Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
| |
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
| |
| |
|
For the fiscal year ended December 31, 2004 |
| |
|
or |
| |
|
o
|
|
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 of incorporation) |
|
(I.R.S. employer identification no.) |
| |
669 River Drive, Center 2
Elmwood Park, New Jersey
(Address of principal executive office) |
|
07407-1361
(Zip code) |
(Registrant’s telephone number including area code):
(201) 703-3400
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001 per share
(Title of each class)
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 (the “Exchange
Act”) during the preceding 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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference into Part III of this
Form 10-K or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange
Act). Yes þ No o
As of June 30, 2004, the aggregate market value of the
registrant’s common stock held by non-affiliates was
approximately $2,742,954,120 (based on the closing price of the
common stock of $9.32 per share on that date, as reported on the
Nasdaq Stock Market’s National Market and, for purposes of
this computation only, the assumption that all of the
registrant’s directors and executive officers are
affiliates). As of March 1, 2005, there were 314,783,047
shares of WebMD common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information in the registrant’s definitive proxy
statement to be filed with the Commission relating to the
registrant’s 2005 Annual Meeting of Stockholders is
incorporated by reference into Part III.
TABLE OF CONTENTS
WebMD®, WebMD Health®, dakota
imagingtm,
Digital Office Manager®, DIMDX®,
Envoy®, ExpressBill®, Image
Directorsm,
Intergy®, Medifax®, Medifax-EDI®, Medscape®,
MEDPOR®, Physician
Flowsm,
POREX®, Publishers’ Circle® The Little Blue
Booktm,
The Medical Manager® and
ViPSsm
are trademarks of WebMD Corporation or its subsidiaries.
1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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. 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 expressions 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 that 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 Our Future Financial Condition or Results of
Operations” beginning on page 73, the following
important risks and uncertainties could affect future results,
causing those results to differ materially from those expressed
in our forward-looking statements:
|
|
|
| |
• |
the failure to achieve sufficient levels of customer utilization
and market acceptance of new or updated products and services, |
| |
| |
• |
the inability to successfully deploy new or updated applications, |
| |
| |
• |
difficulties in forming and maintaining relationships with
customers and strategic partners, |
| |
| |
• |
the anticipated benefits from acquisitions not being fully
realized or not being realized within the expected time frames; |
| |
| |
• |
the inability to attract and retain qualified personnel, and |
| |
| |
• |
general economic, business or regulatory conditions affecting
the healthcare, information technology, Internet and plastic
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 Our Future Financial Condition or Results of
Operations” beginning on page 73 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 Annual
Report on Form 10-K are made only as of the date of this
Annual Report. We expressly disclaim any intent or obligation to
update any forward-looking statements to reflect subsequent
events or circumstances.
2
PART I
INTRODUCTION
General Information
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.
Our principal executive offices are located at 669 River
Drive, Center 2, Elmwood Park, New Jersey 07407-1361
and our telephone number is (201) 703-3400.
We make available free of charge at www.webmd.com (in the
“About WebMD” section) copies of materials we file
with, or furnish to, the Securities and Exchange Commission,
including our Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K, and
amendments to those reports, as soon as reasonably practicable
after we electronically file such materials with, or furnish
them to, the SEC.
Overview of Our Businesses
Our business is comprised of four segments. Three of our
business segments, WebMD Business Services, WebMD Practice
Services and WebMD Health, provide various types of healthcare
information services and technology solutions. Our fourth
business segment is Porex, which designs and manufactures porous
plastic products. The following overview describes our key
products, services and markets:
|
|
|
| |
• |
WebMD Business Services. WebMD Business Services
provides healthcare reimbursement cycle management services for
healthcare providers and transaction-related administrative
services for healthcare payers, together with related technology
solutions. We transmit transactions electronically between
healthcare payers and providers and provide healthcare payers
with transaction processing technology, decision support and
data warehousing solutions, consulting services and outsourcing
services. Our services for payers include conversion of paper
claims to electronic ones and related document management
services, as well as print-and-mail services for the
distribution of checks, remittance advice and explanation of
benefits. We also provide automated patient billing services to
healthcare providers, including statement printing and mailing
services. We are focused on continuing to increase the
percentage of healthcare transactions that are handled
electronically and on providing electronic solutions that can be
used by payers and providers to automate the entire
reimbursement process. |
|
|
| |
WebMD Business Services generates revenues by selling our
transaction services to healthcare payers and providers,
generally on either a per transaction basis or, in the case of
some providers, on a monthly fixed fee basis. We also generate
revenue by selling our patient statement and paid-claims
communication services, typically on a per statement or per
communication basis. Finally, we generate revenue by licensing
software and providing information technology consulting
services to payers, including governmental payers. We charge
healthcare payers annual license fees, which are based on the
number of covered members, for use of our software and provide
business and information technology consulting services to them
on a time and materials basis. The consulting services we
provide to certain governmental agencies are typically billed on
a cost-plus fee structure. WebMD Business Services revenue was
$686.6 million in 2004 and $505.7 million in 2003. |
3
|
|
|
| |
• |
WebMD Practice Services. WebMD Practice Services
develops and markets information technology systems for
healthcare providers, primarily under The Medical Manager,
Intergy and WebMD Network Services brands. Our systems include: |
|
|
|
| |
— |
administrative and financial applications that enable healthcare
providers and their administrative personnel to manage their
practices more efficiently, and |
| |
| |
— |
electronic medical record and other clinical applications that
assist them in delivering quality patient care. |
|
|
| |
Our systems and services are used by physician offices to
automate their scheduling, billing and other administrative
tasks, to transmit transactions electronically, to maintain
electronic medical records and to automate documentation of
patient encounters. In addition, through WebMD Network Services,
we provide integrated access to our WebMD Business Services
transaction services for our WebMD Practice Services customers. |
| |
| |
We generate revenues from: one-time fees for licenses to our
software modules, for system hardware and for implementation
services; and recurring fees for the maintenance and support of
our software and system hardware. Pricing depends on the number
and type of software modules to be licensed, the number of
users, the complexity of the installation and other factors. Our
WebMD Network Services and some of our WebMD Practice Services
products and services are priced on a monthly fee per provider
basis or a per transaction basis. WebMD Practice Services
revenue was $296.1 million in 2004 and $302.6 million
in 2003. |
|
|
|
| |
• |
WebMD Health. WebMD Health provides health
information, health and benefit decision-support tools,
continuing medical education services, and interactive
communications services through its public online portals for
consumers and physicians, through syndication and distribution
relationships, through customized private portals for employers
and payers, and, to a lesser extent, through offline publishing
services. Our offerings for consumers help them become more
informed about healthcare choices and assist them in playing an
active role in managing their own health. Our offerings for
healthcare professionals help them improve their clinical
knowledge, as well as their communication with patients
regarding treatment options for specific health conditions. |
|
|
|
| |
— |
We reach over 20 million unique users per month (based on
the average during 2004) through www.webmd.com,
www.medscape.com and our other public portals, as well as
other Web sites with which we have relationships. We believe
that Medscape from WebMD, our portal for healthcare
professionals, reaches more physicians than any other
physician-targeted Web site. Our private portals provide online
health and benefit management services for employer and payer
sponsors. These services assist the sponsors’ employees and
members to make informed benefit, provider and treatment choices
that help reduce healthcare costs while improving quality of
care. We integrate the sponsor’s unique health and benefits
content with our content and technology platform, to create
private portals specific to the eligibility, coverage and health
profile of each plan member. We generate revenue by providing
healthcare and consumer products companies with opportunities to
reach our public portals audience through a variety of content
sponsorship formats and advertising products. In addition, we
create and distribute accredited online continuing medical
education programs funded by grants from a variety of sponsors.
We also generate revenues by licensing private portals to
employers and payers for use by their employees and members. |
| |
| |
— |
We publish specialized physician directories, used by
physicians, pharmacists and other healthcare professionals, and
professional medical reference textbooks. We generate revenue
from sales of subscriptions to our medical reference
publications, from sales of physician directories, and from
sales of advertisements in those directories. |
|
|
| |
WebMD Health revenue was $134.3 million in 2004 and
$110.7 million in 2003. |
4
|
|
|
| |
• |
Porex. Porex develops, manufactures and
distributes proprietary porous plastic products and components
used in healthcare, industrial and consumer applications. Our
Porex customers include both end-users of our finished products,
as well as manufacturers that include our components in their
products for the medical device, life science, research and
clinical laboratory, surgical and other markets. Porex is an
international business with manufacturing operations in North
America, Europe and Asia and customers in more than 65
countries. Porex revenue from continuing operations was
$77.1 million in 2004 and $71.9 million in 2003. |
During 2004, our revenues were divided among our segments as
follows: 59.2% from WebMD Business Services, 25.5% from WebMD
Practice Services, 11.6% from WebMD Health and 6.6% from Porex.
The sum of these percentages equals 102.9% of our total revenues
of $1,160 million because $33.8 million of our
revenues are from inter-segment transactions and are eliminated
when we consolidate our results.
A more complete description of the products and services of each
of our segments begins on page 6. Some of our products and
services have been developed internally and some have been
acquired. For a description of the companies that we acquired in
2004, 2003 and 2002, see Note 2 to the Consolidated
Financial Statements included in this Annual Report. For
additional information regarding the results of operations of
each of our segments, see “Management’s Discussion and
Analysis of Financial Condition and Results of
Operations — Results of Operations by Operating
Segment” in Item 7 of this Annual Report and
Note 8 to the Consolidated Financial Statements included in
this Annual Report.
For a discussion of key trends in the healthcare marketplace and
the strategies we have developed in response, see
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Key Trends
Affecting our Businesses and Our Healthcare Customers” in
Item 7.
Recent Developments
Evaluation of WebMD Health Transaction Alternatives.
WebMD is continuing to pursue its previously announced plan to
establish WebMD Health as a separate publicly traded company.
WebMD’s Board of Directors continues to evaluate the two
previously announced alternatives it has been
considering — a one-step split-off of WebMD Health
equity through an exchange offer transaction with WebMD’s
stockholders or an initial public offering of a minority
interest in WebMD Health. In the case of a one-step split-off,
all holders of WebMD common stock would have the right, on a pro
rata basis, to exchange shares of WebMD common stock for
newly-issued shares of WebMD Health common stock at an exchange
ratio that would be set by the Board of Directors of WebMD.
While the evaluation process is complex, considerable progress
has been made in refining the tax analysis of these alternative
transactions, preparing the necessary financial statements and
Securities and Exchange Commission filings, planning the
necessary corporate infrastructure separation and completing the
analysis of employee, corporate, third-party contractual and
other considerations relevant to these two alternatives. As each
alternative offers certain potential advantages for WebMD’s
stockholders, some of which are dependant on market conditions,
the Board will not make a decision as to which alternative to
pursue until shortly before WebMD is in a position to make the
required registration statement filing with the SEC. WebMD
anticipates being in a position to make this SEC filing in April
2005.
Acquisition of HealthShare Technologies. On
March 14, 2005, WebMD acquired HealthShare Technologies.
The purchase price paid at closing was $31 million in cash.
In addition, WebMD has agreed to pay up to an additional
$5 million if certain financial milestones are achieved for
calendar year 2005. HealthShare provides health plans and
employers, and their members and employees, with online decision
support tools that evaluate both hospital care cost and quality
to enable users to make more informed decisions. HealthShare
also provides professional decision support tools used by health
plan executives to develop provider networks, identify centers
of excellence, and evaluate comparative hospital quality.
HealthShare tools are also used by hospitals to provide online
decision support to help enhance quality of care, manage costs
and profitability, and better understand market position. The
results of operations of HealthShare will be included in our
WebMD Health segment.
5
HEALTHCARE INFORMATION SERVICES AND TECHNOLOGY SOLUTIONS
We provide services that help consumers, physicians and other
healthcare providers and health plans navigate the complexities
of the healthcare system. Our products and services promote more
informed decision-making, streamline administrative and clinical
processes, increase efficiency and reduce costs by facilitating
information exchange, communication and electronic transactions
between healthcare participants.
WebMD Business Services
Overview
WebMD Business Services provides healthcare reimbursement cycle
management services for healthcare providers and
transaction-related administrative services for healthcare
payers, together with related technology solutions. In addition,
we provide information technology, decision support solutions
and consulting services to governmental and commercial
healthcare payers through ViPS, which we acquired in August 2004.
To ensure timely reimbursement and comply with managed care
requirements, healthcare providers must interact effectively
with healthcare payers from the first point of patient contact
until final payment has been received. Our services allow
providers and payers to replace manual processes, phone calls
and faxes with electronic transactions and, by doing so, to save
time and money. We provide our payer and provider customers
connectivity through an integrated electronic transaction
processing system. We refer to these connectivity services as
electronic data interchange, or EDI. Customers access our
connectivity services through the Internet, through dedicated
high speed communications lines and by modem over standard
telephone lines. After we receive transactions from providers,
they are edited and translated in accordance with payer
specifications and sent to the payer’s system.
Although these EDI services are an important part of what we do,
we have substantially expanded our WebMD Business Services
product line in recent years through both acquisitions and
internal efforts. We now provide healthcare payers with
transaction processing technology, decision support solutions,
consulting services and outsourcing services. Our services for
payers also include conversion of paper claims to electronic
ones and related document management services, as well as
print-and-mail services for the distribution of checks,
remittance advice and explanation of benefits. Our services for
providers also include automated patient billing services, with
statement printing and mailing services available. We are
focused on continuing to increase the percentage of healthcare
transactions that are handled electronically and on providing
enhanced capabilities and additional solutions that can be used
by payers and providers to automate the entire reimbursement
process.
Healthcare payers and providers pay fees to us for our services,
generally on a per transaction basis or, in the case of some
providers, as a flat rate per month. Transaction fees vary
according to the type of transaction and other factors, such as
volume level commitments. We may also charge one-time
implementation fees to providers and payers. ViPS charges
healthcare payers annual license fees, which are based on the
number of covered members, for use of its software. ViPS also
provides business and information technology consulting services
to its customers on a time and materials basis. ViPS’
contracts with the federal government are typically on a
cost-plus award fee structure.
Customer and Vendor Relationships
Customers. WebMD Business Services’ customers
consist of: healthcare providers, such as physician offices,
dental offices, billing services, national laboratories,
pharmacies, hospitals; and healthcare payers, including Medicare
and Medicaid agencies, Blue Cross and Blue Shield organizations,
pharmacy benefit management companies, commercial health
insurance companies and managed care organizations.
|
|
|
| |
• |
Healthcare Providers. For providers, WebMD Business
Services can help them automate every step of the reimbursement
cycle, including: checking patient coverage eligibility
information; |
6
|
|
|
| |
|
seeking pre-authorization from a payer for services; submitting
and tracking claims; and automated payment posting, credit card
billing and patient statement processing. Our EDI connectivity
services reduce paperwork and the need for communication by
mail, telephone and fax, resulting in cost savings for payers
and providers. These services also expedite the reimbursement
process, which can result in a lower average number of
outstanding accounts receivable days for providers. In addition,
the use of EDI for eligibility and other coverage-related
transactions can save hospital, physician and dentist office
staff significant amounts of time compared to phone or other
individual verification methods and allow them to provide faster
answers to patient questions regarding coverage. |
| |
| |
• |
Healthcare Payers. For a healthcare payer, the
administrative cost of supporting patient medical encounters
includes eligibility and benefit information distribution,
intake of paper and electronic claims, claim adjudication,
payment and explanation of benefits (or EOB) distribution, as
well as a wide variety of member and provider service and
communication activities. WebMD Business Services provides
services that help automate and reduce the cost and improve the
accuracy of these processes. Specifically, our electronic
transaction services automate the data exchange between
healthcare providers and payers for patient eligibility and
benefits information, claims transactions, remittance
information, referrals, claim status information and other
processes. Payers using us as their managed EDI gateway for
inbound transactions benefit from improved reliability and
improved auto-adjudication rates. Our systems can apply
customized payer-specific business rules to these transaction
processes to further improve payer auto-adjudication rates
(which means the percentage of claims that are adjudicated by
the payer’s computer systems, without review by payer
personnel), which provides additional cost savings to our
clients. These automation tools, in conjunction with our imaging
and scanning services for inbound transactions and print and
mail services for remittances and other outbound communications,
allow payers to better focus on their core activities: provider
network management, employer marketing and contracting, benefit
plan design, and member service. In addition, by outsourcing
inbound and outbound transaction processes to us, payers can
reduce their capital expenses and operating costs. Our
acquisitions of Advanced Business Fulfillment in 2003 and Dakota
Imaging in 2004 support our ability to provider more
comprehensive business process outsourcing services. For a
description of other services that WebMD Business Services
provides to healthcare payers, see “— ViPS”
below. |
Information System Vendors. We work with numerous medical
and dental practice management system vendors, hospital
information system vendors and other service providers to
provide integrated transaction processing between their systems
and ours. Most practice management and hospital information
systems support, and can be integrated with, our connectivity
services. Many practice management system vendors, including
WebMD Practice Services, market a private label brand of our
transaction services that they have integrated with their
systems. We pay sales commissions to some of these vendors as an
inducement to use WebMD Business Services. We work together with
these vendors to increase the percentage of healthcare
transactions that are handled electronically.
Clearinghouses. Some healthcare transaction
clearinghouses also use our services to transmit transactions to
payers that they have received from healthcare providers. We pay
sales commissions to some of these clearinghouses as an
inducement to use WebMD Business Services to complete the
transactions submitted through their systems.
Our Connectivity Services
Administrative Solutions. WebMD Business Services began
as a clearinghouse for electronic healthcare claims transactions
between physician offices and commercial healthcare payers and
continues to be a leader in those services. WebMD Business
Services connectivity services have grown to include additional
transactions for additional types of providers and payers and
other types of transaction-related
7
services. WebMD Business Services now provides connectivity
throughout the healthcare reimbursement cycle:
|
|
|
| |
• |
beginning with insurance eligibility verification, |
| |
| |
• |
continuing through the claim submission process, |
| |
| |
• |
followed by tracking the reimbursement through claim status
inquiries, and |
| |
| |
• |
concluding with electronic remittance information and payment
posting. |
Providers can also use our services to obtain authorization from
payers, at the point of care, for services and referrals to
other providers.
Our “all-payer” services includes the capture,
validation and routing of claims transactions on behalf of not
just commercial payers, but also Blue Cross Blue Shield payers,
Medicare and Medicaid. The goal is to provide a single source
reimbursement cycle management solution for providers and
practice management system vendors. A single solution reduces
administrative burdens on the provider office in sending claims
transactions and receiving electronic remittance advice
transactions and, more importantly, allows us to provide a
single report back to the provider office regarding those
transactions. That, in turn, allows the provider office to
determine more easily whether it has been paid on a particular
claim and how much. Provider offices without such a solution
typically receive five or more different reports that they then
have to reconcile in order to manage their accounts receivable.
Clinical Solutions. WebMD Clinician is an Internet-based
solution that streamlines the flow of information between
providers, pharmacies, payers and labs. This product supports:
|
|
|
| |
• |
electronic ordering of clinical tests and the reporting of test
results between healthcare providers and labs, and |
| |
| |
• |
electronic prescribing that references medication histories,
payer formularies, and drug usage reports at the point of care. |
The WebMD Clinician suite of solutions is designed to integrate
with most physician practice management systems and electronic
medical record systems through virtually any web-enabled device.
The result is secure delivery of accurate electronic medical
record information into the workflow of the physician when
needed for making care decisions. WebMD Clinician reduces costs
and improves the quality of patient care by improving order
entry accuracy and expediting the delivery of lab results, while
enhancing the ability to share those results with multiple
physicians.
Accessing Our Connectivity. Healthcare providers access
our transaction services both directly and through their
relationships with integrated delivery networks, clinics,
physician and dental practice management system vendors,
hospital information management system vendors, and retail
pharmacy chains. Providers initiate transactions using our
proprietary applications, their practice management systems or
other computer systems or networks. Providers submit
transactions to our clearinghouse by modem connections using
regular telephone lines, using dedicated high speed
telecommunications services and over the Internet. At our
clearinghouse, the transaction is formatted and translated in
accordance with the payer’s specifications and sent to the
payer’s claims adjudication and/or real-time database
systems.
We provide various products designed to assist healthcare
providers in managing their claims processes and utilizing our
services, including:
|
|
|
| |
• |
Claim Master. Through our Claim Master service, providers
can securely access our transaction services through the
Internet. Claim Master can be used as a stand-alone system or as
a complement to a practice management system or hospital
information system. Claims are captured from the source
healthcare information system and incorporated into the Claim
Master relational database to be tracked through event-driven
updates. The Claim Master database serves as the repository for
all claim management functions including viewing, editing (in
real time), correcting, submitting and managing payer responses.
During validation, claims are separated into “clean” |
8
|
|
|
| |
|
claims and those needing additional information. Clean claims
are passed on to our clearinghouse in a HIPAA-compliant format
and then submitted to the appropriate payers. Claims needing
additional information are edited, corrected, and then
submitted. With Claim Master’s wide array of reporting and
display options, providers can clearly understand the location
and status of any claim or batch of claims at any given time,
including the status of all claims in the system, types of claim
errors and list of claims sorted by dollar amount, work queue
and payer. |
| |
| |
• |
WebMD Office. Through our WebMD Office Internet-based
service, providers can securely access our transaction services
through either a standard dial-up or high speed DSL or cable
modem. WebMD Office can be used as a stand-alone system or as a
complement to a practice management system through an import and
data management function that allows transactions to be
generated from the practice management system and submitted
through WebMD Office. In addition, our practice management
system vendor partners may elect to market a private-label brand
version of WebMD Office. |
| |
| |
• |
WebMD Assistant. WebMD Assistant integrates with hospital
information systems to automate various registration activities
such as insurance eligibility verification, credit checking and
address verification. WebMD Assistant can be configured to
automatically perform real-time tasks during patient
registration. This saves the registration staff time by
eliminating the need to use separate systems for registration
and for eligibility verification. The eligibility response can
be automatically stored within the patient record as a permanent
reference. |
| |
| |
• |
WebMD Receivable Analysis. WebMD Receivable Analysis is
an electronic screening service designed to verify Medicaid and
other forms of insurance eligibility in an electronic batch
format. The healthcare provider submits a file electronically
and the file is processed against the WebMD payer databases to
determine eligibility. WebMD customers use this service to
identify Medicaid and other forms of eligibility that may apply
to patients who have been classified as not having coverage. The
resulting reclassification often results in significant
reimbursements. |
| |
| |
• |
WebMD Accupost. WebMD Accupost automates the posting of
payments received from governmental and commercial payers that
provide an electronic remittance advice into the providers’
financial accounting system. Automated posting is completed in a
fraction of the time it takes to perform these same tasks
manually and is more accurate. |
ViPS
ViPS provides information technology, decision support solutions
and consulting services to government, Blue Cross Blue Shield
(BCBS) and commercial healthcare payers. ViPS has been a
long-time leader in helping the government and healthcare
industry manage large data volumes and repositories through
information technology. We acquired ViPS, Inc. in August 2004.
Government Solutions. ViPS’ Government Solutions
Group provides technology services and project personnel to
federal and state agencies, such as the Centers for Medicare and
Medicaid Services (CMS) as well as to key information
services contractors for those agencies. ViPS’ personnel
provide systems support for data warehousing, claims processing,
decision support, and fraud detection. In addition, ViPS’
consultants assess workflow, design complex database
architectures, perform data analysis and analytic reporting
functions for agencies and contractors in the public sector. For
CMS, ViPS’ products and services support Medicare
Part A, Part B and Durable Medical Equipment claims
processing.
Working with Northrop Grumman’s Mission Systems Group, ViPS
designed and is implementing CMS’s Medicare Beneficiary
Database, which serves as the foundation for administering the
new Medicare prescription drug benefit under the Medicare
Prescription Drug, Improvement and Modernization Act, referred
to as the MMA. The MMA, signed into law on December 8,
2003, is the most significant change to Medicare since the
program’s founding in 1965 and is the largest budget
increase in a government entitlement program in the past forty
years. The new drug benefit will give beneficiaries access to
coverage under prescription drug insurance policies in return
for a premium of approximately $35 per month and, as
9
temporary measure until 2006, beneficiaries will have access to
drug discount cards. ViPS is currently working on three projects
relating to the MMA, including:
|
|
|
| |
• |
Centralized Medicare Beneficiary Eligibility Transaction
System. This system will be used by healthcare providers and
other submitters, network service providers and clearinghouses.
