
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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, referred to
herein as the "image device," which was granted clearance by the FDA on August
25, 2000, and is manufactured by Medical Manager Health Systems 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 device and is marketing the interface and the
image device as the DIMDX System. We believe that the addition of our practice
management system to the image device does not change the image device'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 or other of our software or hardware
components could in the future become subject to some or all of the above
requirements. Except with respect to Medical Manager Health Systems and 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.
The FDA also regulates pharmaceuticals, including the regulation of
pharmaceutical advertisements or descriptions posted on a Web site or delivered
electronically to physicians or consumers. Many of our advertisers are
pharmaceutical companies and the content of their ads is subject to FDA scrutiny
and regulation. We have attempted to disclaim responsibility for the content of
these ads and to keep the FDA compliance burden squarely on our advertisers. We
cannot guarantee that the FDA will not hold us also responsible in some way for
this compliance, which could adversely affect or restrict our relationships with
our advertisers.
Medical 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 do
not believe we engage in the practice of medicine and 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 provide Web site capabilities for our physician
customers. Many states regulate the ability of medical professionals to
advertise or maintain referral services. We do not represent that a physician's
use of our Web site will comply with these or other state laws regulating
professional practice and we do not monitor or control the content that
physicians post on their individual practice Web sites using our Web site
application. It is possible a state or a court may determine we are responsible
for any non-compliance with these laws, which could affect our ability to offer
this service to our customers. 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.
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Regulation of the Internet could adversely affect our business
The Internet and its associated technologies are subject to government
regulation. Our failure, or the failure of our business partners, to accurately
anticipate the application of applicable laws and regulations, or any other
failure to comply, could create liability for us, result in adverse publicity,
or negatively affect our business. In addition, new laws and regulations, or new
interpretations of existing laws and regulations, may be adopted with respect to
the Internet or other online services covering user privacy, patient
confidentiality, consumer protection and other issues, including pricing,
content, copyrights and patents, distribution, and characteristics and quality
of products and services. We cannot predict whether laws or regulations will
change or how such changes will affect our business. Government regulation of
the Internet could limit the effectiveness of the Internet for the methods of
healthcare e-commerce that we are providing or developing or even prohibit the
sale of particular products and services.
For more information regarding government regulation of the Internet to
which we are or may be subject, see "-- Healthcare regulation could adversely
affect our business" beginning on page 25.
We face potential liability related to the privacy and security of personal
information we collect on our Web sites
Internet user privacy has become a controversial issue both in the U.S. and
abroad. We have privacy policies posted on our consumer portal and our
professional portal that we believe comply with applicable laws requiring notice
to users about our information collection, use and disclosure practices.
However, whether and how existing privacy and consumer protection laws in
various jurisdictions apply to the Internet still is uncertain and may take
years to resolve. Any legislation or regulation in the area of privacy of
personal information could affect the way we operate our Web sites and could
harm our business. Further, we can give no assurance that the statements on our
portals, or our practices, will be found sufficient to protect us from liability
or adverse publicity in this area.
For more information regarding regulation of the collection, use and
disclosure of personal information to which we may be subject, see
"-- Healthcare regulation could adversely affect our business" beginning on page
25.
Third parties may challenge the enforceability of our online agreements
The law governing the validity and enforceability of online agreements and
other electronic transactions is evolving. We could be subject to claims by
third parties that our online agreements with consumers and physicians that
provide the terms and conditions for use of our portal services and physician
services are unenforceable. A finding by a court that these agreements are
invalid could harm our business and require costly changes to our portals.
Third parties may bring claims as a result of the activities of our strategic
partners
We could be subject to claims by third parties, and to liability, as a
result of the activities, products or services of our strategic partners. We
state on our portals that we do not control or endorse the products or services
of our strategic partners. However, there can be no assurance that the
statements made in our portal will be found to be sufficient to ensure that we
are not held responsible for such activities, products or services. Furthermore,
even if these claims do not result in liability to us, investigating and
defending these claims could be expensive, time-consuming and result in adverse
publicity that could harm our business.
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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, bulletin boards or on Web sites created by
professionals using our Web site application. Even if these claims do not result
in liability to us, investigating and defending against these claims could be
expensive and time consuming and could divert management's attention away from
operating the business.
Our 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.
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 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
business. We cannot guarantee that the disposition of Porex will be successfully
completed in the manner planned, 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.
Until we dispose of our plastics 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, which include:
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
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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.
Healthcare regulation could adversely affect 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 exposes 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.
Since March 1991, Porex has been named as one of many co-defendants in a
number of actions brought by recipients of silicone gel mammary implants. For
more information regarding these actions, see the information under "Legal
Proceedings" in our 2000 annual report on Form 10-K.
Our stock price has been volatile in the past and may continue to be volatile
The market price of our common stock has fluctuated since the date of our
initial public offering and is likely to fluctuate in the future. 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 relationships by us or
our competitors, developments in existing customer or strategic relationships,
actual or perceived changes in our business strategy, developments in pending
litigation and claims, 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, and
fluctuations in the securities markets in general.