ViPS is providing overall program management for this system.
For this project, ViPS is working with other WebMD Business
Services units and benefiting from their EDI subject matter
expertise and is also working with Northrop Grumman Mission
Systems. |
| |
| |
• |
System to Support the Retiree Drug Subsidy Provisions of the
MMA. Under the MMA, employers are eligible for a financial
subsidy from Medicare if they keep retiree beneficiaries on
their prescription drug plan rather than have them move to the
new Medicare prescription drug benefit. ViPS is working with
Group Health, Inc., Arkansas Blue Cross Blue Shield and Northrop
Grumman Mission Systems on this project, which includes
responsibility for processing enrollment applications and
payment requests, issuing payments and remittance advices to
eligible employers, providing a call center, conducting outreach
activities, performing fraud analysis and providing related
training. |
We believe ViPS is well-positioned to play a key role in the
implementation of the MMA and to compete for additional related
projects.
Healthpayer Solutions. ViPS’ Healthpayer Solutions
Group develops and markets software, data warehouses and tools
for disease management, predictive modeling, provider
performance, HEDIS® quality improvement, healthcare fraud
detection and financial management. The products include:
|
|
|
| |
• |
MCSource. MCSource is a medical management decision
support system that consists of an integrated suite of
analytical and Web-based applications designed to give health
plans the ability to address critical issues such as medical
cost and utilization, provider profiling, disease management,
quality improvement and medical review. MCSource’s
foundation is a high-performance data warehouse that can store
all types of administrative healthcare information. MCSource is
designed to support the complexities and usage volumes of large,
information-driven health plans and has been deployed to more
than 20 customers, including the BCBS Federal Employee
Program, where it is used to manage a data warehouse covering
approximately four million lives and five years of longitudinal
member data. |
| |
| |
• |
STARSentinel. STARSentinel is an early-warning detection
system that looks at health plan data and evaluates claims
against providers’ claims histories, specialty profiles and
common, documented fraud schemes. By calling early attention to
questionable patterns, STARSentinel helps prioritize cases and
helps health plans use their resources with maximum productivity. |
ViPS Healthpayer Solutions also provides consulting expertise
and outsourcing services to help its customers, including
commercial health plans and over 65% of the nation’s BCBS
plans, monitor clinical and financial results in order to
predict risk, determine the most effective treatments and
evaluate provider networks.
Print-and-Mail Services
ABF. Advanced Business Fulfillment, Inc., which we refer
to as ABF, provides healthcare paid-claims communication
services for healthcare payers. We acquired ABF in July 2003.
ABF’s operations are supported by proprietary software and
systems that allow healthcare payers to outsource print-and-mail
activities by sending an electronic feed to ABF. By outsourcing
these services to ABF, its clients can reduce operating costs
and capital expenditures. ABF’s systems include a Web-based
suite of management tools to facilitate the printing and mailing
of checks and remittance advice to providers and explanation of
benefits to plan members. These management tools allow clients
to control the processes they have outsourced to ABF and to
access archived data from their desktops. ABF has worked closely
with leading claims processing system vendors to allow its
software to interface with their
10
systems. In return for marketing ABF’s post-adjudication
services and for the creation and maintenance of an ABF-specific
data extract, ABF makes periodic payments to vendor partners.
Healthpayers USA is ABF’s proprietary program to
cross-consolidate provider mail in order to create savings in
postal costs for its clients. Healthpayers USA screens, sorts
and consolidates mail from any number of its clients destined
for a single provider into one package and automatically
produces a recipient cover sheet that itemizes the contents. ABF
and its clients share the resulting postal savings.
WebMD ExpressBill. Through WebMD ExpressBill, we provide
print-and-mail services to healthcare practitioners, hospitals
and high volume commercial customers throughout the United
States. WebMD ExpressBill accepts client data via modem or the
Internet, generates printed materials and prepares them for
mailing. Our WebMD ExpressBill services include:
|
|
|
| |
• |
Patient Mailings. On behalf of healthcare provider
customers, we print invoices, account statements, collection
letters, recall notices and other communications and mail them
to patients. |
| |
| |
• |
Paper Claims. Claims that cannot be sent electronically
to payers can be sent by healthcare providers electronically to
WebMD ExpressBill, where we print and mail them on their behalf. |
| |
| |
• |
Payment Processing. We process payments on behalf of
providers and other customers, receiving and depositing checks,
posting payments and transmitting funds in accordance with
customer instructions. |
| |
| |
• |
Electronic Presentment and Payment Services. Our
electronic presentment and payment services offer healthcare
providers the ability to present statement and invoice images to
patients electronically and to receive payment via the Internet. |
Sales and Marketing
Our WebMD Business Services sales and marketing efforts are
conducted by sales, marketing and account management personnel
located throughout the United States. We participate in trade
shows and use direct mail and various advertising media to
promote our services.
|
|
|
| |
• |
We promote our EDI and print-and-mail services for providers to
organizations that have relationships with or access to a large
number of providers, such as practice management systems
vendors, hospital information systems vendors, practice
management companies and other clearinghouses. In certain cases,
we agree to pay a sales commission to these organizations as an
inducement to use WebMD Business Services as the clearinghouse
for the transactions made through their systems or by providers
with which they have relationships. We also market our EDI and
print-and-mail services directly to small and large physician
practices, dentists, hospitals and other healthcare providers.
We offer our payer customers the opportunity to work with us in
targeted programs to educate physicians and dentists to increase
the utilization of electronic services. When a payer agrees to
participate in such a program, WebMD utilizes information
supplied by the payer to target providers that may not be
sending claims electronically. |
| |
| |
• |
A team of sales, marketing and account management personnel
market our EDI services and other pre- and post-adjudication
transaction services directly to healthcare payers. In addition,
in the post-adjudication services area, we have established
relationships with vendors of claims processing software. |
| |
| |
• |
In the pharmacy EDI area, WebMD Business Services has
established relationships with large retail pharmacy chains and
pharmacy software vendors. |
| |
| |
• |
A team of account management personnel, supported by
professional services representatives, markets our ViPS
Government Solutions Group products and services. The Government
Solutions Group extends its government sales capabilities
through key relationships with leading government contractors,
including Computer Sciences Corp., SAIC, BearingPoint and
Northrop Grumman. |
11
|
|
|
| |
|
ViPS often bids on government projects together with one or more
of these companies. ViPS is seeking to extend its government
services reach into additional government agencies. |
| |
| |
• |
ViPS’ Healthpayer Solutions Group markets its products and
services nationally through a direct sales organization. Because
of ViPS’ long-standing industry relationships, particularly
with BCBS plan organizations and other large commercial payers,
ViPS is often invited to bid on contracts to be awarded based on
competitive bidding procedures. |
HIPAA
Under the Healthcare Insurance Portability and Accountability
Act of 1996, or HIPAA, Congress mandated a package of
interlocking administrative simplification rules, including
rules to establish standards and requirements for the electronic
transmission of certain healthcare transactions, which we refer
to as the Transaction Standards. For a full discussion of HIPAA
and the risks and challenges it presents to our businesses, see
“— Government Regulation — Health
Insurance Portability and Accountability Act of 1996.”
WebMD Practice Services
Overview
WebMD Practice Services develops and markets information
technology systems for healthcare providers and related
services, primarily under The Medical Manager, Intergy, and
WebMD Network Services brands. Our systems include
administrative and financial applications that enable healthcare
providers and their administrative personnel to manage their
practices more efficiently and clinical applications that assist
them in delivering quality patient care. These applications and
related services:
|
|
|
| |
• |
automate scheduling, billing, receivables management and other
administrative and financial management tasks, |
| |
| |
• |
enable providers to maintain electronic medical records and to
automate the documentation of patient encounters, and |
| |
| |
• |
facilitate the use of electronic data interchange for
administrative and clinical healthcare transactions. |
We expect that most of our future sales of practice management
systems will be Intergy Practice systems. However, we intend to
continue to develop and support The Medical Manager system. We
offer our Intergy EHR clinical systems, which can be fully
integrated with our Intergy Practice systems and which can also
interface with The Medical Manager systems. We are developing
additional interfaces to allow our Intergy EHR software to work
with other practice management systems.
Healthcare providers pay us a one-time fee for the purchase of a
license to our software or to additional software modules. They
also pay us a one-time purchase price for system hardware. Many
customers also pay us recurring fees for the maintenance and
support of our software and for providing hardware support and
maintenance. Pricing depends on several factors, including the
number and type of modules to be licensed, the number of users
per site, the number of practices, the operating system, the
hardware to be supported and the complexity of the installation.
Healthcare providers also pay us fees for:
|
|
|
| |
• |
our WebMD Network Services administrative transactions services,
generally on a per provider per month subscription basis or a
per transaction basis; and |
| |
| |
• |
our clinical transaction services, on a per provider per month
subscription basis. |
12
Practice Management Systems
Intergy Practice. We introduced Intergy Practice in 2003.
Since that time, most of our new installations of practice
management systems have been Intergy Practice systems. Intergy
Practice packages complex medical practice functions into
easy-to-navigate windows with consistent point-and-click drop
down menus and buttons. The Intergy Practice software operates
on Windows and UNIX based servers, together with Windows based
workstations. The Intergy Practice base package allows an office
to automate appointment scheduling and recalls, registration,
encounter form management, billing, collections and other
administrative and financial functions. Intergy Practice also
has a customizable security system, with access to functions and
features that can be defined for each user based on practice
policies and procedures. Intergy Practice systems are scalable
to meet the needs of a wide variety of healthcare provider
settings, from small physician groups to large clinics, and
across various medical specialties. Customers can purchase a
base system and then add additional modules and services over
time to expand their use of technology as needed.
We license the Intergy Practice software through several
different license models to meet the varying business needs of
our customer base. The most common model is the standard
practice license, which provides a license to use the Intergy
software for the internal business needs of a medical practice
or clinic. The Management Service Organization model provides a
license to use the Intergy software under one license
arrangement that enables a management service organization to
manage the financial or billing aspects of its owned and managed
practices, while allowing such practices to use our software to
manage the administrative and clinical aspects of their offices.
The Physician Billing Service model provides an Intergy Practice
license to billing service companies enabling them to provide
billing services to multiple doctor practices, while also giving
them an option (at an additional cost) to allow such practices
to use our software to manage the administrative aspects of
their offices.
One of our optional Intergy Practice administrative and
financial modules is the managed care system, which provides
functions required to track incoming and outgoing referrals to
facilities and specialists and to provide risk management
capabilities. The managed care system assists providers in
automating referral management, capitation payment posting, and
contract management and profitability tracking. The system is
designed to work in all managed care scenarios, including
primary and specialty care. Intergy Practice software users can
also elect to implement some or all of the products and services
described below under “— Intergy EHR” and
“— Additional Features and Modules” below
and our administrative and clinical transactions services
described below under “— Transaction
Services.”
We provide radiology practices with practice management and
clinical solutions designed to meet their specific requirements.
WebMD Intergy RIS (which means Radiology Information System)
offers specialized workflow and administrative tools to manage
practice resources, including equipment, technologists,
radiologists and examination rooms. We also offer Intergy PACS,
a picture archiving and communications solution, as part of our
suite of radiology solutions. See “— Clinical
Solutions — IntergyPACS” below.
The Medical Manager. The Medical Manager system provides
physician practices with a broad range of patient care and
practice management features. Although most of our current sales
are of Intergy Practice systems, we offer The Medical Manager
system with modules that meet the functionality needs of public
health and community health markets and family planning clinics
and intend to continue to market The Medical Manager system in
these formats. The Medical Manager software’s base package
serves as the foundation of the system and includes an
appointment scheduler, billing system, financial management
system and other features. Additional modules containing
advanced administrative and financial features are also
available, including automated collections, advanced billing and
multiple resource scheduling and managed care modules. For The
Medical Manager system customers who wish to purchase an
electronic medical record product, we are offering an interfaced
version of Intergy EHR. See “— EMR and Imaging
Systems” below. The Medical Manager software users can also
elect to implement some or all of the integrated products and
services described below under “— Additional
Features and Modules” and our administrative and clinical
transactions services described below under
“— Transaction Services.”
13
Medware. Through our acquisition of Medifax in December
2003, we have obtained ownership of Medware, a practice
management software package used primarily by small physician
practices. Medware has its own programming, sales and support
operations that continue to develop, sell and support Medware
software.
Other Practice Management Systems. Through our
acquisitions of various businesses, we have also obtained
ownership of other practice management systems. We currently
support these other systems and may provide periodic updates to
the users of some of these systems. We are developing interfaces
between some of these systems and Intergy EHR.
Clinical Solutions
Healthcare providers record, use and share various types of
clinical data about their patients, including patient histories,
examination notes, lab results, medication orders and referrals.
Much of this data is currently recorded in handwritten or
printed form on paper records, often referred to as patient
charts. As the amount of patient information maintained by a
practice increases, so do the logistical challenges of moving
paper charts from site to site and physician to physician. Many
healthcare organizations are finding that the most promising
solution to this challenge is the use of electronic medical
record systems. These systems allow providers to share patient
charts and other medical records, access them simultaneously and
view them from remote locations. Electronic medical record
systems not only help healthcare providers enhance clinical
processes and patient safety, they also assist them in sharing
information appropriately and efficiently and in collecting and
managing the data necessary to meet the requirements of
third-party billing procedures and contractual requirements.
Intergy EHR. Intergy EHR is a suite of software modules
that provides physicians with access to patient information,
clinical systems, encounter documentation and outcomes
reporting. Intergy EHR fully integrates with Intergy Practice.
Intergy EHR software creates an electronic patient chart
containing detailed current and historical information regarding
the patient. In addition, Intergy EHR offers:
|
|
|
| |
• |
PhysicianFlow technology that enables physicians to access
information from a variety of sources — including the
patient chart, imaging systems, practice management systems, and
laboratory systems — all from one screen. |
| |
| |
• |
clinical encounter forms that guide the creation of
documentation and capture structured data to facilitate correct
coding and outcomes reporting. Physicians can review and approve
coding as they create the encounter note so that billed
procedures are appropriately documented. Intergy EHR provides a
forms library for major medical specialties, including primary
care, pediatrics, obstetrics/gynecology, cardiology, orthopedics
and others. |
| |
| |
• |
a clinical workflow manager, integrated with the electronic
chart, that allows the physician to communicate with staff
members and that automatically generates tasks list items for
the physician when, for example, a lab report is ready, a
transcription needs to be signed or a prescription needs
approval. |
| |
| |
• |
KnowledgeLink technology to enable physicians to access
information from Medscape and other drug and medical reference
information. This enables the physician to share education with
the patient at the time of care, and document the event in the
encounter notes. |
| |
| |
• |
a selection of various input devices for physicians, including
desktop, laptop and tablet PCs, and handheld personal digital
assistant (PDA) devices. Handheld systems can be used for
offline charge capture, schedule review and dictation, and
tablet PCs for full mobile functionality. Physicians also can
assign tasks and access clinical information from Intergy EHR
systems connected to the practice over the Internet or over a
wireless network. |
| |
| |
• |
a prescription module that automates the process of writing and
tracking prescriptions, providing improved efficiency with both
the clinical and administrative aspects of the prescription
process and can be linked to our optional clinical transaction
services (see “— Transaction Services”
below). |
14
|
|
|
| |
• |
a Laboratory System module that allows providers to access,
review and maintain all lab results from within the Intergy EHR
system. Practices may also arrange to place orders and receive
accurate and timely lab test results via a direct,
bi-directional link with the laboratory. Test results are
received electronically from the laboratory and are stored
directly in the patient’s file for viewing, printing and
analysis. |
Intergy EHR is designed to enable different physicians in the
same practice to use the system in different ways, to suit
different work styles. For example, a physician’s encounter
notes can become part of the electronic record whether created
by computer, dictation or handwritten notes. We provide
technical assistance and support that helps medical practices
transition from paper charts to electronic medical records.
Intergy EHR Imaging. We offer a document image management
(DIM) system that allows a practice to scan, store, catalog and
retrieve documents, images and sound files in electronic form,
which then becomes part of the patient’s medical record and
can be accessed from multiple workstations simultaneously.
Image Director. Image Director combines bar-coding
technology with imaging processes and simplifies moving from
paper charts to electronic ones. It also enables additional
paper flow from outside the practice to be added as an image
into the patient chart without disrupting workflow. Bar codes
can be assigned to paper documents using standard printers which
eliminate the need for expensive scanners at each workstation.
Bar-coded documents can be batch-scanned into patient charts at
any time, by any staff member. The bar code assists the practice
in inserting each image in the right place, in the right patient
chart.
Intergy PACS. We market a third party solution, Dynamic
Imaging’s IntegradWeb PACS, as Intergy PACS, a part of our
radiology solutions product offering. Intergy PACS is a picture
archiving and communications systems (or PACS) that allows a
practice to input, display, archive and transmit X-rays and
other diagnostic images electronically. Using a secure,
encrypted Web protocol, all users, whether local or remote, can
access all of a patient’s images and reports, which are
always available online. In addition, WebMD is working on a
unified desktop application called the WebMD Radiology Navigator
that will integrate Dynamic Imaging’s IntegradWeb PACS with
WebMD Intergy RIS.
Intergy EHR PDA. Healthcare providers are becoming
increasingly aware of the benefits of using wireless handheld
computers in their practices. Intergy EHR PDA, our handheld
point-of-care solution for users of Intergy EHR, combines the
power of our clinical and administrative systems with the
convenience of mobile handheld connectivity. Intergy EHR PDA
runs on a handheld device, such as a Compaq® iPaq®.
From anywhere in the office, the handheld device can be used
with a wireless local area network, or LAN, to access
information stored within, or to enter data into, the Intergy or
The Medical Manager system, giving them access at the
point-of-care to:
|
|
|
| |
• |
appointment schedules, hospital rounds information and clinical
tasks needing the provider’s attention; |
| |
| |
• |
a user-friendly electronic prescription writer, with integrated
drug utilization review, or DUR, and formulary checking, which
electronically submits prescriptions to the patient’s
chosen pharmacy and, at the same time, adds prescription
information directly to the patient’s electronic medical
record in the Intergy EHR system; |
| |
| |
• |
electronic lab ordering and reporting of results that can be
viewed using the handheld device; |
| |
| |
• |
their patients’ electronic medical records, including
demographic data, progress notes, medications, lab results,
procedure histories and other information and transcribed
patient documentation; and |
| |
| |
• |
a fully customized encounter form for capturing patient charges,
which displays procedure and diagnosis codes in customized
checklists and automatically posts charge information to the
practice management system. |
15
Physicians can also use Intergy EHR PDA to digitally record
dictation and then send the voice file electronically for
transcription, reducing the number of devices the physician has
to carry and reducing turn-around time.
In addition, Intergy EHR PDA provides a range of offsite
functionality that can be used at hospitals and other remote
locations. Using the wireless LAN connection, up to ten days of
hospital rounds and patient data can be downloaded to the
handheld device. This information is then accessible to the
provider when he or she is working at another location. The
provider can enter new data and capture patient charges, all of
which are then uploaded to The Medical Manager or Intergy system
when the provider returns to the office.
Maintenance and Support Services
We separately sell hardware and software support and maintenance
services to our customers. Through our software support and
maintenance services, we:
|
|
|
| |
• |
provide customers with access to our telephone help desk,
typically advising customers in the use and operation of our
software and services and remotely accessing customers’
systems to provide support; and |
| |
| |
• |
in most cases, provide customers with periodic releases updating
our software. |
Through our hardware maintenance services, we typically provide
customers with on-site hardware technical service and, if
necessary, the replacement of hardware components that fail to
function properly. Our contracts for maintenance and support
services are generally up to one year in duration. Our customers
may decide whether or not to purchase maintenance and support
services from us. In addition, some of these services are also
available from third party providers. See
“— Competition for Our Healthcare Information
Services and Technology Solutions” below. We cannot provide
assurance regarding the levels at which our customers will
continue to purchase maintenance and support services after the
expiration of existing contracts.
Transaction Services
WebMD Network Services. Both Intergy and The Medical
Manager systems support integrated use of our WebMD Business
Services’ EDI services through WebMD Network Services. For
a description of these EDI services, see “WebMD Business
Services” above. The administrative transactions supported
include electronic claims, claims status inquiry, eligibility
verification, electronic referral authorization/ status, patient
statements and remittances. Using Intergy or The Medical Manager
systems with WebMD Network Services, providers have access to
EDI functionality that is integrated into their practice
management workflow and recordkeeping systems. Integrated EDI
allows providers and their staff to send and receive EDI
transactions from within the practice management system and to
generate reports regarding these transactions, including whether
submitted claims have been accepted or rejected. These
capabilities can be combined with our “all-payer”
suite of transaction services to provide a single-source
electronic reimbursement management solution. See “WebMD
Business Services” above. In addition, our systems perform
automated eligibility verification by contacting payers
electronically overnight so that the practice can start the day
with pre-checked eligibility and benefits for each scheduled
patient. This information is stored as part of the
patient’s record. In addition, eligibility checking for
unscheduled patients can be performed in real time.
WebMD Network Services also provides integrated access to our
WebMD ExpressBill print-and-mail services for patient
statements, collection notices and recall notices. Practices
transmit the required data from Intergy or The Medical Manager
systems to our processing center. From there, customized
statements, letters and inserts and complete mailing services
are provided. Customization options include logos and patient
education inserts.
16
Clinical Transaction Services. We provide clinical
transaction services that allow practices to perform DUR
screenings, transmit prescriptions electronically to connected
pharmacies, and verify formulary compliance with the
patient’s health plan.
Additional Features and Modules
Online Access. Physicians whose offices use the Intergy
or The Medical Manager practice management systems can remotely
access, via an encrypted Internet connection through our
Medscape portal, information contained in their office’s
practice management system, including daily schedules, patient
records and clinical items that need their attention. This
enables physicians to view, in a secure manner, information
residing on their office-based computer system from any personal
or handheld computer with a connection to the Internet. The
physician can use this connection to send and receive secure
email messages, to write and send electronic prescriptions, or
to create laboratory orders and view test results.
Remote Monitoring System. Our Remote Monitoring
System, or RMS, allows for a pro-active approach to system
support and maintenance. Real-time connections allow us to
monitor installations of our Intergy systems for problems that
need immediate attention or for potential problems that are
likely to need attention in the near future or that are
adversely affecting system performance.
Analytics Reporting. We also provide a business
intelligence and reporting application, designed to provide
timely access to practice data for informed managerial
decision-making and to automate the process of generating
reports using data from The Medical Manager and Intergy systems.
Our Analytics Reporting solution also provides access to tools
to analyze that data and to export it to other applications.
Sales and Marketing
We market and distribute our WebMD Practice Services systems and
related services nationally through a direct sales organization,
who are also supported by field technicians and training and
support personnel. We also participate in trade shows and use
direct mail and various advertising media to promote our systems
and services.
WebMD Health
Overview
WebMD Health provides healthcare information, health and benefit
decision-support tools, continuing medical education services,
and interactive communications services through its public
online portals for consumers and physicians, through syndication
and distribution relationships, through customized private
portals for employers and payers, and, to a lesser extent,
through offline publishing services.
Until recently, quality healthcare information has not been
easily accessible. Most consumers relied upon their physicians,
conversations with family and friends, their neighborhood
library, and magazines when they needed answers to healthcare
questions. Physicians relied upon other physicians, medical
societies, journals and other publications, reference textbooks,
conferences, and industry meetings to keep informed. The
Internet has transformed how consumers and physicians find and
utilize healthcare information and WebMD Health has been a
leader in making this happen.
The healthcare information, decision support and communications
services that we provide on our portals:
|
|
|
| |
• |
enable consumers to check symptoms, assess risks, understand
diseases and conditions, evaluate treatment options, find
healthcare providers, communicate with peers about healthcare
issues, and improve their personal health status; |
17
|
|
|
| |
• |
make it easier for physicians to access clinical reference
sources, stay abreast of the latest clinical information, learn
about new treatment options, earn continuing medical education
credits, and communicate with peers; and |
| |
| |
• |
enable employees and health plan members to access health
information and decision support tools that help them make
informed benefit, provider and treatment choices. |
Our in-depth content and timely reporting have made our Web
sites leading Internet destinations for consumers, physicians
and healthcare professionals. Our dedication to quality and
editorial integrity have made the WebMD brand among the most
recognized and trusted in healthcare. We believe that we are
well-positioned to meet consumer demand for up-to-date,
objective, reliable and relevant health information and the
information resource needs of busy healthcare professionals.
We generate revenue by providing healthcare and consumer
products companies with opportunities to reach our public portal
audiences through a variety of content sponsorship formats and
advertising products. In addition, we create and distribute
accredited online continuing medical education programs, which
are funded by grants from a variety of sponsors. We also
generate revenues by licensing our customized private portals to
employers and payers for use by their employees and members. Our
private portals carry no advertising or sponsorship programs.
Finally, we generate revenue from sales of subscriptions to our
medical reference publications, from sales of physician
directories, and from sales of advertisements in those
directories.
For information about our previously announced plan to establish
WebMD Health as a separate publicly traded company, see
“Recent Developments — Evaluation of WebMD Health
Transaction Alternatives” above.
Online Services
We utilize our health information content, decision support
applications and interactive communications services across our
public and private portals. Within each portal, the specific
content, applications and services provided are tailored and
organized in a manner designed to fulfill the specific
objectives for which that portal was created.
Portals for Consumers
Introduction. The Internet is rapidly
displacing traditional sources of information as a result of its
ease of access, breadth of information, and anonymity. According
to a 2004 study by Manhattan Research, a healthcare market
research firm, consumer satisfaction with the Internet for
healthcare information is greater than for alternative sources
such as television news, health magazines, and television and
magazine ads. A study published in 2003 by the Pew Internet and
American Life Project estimated that approximately half of all
American adults in the United States have accessed the Internet
for health information, with nearly three-quarters of those who
use the Internet reporting use of the Internet for health
information. In addition to traditionally strong public interest
in health, wellness and quality of life issues, consumers
increasingly seek to educate themselves about available
treatment options for specific health conditions, motivated in
part by the larger share of their healthcare expenditures they
are being asked to bear due to changes in the design of the
health plans being offered by insurance companies and employers.
The Internet allows consumers to have immediate access to
searchable information and dynamic interactive content.
Content. Our flagship portal for serving
consumers is WebMD Health located at www.webmd.com. Our
goal is to provide an objective, credible and trusted source of
consumer healthcare information that helps consumers play an
active role in managing their own health. We offer consumers
proprietary, medically reviewed health and wellness news
articles written daily by our staff of journalists. We also
offer searchable access to a library of health and wellness
articles, reference information and decision support tools, some
of which we own and some of which we have licensed from others.
Our articles and other content cover various health-related
topics, including: specific diseases and chronic health
conditions, drug
18
information, medical tests, pregnancy and parenting, diet and
nutrition, fitness and sports medicine, and sexuality and
relationships. WebMD Health also has features that allow
consumers to search for a physician or group practice in their
area.
Membership. Consumers can choose to become
members of WebMD Health, which allows them to make use of
additional WebMD content, decision support and communications
services. Members can also opt to receive e-mail newsletters on
health-related topics or specific conditions and to access our
communities and events. Our online communities allow our members
to participate in real-time discussions in our chat rooms and on
our message boards. Members can share experiences and exchange
information with other members who share their health condition
or concern. Members can also use our “Ask the Experts”
service to post their health questions for experts. We have
built a large database of consumers who have expressed interest
in receiving our clinical alerts, newsletters and reports on
specific diseases, conditions and other health and wellness
topics. There are no membership fees and no general usage
charges for our consumer portals; however, we do offer consumers
paid subscription services that provide consumers with access to
exclusive interactive tools, personalized in-depth content and
expertise from leaders in their fields.
Portals for Physicians and
Other Healthcare Professionals
Introduction. The Internet has become a
primary source of information for physicians and is growing
relative to other sources, such as conferences, meetings and
offline journals. According to a study done by Manhattan
Research in early 2004, approximately 97% of physicians use the
Internet, and approximately 99% of these physicians use the
Internet in relation to their practice. In particular,
approximately 63% of physicians read e-journals and
approximately 46% complete continuing medical education, or CME,
programs online on at least a monthly basis. We believe that
Medscape from WebMD, our Web site for physicians and
other healthcare professionals, located at
www.medscape.com, reaches more physicians than any other
physician-targeted Web site and is well-positioned to increase
usage by its existing members and to gain additional membership.
Content. Our goal is to enable physicians and
other healthcare professionals to stay abreast of the latest
clinical information through access to resources that include
timely medical news and coverage of professional conferences,
continuing medical education activities, full-text medical
journal articles and drug and medical literature databases. We
provide original, daily medical news stories that are written by
our staff of journalists and reviewed by our staff of
physicians, as well as news provided by professional wire
services. Our news group also regularly produces in-depth
interviews with experts and newsmakers. In addition, we provide
alerts on critical clinical issues, including pharmaceutical
recalls and product advisories. We also publish an original
electronic-only journal, Medscape General Medicine (MedGenMed),
indexed in the National Library of Medicine’s MEDLINE
reference database. MedGenMed, the world’s first
online-only, primary source, peer-reviewed medical journal, was
established in April 1999. Visitors to www.medgenmed.com
also can access specialty sections for HIV-AIDS,
Gastroenterology, Hematology-Oncology, Pulmonary Medicine,
OB-Gyn and Women’s Health, Orthopedics and Sports Medicine
and Psychiatry/ Mental Health.
Membership. Users must register to access the
content and features of Medscape from WebMD. This enables
us to deliver targeted medical content based on our
members’ registration profiles. We have areas organized by
profession or interest area, including sites for nurses,
pharmacists, medical students, and members interested in medical
policy and practice management issues. The registration process
enables professional members to choose a Medscape home page
tailored to their medical specialty or interest. For example, a
member registered as a cardiologist is automatically directed to
Medscape Cardiology, rather than a more generic home page. Every
member, however, regardless of medical specialty or professional
status, has access to Medscape’s full suite of original and
licensed content through a uniform, easy-to-use interface. There
are no membership fees and no general usage charges for the
site. Members receive MedPulse®, our weekly e-mail
newsletter, which is published in more than 35
specialty-specific editions and highlights new information and
CME activities on the Medscape site. We also provide
“Special Reports” e-mail newsletters, which contain
information on specific conditions and treatments.
19
CME. Medscape is a leading distributor of
online CME to physicians and other healthcare professionals,
offering a wide selection of free, regularly updated online CME
activities designed to educate healthcare professionals about
important diagnostic and therapeutic issues. Our CME programs
include original programs and online multimedia adaptations of
live events. In addition, our CME Live offerings provide
real-time Webcasts of continuing education programs on key
topics and conditions. These live Webcasts combine streaming
audio and slide presentations and allow participants to interact
with faculty. In 2004, approximately 927,000 physicians and
healthcare professional participants earned approximately
827,000 CME credits at Medscape, an increase of 59% and 31%,
respectively, over 2003. We provide services that automatically
track CME credits accumulated through our site for our users.
We have organized the operations of our physician portals to
provide for appropriate separation of education and promotion.
Our educational activities for healthcare professionals are
managed within Medscape, LLC, our professional education
subsidiary. Individuals who work on educational matters within
Medscape, LLC are not involved with promotional programs.
Our CME activities are planned and implemented in accordance
with the Essential Areas and Policies of the Accreditation
Council for Continuing Medical Education, or ACCME, which
oversees providers of CME credit, and other applicable
accreditation standards. In addition, some of our programs have
been produced in collaboration with other ACCME-accredited CME
providers. Medscape received provisional ACCME accreditation as
a CME provider in July 2002 and full accreditation, for the
maximum six-year period, beginning in July 2004. Such
accreditation allows Medscape to continue to certify online CME
activities. In September 2004, ACCME revised its standards for
commercial support of CME. The revised standards are intended to
ensure that CME activities of ACCME-accredited providers are
independent of providers of healthcare goods and services that
fund the development of CME. ACCME expects accredited providers
to implement these standards by May 2005. Implementation has
required additional disclosures to CME participants about those
in a position to influence content and other adjustments to the
management and operations of our CME programs. We believe that
we have modified our procedures as appropriate to meet the
revised standards. However, we cannot be certain whether these
adjustments will ensure that we meet the new standards or
predict whether ACCME may impose additional requirements.
Private Online
Portals
Introduction. In response to increases in healthcare
costs, employers and payers have been changing benefit plan
designs and taking other steps to motivate their members and
employees to use healthcare services in a cost-effective manner.
As employees are being asked to bear additional healthcare
costs, many employers and payers seek to provide information and
tools that help their employees and members become more
knowledgeable healthcare consumers and that help them choose
among offered benefit plan structures. We expect these trends to
continue and believe that WebMD Health is well-positioned to
provide a cost-effective, outsourced solution to employers and
payers that complements their existing benefit-related services
and offline educational efforts. We believe that by educating
and encouraging employees and plan members to lower health risks
and to take a more active role in their healthcare, WebMD Health
can help employers and payers realize cost savings from more
informed decision-making, while also improving healthcare
outcomes for their employees and health plan members. Other
potential benefits to an employer or plan include:
|
|
|
| |
• |
lowering benefits administration and communication costs for
employers and payers; |
| |
| |
• |
increasing effectiveness of communications by delivering
targeted, personalized messages; and |
| |
| |
• |
efficiently identifying and enrolling candidates in disease
management or other health management programs. |
We provide health and benefit management services through
private online portals that we host for employer and healthcare
payer clients. Through these portals, employees and plan members
can access much of the same online health and wellness content
that is available on our public portals, along with
20
proprietary content of our clients, as well as a suite of health
assessment, health management and cost and benefit comparison
tools. These tools combine information provided by the employer
or payer, such as plan design and eligibility information, with
self-reported information from employees or members. By making
the information and tools available through a convenient and
easy-to-use online service, employers and payers can assist
their employees and plan members in making informed benefit,
provider and treatment choices.
Content. We integrate our health and benefits
applications into the client’s intranet or Web site and
health and benefit programs and provide secure access for
employees and plan members. We are able to co-brand and
customize our private portals to match client branding and
“look and feel.” We are also able to integrate health
and benefit applications with existing health and benefit
intranets, health plan sites and pharmacy benefit manager sites,
creating a seamless experience for the end-user based on a
single registration process. Health and benefits information is
presented to each employee or health plan member as a personal
home page, with direct access to content, tools and other
resources relevant to his or her needs.
Our WebMD Health and Benefits Manager private portals include
the following:
|
|
|
| |
• |
Health Manager. Health Manager provides a user-friendly
experience that enables employees to access and manage health
and benefits information and decision support tools relevant to
their individual needs, risks and interests in one place. Health
Manager includes The WebMD Personal Health Record, a secure
online personal health record that allows employees to store and
manage health information for themselves and their family
members. We also enable employers to target employees with
information, programs or messages specific to the individual
employee’s needs. Finally, Health Manager makes available
online lifestyle modification programs, including programs for
smoking cessation, nutrition and fitness. |
| |
| |
• |
Benefit Manager. Benefit Manager is a set of benefit
decision-support applications that explain health plan benefit
choices and facilitate informed selection and use of those
benefits options. For example, CostCompare allows an employee to
forecast and model their individual premium and out-of-pocket
costs for the different types of benefit programs their plan
sponsor may offer. |
| |
| |
• |
Site Manager. Site Manager is our online service and
administrative suite of applications that provides specialized
decision support for our WebMD Health and Benefits Manager
clients. With Site Manager, employers and health plans are able
to analyze aggregate health data, address population health
risks more effectively and proactively implement preventive
programs. Site Manager’s messaging capabilities also allow
employers to streamline their communication with their employees. |
| |
| |
• |
Integration Services: We offer a proprietary suite of
applications that allows us to integrate third party
applications and data. |
Membership. Membership for each of our private portals is
limited to the employees and members of the respective employer
and health plan clients. Each member must initially register on
the private portal provided to them, at which point they are
given a unique user identification name and passcode that they
must utilize to achieve a secure sign-on each time they enter
the private portal.
Advertising and
Sponsorship
General. We compete in the market for healthcare
advertising and education services targeted to consumers and
physicians. We believe that our public portals offer a very
efficient and effective means for sponsors to reach large
audiences of health-involved consumers and clinically active
physicians. We attract sponsors and advertisers whose products
and services are targeted toward these audiences, including
pharmaceutical, biotech, medical device and consumer products
companies. Pharmaceutical companies and medical device
manufacturers currently spend only a very small portion of their
marketing and educational budgets on online media. However, we
expect this portion to increase and believe that, because of
existing sponsorship relationships with those companies and the
reach of our portals, we are well-positioned to
21
benefit from the expected increase. Our sponsors also include
consumer products companies that provide health-related
products, and we are actively pursuing additional opportunities
in that market.
The WebMD Health Network. Although television and
magazine advertising are likely to remain the largest sectors in
the healthcare-related advertising market for the next several
years, marketers are expected to increase their spending for
online marketing, including Web advertising, search, e-mail and
promotions. We offer advertisers and sponsors an effective and
efficient network that reaches a broad audience of
health-involved consumers and physicians, as well as the ability
to reach specific portions of our audience.
The WebMD Health Network consists of the following
WebMD-owned sites:
|
|
|
| |
• |
WebMD Health, our flagship consumer portal, which is
located at www.webmd.com; |
| |
| |
• |
MedicineNet, a health information site for consumers
produced and written by practicing physicians, which is located
at www.medicinenet.com; |
| |
| |
• |
RxList, an online drug directory with information on over
1,400 pharmaceutical products, which is located at
www.rxlist.com and which is also used by healthcare
professionals; and |
| |
| |
• |
Medscape from WebMD, our online Web site for physicians
and healthcare professionals, which is located at
www.medscape.com. |
In addition, we have increased the reach of the WebMD Health
Network through relationships with leading news and
information sources, including:
|
|
|
| |
• |
our content and distribution alliance with AOL, pursuant to
which we are the primary provider of healthcare content, tools
and services for AOL properties and provide related co-branded
services for AOL members; and |
| |
| |
• |
our relationships with Fox News Online and CBS News Online,
which distribute health content from WebMD through their online
health channels. |
Key benefits that we offer healthcare advertisers and other
sponsors include:
|
|
|
| |
• |
our reach of over 20 million unique users per month (based
on the monthly average during 2004), which we believe is much
larger than the number of unique users of any other sponsor
supported health-oriented Web portal; |
| |
| |
• |
our ability to attract health-involved consumers and clinically
active physicians who view approximately 165 million of our
Web pages of content per month (based on the monthly average
during 2004); |
| |
| |
• |
our ability to help advertisers and sponsors reach specific
groups of consumers and physicians by specialty, product,
disease or wellness topic, which typically produces a more
efficient and productive marketing campaign; and |
| |
| |
• |
our ability to provide advertisers and other sponsors with
objective measures of the effectiveness of their online
marketing. |
We provide healthcare advertisers and other sponsors with the
means to communicate with targeted groups of consumers and
physicians by offering placements and programs at designated
locations on our portals. The following are some of the types of
placements and programs we offer to advertisers and sponsors:
|
|
|
| |
• |
Media Solutions. These are traditional online advertising
solutions — such as banners, buttons and
badges — used to reach health-involved consumers. In
addition, clients can sponsor a variety of condition-specific or
specialty-specific email newsletters, keyword searches and
specific educational programs. |
22
|
|
|
| |
• |
Sponsored Content Solutions. These are customized
collections of articles, topics, and decision support tools,
sponsored by clients and distributed within WebMD environments. |
| |
| |
• |
Patient Education Centers. Patient education centers are
sponsored destinations on Medscape for physicians to access
patient education materials on a particular topic or condition. |
We do not place advertising or accept sponsorship on private
portals we develop and host for employers and payers for use by
their employees and members.
We receive revenue for CME and other educational programs from
pharmaceutical and medical device companies, as well as
foundations and government agencies. The following are some of
the CME products for which we receive funding:
|
|
|
| |
• |
Conference Coverage. Medscape provides coverage of major
medical conferences. |
| |
| |
• |
CME Circle. CME Circle provides online multimedia
extensions of sponsor-supported CME activities, including
symposia, monographs and CD-ROMs. |
| |
| |
• |
CME Live. These are original Medscape online events
featuring live streaming video, audio and synchronized visual
presentation by experts. |
| |
| |
• |
CME Cases. These are original CME activities presented by
healthcare professionals in a patient case format. |
| |
| |
• |
Resource Centers. Resource centers are grant-based
sponsored disease or condition-specific areas, for conditions
such as congestive heart failure or breast cancers. These
centers include news, expert columns, guidelines and reference
material. |
Publishing Services Group: Offline Publications
WebMD Health’s Publishing Services Group is a complementary
business to our online services and extends the reach of our
brand and our influence with health-involved consumers and
clinically active physicians.
The Little Blue Book. In 2003, we acquired the company
that publishes The Little Blue Book, a leading source of
medical practice contact information for physicians since 1988.
The pocket-sized reference book is published annually in 146
local editions. We also use the information used to produce
The Little Blue Book to generate both online and
offline directory and information products. Physicians utilize
The Little Blue Book for local and up-to-date physician,
pharmacy and hospital contact information. Physicians are listed
free of charge in their local metropolitan-area edition, along
with their specialties, HMO affiliations, hospital affiliations,
office addresses, telephone numbers and Medicare-assigned Unique
Physician Identification Number. WebMD Health receives revenue
from sales of The Little Blue Book, as well as from
sponsors and advertisers in The Little Blue Book, most of
which are pharmaceutical companies.
Reference Publications. WebMD also publishes medical
reference publications, including the reference texts
ACP Medicine and ACP Surgery: Principles and Practice.
ACP Medicine and ACP Surgery are official
publications of the American College of Physicians and the
American College of Surgeons, respectively, although the rights
are wholly owned by WebMD Health. They are available for sale by
subscription to individual physicians and to institutions in
multiple formats (print, CD-ROM and Online). ACP Medicine has
been a comprehensive and regularly updated internal medicine
reference for over 25 years.
23
Editorial, Privacy, Education and Advertising and Promotion
Policies
General. We have adopted internal policies and practices
relating to, among other things, content standards and user
privacy, designed to foster our relationships with our users.
Some of those policies are described below. In addition, we
participate in the following external, independent verification
programs:
|
|
|
| |
• |
URAC. WebMD has been awarded e-Health accreditation from
URAC, an independent accrediting body that has reviewed and
approved the WebMD.com site for compliance with its more than 50
quality and ethics standards. |
| |
| |
• |
TRUSTe. WebMD is a licensee of the TRUSTe Privacy
Program. TRUSTe is an independent, non-profit organization whose
goal is to build users’ trust and confidence in the
Internet. In January 2005 a panel of privacy experts, sponsored
by TRUSTe, ranked WebMD among the ten most trusted companies in
America for privacy. |
| |
| |
• |
Health on the Net Foundation. Our WebMD.com and
Medicinet.com sites comply with the principles of the HON Code
of Conduct established by the Health on the Net Foundation. |
Editorial Practices. Our news stories and other original
content and reporting presented on our portals are based on our
editors’ selections of the most important and relevant
health events occurring on any given day, obtained from an array
of sources, including peer-reviewed medical journals, medical
conferences, federal or state government actions and enterprise
material derived from interviews with medical experts. We also
focus on: seasonal interests, including programs such as Healthy
Holidays, Fourth of July Safety and Allergy Seasons; public
health awareness, such as Breast Cancer Awareness Month and
Diabetes Awareness Month; and emerging health trends such as the
latest in nutrition, fitness, aging and healthy living. Each
news story is reviewed by a medical editor for accuracy,
appropriateness of medical language and proper characterization
of the findings. We also license health and wellness content
from third parties for publication on our Web sites and, prior
to its publication, confirm that the third party has applied
appropriate editorial policies.
Privacy Policies. WebMD understands how important the
privacy of personal information is to our users. Our Privacy
Policies are posted on our Web sites and tell users what
information we collect about them and about their use of WebMD
Health and its services. Our Privacy Policies also explain the
choices they have about how their personal information is used
and how we protect that information.
Continuing Medical Education Services. Our CME activities
are planned and implemented in accordance with the policies of
the Accreditation Council for Continuing Medical Education
(ACCME), which overseas providers of CME credits and other
applicable accreditation standards.
Advertising and Promotion Policies. All advertisements,
sponsorships and promotions that appear on our Web sites are
displayed in compliance with our advertising and promotions
policies. Among other things, as a matter of policy, we have
sole discretion for determining the types of advertising that we
accept, and under no circumstances would accept advertising
that, in our opinion, is not factually accurate or not
undertaken in good taste. We also recognize and maintain a
distinct separation between advertising content that appears on
our Web site and editorial content that we publish. We take
meaningful steps to ensure that our users can easily distinguish
between sponsored content and our news reporting and other
editorial content.
Technological Infrastructure
Our Internet-based services are delivered through Web sites
designed to address the healthcare information needs of
consumers and healthcare professionals with easy-to-use
interfaces, search functions and navigation capabilities. We use
customized content management and publishing technology to
develop, edit, publish, manage, and organize the content for our
Web sites. We use ad serving technology to store, manage and
serve online advertisements in a contextually relevant manner to
the extent possible. We also use specialized software for
delivering personalized content through the WebMD Health and
Benefits Manager and, for registered members, through our public
Web sites. WebMD Health has invested and
24
intends to continue to invest in software and systems that allow
it to meets the demands of our users and sponsors.
Continued development of our technological infrastructure is
critical to our success. Our development teams work closely with
marketing and account management employees to create content
management capabilities, interactive tools and other
applications for use across all of our portals. The goal of
WebMD Health’s current and planned investments is to
further develop a unified content and technology platform
serving various end-users, including consumers and physicians,
and to create innovative services that provide value for
healthcare advertisers, employers, payers, and other sponsors.
Sales and Marketing
A dedicated team of sales, marketing and account management
personnel represents our public online portals to pharmaceutical
companies, medical device companies, health plans and other
healthcare and consumer companies. These individuals work
closely with clients and potential clients to develop innovative
means of using our public portals to bring their companies, and
their products and services, to the attention of targeted groups
of consumers and healthcare professionals, and to create
channels of communication with these audiences.
We market our private online portals to employers and health
plans through a dedicated sales, marketing and account
management team and through relationships with employee benefits
consultants and other companies that assist employers in
purchasing or managing employee benefits, including Fidelity
Employer Services Company.
We seek to attract traffic and new members to our consumer Web
sites through a variety of methods, including online and offline
media campaigns. We promote WebMD Health’s subscription
services through our consumer portals and our e-mailed
newsletters.
We seek to attract traffic and new members to Medscape through a
variety of methods, including advertising on other Internet
sites and in medical journals, pharmaceutical and other
healthcare publications and other targeted publications. We also
promote Medscape at industry conferences, trade shows and
medical meetings and by using direct mail.
Competition for Our Healthcare Information Services and
Technology Solutions
The markets for healthcare information services and technology
solutions are intensely competitive, continually evolving and,
in some cases, subject to rapid technological change. We have
many competitors, including:
|
|
|
| |
• |
healthcare information system vendors and support providers,
including physician practice management system and EMR system
vendors and support providers; |
| |
| |
• |
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, search engines or Web sites targeted
to the healthcare industry, healthcare consumers and/or
physicians generally, including both commercial sites and
not-for-profit sites; |
| |
| |
• |
health insurance companies, pharmacy benefit management
companies and pharmacies that provide or are developing
electronic transaction services for use by their members and
customers; |
| |
| |
• |
publishers and distributors of traditional offline media,
including those targeted to healthcare professionals, many of
which have established or may establish their own Web sites or
partner with other Web sites; |
25
|
|
|
| |
• |
general purpose consumer online services and portals and other
high-traffic Web sites that provide access to healthcare-related
content and services; |
| |
| |
• |
public sector and non-profit Web sites that provide healthcare
information without advertising or commercial
sponsorships; and |
| |
| |
• |
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. Major software, hardware 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 ours.