In addition, the market prices of Internet and healthcare information
technology stocks in general, and of our common stock in particular, have
experienced large fluctuations, sometimes quite rapidly. These fluctuations
often may be unrelated or disproportionate to the operating performance of these
companies.
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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 from time to time until the second quarter of 2002, as
contractual restrictions on transfer lapse. Additional amounts of our common
stock will also become available for sale, from time to time, as holding periods
under applicable securities regulations are met.
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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
and maintain adequate liquidity, while at the same time maximizing the yield we
receive from our investment portfolio. This objective is accomplished by
adherence to our investment policy, which establishes the list of eligible
securities and credit requirements for each investment.
Changes in prevailing interest rates will cause the principal amount of the
investment to fluctuate. To minimize this risk, we maintain our portfolio of
cash equivalents, short-term investments and marketable securities in commercial
paper, non-government debt securities, money market funds and highly liquid U.S.
Treasury notes and federal agency notes. We view these high grade securities
within our portfolio as having similar market risk characteristics.
Principal amounts expected to mature are $0, $94.8 million, $5.8 million,
$0 and $0 for the remainder of 2001 and 2002, 2003, 2004 and 2005, respectively.
We had investments totaling $5.8 million in federal agency notes that were
callable subjecting us to interest rate risk on the reinvestment of these
securities.
We have not utilized derivative financial instruments in our investment
portfolio.
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 1. LEGAL PROCEEDINGS
Ehlert v. Singer, et al.
This lawsuit was filed against Medical Manager Health Systems, Inc., which
became our subsidiary upon Medical Manager's merger with us in September 2000,
and some of its officers and directors, among other parties, on October 23, 1998
in the United States District Court for the Middle District of Florida. The
lawsuit purports to bring an action on behalf of the plaintiffs and others
similarly situated to recover damages for alleged violations of the federal
securities laws and Florida laws arising out of Medical Manager Health Systems'
issuance of allegedly materially false and misleading statements concerning its
business operations, including the development and sale of its principal
product, during the class period. The lawsuit seeks, among other things,
compensatory damages in favor of the plaintiffs and the other purported class
members and reasonable costs and expenses. An amended complaint was served on
March 2, 1999. Medical Manager Health Systems moved to dismiss the amended
complaint and the court ruled in favor of that motion. Plaintiffs appealed this
dismissal to the Court of Appeals for the 11th Circuit, which issued an order
affirming the dismissal on March 30, 2001.
Other legal proceedings
In the normal course of business, we and our subsidiaries are involved in
various other claims and legal proceedings. While the ultimate resolution of
these matters, including those discussed in our 2000 annual report on Form 10-K
under "Legal Proceedings," has yet to be determined, we do not believe that
their outcome will have a material adverse effect on our financial position.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with the revisions to the relationship between WebMD and News
Corporation described in note 2 to the condensed consolidated financial
statements in this quarterly report, WebMD issued to News Corporation a warrant
to acquire 3,000,000 shares of WebMD common stock at an exercise price of $15
per share. The issuance of the warrant was exempt from registration under
Section 4(2) of the Securities Act because there was no public offering of the
warrant.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits listed in the accompanying Exhibit Index on page E-1 are filed
as part of this quarterly report.
(b) The following reports on Form 8-K were filed during the quarter ended
March 31, 2001:
- Report on Form 8-K filed on January 4, 2001, pursuant to which the
Registrant announced the revision of its strategic relationship with
News Corporation
- Report on Form 8-K filed on March 1, 2001, pursuant to which the
Registrant described certain legal proceedings involving the
Registrant and Quintiles Transnational Corp.
- Report on Form 8-K filed on March 6, 2001, pursuant to which the
Registrant described developments with respect to certain legal
proceedings involving the Registrant and Quintiles Transnational
Corp.
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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: May 15, 2001
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
10.1 Amendment dated February 15, 2001 to Healtheon/WebMD
Corporation Registration Rights Agreement dated January 26,
2000 among Registrant, Eastrise Profits Limited, AHN/FIT
Cable, LLC, AHN/FIT Internet, LLC, News America
Incorporated, and Fox Broadcasting Company; the
Healtheon/WebMD Corporation Registration Rights Agreement
was filed as Exhibit 10.4 to Registrant's Quarterly Report
on Form 10-Q for the quarter ended March 31, 2000
10.2 Amendment dated February 15, 2001 to Healtheon/WebMD Media
Services Agreement dated January 26, 2000 among Registrant,
Eastrise Profits Limited and Fox Entertainment Group, Inc.;
the Healtheon/WebMD Media Services Agreement was filed as
Exhibit 10.5 to Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000
10.3 Domestic Assignment Agreement dated as of February 15, 2001
among Registrant, Healtheon/WebMD Cable Corporation,
Healtheon/WebMD Internet Corporation, The News Corporation
Limited, Fox Entertainment Group, Inc., AHN/FIT Cable, LLC
and AHN/FIT Internet, LLC
10.4 International Assignment Agreement dated as of February 15,
2001 among Registrant, HW International Holdings, Inc., The
News Corporation Limited, Eastrise Profits Limited and IJV
Holdings Inc.
E-1