Competitors for one or more of our healthcare information
services and technology solutions include, among others, AMICAS,
Inc., Amicore (a joint venture of IBM Corporation, Microsoft
Corporation and Pfizer, Inc.), Allscripts Healthcare Solutions,
Cerner Corporation, Computer Sciences Corp., Electronic Data
Systems Corporation, Eclipsys Corporation, First Consulting
Group, Inc., General Electric Corporation, IBM Corporation, IDX
Systems Corporation, iVillage Inc., McKesson Corporation,
Microsoft Corporation, Misys plc, NDCHealth Corporation, Per-Se
Technologies, Inc., ProxyMed, Inc., Quality Systems, Inc.,
RxHub, Siemens Corporation, SureScripts, and TriZetto Group,
Inc. 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.
Some of our existing payer and provider customers and some of
our strategic partners 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, through affiliated
clearinghouses, Web portals and other means, electronic data
transmission services to healthcare providers that allow the
provider to have a direct connection to the payer, bypassing
third party EDI service providers such as WebMD Business
Services. 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. We cannot provide assurance that we will be able to
maintain our existing links to payers or develop new connections
on satisfactory terms, if at all. In addition, some of our other
services allow healthcare payers to outsource business processes
that they have been or could be performing for themselves and,
in order for us to be able to compete, use of our services must
be more efficient for them than use of their internal resources.
WebMD Health faces competition both in attracting members and
visitor traffic and in generating revenue from sponsors and
others. We compete with numerous companies and organizations for
the attention of healthcare professionals and consumers
including traditional offline media such as network and cable
television, print journals, conferences, continuing medical
education programs and symposia. In addition, many of these
providers of offline healthcare information resources,
particularly the larger ones, have also established Web sites
that compete with us or have partnered with competitor sites. We
also face significant competition from the numerous
healthcare-related Web sites on the Internet competing for
users’ attention and, since there are no substantial
barriers to entry, expect additional competitors to continue to
enter the market. Healthcare information for consumers is
provided, free of charge and without advertising, on sites
provided by hospitals, HMOs, managed care organizations,
insurance companies and other healthcare providers and payers
that offer healthcare information to their customers or members.
The competition we face may result in advertising and
sponsorship price reductions, reduced margins or loss of market
share, any of which could adversely affect our financial results.
WebMD Practices Services faces competition for the support
services it markets to owners of The Medical Manager and Intergy
practice management systems, as well as for similar services
that we market to owners of certain other practice management
systems that we have acquired. See “WebMD Practice
Services — Maintenance and Support Services” and
“WebMD Practice Services — Practice Management
Systems — Other Practice Management Systems”
above. Physician practices may seek such support from third
parties, including businesses that support or manage information
technology for various types of
26
clients and businesses that specialize in physician office
management systems, some of whom may formerly have been
independent dealers of The Medical Manager software or of
practice management systems we have acquired. We cannot provide
assurance that we will be able to compete successfully against
these service providers. In addition, some physician practices,
especially larger ones, may use their own employees and other
internal resources to support their practice management systems.
POREX
Overview
Through Porex, we develop, manufacture and distribute
proprietary porous plastic products and components used in
healthcare, industrial and consumer applications. Porex also
works with porous structures using other materials such as fiber
and membranes. Our Porex customers include both end-users of its
finished products as well as manufacturers that include our
components in their products, which we refer to as original
equipment manufacturers or OEMs.
Porex is an international business with manufacturing operations
in North America, Europe and Asia. Porex’s global sales and
customer service network markets its products to customers in
more than 65 countries. In 2004, Porex derived approximately 57%
of its revenues from the United States, approximately 31% from
Europe, approximately 9% from Asia and approximately 3% from
Canada and Latin America.
Porex Products
Porous Plastics. Porous plastics are permeable plastic
structures having omni-directional (porous in all directions)
inter-connecting pores to permit the flow of fluids and gases.
These pores, depending upon the number and size, control the
flow of liquids and gases. We manufacture porous plastics with
pore sizes between approximately 1 and 500 micrometers. One
micrometer is equal to one-millionth of a meter; an object of 40
micrometers in size is about as small as can be discerned by the
naked eye. Our ability to control pore size provides the
opportunity to serve numerous applications, including:
|
|
|
| |
• |
Filtering. In filtration applications, the pore structure
acts as both a surface filter and a depth filter. The structure
acts as a surface filter by trapping particles larger than its
average pore size and as a depth filter by trapping much smaller
particles deep in its complex channels. Unlike the direct
passages in woven synthetic materials and metal screens, the
pores in porous plastics join to form many tortuous paths.
Examples of these applications include: filters for drinking
water purification, air filters, fuel filters for power tools
and appliances and other liquid filters for clarification of
drugs, blood separation and chemicals. |
| |
| |
• |
Venting. In venting applications, the pore structure
allows gases to easily escape while retaining fluids. Examples
of these applications include: vents for medical devices,
printers and automotive batteries; and caps and closures. |
| |
| |
• |
Wicking. When used as a wicking device, the pore
structure creates capillary channels for liquid transfer
allowing fluid to flow, or wick, from a reservoir. Examples of
these applications include: nibs or tips for writing
instruments, such as highlighters and coloring markers; fluid
delivery components for printers and copiers; fragrance wicks;
and absorbent media for diagnostic testing. |
| |
| |
• |
Diffusing. When used in diffusion applications, porous
plastic components emit a multitude of small, evenly distributed
bubbles. Examples of these applications include air diffusers
for fermentation, metal finishing and plating. |
| |
| |
• |
Muffling. In muffling applications, exhaust air is
channeled through a tortuous path, causing significant sound
reduction by breaking up and diffusing the sound waves. Examples
of these applications include industrial mufflers for pneumatic
equipment. |
27
We produce porous plastic components and products in our own
manufacturing facilities, which are equipped to manufacture
products for our customers in custom-molded shapes, sheets,
tubes or rods, depending on customer needs.
Other Porous Media. We believe that, in some
applications, fiber and other porous membranes are preferred
over our standard porous plastic materials. We use fiber
technology for applications requiring high flow rates. Based on
the same principles used in making our standard porous plastic
products, fibers are thermally bonded into a matrix. This fiber
material is well-suited for use in filtration and wicking
applications, including our products for the consumer fragrance
market. We also use sub-micron porous polytetrafluoroethylene,
or PTFE, membranes to serve product markets where porous
plastics do not have the physical properties to meet application
demands. PTFE material is commonly known as Teflon®.
Markets for Our Porous Plastic Products. Our porous
plastic products are used in healthcare, consumer and industrial
applications, including the following:
|
|
|
| |
• |
Healthcare Products. We manufacture a variety of porous
plastic components for the healthcare industry that are
incorporated into the products of other manufacturers. These
components are used to vent or diffuse gases or fluids and are
used as membrane supports, including catheter vents,
self-sealing valves in surgical vacuum canisters, fluid
filtration components and components for diagnostic devices. |
|
|
| |
We also use proprietary porous plastic technology to produce
MEDPOR® Biomaterial implantable products for use in
reconstructive and aesthetic surgery of the head and face. These
permanent implants, which are composed of biocompatible porous
high-density plastics, are biomaterial alternatives for
replacement or augmentation of bone and cartilage. Their unique
porous structure allows for rapid in growth of the
patient’s tissue and capillary blood vessels. Since the
initial product introduction in 1985, we have continued to
introduce new shapes and sizes of MEDPOR products to meet
surgeons’ needs. |
|
|
|
| |
• |
Consumer Products. Our porous plastics are used in a
variety of office and home products. These products include
writing instrument tips, or “nibs,” which we supply to
manufacturers of highlighting pens and children’s coloring
markers. The porous nib conducts the ink stored in the pen
barrel to the writing surface by capillary action. Our porous
plastic components are also found in products such as air
fresheners, power tool dust canisters and computer printers. We
also produce a variety of porous plastic water filters used to
improve the taste and safety of drinking water. |
| |
| |
• |
Industrial Products. We manufacture a variety of custom
porous plastic components for industrial applications, designed
to customer specifications as to size, rigidity, porosity and
other needs, including automobile battery vents and various
types of filters and filtration components. |
| |
| |
• |
Operating Room Products. We also produce two product
lines for the operating room supplies market: surgical markers
and surgical drainage systems. |
Competition
Porex operates in competitive markets and its products are, in
general, used in applications that are affected by technological
change and product obsolescence. The competitors for
Porex’s porous plastic products include other producers of
porous plastic materials as well as companies that manufacture
and sell products made from materials other than porous plastics
that can be used for the same purposes as Porex’s products.
For example, Porex’s porous plastic pen nibs compete with
felt and fiber tips manufactured by a variety of suppliers
worldwide. Other Porex porous plastic products compete,
depending on the application, with membrane material, porous
metals, metal screens, fiberglass tubes, pleated paper,
resin-impregnated felt, ceramics and other substances and
devices. Porex’s competitors include, among others, Pall
Corporation, Millipore Corporation, Filtrona (a division of
Bunzl plc), Porvair plc and Whatman plc. The MEDPOR®
Biomaterial implantable products compete for surgical use
against autogenous and allograph materials and other alloplastic
biomaterials. Porex’s surgical drains and markers compete
against a variety of products from several manufacturers.
28
Some of Porex’s competitors may have greater financial,
technical, product development, marketing and other resources
than Porex does. We cannot provide assurance that Porex will be
able to compete successfully against these companies or against
particular products and services they provide or may provide in
the future.
Raw Materials
The principal raw materials used by Porex include a variety of
plastic resins that are generally available from a number of
suppliers. Many of Porex’s products also require high-grade
plastic resins with specific properties as raw materials. While
Porex has not experienced any material difficulty in obtaining
adequate supplies of high-grade plastic resins that meet its
requirements, it relies on a limited number of sources for some
of these plastic resins. If Porex experiences a reduction or
interruption in supply from these sources, it may not be able to
access alternative sources of supply within a reasonable period
of time or at commercially reasonable rates, which could have a
material adverse effect on its business and financial results.
Marketing
Sales and marketing of our porous plastic products are conducted
by a sales and marketing team of professionals with in-depth
knowledge of plastic technologies. Marketing activities include
advertising in various trade publications and directories and
participating in tradeshows. Sales to OEM customers in the
United States of our porous plastic products are made directly
by our sales and marketing team. Internationally, these products
are sold by our sales and marketing team and through independent
distributors and agents.
We sell our MEDPOR Biomaterial products directly to medical
centers, trauma centers, hospitals and private practice surgeons
using independent and direct sales representatives.
Internationally, these products are sold in over 40 countries
through local distributors. We provide training, materials and
other support to the sales representatives and distributors.
Market awareness is primarily achieved through exhibitions in
conjunction with medical specialty meetings, presentations by
surgeons at medical meetings, journal publication of clinical
papers, a group sponsored “visiting speaker” program
and direct mail programs. Journal advertising is placed on a
selected basis and we maintain an active database of contacts
for targeted direct mail programs.
EMPLOYEES
As of December 31, 2004, we had approximately 5,940
employees, of which approximately 180 work in our corporate
headquarters or related functions, approximately 2,690 are WebMD
Business Services employees, approximately 1,960 are WebMD
Practice Services employees, approximately 510 are WebMD Health
employees and approximately 600 are Porex employees.
DEVELOPMENT AND ENGINEERING
We have developed internally and acquired through acquisitions
healthcare information services and technology solutions
products and services. Our development and engineering expense
totaled $54.2 million in 2004, $43.0 million in 2003,
and $43.5 million in 2002.
The markets for some of our products and services are
characterized by rapid change and technological advances. Our
future success will depend, in part, upon our ability to enhance
our existing products and services, to respond effectively to
technological changes, and to introduce new and updated
applications and technologies that address the changing needs of
our customers. Accordingly, we intend to continue to make
investments in development and engineering and to recruit and
hire experienced development personnel. However, we cannot
provide assurance that we will be able to successfully complete
the development of new products or services or of enhancements
to existing products or services.
29
Further, there can be no assurance that products or technologies
developed by others will not adversely affect our competitive
position or render our products, services or technologies
noncompetitive or obsolete.
INTELLECTUAL PROPERTY
We rely upon a combination of patent, trade secret, copyright
and trademark laws, license agreements, confidentiality
procedures, employee and client nondisclosure agreements and
technical measures to protect the intellectual property used in
our businesses.
We use numerous trademarks, trade names and service marks for
healthcare information services and technology solutions,
including WebMD®, Web-MD®, WebMD Health®, dakota
imagingtm,
Digital Office Manager®,
DIMdx®,
Envoy®, ExpressBill®, Image
Directorsm,
Intergy®, Medifax®, Medifax-EDI®, Medscape®,
Publishers’ Circle®, The Little Blue
Booktm,
The Medical Manager®, and
ViPSsm.
In addition, Porex uses trademarks and trade names, including
POREX®,
Lateral-Flotm,
MEDPOR®, SQUEEZE-MARK®, and TLS®. We also use
numerous other registered and unregistered trademarks and
service marks for our various products and services. In addition
to our trademark registrations and applications, we have
registered the domain names “webmd.com,”
“my.webmd.com” and “medscape.com” and
numerous other domain names that either are or may be relevant
to conducting our business. Our inability to protect our marks
and domain names adequately could have a material adverse effect
on our business and hurt us in establishing and maintaining our
brands.
We also rely on a variety of intellectual property rights that
we license from third parties, including our Internet server
software and healthcare content used on our Web sites, as well
as various products incorporated into our physician practice
management systems. These third party licenses may not continue
to be available to us on commercially reasonable terms. Our loss
of or inability to maintain or obtain upgrades to any of these
licenses could significantly harm us. In addition, because we
license content from third parties, we may be exposed to
copyright infringement actions if these parties are subject to
claims regarding the origin and ownership of that content.
The steps we have taken to protect our proprietary rights may
not be adequate, and we may not be able to secure trademark or
service mark registrations for marks in the United States or in
foreign countries. Third parties may infringe upon or
misappropriate our copyrights, trademarks, service marks and
similar proprietary rights. In addition, effective copyright and
trademark protection may be unavailable or limited in many
foreign countries, and the global nature of the Internet makes
it impossible to control the ultimate destination of our
services. It is possible that competitors or others will adopt
product or service names similar to our names, which could
impede our efforts to build brand identity and possibly lead to
customer confusion. Our inability to protect our marks and
domain names adequately would hurt our ability to establish and
maintain our brands. In the future, litigation may be necessary
to enforce and protect our trade secrets, copyrights and other
intellectual property rights. Litigation would divert management
resources and be expensive and may not effectively protect our
intellectual property.
Substantial litigation regarding intellectual property rights
exists in the industries in which we participate, and we expect
that this may continue to increase as the number of competitors
grows and the functionality of products overlaps. Although we
believe that our products do not infringe on the intellectual
property rights of others, we cannot provide assurance that such
a claim will not be asserted against us in the future, or that a
license or similar agreement will be available on reasonable
terms in the event of an unfavorable ruling on any such claim.
We have several patents covering our software technology. Due to
the nature of our application software, we believe that patent
protection is less significant than our ability to further
develop, enhance and modify our current services and products.
However, any infringement or misappropriation of our proprietary
software and databases could disadvantage us in our efforts to
attract and retain customers in a highly competitive market and
could cause us to lose revenue or to incur substantial
litigation expense. Moreover, numerous patents have been issued
relating to Internet business methods. While we are unaware of
any patent the loss of which would impact our ability to conduct
our business, defense of a
30
patent infringement claim against us could divert management and
monetary resources, and an adverse judgment in any such matter
may negatively impact our ability to conduct our business in the
manner we desire.
Porex relies upon a combination of patent and trade secret laws,
license agreements, confidentiality procedures, employee and
client nondisclosure agreements and technical measures in its
efforts to protect its intellectual property and proprietary
rights. For example, Porex seeks to protect its proprietary
manufacturing technology by designing and fabricating its own
manufacturing equipment and molds. In addition, in some cases,
Porex has patented specific products and processes and intends
to do so in some instances in the future. Porex seeks to take
appropriate steps to protect its intellectual property and
proprietary rights and intends to defend those rights as may be
necessary. However, we cannot provide assurance that the steps
it has taken to protect these rights are adequate. In the
future, litigation may be necessary to enforce and protect those
rights, which would divert management resources, may be
expensive and may not effectively protect those rights.
GOVERNMENT REGULATION
Introduction
General. This section of the Annual Report contains a
description of laws and regulations applicable to our
businesses, either directly or through their effect on our
healthcare industry customers. Existing and new laws and
regulations affecting the healthcare, information technology,
Internet and plastic industries could create unexpected
liabilities for us, cause us to incur additional costs and could
restrict our operations. Many of the laws that affect us, and
particularly those applying to healthcare, are very complex and
may be subject to varying interpretations by courts and other
governmental authorities. Our failure, or the failure of our
business partners, to accurately anticipate the application of
these laws and regulations, or other failure to comply, could
create liability for us, result in adverse publicity and
negatively affect our businesses.
Healthcare Regulation. Most of our revenue is either from
the healthcare industry or could be affected by changes
affecting healthcare spending. The healthcare industry is highly
regulated and is subject to changing political, regulatory and
other influences. These factors affect the purchasing practices
and operations of healthcare organizations as well as the
behavior and attitudes of consumers. Federal and state
legislatures and agencies periodically consider programs to
reform or revise aspects of the United States 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 products and services.
We are unable to predict future proposals with any certainty or
to predict the effect they would have on our businesses.
Many healthcare laws are complex and their application to
specific products and services may not be clear. In particular,
many existing healthcare laws and regulations, when enacted, did
not anticipate the healthcare information services and
technology solutions that we provide. However, these laws and
regulations may nonetheless be applied to our products and
services.
Other Regulation. This section of the Annual Report also
contains a description of other laws and regulations, including
general consumer protection laws and Internet-related laws, that
affect some of our businesses. Laws and regulations have been
adopted, and may be adopted in the future, that address
Internet-related issues, including online content, privacy,
online marketing, unsolicited commercial e-mail, taxation,
pricing, and quality of products and services. Some of these
laws and regulations, particularly those that relate
specifically to the Internet, were adopted relatively recently
and their scope and application may still be subject to
uncertainties. Interpretations of these laws, as well as any new
or revised law or regulation, could decrease demand for our
services, increase our cost of doing business, or otherwise
cause our business to suffer.
31
Health Insurance Portability and Accountability Act of
1996
General. 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. The five rules
published in final form are:
|
|
|
| |
• |
the Standards for Electronic Transactions, published
August 17, 2000, which we refer to as the Transaction
Standards; |
| |
| |
• |
the Standards for Privacy of Individually Identifiable Health
Information, published December 28, 2000, which we refer to
as the Privacy Standards; |
| |
| |
• |
the Standard Unique Employer Identifier, published May 31,
2002; |
| |
| |
• |
the Health Insurance Reform: Security Standards, published
February 20, 2003, which we refer to as the Security
Standards; and |
| |
| |
• |
the Standard Unique Health Identifier for Health Care Providers,
published January 23, 2004, which we refer to as the NPI
Standard. |
These rules took or will take effect on October 16, 2000,
April 14, 2001, July 30, 2002, April 21, 2003 and
May 23, 2005, respectively, with compliance by healthcare
providers, healthcare clearinghouses and large health plans
required under the rules two years following the respective
effective dates. Small health plans are given an additional year
to comply. On December 27, 2001, the compliance date for
the Transaction Standards was extended to October 16, 2003 for
any covered entity that submitted to the Secretary of the United
States Department of Health and Human Services, or HHS, a plan
of how the entity would come into compliance with the
requirements by that deadline.
Transaction Standards. The Transaction Standards
establish format and data content standards for the most common
healthcare transactions, using technical standards promulgated
by recognized standards publishing organizations. These
transactions include healthcare claims, enrollment, payment and
eligibility. The Transaction Standards were intended to make it
easier for payers and providers to send and receive healthcare
transactions electronically. 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, including
WebMD Business Services and Medical Manager Network Services.
October 16, 2003 was the deadline for covered entities to
comply with HIPAA’s Transaction Standards. Failure to
comply with the Transaction Standards may subject covered
entities, including WebMD Business Services, to civil monetary
penalties and possibly to criminal penalties. The Centers for
Medicare & Medicaid Services, or CMS, is responsible
for enforcing the Transaction Standards. On July 24, 2003,
in response to concerns communicated to CMS regarding the
readiness of a significant portion of the covered entities for
the October 16 deadline and the consequences to the healthcare
industry if significant claim processing problems were to occur
at that time, CMS released its “Guidance on Compliance with
HIPAA Transactions and Code Sets After the October 16, 2003
Implementation Deadline” (which we refer to as the CMS
Guidance). In addition, on July 24, 2003, CMS officials
participated in an “Open Door Forum” teleconference
during which they provided additional clarification on planned
enforcement practices. CMS also urged the adoption of
“contingency plans” to help prevent disruptions in the
healthcare payment system. Under its contingency plan for
Medicare, CMS continues to accept claims in both HIPAA standard
and legacy formats, with the legacy formats to be accepted for a
period to be determined by CMS based upon a regular reassessment
of the readiness of its electronic “trading partners.”
In response, WebMD Business Services announced a contingency
plan, pursuant to which it continues to process HIPAA standard
transactions and, for a limited period of time, will also
process legacy transactions as appropriate based on the needs of
our business partners. On February 27, 2004, CMS modified
its Medicare contingency plan to delay the payment of electronic
claims that are not HIPAA-compliant. Specifically, effective
July 1, 2004, only claims that are compliant with the
Transaction
32
Standards are reported as electronic media claims, which may be
paid no earlier than after a 13 day waiting period. All
other claims (including both electronic claims that are not
compliant with the Transaction Standards, as well as paper
claims) may be paid no earlier than after a 26 day waiting
period.
CMS has made clear that it expects each party to every
transaction to be accountable for compliance with the new
standards. However, the CMS Guidance provides for a flexible,
complaint-driven enforcement strategy that will take into
consideration good faith efforts to comply with the Transaction
Standards. In evaluating good faith efforts, CMS stated that it
will consider not only the entity’s efforts on behalf of
itself, but its efforts — through outreach and
testing — to ensure that its trading partners are also
in compliance. CMS also noted that its expectations regarding
compliance efforts will vary with the size and type of covered
entity. We understand that CMS expects that larger organizations
will have more sophisticated compliance efforts and outreach to
their smaller trading partners. We cannot provide assurance
regarding how CMS will regulate clearinghouses in general or
WebMD Business Services in particular. We continue to work with
payers, providers, practice management system vendors and other
healthcare participants to implement the Transaction Standards.
Implementation of the Transaction Standards has presented us
with significant technical and operational challenges. As with
any highly complex transition involving significant
modifications to trading partner systems, we have experienced
some problems during this process. We seek to resolve all such
problems when identified, but no assurance can be given that we
will identify and resolve all problems promptly.
As various healthcare entities are in different stages of
migration during the transition, WebMD Business Services is
working to translate claim information from non-standard to
standard formats and vice versa. In addition, the Transaction
Standards require healthcare providers to collect and supply
more information than they have in the past in order to submit a
healthcare claim. A majority of the claims we currently receive
from submitters continue to use legacy formats and, of those
claims submitted to us in HIPAA-standard formats, many do not
contain the additional data content provided for in the
Transaction Standards. Some providers who can submit claims in
the HIPAA standard formats cannot yet collect all of the data
payers may require to process the claim. In order to assist in
claims processing, our clearinghouse software edits the
information submitted in a claim using logic, mapping and
defaults. A small number of our submitters currently send some
additional HIPAA data content that does not yet pass through our
clearinghouse.
Transaction clearinghouses can provide a great deal of support
for the healthcare industry in addressing the requirements of
the Transaction Standards and in overcoming other connectivity
challenges that HIPAA does not eliminate. Healthcare payers and
providers who are unable to exchange data in the required
standard formats can achieve Transaction Standards compliance by
contracting with a clearinghouse, like WebMD Business Services,
to translate between standard and non-standard formats. As a
result, use of a clearinghouse has allowed numerous providers
and payers to move to the Transaction Standards independently
and at different times, reducing transition costs and risks. In
addition, the standardization of formats and data standards
envisioned by the Transaction Standards has only partially
occurred. Multiple versions of a HIPAA standard claim have
emerged as each payer defines for itself what constitutes a
“HIPAA-compliant” claim. Payers have published more
than 600 different “companion documents” setting forth
their individual interpretations and implementation of the
government guidelines. We believe that use of clearinghouses
will continue to be the most efficient way for most providers to
transact electronically with multiple payers. Nonetheless, the
Transaction Standards may facilitate use of direct EDI links for
transmission of such transactions without a clearinghouse
between some payers and providers. Any significant increase in
the utilization of links between healthcare providers and payers
without use of a third party clearinghouse could have a material
adverse effect on WebMD Business Services’ transaction
volume and financial results. In addition, any increase in the
ability of payers to bypass third party EDI service providers
may adversely affect the terms and conditions we are able to
negotiate in our agreements with them, which could also have a
material adverse impact on WebMD Business Services’
business and financial results.
WebMD has taken a leadership role in efforts to bring healthcare
constituencies together to seek ways to achieve the reductions
in healthcare administrative costs promised by HIPAA. However,
our
33
technological and strategic responses to the Transaction
Standards may result in conflicts with or other adverse changes
in our relationships with, some healthcare industry
participants, including some who are existing or potential
customers for our products and services or existing or potential
strategic partners.
Privacy Standards. The Privacy Standards establish a set
of basic national privacy standards for the protection by health
plans, healthcare clearinghouses, healthcare providers and their
business associates of individually identifiable health
information. This rule became effective on April 14, 2001
and the compliance date for most entities was April 14,
2003. The Privacy Standards apply, either directly or through
our contractual relationships, to the portions of our business
that process healthcare transactions, that provide certain
information technology and data management services for other
participants in the healthcare industry, or that enable
electronic communications of patient information among
healthcare industry participants. In addition, WebMD Practice
Services provides information technology products designed to
assist physician offices in their compliance with the Privacy
Standards. Some of our businesses may use, as permitted by the
Privacy Standards, health information which has been
de-identified. Although determining whether data has been
sufficiently de-identified may require complex factual and
statistical analyses and may be subject to interpretation, we
believe that our use of such information is in accordance with
the Privacy Standards.
The Privacy Standards provide for civil and criminal liability
for their breach and require 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 authorizations for some activities, and to
provide certain access rights to individuals. There can be no
assurances that we will adequately address the risks created by
the Privacy Standards or that we will be able to take advantage
of any resulting opportunities. In addition, we are unable to
predict what changes to the Privacy Standards might be made in
the future or how those changes could affect our business.
Unique Employer Identifier Standard. The Unique Employer
Identifier Standard establishes a standard for identifying
employers in healthcare transactions where information about the
employer is transmitted electronically, as well as requirements
concerning its use by covered entities. This rule requires the
use of an employer identification number as assigned by the IRS
on all standard transactions that require an employer identifier
to identify a person or entity as an employer. This standard
applies to the portions of our business that process healthcare
transactions or provide certain technical services to other
participants in the healthcare industry, and certain of our
portal services may be affected through contractual
relationships. The compliance date for most participants in the
healthcare industry for the Unique Employer Identifier Standard
was July 30, 2004. The effect of the Unique Employer
Identifier Standard on our business is difficult to predict and
there can be no assurances that we will adequately address the
risks created by the Unique Employer Identifier Standard and its
implementation or that we will be able to take advantage of any
resulting opportunities.
Security Standards. On February 20, 2003, HHS
published the final Security Standards. The Security Standards
establish detailed requirements for safeguarding patient
information that is electronically transmitted or electronically
stored. The rule establishes 42 implementation specifications,
20 of which are “required,” meaning they must be
implemented as specified in the rule. Twenty-two are
“addressable.” Complying with addressable
implementation specifications requires a business to assess
whether they constitute a reasonable and appropriate safeguard
for the particular business; if not, an alternative approach
must be designed and implemented to achieve the particular
standard. The Security Standards apply, either directly or
through our contractual relationships, to the portions of our
business that process healthcare transactions, that provide
certain information technology and data management services for
other participants in the healthcare industry, or that enable
electronic communications of patient information among
healthcare industry participants. In addition, WebMD Practice
Services provides products designed to assist physician offices
in their compliance with the Security Standards.
Most participants in the healthcare industry must be in
compliance with the Security Standards by April 21, 2005.
Some of the Security Standards are technical in nature, while
others may be addressed through policies and procedures for
using information systems. As of the date of this Annual Report,
we
34
expect that our infrastructure and processes will be in
compliance with the Security Standards by the April 21,
2005 deadline. However, we are unable to predict what changes
might be made to the Security Standards prior to or after the
implementation deadline or how those changes might help or
hinder our business. The effect of the Security Standards on our
business is difficult to predict and there can be no assurances
that we will adequately address the risks created by the
Security Standards and their implementation or that we will be
able to take advantage of any resulting opportunities.
NPI Standard. On January 23, 2004, HHS published the
final HIPAA standard for a unique health identifier for
healthcare providers, commonly referred to as the National
Provider Identifier (NPI) Standard. The NPI Standard
requires healthcare providers that transmit any health
information in electronic form in connection with a HIPAA
covered transaction to obtain a single, 10 position all-numeric
NPI from the National Provider System, and to use the NPI in
standard transactions where a provider identifier is required.
The NPI Standard requires health plans and healthcare
clearinghouses to use a provider’s NPI to identify the
provider on all standard transactions where that provider’s
identifier is required. The NPI Standard is effective
May 23, 2005. Most participants in the healthcare industry
must be in compliance with the NPI Standard by May 23,
2007. The effect of the NPI Standard is difficult to predict and
there can be no assurances that we will adequately address any
business risks created by the NPI rule and its implementation or
that we will be able to take advantage of any resulting business
opportunities.
Other Restrictions Regarding Confidentiality and Privacy of
Patient Information
In addition to HIPAA, numerous other state and federal laws
govern the collection, dissemination, use, access to and
confidentiality of patient health information. In addition, some
states are considering new laws and regulations that further
protect the confidentiality of medical records or medical
information. In many cases, these state laws are not 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. These 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. In
addition, parties may also have contractual rights that provide
additional limits on our collection, dissemination, use, access
to and confidentiality of patient health information. Claims of
violations of privacy rights or contractual 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.
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 services to be maintained
as separate and distinct operations. Furthermore, the Medicare
Prescription Drug, Improvement and Modernization Act of 2003
authorizes the development of an electronic prescription drug
program that specifies standards for electronically transmitted
prescriptions and other required information related to
Medicare-covered prescription drugs. 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. See also
“— Regulation of Healthcare Relationships”
below.
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 us, impose additional operational requirements or
restrictions on our business, affect the manner in which we use
or transmit data and increase our cost of doing business.
35
Regulation of Healthcare Relationships
Anti-kickback Laws. There are federal and state laws that
govern patient referrals, physician financial relationships and
inducements to healthcare providers and patients. The federal
healthcare programs 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. 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. These laws are applicable to manufacturers
and distributors and, therefore, may restrict how we and some of
our customers market products to healthcare providers. Also, in
2002, the Office of the Inspector General, or OIG, of HHS, the
federal government agency responsible for interpreting the
federal anti-kickback law, issued an advisory opinion that
concluded that the sale of advertising and sponsorships to
healthcare providers and vendors by Web-based information
services, such as WebMD Health, implicates the federal
anti-kickback law. However, the advisory opinion suggests that
enforcement action will not result if the fees paid represent
fair market value for the advertising/sponsorship arrangements,
the fees do not vary based on the volume or value of business
generated by the advertising and the advertising/sponsorship
relationships are clearly identified as such to users. 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. Penalties
for violating the federal anti-kickback law include
imprisonment, fines and exclusion from participating, directly
or indirectly, in Medicare, Medicaid and other federal
healthcare programs. 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. Even an
unsuccessful challenge by regulatory authorities of our
practices could cause us adverse publicity and be costly for us
to respond to.
False Claims Laws. We currently provide transaction
services to healthcare providers and, as a result, 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. Some of these laws also provide civil and criminal
penalties for noncompliance, and can be enforced by individuals
through qui tam actions. We cannot guarantee that state and
federal agencies will regard billing errors processed by us as
inadvertent and not in violation of these laws. In addition,
changes in these laws could also require us to incur costs or
restrict our business operations. As part of our data
transmission and claims submission services, we may employ
certain edits, using logic, mapping and defaults, when
submitting claims to third party payers. Such edits are utilized
when the information received from providers is insufficient to
complete individual data elements requested by payers. We
believe our editing processes are consistent with industry
practice. However, it is possible that a court or governmental
agency might view such practices in a manner that could result
in liability and adversely affect our business.
Regulation of Medical Devices
Overview. We manufacture and market medical devices
subject to extensive regulation by the Food and Drug
Administration, or FDA, under the Federal Food, Drug, and
Cosmetic Act, or the FDC Act. The FDA’s regulations govern,
among other things, product development, testing, manufacturing,
labeling, storage, premarket clearance (referred to as
510(k) clearance), premarket approval (referred to as PMA
approval), advertising and promotion, and sales and
distribution. If the FDA finds that we have failed to comply,
the agency can institute a wide variety of enforcement actions,
ranging from a public warning letter to more severe sanctions
such as: fines, injunctions, and civil penalties; recall or
seizure of our products; issuance of public notices or warnings;
operating restrictions, partial suspension or total shutdown
36
of production; refusal of our requests for 510(k) clearance
or PMA approval of new products, withdrawal of
510(k) clearance or PMA approvals already granted, and
criminal prosecution.
Access to U.S. Market. Each medical device that we
wish to commercially distribute in the U.S. will likely
require either 510(k) clearance or PMA approval from the
FDA prior to commercial distribution, unless exempt. Devices
deemed to pose relatively less risk are placed in either
class I or II, which requires the manufacturer to
submit a premarket notification requesting
510(k) clearance. Some low risk devices are exempted from
this requirement. Devices deemed by the FDA to pose the greatest
risk, such as life-sustaining, life-supporting or implantable
devices, or devices deemed not substantially equivalent to a
previously 510(k) cleared device or to a
“preamendment” class III device (in commercial
distribution before May 28, 1976) for which PMA
applications have not been called, are placed in Class III
requiring PMA approval.
|
|
|
| |
• |
510(k) Clearance Process. To obtain
510(k) clearance, we must submit a premarket notification
demonstrating that the proposed device is substantially
equivalent in intended use and in safety and effectiveness to a
“predicate device” — either a previously
510(k) cleared class I or class II device or a
preamendment class III device for which the FDA has not
called for PMA applications. The FDA’s
510(k) clearance process usually takes from four to
12 months, but it can last longer. After a device receives
510(k) clearance, any modification that could significantly
affect its safety or effectiveness, or that would constitute a
major change in its intended use, requires a new
510(k) clearance or could even require a PMA approval. The
FDA requires each manufacturer to make this determination in the
first instance, but the FDA can review any such decision. If the
FDA disagrees with that decision, the agency may retroactively
require the manufacturer to seek 510(k) clearance or PMA
approval. The FDA also can require the manufacturer to cease
marketing and/or recall the modified device until
510(k) clearance or PMA approval is obtained. |
| |
| |
• |
PMA Approval Process. If a product is not eligible for
510(k) clearance, the product is placed in class III
and must follow the PMA approval process, which requires proof
of the safety and effectiveness of the device to the FDA’s
satisfaction. A PMA approval application must provide extensive
preclinical and clinical trial data and also information about
the device and its components regarding, among other things,
device design, manufacturing and labeling. As part of the PMA
approval application review, the FDA will inspect the
manufacturer’s facilities for compliance with the Quality
System Regulation, which requires manufacturers to follow
elaborate design, testing, control, documentation and other
quality assurance procedures during the manufacturing process.
The PMA approval pathway is costly, lengthy and uncertain. It
generally takes from one to three years or longer. After
approval of a PMA approval application, a new PMA approval
or PMA supplement approval may be required in the event of a
modification to the device, its labeling or its manufacturing
process. |
| |
| |
• |
Clinical Studies. A clinical study is generally required
to support a PMA approval application and is sometimes required
for a 510(k) premarket notification. For “significant
risk” devices, such studies generally require submission of
an application for an Investigational Device Exemption, or IDE.
The IDE application must be supported by appropriate data, such
as animal and laboratory testing results, showing that it is
safe to test the device in humans and that the testing protocol
is scientifically sound. The IDE must be approved in advance by
the FDA for a specified number of patients. Clinical studies may
begin once the IDE application is approved by the FDA and the
appropriate institutional review boards at the study sites. For
“nonsignificant risk” devices, one or more
institutional review boards must review the study, but
submission of an IDE application to the FDA for advance approval
is not required. Both types of studies are subject to record
keeping, reporting and other IDE regulation requirements. |
Post-market Regulation. After the FDA permits a device to
enter commercial distribution, numerous regulatory requirements
apply. These include the Quality System Regulation, labeling
regulations, the FDA’s general prohibition against
promoting products for unapproved or “off-label” uses,
and the Medical Device Reporting regulation, which requires that
manufacturers report to the FDA if their device may
37
have caused or contributed to a death or serious injury or
malfunctioned in a way that would likely cause or contribute to
a death or serious injury if it were to recur.
Products. Certain of Porex’s products are
FDA-regulated medical devices, such as reconstructive and
aesthetic surgical implants and post-surgical drains. In
addition, the FDA regulates WebMD Practice Services’
DIMDX System as a medical image management device. It
received 510(k) clearance on August 25, 2000. Subsequently,
we have made modifications to certain of Porex’s products
and to the DIMDX System that we believe do not
require new 510(k) clearance. If the FDA disagrees with our
decisions, it can retroactively require new 510(k) clearance or
PMA approval. The FDA also can require us to cease marketing
and/or recall the modified device until 510(k) clearance or PMA
approval is obtained. Because Porex’s medical devices and
the DIMDX System are in commercial distribution, we
are subject to inspection and market surveillance by the FDA to
determine compliance with all regulatory requirements.
Compliance with these requirements can be costly and
time-consuming. Our failure to comply could subject us to FDA
enforcement action and sanctions.
The FDA has a long-standing draft software policy exempting
computer software products from active regulation as medical
devices if they are decision support systems intended to involve
competent human intervention before any impact on human health
occurs (in other words, where clinical judgment and experience
can be used to check, interpret and potentially challenge a
system’s output). Except for the cleared DIMDX
System, we believe that, under the draft software policy, the
Intergy and The Medical Manager practice management systems are
subject to limited FDA regulation and do not require 510(k)
clearance or PMA approval. WebMD Practice Services has created
an interface between the Intergy and The Medical Manager
practice management systems and the image device. We are
marketing the interface and the image device as the
DIMDX System. We believe that the sale of our
practice management systems with the DIMDX System
does not require a new 510(k) clearance or PMA approval. We
cannot assure you, however, that the FDA would agree with this.
If the FDA does not agree, we may be required to obtain 510(k)
clearance or PMA approval for these products and may be required
to cease marketing and/or recall such products until 510(k)
clearance or PMA approval is obtained.
We distribute the IntegradWeb PACS product for the input,
display, archiving, and transmission of X-rays and other
diagnostic images. The 510(k) clearance for the IntegradWeb PACS
product is currently held by the manufacturer, Dynamic Imaging,
which is primarily responsible for Quality System Regulation
compliance and other FDA regulatory compliance related to this
product.
The FDA’s draft software policy has been under review for
several years. A risk exists that the Intergy or The Medical
Manager practice management system or other of our software or
hardware components could in the future become subject to some
or all of the medical device regulation requirements. In
addition, the FDA may take the position that other products and
services we offer, such as Intergy EHR PDA, are subject to FDA
regulation. We also may expand our services in the future to
areas that subject us to FDA regulation. Except with respect to
WebMD Practice Services and Porex, we have no experience in
complying with FDA regulations. We believe that complying with
FDA regulations is time consuming, burdensome and expensive and
could delay our introduction of new applications or services.
Regulation of Drug and Medical Device Advertising and
Promotion
With limited exceptions, the FDA and the FTC regulate the form,
content and dissemination of labeling, advertising and
promotional materials, including direct-to-consumer prescription
drug and medical device advertising, prepared by, or for,
pharmaceutical or medical device companies. The FTC regulates
over-the-counter drug advertising and, in some cases, medical
device advertising, as well as general product or service
advertising. Generally, based on FDA requirements, regulated
companies must limit advertising and promotional materials to
discussions of FDA-approved claims. In limited circumstances,
regulated companies may disseminate non-promotional scientific
information regarding products or claims not yet approved by the
FDA.
38
Information that promotes the use of pharmaceutical products or
medical devices that is put on our Web sites is subject to the
full array of the FDA and FTC requirements and enforcement
actions and information regarding other products and services is
subject to FTC requirements. Areas of our Web sites that could
be the primary focus of the FDA and FTC include pages and
programs that discuss use of an FDA-regulated product or that
the regulators believe may lack editorial independence from the
influence of sponsoring pharmaceutical or medical device
companies. Television broadcast advertisements by WebMD may also
be subject to FTC regulation and FDA regulation depending on the
content. The FDA and the FTC place the principal burden of
compliance with advertising and promotional regulations on
advertisers and sponsors to make truthful, substantiated claims.
If the FDA or the FTC finds that any information on our Web site
violates FDA or FTC regulations, they may take regulatory or
judicial action against us or the advertiser or sponsor of that
information. State attorneys general may also take similar
action based on their state’s consumer protection statutes.
Drug Advertising. The FDC Act requires that prescription
drugs (including biological products) be approved for a specific
medical indication by the FDA prior to marketing in interstate
commerce. It is a violation of the FDC Act and of FDA
regulations to market, advertise or otherwise commercialize such
products prior to approval. The FDA does allow for preapproval
exchange of scientific information, provided it is
nonpromotional in nature and does not draw conclusions regarding
the ultimate safety or effectiveness of the unapproved drug.
Upon approval, the FDA’s regulatory authority extends to
the labeling and advertising of prescription drugs offered in
interstate commerce. Such products may only be promoted and
advertised for approved indications. In addition, the labeling
and advertising can be neither false nor misleading, and must
present all material information, including risk information, in
a balanced manner. Labeling and advertising that violate these
legal standards are subject to FDA enforcement action.
The FDA regulates the safety, efficacy, and labeling of
over-the-counter drugs, or OTC drugs, under the FDC Act either
through specific product approvals or through regulations that
define approved claims for specific categories of such products.
The FTC regulates the advertising of OTC drugs under the section
of the Federal Trade Commission Act that prohibits unfair or
deceptive trade practices. Together, the FDA and FTC regulatory
framework requires that OTC drugs be formulated and labeled in
accordance with FDA approvals or regulations and promoted in a
manner that is truthful, adequately substantiated, and
consistent with the labeled uses. OTC drugs that do not meet
these requirements are subject to FDA or FTC enforcement action
depending on the nature of the violation. In addition, state
attorneys general can also bring enforcement actions for alleged
unfair or deceptive advertising.
There are several administrative, civil and criminal sanctions
available to the FDA for violations of the FDC Act or FDA
regulations as they relate to labeling and advertising.
Administrative sanctions may include a written request that
violative advertising or promotion cease and/or that corrective
action be taken, such as requiring a company to provide to
healthcare providers and/or consumers information to correct
misinformation previously conveyed. In addition, the FDA may use
publicity, such as press releases, to warn the public about
false and misleading information concerning a drug or medical
device product. More serious civil sanctions include seizures,
as well as injunctions and their resulting consent decrees. Such
measures could prevent a company from introducing or maintaining
its product in the marketplace. Criminal penalties for severe
violations can result in a prison term and/or substantial fines.
State attorneys general have similar investigative tools and
sanctions available to them as well. The National Association of
Attorneys General has formed a Prescription Drug Task Force that
has taken a very proactive position in addressing issues related
to prescription drugs.
Any increase in FDA regulation of the Internet or other media
for direct-to-consumer advertisements of prescription drugs
could make it more difficult for WebMD Health to obtain
advertising and sponsorship revenue. In the last 15 years,
the FDA has gradually relaxed its formerly restrictive policies
on direct-to-consumer advertising of prescription drugs.
Companies can now advertise prescription drugs for serious
conditions to consumers in any medium. However, physician groups
and others have criticized the FDA’s current policies, and
have called for restrictions on any advertising of prescription
drugs to consumers and increased FDA enforcement. These critics
point to both public health concerns and to the laws of many
other countries that make direct-to-consumer advertising of
prescription drugs a criminal
39
offense. Scrutiny of direct-to-consumer advertising increased
after Vioxx® was withdrawn from the market due to potential
safety concerns in September 2004. Critics have proposed
postponing direct-to-consumer advertising for a new drug until
the drug has been safely marketed commercially for one or two
years. In response to these criticisms, the FDA or the FTC may
alter its present policies on the direct-to-consumer advertising
of prescription drugs or medical devices in a way that would
materially reduce our advertising and sponsorship revenues. In
early 2004, the FDA issued three draft guidance documents
intended to improve communication of: (1) risk information
in direct-to-consumer print advertisements, (2) disease
awareness information, and (3) risk information in
direct-to-consumer advertising of restricted medical devices.
These draft guidance documents do not alter existing FDA
regulatory requirements, but may lead to future policy changes.
Continuing Medical Education. Activities and information
provided in the context of a medical or scientific educational
program, often referred to as continuing medical education or
“CME,” usually are treated as nonpromotional and fall
outside the FDA’s jurisdiction. The FDA does, however,
evaluate such CME activities to determine whether they are
independent of the promotional influence of the drug or medical
device sponsor or whether they are promotional activities
subject to FDA’s advertising and labeling requirements. In
order to determine whether a company’s activities are
sufficiently independent, the FDA looks at a number of factors
related to the planning, content, speakers and audience
selection of such activities. To the extent that the FDA
concludes that such activities are not independent from a
manufacturer, such content must fully comply with the FDA’s
requirements. During the past two years, the independence of
information provided during CME programs has been subject to
increased scrutiny. If any CME activity provided on our Web site
is considered promotional, there may be regulatory or judicial
action against us and/or the sponsor of the CME program.
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 that 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. We do not
believe we provide professional medical advice, diagnosis or
treatment. We employ and contract with physicians who provide
only medical information to consumers, and we have no intention
to provide medical care or advice. 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. Any determination that
we are a healthcare provider and acted improperly as a
healthcare provider may result in liability to us. 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.
Consumer Protection Regulation
General. Advertising and promotional activities presented
to visitors on our Web sites are subject to federal and state
consumer protection laws which regulate unfair and deceptive
practices. We are also subject to various other federal and
state consumer protection laws, including the ones described
below.
CAN-SPAM Act. Effective January 1, 2004, the
Controlling the Assault of Non-Solicited Pornography and
Marketing Act of 2003, or the CAN-SPAM Act, became effective.
The CAN-SPAM Act regulates commercial emails and provides a
right on the part of the recipient to request the sender to stop
sending messages, and establishes penalties for the sending of
email messages which are intended to deceive the recipient as to
source or content. Under the CAN-SPAM Act, senders of commercial
emails (and other persons who initiate those emails) are
required to make sure that those emails do not contain
40
false or misleading transmission information. Commercial emails
are required to include a valid return email address and other
subject heading information so that the sender and the Internet
location from which the message has been sent are accurately
identified. Recipients must be furnished with an electronic
method of informing the sender of the recipient’s decision
to not receive further commercial emails. In addition, the email
must include a postal address of the sender and notice that the
email is an advertisement. The CAN-SPAM Act may apply to the
e-newsletters that WebMD’s public portals distribute to
members and to some of our other commercial email
communications. However, there may be additional FTC regulations
indicating that our e-newsletters are outside the scope of
CAN-SPAM. At this time, we are applying the CAN-SPAM
requirements to these email communications, and believe that our
email practices comply with the requirements of the CAN-SPAM Act.
Regulation of Advertisements Sent by Fax. In 2004, the
Federal Communication Commission (FCC) issued a new
interpretation of a section of the Telephone Consumer Protection
Act that affects advertisements sent to telephone facsimile
(fax) machines. Under this new interpretation, unsolicited
advertisements which advertise the commercial availability or
quality of a product or service cannot be sent to the fax
machine of a recipient unless the recipient has signed a written
statement that includes the fax number to which these
advertisements may be sent and clearly indicates the
recipient’s consent to receive these advertisements by fax
from the sender. Previously, these advertisements could be sent
without permission to entities with whom a current business
relationship exists. However, the FCC has delayed the effective
date of the new interpretation until June 30, 2005. We do
not send advertisements to fax machines in any significant
portions of our business. We intend to comply with the
FCC’s new interpretation effective as of the deadline.
COPPA. The Children’s Online Privacy Protection Act,
or COPPA, applies to operators of commercial Web sites and
online services directed to U.S. children under the age of
13 that collect personal information from children, and
operators of general audience sites with actual knowledge that
they are collecting information from U.S. children under
the age of 13. WebMD’s sites are not directed at children
and its general audience site, WebMD Health, states that no one
under the applicable age is entitled to use the site. In
addition, WebMD Health employs a kick-out procedure whereby
anyone identifying themselves as being under the age of 13
during the registration process is not allowed to register for
the site’s member only services, such as message boards and
live chat events. COPPA, however, is a relatively new law, can
be applied broadly and is subject to interpretation by courts
and other governmental authorities. The failure to accurately
anticipate the application or interpretation of this law could
create liability to us, result in adverse publicity and
negatively affect our business.
Regulation of Contests and Sweepstakes. We conduct
contests and sweepstakes in some of our marketing channels. The
federal Deceptive Mail Prevention and Enforcement Act and some
state prize, gift or sweepstakes statutes may apply to these
promotions. We believe that we are in compliance with any
applicable law or regulation when we run these promotions.
Other Consumer Protection Regulation. The 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 imposed by 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.
In addition, several foreign governments have regulations
dealing with the collection and use of personal information
obtained from their citizens. Those governments may attempt to
apply such laws extraterritorially or through treaties or other
arrangements with U.S. governmental entities. We might
unintentionally violate such laws, such laws may be modified and
new laws may be enacted in the future. Any such developments (or
developments stemming from enactment or modification of other
laws) or the
41
failure to accurately anticipate the application or
interpretation of these laws could create liability to us,
result in adverse publicity and negatively affect our businesses.
We believe that the offices and other facilities described in
this Item are, in general, in good operating condition and
adequate for our current operations.
Headquarters
We lease approximately 45,000 square feet of office space
for our corporate headquarters in Elmwood Park, New Jersey. The
leases for that space expire in March 2006.
WebMD Business Services, WebMD Health and WebMD Practice
Services
WebMD Business Services leases office space and operational
facilities in:
|
|
|
| |
• |
Nashville, Tennessee for WebMD Business Services’
headquarters and primary data and call centers and
Medifax’s operations; |
| |
| |
• |
Towson, Maryland; |
| |
| |
• |
Columbia, Maryland; |
| |
| |
• |
St. Louis, Missouri; |
| |
| |
• |
Costa Rica; |
| |
| |
• |
Waterloo, Iowa; |
| |
| |
• |
Scottsdale, Arizona; and |
| |
| |
• |
Toledo, Ohio. |
WebMD Practice Services leases office space in Tampa, Florida
for its headquarters and in Alachua, Florida for its development
and engineering operations.
WebMD Health leases office space in New York, New York for its
headquarters and its editorial and marketing operations and in
Atlanta, Georgia and Portland, Oregon for related operations.
We also use facilities in approximately 100 additional
locations throughout the United States, eight of which are
owned and the rest of which are leased. These locations include
sales and other offices, production centers, data centers and
call centers.
Porex
We use approximately 380,000 square feet for Porex’s
headquarters and for office and manufacturing operations related
to its porous plastics and other porous media product lines,
including: the Porex headquarters and largest plant, which are
located in property that we own in Fairburn, Georgia, a suburb
of Atlanta; space that we own in Newnan, Georgia, College Park,
Georgia and Bautzen, Germany; and space that we lease in
Selangor, Malaysia and Alness, Scotland.
|
|
| Item 3. |
Legal Proceedings |
Investigations by United States Attorney for the District of
South Carolina and the SEC
As previously disclosed, the United States Attorney for the
District of South Carolina is conducting an investigation of our
company, which we first learned about on September 3, 2003.
On that date, Federal Bureau of Investigation and Internal
Revenue Service agents executed search warrants at our corporate
headquarters in Elmwood Park, New Jersey and the offices of
Medical Manager Health Systems, currently
42
known as WebMD Practice Services, Inc. (a subsidiary of WebMD
Corporation), in Tampa, Florida and Alachua, Florida and
delivered subpoenas for documents and financial records. Based
on the information available to us, we believe that the
investigation relates principally to issues of financial
accounting improprieties for Medical Manager Corporation, a
predecessor of WebMD (by its merger into WebMD in September
2000), and our WebMD Practice Services subsidiary; however, we
cannot be sure of the investigation’s exact scope or how
long it will continue. Included among the materials removed or
subject to subpoena are records relating to a $5.5 million
restatement of revenue by Medical Manager Corporation in August
1999 and to acquisitions by our WebMD Practice Services
subsidiary of other companies, most of which were dealers of
Medical Manager products and services.
In connection with this matter, WebMD has uncovered evidence
that, prior to Medical Manager’s acquisition by WebMD
Corporation in September 2000, Medical Manager’s dealer
acquisition program was improperly used to artificially inflate
the revenue, earnings and goodwill of Medical Manager. Also, as
we have stated in the past, WebMD has evidence of kickback
payments by former dealers to certain former employees of
Medical Manager who were responsible for the acquisition
program. WebMD has commenced lawsuits against two of those
former employees. These kickback payments appear to have
continued until sometime in 2002.
It is our understanding that the investigation by the
U.S. Attorney’s Office also relates to allegations of
improper revenue recognition practices in connection with system
sales in the Medical Manager business. WebMD has identified
evidence that some employees had in the past engaged in
practices to improperly recognize revenue in connection with
system sales.
The United States Attorney for the District of South Carolina
announced on January 10, 2005, that three former employees
of WebMD Practice Services, Inc. have each agreed to plead
guilty to one count of mail fraud and that one such employee has
also agreed to plead guilty to one count of tax evasion for acts
committed while they were employed by WebMD Practice Services,
Inc. and its predecessor. The three former employees include a
Vice President of WebMD Practice Services responsible for
acquisitions who was terminated for cause in January 2003; an
executive who served in various accounting roles at WebMD
Practice Services until his resignation in March 2002; and a
former independent Medical Manager dealer who was a paid
consultant to Medical Manager until the termination of his
services in 2002.
According to the Informations, Plea Agreements and Factual
Summaries filed by the United States Attorney in, and available
from, the District Court of the United States for the District
of South Carolina — Beaufort Division, on
January 7, 2005, the three former employees and other as
yet unnamed co-schemers were engaged in schemes between 1997 and
2002 that included causing companies acquired by Medical Manager
to pay the former vice president in charge of acquisitions and
co-schemers kickbacks which were funded through increases in the
purchase price paid by Medical Manager to the acquired company
and that included fraudulent accounting practices to inflate
artificially the quarterly revenues and earnings of WebMD
Practice Services, Inc., when it was an independent public
company called Medical Manager Corporation from 1997 through
1999, when and after it became acquired by Synetic, Inc. in July
1999 and when and after it became a subsidiary of WebMD
Corporation in September 2000. Medical Manager Corporation
ceased being a separate public company on September 12,
2000 and filed its last quarterly report with the Securities and
Exchange Commission for the quarter ended March 31, 2000.
To date, in light of the information obtained by WebMD,
including that contained in the court documents filed by the
United States Attorney in South Carolina, WebMD has not
uncovered information that it believes would require a
restatement for any of the years covered by its financial
statements. In addition, WebMD believes that the amounts of the
kickback payments referred to in the court documents have
already been reflected in the financial statements of WebMD to
the extent required.
The fraudulent accounting practices cited by the government in
the January 7, 2005 District Court filings included:
causing companies acquired by Medical Manager to reclassify
previously recognized sales revenue as deferred income so that
such deferred income could subsequently be reported as revenue
by Medical Manager and its parents in later periods; fabricating
deferred revenue entries which could be used
43
to inflate earnings when Medical Manager acquired companies;
causing companies acquired by Medical Manager to inflate reserve
accounts so that these reserves could be reversed in later
reporting periods in order to artificially inflate earnings for
Medical Manager and its parents; accounting for numerous
acquisitions through the pooling of interests method in order to
fraudulently inflate Medical Manager’s quarterly earnings,
when the individuals involved knew the transactions failed to
qualify for such treatment; causing companies acquired by
Medical Manager to enter into sham purchases of software from
Medical Manager in connection with the acquisition which
purchases were funded by increasing the purchase price paid by
Medical Manager to the acquired company and using these
“round trip” sales to create fraudulent revenue for
Medical Manager and its parents; and causing Medical Manager to
book and record sales and training revenue before the revenue
process was complete in accordance with Generally Accepted
Accounting Principles and thereby fraudulently inflating Medical
Manager’s reported revenues and earnings. According to the
Informations to which the former employees have plead guilty,
the fraudulent accounting practices resulted in the reported
revenues of Medical Manager being overstated materially between
June 1997 and at least December 31, 2001, and reported
quarterly earnings per share for Medical Manager being
overstated by at least one cent per share in every quarter
during that period.
The documents filed by the United States Attorney state that the
former employees engaged in their fraudulent conduct “in
concert with senior management,” and “at the direction
of senior Medical Manager officers.” In its statement the
United States Attorney for the District of South Carolina stated
that “the senior management and officers referred to in the
Court documents were members of senior management of the Medical
Manager subsidiary during the relevant time period.” Based
on the information it has obtained to date, WebMD does not
believe that any member of its senior management whose duties
were not primarily related to the operations of WebMD Practice
Services during the relevant time periods engaged in the alleged
improprieties. WebMD understands, however, that in light of the
nature of the allegations involved, the
U.S. Attorney’s office has been investigating all
levels of WebMD management. As part of its responsibilities, the
Special Committee of the Board of Directors that is overseeing
this matter is evaluating whether members of senior management
whose duties were primarily related to the operations of WebMD
Practice Services during the relevant time periods engaged in
the alleged improprieties, and will continue to evaluate as
information becomes available to it whether any other member of
WebMD’s senior management engaged in improprieties in
connection with any matter being investigated by the United
States Attorney.
WebMD has been cooperating and intends to continue to cooperate
fully with the U.S. Attorney’s Office. As previously
reported, our Board of Directors has formed a special committee
consisting solely of independent directors to oversee this
matter with the sole authority to direct WebMD’s response
to the allegations that have been raised. The Special Committee
has retained independent legal counsel to advise it. WebMD has
retained counsel to advise it in connection with the
investigation and such counsel reports directly to the Special
Committee.
As previously disclosed, WebMD understands that the SEC is also
conducting a formal investigation into this matter.
While WebMD is not able to estimate, at this time, the amount of
the expenses that it will incur in connection with the
investigations, it expects that they may continue to be
significant. For the years ended December 31, 2004 and
2003, those expenses are reflected as “Legal Expense”
in the Consolidated Statements of Operations included in this
Annual Report.
Litigation Regarding Distribution of Shares in Healtheon
Initial Public Offering
In the summer and fall of 2001, seven purported class action
lawsuits were filed against Morgan Stanley & Co.
Incorporated and Goldman Sachs & Co., underwriters of
the initial public offering of the Company (then known as
Healtheon) in the United States District Court for the Southern
District of New York. Three of these suits also named WebMD and
certain former officers and directors of WebMD as defendants.
These suits were filed in the wake of reports of governmental
investigations of the
44
underwriters’ practices in the distribution of shares in
certain initial public offerings. Similar suits were filed in
connection with over 300 other initial public offerings that
occurred in 1999, 2000 and 2001.
The complaints against WebMD and its former officers and
directors alleged violations of Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 under that
Act and Section 11 of the Securities Act of 1933 because of
failure to disclose certain practices alleged to have occurred
in connection with the distribution of shares in the Healtheon
IPO. Claims under Section 12(a)(2) of the Securities Act of
1933 were also brought against the underwriters. These claims
were consolidated, along with claims relating to over 300 other
initial public offerings, in the Southern District of New York.
The plaintiffs have dismissed the claims against the four former
officers and directors of WebMD without prejudice, pursuant to
Reservation of Rights and Tolling Agreements with those
individuals.
On July 15, 2002, the issuer defendants in the consolidated
action, including WebMD, filed a joint motion to dismiss the
consolidated complaints. On February 18, 2003, the District
Court denied, with certain exceptions not relevant to WebMD, the
issuer defendants’ motion to dismiss.
After a lengthy mediation under the auspices of former United
States District Judge Nicholas Politan, the issuer defendants in
the consolidated action (including WebMD), the affected
insurance companies and the plaintiffs reached an agreement on a
settlement to resolve the matter among the participating issuer
defendants, their insurers and the plaintiffs. The settlement
calls for the participating issuers’ insurers jointly to
guarantee that plaintiffs recover a certain amount in the IPO
litigation and certain related litigation from the underwriters
and other non-settling defendants. Accordingly, in the event
that the guarantee becomes payable, the agreement calls for
WebMD’s insurance carriers, not WebMD, to pay WebMD’s
pro rata share.
WebMD and virtually all of the approximately 260 other issuer
defendants who are eligible have also elected to participate in
the settlement. Although WebMD believes that the claims alleged
in the lawsuits were primarily directed at the underwriters and,
as they relate to WebMD, were without merit, we believe that the
settlement is beneficial to WebMD because it reduces the time,
expense and risks of further litigation, particularly since
virtually all of the other issuer defendants will participate
and our insurance carriers strongly support the settlement.
On June 10, 2004, plaintiffs submitted to the court a
Stipulation and Agreement of Settlement with Defendant Issuers
and Individuals. On February 15, 2005, the court certified
the proposed settlement class and preliminarily approved the
settlement, subject to certain modifications by the parties.
Assuming these modifications are made, notice of the settlement
will be provided to the class members and the Court will
schedule a hearing for final approval of the settlement.
Merrill Lynch Fundamental Growth Fund, Inc.
et al. v. McKesson HBOC, Inc., et al.
WebMD was named as a defendant in the action Merrill Lynch
Fundamental Growth Fund, Inc., et al. v. McKesson
HBOC, Inc., et al., Case No. 405792, in the
San Francisco Superior Court. The original complaint in
this matter alleged that McKesson HBOC (now known as McKesson
Corp.), HBO and Company (which we refer to as HBOC), certain
officers and directors of those firms, Arthur Andersen LLP, and
Bear Stearns & Co. engaged in a number of practices
whereby HBOC and later McKesson HBOC improperly recognized
revenues. When these practices were discovered, McKesson HBOC
eliminated more than $327 million in revenues that HBOC had
recognized over the prior three years. Plaintiffs claim to have
lost more than $150 million as a result of the decline in
McKesson HBOC’s share value after the accounting practices
came to light in April 1999.
On September 4, 2003, the plaintiffs filed a fourth amended
complaint, naming WebMD and two other defendants, General
Electric Capital Corporation, Inc. and Computer Associates
International, Inc., for the first time. The complaint alleged
that WebMD aided and abetted alleged fraud by certain defendants
and conspired with those defendants in relation to HBOC’s
and McKesson HBOC’s alleged improper recognition of
approximately $14 million in revenue on two software
transactions. Plaintiffs also alleged that WebMD made certain
negligent misrepresentations with respect to these transactions.
45
Plaintiffs alleged that WebMD, through its participation in
certain transactions with HBOC and McKesson HBOC, learned that
officers of HBOC and/or McKesson HBOC, HBOC and McKesson HBOC
were breaching duties owed to McKesson HBOC shareholders by
making material misstatements and suppressing or omitting facts
with respect to HBOC’s and McKesson HBOC’s financial
results for the periods ending December 31, 1998 and
March 31, 1999 and that WebMD, Inc. aided and abetted and
conspired with these defendants. The complaint was based on
alleged conduct by WebMD, Inc., then a separate private company
and now a subsidiary of WebMD. One of the HBOC officers became
an officer of WebMD, Inc. on December 1, 1998, after having
served as HBOC’s representative on the board of WebMD, Inc.
and was dismissed by WebMD, Inc. after the accounting fraud at
HBOC was disclosed. The other officer served as HBOC’s
representative on the Board of WebMD, Inc. and ceased to be a
director of WebMD, Inc. upon dismissal by McKesson HBOC.
Plaintiffs seek unspecified damages against WebMD. The complaint
alleges numerous instances of improper accounting by HBOC
unrelated to the transactions between WebMD, Inc. and HBOC
and/or McKesson HBOC.
On December 16, 2003, WebMD filed a demurrer, seeking
dismissal of the plaintiffs’ two claims against it. On
July 22, 2004, the Court sustained that demurrer, finding
that the plaintiffs’ claims were time barred. On
October 8, 2004, the Court dismissed plaintiffs’
Fourth Amended Complaint with prejudice as to California, but
without prejudice with respect to filing in another
jurisdiction. On November 17, 2004, plaintiffs filed a
notice of appeal of the Court’s order in favor of WebMD. On
November 30, 2004, WebMD filed a cross-appeal for the
purpose of challenging the form of the order. Those appeals have
not yet been briefed.
In March 2004, McKesson Corp. filed cross-complaints against
General Electric Capital Corporation, Inc., Computer Associates
International, Inc., and WebMD for declaratory relief and
indemnification, alleging that each of these cross-defendants is
obligated to indemnify McKesson if McKesson is compelled to pay
any sum as the result of any damages, judgment or other awards
recovered by the plaintiffs against McKesson. McKesson sought
judicial determinations of the comparative fault of McKesson and
each cross-defendant for damages claimed by the plaintiffs, if
any such damages are found to exist, and declarations of the
amount that each cross-defendant is obligated to indemnify
McKesson if McKesson is compelled to pay any sum as the result
of any damages, judgment or other awards recovered by the
plaintiffs against McKesson.
On June 8, 2004, WebMD filed a demurrer, seeking dismissal
of McKesson’s claims. On September 10, 2004, the Court
sustained the demurrer to McKesson’s claims against WebMD.
On December 7, 2004, the Court dismissed McKesson’s
cross-complaint with prejudice and ordered entry of judgment in
favor of WebMD. On January 27, 2005, McKesson filed a
notice of appeal of the Court’s order in favor of WebMD.
That appeal has not yet been briefed.
On August 12, 2004, the original plaintiffs in the
California lawsuit, Merrill Lynch Fundamental Growth Fund, Inc.
and Merrill Lynch Global Value Fund, Inc., filed a separate
lawsuit in Superior Court in New Jersey, Middlesex County,
alleging substantially the same issues and claims as they did in
the California lawsuit. In response to WebMD’s motion to
dismiss, plaintiffs filed a First Amended Complaint on
January 4, 2005, dropping claims against WebMD Corporation,
but asserting the same claims against its subsidiary WebMD,
Inc., the company that engaged in the two software transactions.
On February 4, 2005, the New Jersey court dismissed WebMD
Corporation from the action without prejudice, and stayed the
New Jersey action until the California action is resolved,
subject to WebMD Corporation’s entering into a tolling
agreement with plaintiffs, which WebMD Corporation has done.
WebMD intends to vigorously defend against the plaintiffs’
and McKesson’s claims against WebMD and WebMD,
Inc.
Porex Mammary Implant Litigation
From 1988 through 1990, Porex distributed silicone mammary
implants in the United States pursuant to a distribution
arrangement with a Japanese manufacturer. Porex believes that,
after accounting for implants returned to Porex, the aggregate
number of persons who received implants distributed by Porex
46
totals approximately 2,500. Since March 1991, Porex has been
named as one of many co-defendants in a number of actions
brought by recipients of mammary implants. The typical case or
claim alleges that the individual’s mammary implants caused
one or more of a wide range of ailments. These implant cases and
claims generally raise difficult and complex factual and legal
issues and are subject to many uncertainties and complexities,
including, but not limited to, the facts and circumstances of
each particular case or claim, the jurisdiction in which each
suit is brought, and differences in applicable law. Porex does
not have sufficient information to evaluate each case and claim.
Certain of the actions against Porex have been dismissed, where
it was determined that the implant in question was not
distributed by Porex. In addition, as of March 1 2005,
approximately 300 actions have been settled by the manufacturer,
or by Porex’s insurance carriers, without material cost to
Porex. As of March 1, 2005, no implant-related claims were
pending against Porex. During calendar years 2004 and 2003,
there were no implant-related claims made against Porex by
individuals, as compared to two claims during each of 2002, 2001
and 2000, 39 claims during 1999 and nine claims during 1998. The
majority of claims made during 1999 were claims that were filed
by individuals following a court ruling in 1999 that cases filed
in earlier years would not proceed as class actions, as a result
of which such individuals would not be members of a class in
such cases.
In 1994, Porex was notified that its insurance carrier would not
renew its then-existing insurance coverage after
December 31, 1994 with respect to actions and claims
arising out of its distribution of implants. However, Porex
exercised its right, under such policy, to purchase extended
reporting period coverage with respect to such actions and
claims. Such coverage provides insurance subject to existing
policy limits, but for an unlimited time period with respect to
actions and claims made after December 31, 1994 based on
events that occurred during the policy period. In addition,
Porex has purchased extended reporting period coverage with
respect to other excess insurance. This coverage also extends
indefinitely, replacing coverage that would, by its terms, have
otherwise expired by December 31, 1997. Porex will continue
to evaluate the need to purchase further extended reporting
period coverage from excess insurers to the extent such coverage
is reasonably available.
Porex believes that its present coverage, together with its
insurance policies in effect on or before December 31,
1994, should provide adequate coverage against liabilities that
could result from actions or claims arising out of Porex’s
distribution of silicone mammary implants. However, Porex cannot
be certain that particular cases and claims will not result in
liability that is greater than expected based on Porex’s
prior experience. If so, Porex’s liability could exceed the
amount of its insurance coverage. Furthermore, certain actions
and claims may seek punitive and compensatory damages arising
out of alleged intentional torts. If these claims are
successful, such damages may or may not be covered, in whole or
in part, by Porex’s insurance policies.
Other Legal Proceedings
In the normal course of business, we are involved in various
other claims and legal proceedings. While the ultimate
resolution of these matters, and those discussed above, has yet
to be determined, we do not believe that their outcome will have
a material adverse effect on our financial position, results of
operations or liquidity.
|
|
| Item 4. |
Submission of Matters to a Vote of Security Holders |
During the fourth quarter of 2004, no matters were submitted to
a vote of security holders of WebMD.
47
PART II
|
|
| Item 5. |
Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities |
We completed the initial public offering of our common stock on
February 10, 1999. Our common stock has been traded on the
Nasdaq National Market under the symbol “HLTH” since
February 11, 1999.
The high and low prices for each quarterly period during the
last two fiscal years are as follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
High | |
|
Low | |
| |
|
| |
|
| |
|
2003
|
|
|
|
|
|
|
|
|
| |
First quarter
|
|
$ |
10.28 |
|
|
$ |
8.25 |
|
| |
Second quarter
|
|
|
12.00 |
|
|
|
8.28 |
|
| |
Third quarter
|
|
|
12.49 |
|
|
|
8.20 |
|
| |
Fourth quarter
|
|
|
9.32 |
|
|
|
7.59 |
|
|
2004
|
|
|
|
|
|
|
|
|
| |
First quarter
|
|
$ |
10.23 |
|
|
$ |
8.26 |
|
| |
Second quarter
|
|
|
9.65 |
|
|
|
8.26 |
|
| |
Third quarter
|
|
|
9.28 |
|
|
|
6.68 |
|
| |
Fourth quarter
|
|
|
8.33 |
|
|
|
6.46 |
|
On March 1, 2005, there were approximately 4,300 holders of
record of our common stock. Because many of these shares are
held by brokers and other institutions on behalf of
stockholders, we are unable to estimate the total number of
stockholders represented by these record holders.
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
and other securities may result from, among other things:
|
|
|
| |
• |
quarter-to-quarter variations in operating results; |
| |
| |
• |
operating results being less than analysts’ estimates; |
| |
| |
• |
changes in analysts’ earnings estimates; |
| |
| |
• |
announcements of new technologies, products and services or
pricing policies by us or our competitors; |
| |
| |
• |
announcements of acquisitions or strategic partnerships by us or
our competitors; |
| |
| |
• |
developments in existing customer or strategic relationships; |
| |
| |
• |
actual or perceived changes in our business strategy; |
| |
| |
• |
developments in new or pending litigation and claims; |
| |
| |
• |
sales of large amounts of our common stock; |
| |
| |
• |
changes in market conditions in the healthcare, information
technology, Internet or plastic industries; |
| |
| |
• |
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.
48
Any negative change in the public’s perception of the
prospects of these companies, as well as other broad market and
industry factors, may result in changes in the price of our
common stock.
For information about our previously announced plan to establish
WebMD Health as a separate publicly traded company, see
“Recent Developments — Evaluation of WebMD Health
Transaction Alternatives” above. As part of either of the
alternatives being considered, WebMD Health will become a
separate public company. In the case of a one-step split-off,
all holders of WebMD common stock would have the right, on a pro
rata basis, to exchange shares of WebMD common stock for
newly-issued shares of WebMD Health common stock at an exchange
ratio that would be set by the Board of Directors of WebMD. We
are not able to predict what the market prices of the common
stock of the two companies would be after either alternative
transaction and we cannot provide assurance that either of the
alternative transactions will produce any increase, for our
stockholders, in the market value of their holdings. In
addition, the market prices of WebMD Corporation common stock
and WebMD Health common stock could be highly volatile for
several months after either alternative transaction and may each
continue to be more volatile than WebMD Corporation common stock
would have been if a transaction had not occurred.
We have never declared or paid any cash dividends on our common
stock, and we do not anticipate paying cash dividends in the
foreseeable future. We intend to retain earnings to finance the
expansion of our operations.
Repurchases of Equity Securities During the Fourth Quarter of
2004
The following table provides information about purchases by
WebMD during the three months ended December 31, 2004 of
equity securities that are registered by us pursuant to
Section 12 of the Securities Act:
Issuer Purchases of Equity Securities
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Maximum Number (or | |
| |
|
|
|
|
|
Total Number of Shares | |
|
Approximate Dollar Value) | |
| |
|
|
|
|
|
Purchased as Part of | |
|
of Shares that May Yet Be | |
| |
|
Total Number of | |
|
Average Price | |
|
Publicly Announced | |
|
Purchased Under the | |
| Period |
|
Shares Purchased | |
|
Paid per Share | |
|
Plans or Programs(1) | |
|
Plans or Programs | |
| |
|
| |
|
| |
|
| |
|
| |
|
10/01/04-10/31/04
|
|
|
1,371,424 |
(2) |
|
$ |
6.70 |
|
|
|
1,190,124 |
|
|
$ |
63,392,577 |
|
|
11/01/04-11/30/04
|
|
|
264,900 |
|
|
$ |
7.02 |
|
|
|
264,900 |
|
|
$ |
61,531,935 |
|
|
12/01/04-12/31/04
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
61,531,935 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
|
1,636,324 |
|
|
$ |
6.75 |
|
|
|
1,455,024 |
|
|
$ |
61,531,935 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
These repurchases were made pursuant to the repurchase program
that we announced on March 29, 2001 where WebMD was
originally authorized to use up to $50 million to purchase
shares of its common stock from time to time beginning on
April 2, 2001. On November 2, 2001, the maximum
aggregate amount of purchases under the Program was increased to
$100 million; on November 7, 2002, it was increased to
$150 million; and on August, 19, 2004, it was increased to
$200 million. |
| |
| (2) |
Includes 181,300 previously owned shares tendered to WebMD to
pay the withholding taxes due upon exercise of employee stock
options. The value of these shares was determined based on the
closing fair market value of WebMD common stock on the date of
exercise. |
49
|
|
| Item 6. |
Selected Financial Data |
The following selected consolidated financial data should be
read in conjunction with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”
and with the consolidated financial statements and notes
thereto, which are included elsewhere in this Annual Report. On
August 1, 2003, we completed the sale of two operating
units of our Porex segment. Accordingly, the following selected
consolidated financial data has been reclassified to reflect the
historical results of these two operating units as discontinued
operations.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
1,160,351 |
|
|
$ |
963,980 |
|
|
$ |
871,696 |
|
|
$ |
842,020 |
|
|
$ |
574,524 |
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cost of operations
|
|
|
666,431 |
|
|
|
564,939 |
|
|
|
509,744 |
|
|
|
568,321 |
|
|
|
430,296 |
|
| |
Development and engineering
|
|
|
54,161 |
|
|
|
42,985 |
|
|
|
43,467 |
|
|
|
43,572 |
|
|
|
59,867 |
|
| |
Sales, marketing, general and administrative
|
|
|
324,027 |
|
|
|
282,482 |
|
|
|
283,424 |
|
|
|
448,082 |
|
|
|
535,462 |
|
| |
Depreciation, amortization and other
|
|
|
57,765 |
|
|
|
62,434 |
|
|
|
125,593 |
|
|
|
2,394,857 |
|
|
|
2,188,461 |
|
| |
Legal expense
|
|
|
9,230 |
|
|
|
3,959 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Impairment of long-lived and other assets
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,816,115 |
|
|
|
— |
|
| |
Restructuring and integration charge (benefit)
|
|
|
4,535 |
|
|
|
— |
|
|
|
(5,850 |
) |
|
|
266,755 |
|
|
|
452,919 |
|
| |
Gain (loss) on investments
|
|
|
457 |
|
|
|
1,659 |
|
|
|
6,547 |
|
|
|
— |
|
|
|
(40,365 |
) |
| |
Interest income
|
|
|
18,717 |
|
|
|
22,901 |
|
|
|
19,590 |
|
|
|
30,409 |
|
|
|
51,467 |
|
| |
Interest expense
|
|
|
19,253 |
|
|
|
15,214 |
|
|
|
8,491 |
|
|
|
507 |
|
|
|
735 |
|
| |
Other income, net
|
|
|
121 |
|
|
|
4,218 |
|
|
|
3,844 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income tax
provision (benefit)
|
|
|
44,244 |
|
|
|
20,745 |
|
|
|
(63,192 |
) |
|
|
(6,665,780 |
) |
|
|
(3,082,114 |
) |
| |
Income tax provision (benefit)
|
|
|
4,910 |
|
|
|
4,140 |
|
|
|
(10,079 |
) |
|
|
2,588 |
|
|
|
790 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income (loss) from continuing operations
|
|
|
39,334 |
|
|
|
16,605 |
|
|
|
(53,113 |
) |
|
|
(6,668,368 |
) |
|
|
(3,082,904 |
) |
| |
Income (loss) from discontinued operations, net of income taxes
|
|
|
— |
|
|
|
(33,611 |
) |
|
|
3,411 |
|
|
|
(3,950 |
) |
|
|
1,296 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
39,334 |
|
|
$ |
(17,006 |
) |
|
$ |
(49,702 |
) |
|
$ |
(6,672,318 |
) |
|
$ |
(3,081,608 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income (loss) from continuing operations
|
|
$ |
0.12 |
|
|
$ |
0.05 |
|
|
$ |
(0.17 |
) |
|
$ |
(19.13 |
) |
|
$ |
(12.60 |
) |
| |
Income (loss) from discontinued operations
|
|
|
— |
|
|
|
(0.11 |
) |
|
|
0.01 |
|
|
|
(0.01 |
) |
|
|
0.01 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
0.12 |
|
|
$ |
(0.06 |
) |
|
$ |
(0.16 |
) |
|
$ |
(19.14 |
) |
|
$ |
(12.59 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income (loss) from continuing operations
|
|
$ |
0.12 |
|
|
$ |
0.05 |
|
|
$ |
(0.17 |
) |
|
$ |
(19.13 |
) |
|
$ |
(12.60 |
) |
| |
Income (loss) from discontinued operations
|
|
|
— |
|
|
|
(0.10 |
) |
|
|
0.01 |
|
|
|
(0.01 |
) |
|
|
0.01 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
0.12 |
|
|
$ |
(0.05 |
) |
|
$ |
(0.16 |
) |
|
$ |
(19.14 |
) |
|
$ |
(12.59 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding used in computing income
(loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
320,080 |
|
|
|
304,858 |
|
|
|
304,168 |
|
|
|
348,570 |
|
|
|
244,688 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Diluted
|
|
|
333,343 |
|
|
|
325,811 |
|
|
|
304,168 |
|
|
|
348,570 |
|
|
|
244,688 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Consolidated Balance Sheets Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$ |
107,694 |
|
|
$ |
270,681 |
|
|
$ |
186,484 |
|
|
$ |
378,762 |
|
|
$ |
505,793 |
|
|
Long-term marketable securities
|
|
|
515,881 |
|
|
|
456,034 |
|
|
|
456,716 |
|
|
|
18,769 |
|
|
|
222,774 |
|
|
Working capital
|
|
|
48,295 |
|
|
|
202,573 |
|
|
|
193,031 |
|
|
|
360,429 |
|
|
|
528,136 |
|
|
Total assets
|
|
|
2,302,224 |
|
|
|
2,135,306 |
|
|
|
1,766,248 |
|
|
|
1,601,454 |
|
|
|
8,487,108 |
|
|
Convertible subordinated notes
|
|
|
649,999 |
|
|
|
649,999 |
|
|
|
300,000 |
|
|
|
— |
|
|
|
— |
|
|
Other long-term liabilities
|
|
|
1,283 |
|
|
|
1,182 |
|
|
|
498 |
|
|
|
1,226 |
|
|
|
15,279 |
|
|
Convertible redeemable exchangeable preferred stock
|
|
|
98,299 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Convertible redeemable preferred stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
10,000 |
|
|
|
10,000 |
|
|
Convertible preferred stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
710,746 |
|
|
Stockholders’ equity
|
|
|
1,224,216 |
|
|
|
1,178,597 |
|
|
|
1,153,801 |
|
|
|
1,255,512 |
|
|
|
8,097,435 |
|
51
|
|
| Item 7. |
Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
This Item 7 contains forward-looking statements with
respect to possible events, outcomes or results that are, and
are expected to continue to be, subject to risks, uncertainties
and contingencies, including those identified in this Item. See
“Cautionary Statement Regarding Forward-Looking
Statements” on page 2.
Overview
Management’s discussion and analysis of financial condition
and results of operations, or MD&A, is provided as a
supplement to the consolidated financial statements and notes
thereto included elsewhere in this Annual Report and to provide
an understanding of our results of operations, financial
condition, and changes in financial condition. Our MD&A is
organized as follows:
|
|
|
| |
• |
Introduction. This section provides a general description
of our business, a brief discussion of our operating segments, a
description of certain recent developments and a summary of the
acquisitions we completed during the last two years. |
| |
| |
• |
Critical Accounting Policies and Estimates. This section
discusses those accounting policies that both are considered
important to our financial condition and results of operations,
and require us to exercise subjective or complex judgments in
their application. In addition, all of our significant
accounting policies, including our critical accounting policies,
are summarized in Note 1 to the Consolidated Financial
Statements included in this Annual Report. |
| |
| |
• |
Results of Operations and Results of Operations by Operating
Segment. These sections provide our analysis and outlook for
the significant line items on our consolidated statements of
operations, on both a company-wide and a segment-by-segment
basis. |
| |
| |
• |
Liquidity and Capital Resources. This section provides an
analysis of our liquidity and cash flows, as well as a
discussion of our outstanding debt and commitments that existed
as of December 31, 2004. |
| |
| |
• |
Recent Accounting Pronouncements. This section provides a
summary of the most recent authoritative accounting standards
and guidance that have either been recently adopted by the
Company or may be adopted in the future. |
| |
| |
• |
Key Trends Affecting Our Businesses and Our Healthcare
Customers. This section provides background information on
key trends in the healthcare industry and our strategic
responses to those trends. |
| |
| |
• |
Factors That May Affect Our Future Financial Condition or
Results of Operations. This section describes circumstances
or events that could have a negative effect on our financial
condition or results of operations, or that could change, for
the worse, existing trends in some or all of our businesses. The
factors discussed in this section are in addition to factors
that may be described elsewhere in this Annual Report. |
In this MD&A, dollar amounts are in thousands, except per
share amounts.
Introduction
WebMD Corporation is a Delaware corporation that was
incorporated in December 1995 and commenced operations in
January 1996 as Healtheon Corporation. We changed our name to
Healtheon/ WebMD Corporation in November 1999 and to WebMD
Corporation in September 2000. Our common stock has traded on
the Nasdaq National Market under the symbol “HLTH”
since February 11, 1999.
52
We have aligned our business into four operating segments as
follows:
|
|
|
| |
• |
WebMD Business Services. We provide healthcare
reimbursement cycle management services for healthcare providers
and transaction-related administrative services for healthcare
payers, together with related technology solutions. We transmit
transactions electronically between healthcare payers and
providers and provide healthcare payers with transaction
processing technology, consulting services and outsourcing
services, including document management services for transaction
processing and print-and-mail services for the distribution of
checks, remittance advice and explanation of benefits. We also
provide automated patient billing services to healthcare
providers, including statement printing and mailing services. In
addition, we provide software products, including decision
support and data warehousing solutions, and related maintenance
services to Blue Cross Blue Shield and commercial healthcare
payers and perform software maintenance and consulting services
for certain governmental agencies. |
| |
| |
• |
WebMD Practice Services. We develop and market
information technology systems for healthcare providers and
related services, under The Medical Manager, Intergy and WebMD
Network Services brands. These systems and services allow
physician offices to automate their scheduling, billing and
other administrative tasks, to transmit transactions
electronically, to maintain electronic medical records and to
automate documentation of patient encounters. |
| |
| |
• |
WebMD Health. We provide health information, healthcare
and benefit decision-support tools, continuing medical education
(“CME”) services, and interactive communications
services through our public online portals for consumers and
physicians, through syndication and distribution relationships,
through customized private online portals for employers and
payers and, to a lesser extent, through offline publishing
services. Our public portal sells advertising and sponsorship
programs to companies interested in reaching consumers and
physicians online, including pharmaceutical, biotech, medical
device and consumer products companies. |
| |
| |
• |
Porex. We develop, manufacture and distribute proprietary
porous plastic products and components used in healthcare,
industrial and consumer applications, as well as in finished
products used in the medical device and surgical markets. |
Evaluation of WebMD Health Transaction Alternatives.
WebMD is continuing to pursue its previously announced plan to
establish WebMD Health as a separate publicly traded company.
WebMD’s Board of Directors continues to evaluate the two
previously announced alternatives it has been
considering — a one-step split-off of WebMD Health
equity through an exchange offer transaction with WebMD’s
stockholders or an initial public offering of a minority
interest in WebMD Health. In the case of a one-step split-off,
all holders of WebMD common stock would have the right, on a pro
rata basis, to exchange shares of WebMD common stock for
newly-issued shares of WebMD Health common stock at an exchange
ratio that would be set by the Board of Directors of WebMD.
While the evaluation process is complex, considerable progress
has been made in refining the tax analysis of these alternative
transactions, preparing the necessary financial statements and
Securities and Exchange Commission filings, planning the
necessary corporate infrastructure separation and completing the
analysis of employee, corporate, third-party contractual and
other considerations relevant to these two alternatives. As each
alternative offers certain potential advantages for WebMD’s
stockholders, some of which are dependant on market conditions,
the Board will not make a decision as to which alternative to
pursue until shortly before WebMD is in a position to make the
required registration statement filing with the SEC. WebMD
anticipates being in a position to make this SEC filing in April
2005.
Acquisition of HealthShare Technologies. On
March 14, 2005, WebMD acquired HealthShare Technologies.
The purchase price paid at closing was $31,000 in cash. In
addition, WebMD has agreed to pay up to an additional $5,000 if
certain financial milestones are achieved for calendar year 2005.
53
HealthShare provides health plans and employers, and their
members and employees, with online decision support tools that
evaluate both hospital care cost and quality to enable users to
make more informed decisions. HealthShare also provides
professional decision support tools used by health plan
executives to develop provider networks, identify centers of
excellence, and evaluate comparative hospital quality.
HealthShare tools are also used by hospitals to provide online
decision support to help enhance quality of care, manage costs
and profitability, and better understand market position. The
result of operations of HealthShare will be included in our
WebMD Health segment.
Acquisitions
In 2004, we completed seven acquisitions. Our WebMD Health
segment acquired two companies for a total purchase
consideration of approximately $22,489, comprised of $20,894 in
cash $838 to be paid within the next two years and $757 of
estimated acquisition costs. In connection with the preliminary
allocation of the purchase prices and intangible asset
valuations, we recorded goodwill of $14,942 and intangible
assets of $6,660, with estimated useful lives ranging from three
to five years. Additionally, we will pay up to an
additional $20,000 if certain milestones are achieved in the
future for these WebMD Health acquisitions. Our WebMD Business
Services segment acquired two companies for a total purchase
price of $206,226, comprised of $204,243 in cash and $1,983 in
estimated acquisition costs. In connection with the preliminary
allocation of the purchase prices of these acquisitions, we
recorded goodwill of $99,829 and intangible assets of $97,100,
with estimated useful lives ranging from five to fifteen years.
Additionally, we have agreed to pay up to an additional $25,000
if certain milestones are achieved in the future for one of
these WebMD Business Services acquisitions. Our Porex segment
acquired two companies for a total purchase price of $5,880,
comprised of $5,160 in cash, $490 to be paid over five years and
$230 in estimated acquisition costs. In connection with the
preliminary allocation of the purchase prices, we recorded
goodwill of $4,122 and intangible assets of $1,400 with
estimated useful lives ranging from five to eleven years. Our
WebMD Practice Services segment acquired one company for a total
cost of $70, which was paid in cash. In connection with the
preliminary allocation of the purchase price, we recorded $85 of
intangible assets. Additionally, we have agreed to pay up to an
additional $30 if certain milestones are achieved in the future
for this WebMD Practice Services acquisition.
In 2003, we completed twelve acquisitions. Our WebMD Health
segment acquired two companies for a total purchase
consideration of approximately $14,113, comprised of $13,926 in
cash and $187 of estimated acquisition costs. We agreed to pay
up to an additional $2,500 if certain financial milestones are
achieved. The Company paid $1,500 in cash in 2004 as a result of
achieving certain of those milestones. In connection with the
initial allocation of the purchase prices, we recorded goodwill
of $12,615 and intangible assets of $3,525, with estimated
useful lives of three to seven years. Our WebMD Business
Services segment acquired three companies for a total purchase
price of $386,732, comprised of $380,168 in cash and $6,564 in
estimated acquisition costs. Additionally, we agreed to pay up
to an additional $154,200 if certain milestones are achieved in
the future. The Company paid $17,455 in cash in 2004 and accrued
$43,500 for the 2005 expected cash payment as a result of
achieving certain of those milestones. In connection with the
initial allocation of the purchase prices of these three
acquisitions, we recorded goodwill of $242,758 and intangibles
assets of $142,092, with estimated useful lives ranging from
nine months to fifteen years. Also, during 2003, our WebMD
Practice Services segment acquired seven companies for a total
cost of $2,175, which was paid in cash. We agreed to pay up to
an additional $675 if certain of the acquired companies meet
certain financial milestones. The Company paid $155 in cash in
2004 as a result of achieving certain of those milestones. In
connection with the initial allocation of the purchase prices,
goodwill of $1,469 and intangible assets subject to amortization
of $1,054 were recorded. The intangible assets have estimated
useful lives from three to nine years.
Critical Accounting Policies and Estimates
Our discussion and analysis of WebMD’s financial condition
and results of operations are based upon our Consolidated
Financial Statements and Notes to Consolidated Financial
Statements, which were prepared in conformity with U.S.
generally accepted accounting principles. The preparation of the
54
consolidated financial statements requires us to make estimates
and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. We
base our estimates on historical experience, current business
factors, and various other assumptions that we believe are
necessary to form a basis for making judgments about the
carrying values of assets and liabilities and disclosure of
contingent assets and liabilities. We are subject to
uncertainties such as the impact of future events, economic,
environmental and political factors, and changes in our business
environment; therefore, actual results could differ from these
estimates. Accordingly, the accounting estimates used in
preparation of our financial statements will change as new
events occur, as more experience is acquired, as additional
information is obtained and as our operating environment
changes. Changes in estimates are made when circumstances
warrant. Such changes in estimates and refinements in estimation
methodologies are reflected in reported results of operations;
if material, the effects of changes in estimates are disclosed
in the notes to our consolidated financial statements.
We evaluate our estimates on an ongoing basis, including those
related to revenue recognition, short-term and long-term
investments, deferred tax assets, income taxes, collectibility
of customer receivables, prepaid content and distribution
services, long-lived assets including goodwill and other
intangible assets, software development costs, inventory
valuation, certain accrued expenses, contingencies, litigation
and the value attributed to warrants issued for services.
We believe the following reflects our critical accounting
policies and our more significant judgments and estimates used
in the preparation of our consolidated financial statements:
|
|
|
| |
• |
Revenue — Our revenue recognition
policies for each reportable segment are as follows: |
|
|
| |
WebMD Business Services. Healthcare payers and providers
pay us fees for transaction services, generally on either a per
transaction basis or, in the case of some providers, on a
monthly fixed fee basis. Healthcare payers and providers also
pay us fees for patient statement and paid-claims communication
services, typically on a per statement or per communication
basis. Additionally, payers, including government payers, pay us
fees to license decision support software and provide related
support and maintenance for that decision support software, and
provide information technology consulting services. Healthcare
payers pay us annual license fees, which are based on the number
of covered members, for use of our software and for providing
business and information technology consulting services to them
on a time and materials basis. The consulting services we
provide to certain governmental agencies are typically billed on
a cost-plus fee structure. |
| |
| |
Revenue for transaction services, patient statement and
paid-claims communication services is recognized as the services
are provided. Decision support software and the related support
and maintenance agreements are generally sold as bundled
time-based license agreements and accordingly, the revenue for
both the software and related support and maintenance is
recognized ratably over the term of the license and maintenance
agreement. Revenue for consulting services is recognized as the
services are provided. |
| |
| |
WebMD Practice Services. Healthcare providers pay us fees
to license our Medical Manager and Intergy practice management
systems and Intergy EHR electronic medical records system. Our
practice management systems are sold as multiple-element
arrangements as these software arrangements typically include
related hardware, support and maintenance agreements and
implementation and training services. We also charge healthcare
providers fees for transmitting, through WebMD Network Services,
transactions to payers and billing statements to patients. We
recognize revenue from these fees, which are generally paid on a
per transaction or monthly basis, as we provide the service. |
| |
| |
Software revenue is recognized in accordance with SOP
No. 97-2, “Software Revenue Recognition,” as
amended by SOP 98-9, “Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions.”
Software license revenue is recognized when a customer enters
into a non-cancelable license agreement, the software product
has been delivered, there are no uncertainties surrounding
product acceptance, there are no significant future |
55
|
|
| |
performance obligations, the license fees are fixed or
determinable and collection of the license fee is considered
probable. Amounts received in advance of meeting these criteria
are deferred. As required by SOP 98-9, the Company determines
the value of the software component of its multiple-element
arrangements using the residual method as vendor specific
objective evidence (“VSOE”) of fair value exists for
the undelivered elements such as the support and maintenance
agreements and related implementation and training services, but
not for all the delivered elements such as the software itself.
The residual method requires revenue to be allocated to the
undelivered elements based on the fair value of such elements,
as indicated by VSOE. VSOE is based on the price charged when an
element is sold separately. |
| |
| |
The vast majority of our practice management and medical records
systems include support and maintenance agreements of the
underlying software and hardware. These arrangements provide
customers with rights to unspecified software product upgrades
released during the term of the support period, as well as
Internet and telephone access to technical support personnel.
Revenue from support and maintenance agreements is recognized
ratably over the term of the arrangement, typically one year or
less. Additionally, many of our software arrangements include
implementation and training services. Revenues from these
services are accounted for separately from the software revenue,
as they are not essential to the functionality of any other
element of the software arrangement, and are generally
recognized as the services are performed. |
| |
| |
WebMD Health. Customers pay us for advertising,
sponsorship, healthcare management tools, content syndication
and distribution, and licenses of private online portals. In
addition, in connection with our Medscape portal, our customers
provide funding for online education programs for healthcare
professionals, including online continuing medical education
(“CME”). Revenue from advertising is recognized as
advertisements are delivered. Revenues from sponsorship
arrangements and healthcare management tools are recognized
ratably over the term of the applicable agreement. Revenue from
CME arrangements is recognized over the period we satisfy the
minimum credit hour requirements of the applicable agreements.
Revenue from fixed fee content license or carriage fees is
recognized ratably over the term of the applicable agreement.
E-commerce revenue is recognized when a subscriber or consumer
utilizes our Internet-based services or purchases goods or
services through our Web site or a Web site co-branded with one
of our strategic partners. Subscription revenue, including
subscription revenue from sponsorship arrangements, is
recognized over the subscription period. When contractual
arrangements contain multiple elements, revenue is allocated to
the elements based on their relative fair values, determined
using prices charged when elements are sold separately. |
| |
| |
Porex. We develop, manufacture and distribute porous
plastic products and components. For standard products, we
recognize revenue upon shipment of product, net of sales returns
and allowances. For sales of certain custom products, we
recognize revenue upon completion and customer acceptance.
Recognition of amounts received in advance of meeting these
criteria is deferred until we meet these criteria. |
|
|
|
| |
• |
Long-Lived Assets — Our long-lived
assets consist of property and equipment, goodwill and other
intangible assets. Goodwill and other intangible assets arise
from the acquisitions we have made. The amount assigned to
intangible assets is subjective and based on our estimates of
the future benefit of the intangible asset using accepted
valuation techniques, such as discounted cash flow and
replacement cost models. Our long-lived assets, excluding
goodwill, are amortized over their estimated useful lives, which
we determined based on the consideration of several factors
including the period of time the asset is expected to remain in
service. We evaluate the carrying value and remaining useful
lives of long-lived assets, excluding goodwill, whenever
indicators of impairment are present. We evaluate the carrying
value of goodwill annually. We use a discounted cash flow
approach to determine the fair value of goodwill. There was no
impairment of goodwill noted as a result of our impairment
testing in 2004, 2003 or 2002. |
56
|
|
|
| |
• |
Investments — Our investments, at
December 31, 2004, consisted principally of certificates of
deposit, municipal bonds, auction rate securities, asset-backed
securities, Federal Agency Notes, U.S. Treasury Notes and
marketable equity securities in publicly traded companies. Each
reporting period we evaluate the carrying value of our
investments and record a loss on investments when we believe an
investment has experienced a decline in value that is other than
temporary. Our investments are classified as available-for-sale
and are carried at fair value. We do not recognize gains on an
investment until sold. Unrealized gains and losses are recorded
as a component of accumulated other comprehensive income. Future
changes in market or economic conditions or operating results of
our investments could result in gains or losses or an inability
to recover the carrying value of the investments that may not be
reflected in an investment’s carrying value. |
| |
| |
• |
Deferred Tax Assets — Our deferred tax
assets are comprised primarily of net operating loss
carryforwards. At December 31, 2004, we had net operating
loss carryforwards of approximately $2.0 billion. These
loss carryforwards may be used to offset taxable income in
future periods, reducing the amount of taxes we might otherwise
be required to pay. Due to a lack of a history of generating
taxable income, we record a valuation allowance equal to 100% of
our net deferred tax assets. In the event that we are able to
generate taxable earnings in the future and determine it is more
likely than not that we can realize our deferred tax assets, an
adjustment to the valuation allowance would be made which may
increase income in the period that such determination was made. |
| |
| |
• |
Tax Contingencies — Our tax
contingencies are recorded to address potential exposures
involving tax positions we have taken that could be challenged
by tax authorities. These potential exposures result from the
varying application of statutes, rules, regulations and
interpretations. Our estimates of tax contingencies reflect
assumptions and judgments about potential actions by taxing
jurisdictions. We believe that these assumptions and judgments
are reasonable; however, our accruals may change in the future
due to new developments in each matter and the ultimate
resolution of these matters may be greater or less than the
amount that we have accrued. |
57
Results of Operations
The following table sets forth our consolidated statements of
operations data and expresses that data as a percentage of
revenue for the periods presented (amounts in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
$ | |
|
% | |
|
$ | |
|
% | |
|
$ | |
|
% | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Revenue
|
|
|
1,160,351 |
|
|
|
100.0 |
|
|
|
963,980 |
|
|
|
100.0 |
|
|
|
871,696 |
|
|
|
100.0 |
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cost of operations
|
|
|
666,431 |
|
|
|
57.4 |
|
|
|
564,939 |
|
|
|
58.6 |
|
|
|
509,744 |
|
|
|
58.5 |
|
| |
Development and engineering
|
|
|
54,161 |
|
|
|
4.7 |
|
|
|
42,985 |
|
|
|
4.5 |
|
|
|
43,467 |
|
|
|
5.0 |
|
| |
Sales, marketing, general and administrative
|
|
|
324,027 |
|
|
|
27.9 |
|
|
|
282,482 |
|
|
|
29.3 |
|
|
|
283,424 |
|
|
|
32.5 |
|
| |
Depreciation, amortization and other
|
|
|
57,765 |
|
|
|
5.0 |
|
|
|
62,434 |
|
|
|
6.5 |
|
|
|
125,593 |
|
|
|
14.4 |
|
| |
Legal expense
|
|
|
9,230 |
|
|
|
0.8 |
|
|
|
3,959 |
|
|
|
0.4 |
|
|
|
— |
|
|
|
— |
|
| |
Restructuring and integration charge (benefit)
|
|
|
4,535 |
|
|
|
0.4 |
|
|
|
— |
|
|
|
— |
|
|
|
(5,850 |
) |
|
|
(0.7 |
) |
| |
Gain on investments
|
|
|
457 |
|
|
|
0.1 |
|
|
|
1,659 |
|
|
|
0.2 |
|
|
|
6,547 |
|
|
|
0.8 |
|
| |
Interest income
|
|
|
18,717 |
|
|
|
1.6 |
|
|
|
22,901 |
|
|
|
2.4 |
|
|
|
19,590 |
|
|
|
2.3 |
|
| |
Interest expense
|
|
|
19,253 |
|
|
|
1.7 |
|
|
|
15,214 |
|
|
|
1.6 |
|
|
|
8,491 |
|
|
|
1.0 |
|
| |
Other income, net
|
|
|
121 |
|
|
|
0.0 |
|
|
|
4,218 |
|
|
|
0.4 |
|
|
|
3,844 |
|
|
|
0.4 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income tax
provision (benefit)
|
|
|
44,244 |
|
|
|
3.8 |
|
|
|
20,745 |
|
|
|
2.1 |
|
|
|
(63,192 |
) |
|
|
(7.2 |
) |
| |
Income tax provision (benefit)
|
|
|
4,910 |
|
|
|
0.4 |
|
|
|
4,140 |
|
|
|
0.4 |
|
|
|
(10,079 |
) |
|
|
(1.1 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income (loss) from continuing operations
|
|
|
39,334 |
|
|
|
3.4 |
|
|
|
16,605 |
|
|
|
1.7 |
|
|
|
(53,113 |
) |
|
|
(6.1 |
) |
| |
Income (loss) from discontinued operations, net of income taxes
|
|
|
— |
|
|
|
— |
|
|
|
(33,611 |
) |
|
|
(3.5 |
) |
|
|
3,411 |
|
|
|
0.4 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
39,334 |
|
|
|
3.4 |
|
|
|
(17,006 |
) |
|
|
(1.8 |
) |
|
|
(49,702 |
) |
|
|
(5.7 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue is derived from our four business segments: WebMD
Business Services, WebMD Practice Services, WebMD Health and
Porex. WebMD Business Services provides: electronic transmission
services for medical, dental and pharmacy transactions and
related technology solutions, consulting services and
outsourcing services for healthcare payers, including document
management services for transaction processing and
print-and-mail services for the distribution of checks,
remittance advice and explanation of benefits; and automated
patient billing services for healthcare providers, including
statement printing and mailing services. Additionally, WebMD
Business Services provides software products including decision
support and data warehousing, and related maintenance services
to Blue Cross Blue Shield and commercial healthcare payers, and
performs software maintenance and consulting services for
certain governmental agencies. A significant portion of WebMD
Business Services revenue is generated from the country’s
largest national and regional healthcare payers. WebMD Practice
Services provides information technology systems for healthcare
providers, including administrative, financial and clinical
applications, primarily under The Medical Manager, Intergy and
WebMD Network Services brands. WebMD Practice Services also
provides support and maintenance services related to the
hardware and software associated with our practice management
systems. WebMD Health services include advertising, sponsorship,
continuing medical education (“CME”), content
syndication and distribution, and licenses of private online
portals to employers and healthcare payers for use by their
employees and plan members. A significant portion of WebMD
Health revenue is derived from a small number of customers. Our
customers include pharmaceutical companies, biotech companies,
medical device companies and media companies. Our Porex revenue
includes the sale of porous plastic components used to control
the flow of fluids and gases for use in healthcare, industrial
and consumer applications, as well as in finished products used
in the medical device and surgical markets.
58
Cost of operations consists of costs related to services and
products we provide to customers and costs associated with the
operation and maintenance of our networks. These costs include
salaries and related expenses for network operations personnel
and customer support personnel, telecommunication costs,
maintenance of network equipment, cost of postage related to our
automated print-and-mail services and paid-claims communication
services, cost of hardware related to the sale of practice
management systems, a portion of facilities expenses, leased
personnel and facilities costs, sales commissions paid to
certain distributors of our WebMD Business Services products and
non-cash expenses related to content and distribution services.
In addition, cost of operations includes raw materials, direct
labor and manufacturing overhead, such as fringe benefits and
indirect labor related to our Porex segment.
Development and engineering expense consists primarily of
salaries and related expenses associated with the development of
applications and services. Expenses include compensation paid to
development and engineering personnel, fees to outside
contractors and consultants, and the maintenance of capital
equipment used in the development process.
Sales, marketing, general and administrative expense consists
primarily of advertising, product and brand promotion, salaries
and related expenses for sales, administrative, finance, legal,
information technology, human resources and executive personnel.
These expenses include items related to account management and
marketing personnel, commissions, costs and expenses for
marketing programs and trade shows, and fees for professional
marketing and advertising services, as well as fees for
professional services, costs of general insurance and costs of
accounting and internal control systems to support our
operations. Also included are non-cash expenses related to
content and distribution services acquired in exchange for our
equity securities and stock compensation expense primarily
related to the amortization of deferred compensation. Content
and distribution services consist of advertising, promotion and
distribution services from our arrangements with News
Corporation, Microsoft, AOL and other partners. Stock
compensation primarily relates to deferred compensation
associated with the intrinsic value of the unvested portion of
stock options issued in exchange for outstanding stock options
of companies we acquired in 2000, the excess of the market price
over the exercise price of options granted to employees and the
market price of restricted stock granted to employees.
Legal expense consists of costs and expenses incurred related to
the investigation by the United States Attorney for the District
of South Carolina and the SEC.
Our total revenues increased to $1,160,351 in 2004 from
$963,980 in 2003. WebMD Business Services, WebMD Health and
Porex accounted for $180,856, $23,652, and $5,159,
respectively, of the revenue increase, which was partially
offset by a decrease in revenue of $6,525 in WebMD Practice
Services and an increase in inter-segment eliminations of $6,771.
Revenue from customers acquired through the 2004 Acquisitions
and 2003 Acquisitions contributed $144,140 to the overall
increase in revenue for 2004 of $196,371. For purposes
of this discussion, only revenue from existing customers of the
acquired business on the date of the acquisition is considered
to be revenue from acquired customers. We integrate acquisitions
as quickly as practicable, and only revenue recognized during
the first twelve months following the quarter in which the
acquisitions closed is considered to be revenue from acquired
customers. Excluding revenues from the 2004 Acquisitions
and 2003 Acquisitions, the remaining increase
of $52,231 is primarily related to increased sales of our
paid-claims communication services, automated print-and-mail
services and growth in online revenues from pharmaceutical and
medical companies.
Cost of Operations. Cost of operations increased
to $666,431 in 2004 from $564,939 in 2003.
Our cost of operations represented 57.4% of revenues
in 2004, compared to 58.6% of revenue in 2003. The
59
inclusion of the Medifax operations had a favorable impact on
cost of operations as a percentage of revenue when compared to a
year ago, as Medifax has higher gross margins than the average
gross margins of other products we offer. Also favorably
impacting cost of operations as a percentage of revenue compared
to a year ago, was the impact of productivity gains as a result
of streamlining our delivery and service infrastructure within
WebMD Practice Services operating segment. Partially offsetting
these items was the inclusion of ABF’s operations, which
have products with lower gross margins due to the high cost of
postage associated with providing ABF services, and higher sales
commissions, as a percentage of revenue, paid to our channel
partners. Included in cost of operations were non-cash expenses
related to content and distribution services of $901
and $2,356 for 2004 and 2003, respectively.
Development and Engineering. Development and engineering
expense was $54,161 and $42,985 in 2004
and 2003, respectively. Our development and engineering
expense represented 4.7% of revenues in 2004, compared
to 4.5% of revenues in 2003. The increase in
development and engineering expense, in dollars and as a
percentage of revenue, was primarily attributable to the
development and engineering expense of the Medifax, ViPS, Dakota
and ABF operations which, due to timing of these acquisitions,
were excluded or only partially included in our results during
the 2003 period and, to a lesser extent, higher development
and engineering expense at WebMD Practice Services segment.
Sales, Marketing, General and Administrative. Sales,
marketing, general and administrative expense increased
to $324,027 in 2004, from $282,482 in 2003,
which represents an increase of $41,545. Included in sales,
marketing, general and administrative expense are non-cash
expenses related to content and distribution services and stock
compensation. Non-cash expenses related to content and
distribution services were $17,925 in 2004, compared to $21,942
in 2003, which reflects the completion of a distribution
agreement in May 2004 that existed during the full year of 2003.
Non-cash stock compensation was $8,975 in 2004, compared to
$12,449 in 2003. The decrease in non-cash stock compensation was
primarily related to the vesting schedules of options issued and
assumed in connection with our 2000 acquisitions, partially
offset by additional compensation expense related to restricted
stock issued to certain employees during 2004. Sales, marketing,
general and administrative expense excluding the non-cash
expenses discussed above, were $297,127, or 25.6% of revenue in
2004, compared to $248,091, or 25.7% of revenue in 2003. While
sales, marketing, general and administrative expense as a
percentage of revenue was relatively unchanged from 2004 to
2003, the operations of ABF and ViPS caused a reduction of
sales, marketing, general and administrative expense as a
percentage of revenue, as these operations have lower
administrative expenses. This reduction was offset by higher
personnel and professional service cost in 2004 related to our
implementation efforts with respect to the Health Insurance
Portability Act of 1996, or HIPAA, Transaction Standards and our
“all payer” transaction services and our efforts
related to Section 404 of the Sarbanes-Oxley Act of 2002.
Depreciation, Amortization and Other. Depreciation,
amortization and other expense decreased to $57,765 in 2004 from
$62,434 in 2003. The decrease was primarily due to intangible
assets relating to certain acquisitions made in 2000 becoming
fully amortized since the beginning of the prior periods. The
decrease was partially offset by amortization expense related to
the intangible assets acquired through our 2004 and 2003
Acquisitions, primarily Medifax, ViPS and ABF.
Legal Expense. Legal expense was $9,230 and $3,959 in
2004 and 2003, respectively, and represents the costs and
expenses incurred related to the investigation by the United
States Attorney for the District of South Carolina and the SEC.
Over the course of the investigation, we expect that these costs
and expenses may continue to be significant.
Restructuring and Integration Charge (Benefit). The
restructuring and integration charge in 2004 of $4,535
represents an incremental charge taken in connection with the
settlement of a lawsuit against the landlord of a property
leased in 2000, but never occupied. The remaining cost of the
settlement was previously expensed in connection with the
restructuring and integration plan that we announced in
September 2000.
Gain on Investments. During 2004, the gain on investments
in the amount of $457 consisted of a gain of $343 and a net gain
of $114 related to the sale of a portion of our investments in
marketable
60
equity securities and marketable debt securities, respectively.
During 2003, we recognized a gain on investments of $1,659,
which consisted of a gain of $2,973 related to the sale of a
portion of our investments in marketable equity securities,
offset by a loss $1,314 related to the sale of our investments
in marketable debt securities.
Interest Income. Interest income decreased to $18,717 in
2004, from $22,901 in 2003. This decrease was mainly due to
lower average investment balances and lower average rates of
return, primarily during the six months ended December 31,
2004. The lower investment balances in 2004 were primarily the
result of the acquisitions of Medifax, Dakota and ViPS, slightly
offset by the proceeds from the issuance of the convertible
redeemable exchangeable preferred stock.
Interest Expense. Interest expense increased to $19,253
in 2004, from $15,214 in 2003, primarily due to the inclusion of
a full year of interest expense and amortization of debt
issuance costs related to our $350,000, 1.75% Convertible
Subordinated Notes issued in June and July of 2003.
Other Income, Net. Other income for 2004 of $121
represents a gain from the sale of property. Other income for
2003 of $4,218 is comprised of a gain of $3,100 from the sale of
property in California and Ohio and a benefit of $1,118 from a
state tax refund which applied to a pre-acquisition tax year of
a company we acquired.
Income Tax Provision. Income tax provision in 2004 and
2003 primarily represents taxes from profitable operations in
certain states and foreign countries in which we do not have net
operating losses to offset that income. Accordingly, we provided
for taxes of $4,910 and $4,140 related to foreign, state and
other jurisdictions during 2004 and 2003, respectively. The
increase in the income tax provision was due to more income
earned in certain states in 2004, compared to 2003.
Discontinued Operations. Loss from discontinued
operations in 2003 represents the operating results of the
discontinued units of the Porex segment, as well as a loss of
$3,491 recognized in connection with their disposal on
August 1, 2003. Included in the loss from discontinued
operations in 2003 was an impairment charge of $33,113 to reduce
certain long-lived assets of the discontinued units to fair
value.
Our total revenues increased to $963,980 in 2003 from $871,696
in 2002. WebMD Business Services, WebMD Practice Services, WebMD
Health and Porex accounted for $38,919, $27,334, $26,369 and
$6,129, respectively, of the revenue increase. This revenue
increase was partially offset by an increase in inter-segment
eliminations of $6,467.
Revenue from customers acquired through the 2003 Acquisitions
and 2002 Acquisitions contributed $55,629 to the overall
increase in revenue for 2003 of $92,284. For purposes of this
discussion, only revenue from existing customers of the acquired
business on the date of the acquisition is considered to be
revenue from acquired customers. We integrate acquisitions as
quickly as practicable, and only revenue recognized during the
first twelve months following the quarter in which the
acquisitions closed is considered to be revenue from acquired
customers.
Cost of Operations. Cost of operations increased to
$564,939 in 2003 from $509,744 in 2002. Our cost of operations
represented 58.6% of revenues in 2003, compared to 58.5% in
2002. While cost of operations as a percentage of revenue has
remained relatively consistent from 2003 to 2002, cost of
operations increased due to our July 17, 2003 acquisition
of ABF, whose products have a lower gross margin. Additionally,
cost of operations increased due to higher sales commissions
paid to our channel partners and due to higher consulting and
personnel costs related to our implementation of the HIPAA
Transaction Standards. These increases were offset by lower data
communication costs and the costs associated with the lower
margin terminated products and relationships exited in May 2002.
Cost of
61
operations for 2003 and 2002 includes approximately $2,356 and
$4,765, respectively, of non-cash expenses related to content
and distribution services.
Development and Engineering. Development and engineering
expense was $42,985 and $43,467 in 2003 and 2002, respectively.
Development and engineering expense was relatively flat in 2003
compared to 2002, both in the aggregate and at the segment
level, reflecting relatively consistent spending throughout all
operating segments.
Sales, Marketing, General and Administrative. Sales,
marketing, general and administrative expense decreased to
$282,482 in 2003, from $283,424 in 2002, which represents a
decrease of $942. Included in sales, marketing, general and
administrative expense are non-cash expenses related to content
and distribution services and stock compensation. Non-cash
expenses related to content and distribution services were
$21,942 in 2003, compared to $20,941 in 2002. Non-cash stock
compensation was $12,449 in 2003, compared to $25,265 in 2002.
The decrease in non-cash stock compensation is primarily related
to the vesting schedules of options issued and assumed in
connection with our 2000 acquisitions. Sales, marketing, general
and administrative expense excluding the non-cash expenses
discussed above, were $248,091, or 25.7% of revenue in 2003,
compared to $237,218, or 27.2% of revenue in 2002. The decrease
in sales, marketing, general and administrative expense,
excluding the non-cash expenses discussed above, as a percentage
of revenue, is due to the fixed cost leverage of our increased
revenues as well as lower sales and marketing costs, partially
offset by higher consulting and personnel costs related to our
implementation efforts with respect to the HIPAA Transaction
Standards and our “all-payer” transaction services,
higher professional services expenses, and higher insurance
expenses.
Depreciation, Amortization and Other. Depreciation,
amortization and other expense decreased to $62,434 in 2003 from
$125,593 in 2002. The decrease was primarily the result of
intangible assets relating to certain acquisitions made in 1999
and 2000 becoming fully amortized since the beginning of the
prior year period.
Legal Expense. Legal expense in 2003 was $3,959 and
represents the costs and expenses incurred related to the
investigation by the United States Attorney for the District of
South Carolina initiated on September 3, 2003.
Restructuring and Integration (Benefit) Charge. In
connection with our restructuring and integration efforts, we
recorded a benefit of $5,850 in 2002, which related to the
settlement of certain contractual obligations. There were no
restructuring or integration charges recorded during 2003.
Gain on Investments. During 2003, the gain on investments
in the amount of $1,659 consisted of a gain of $2,973 related to
the sale of a portion of our investments in marketable equity
securities, offset by a loss of $1,314 related to the sale of
our investments in marketable debt securities. During 2002, we
recognized a gain on investments of $6,547, which is comprised
of a gain of $5,866 and $681 related to the sale of our
investment in an available-for-sale and an early redemption call
of a held-to-maturity security, respectively.
Interest Income. Interest income increased to $22,901 in
2003, from $19,590 in 2002. This increase was mainly due to
higher average investment balances, partially offset by lower
average rates of return, during 2003 as compared to 2002. The
higher average investment balances in 2003 were primarily
attributable to the proceeds from the issuance of our $300,000
31/4% Convertible
Subordinated Notes in April 2002, and the issuance of our
$350,000 1.75% Convertible Subordinated Notes in June and
July 2003.
Interest Expense. Interest expense increased to $15,214
in 2003, from $8,491 in 2002, due to the inclusion of a full
year of interest expense and amortization of debt issuance costs
related to our $300,000
31/4% Convertible
Subordinated Notes issued in April 2002 and the interest expense
and amortization of debt issuance costs related to our $350,000
1.75% Convertible Subordinated Notes issued in June and
July of 2003.
Other Income, Net. Other income for 2003 of $4,218 is
comprised of a gain of $3,100 for the sale of property in
California and Ohio and a benefit of $1,118 from a state tax
refund which applied to a pre-acquisition tax year of a company
we acquired. Other income of $3,844 in 2002 includes $5,223 for
the
62
settlement of various pre-acquisition issues related to certain
companies acquired in 1998 through 2000, partially offset by
$1,379 in expenses related to our disposition plan for our Porex
business.
Income Tax Provision (Benefit). Income tax provision
(benefit) in 2003 and 2002 primarily represents taxes from
profitable operations in certain states and foreign countries in
which we do not have net operating losses to offset that income.
Accordingly, we provided for taxes of $4,140 and $2,808 related
to foreign, state and other jurisdictions during 2003 and 2002,
respectively. Also included in the 2002 income tax provision
(benefit) is a $12,887 benefit reflecting the carryback of net
operating losses to the prior periods of certain acquired
subsidiaries, in which those subsidiaries generated taxable
income. The carryback was allowed as a result of the “Job
Creation and Worker Assistance Act of 2002” that was
enacted on March 9, 2002.
Discontinued Operations. Loss from discontinued
operations in 2003 represents the operating results of the
discontinued units of the Porex segment as well as the loss of
$3,491 recognized in connection with their disposal on
August 1, 2003. Also included in the loss from discontinued
operations in 2003 was an impairment charge of $33,113 to reduce
the long-lived assets of the discontinued units to fair value.
The income from discontinued operations in 2002 includes the
operating results of the discontinued units.
Results of Operations by Operating Segment
We evaluate the performance of our business segments based upon
income or loss before restructuring, taxes, non-cash and other
items. Non-cash and other items include depreciation,
amortization, costs and expenses related to the investigation by
the United States Attorney for the District of South Carolina
and the SEC (“legal expense”), gain on investments,
other income, non-cash expenses related to content, advertising
and distribution services acquired in exchange for our equity
securities in acquisitions and strategic alliances, and stock
compensation expense primarily related to stock options issued
and assumed in connection with acquisitions and restricted stock
issued to employees. The accounting policies of the segments are
consistent with the accounting policies for the consolidated
company. Inter-segment revenues represent sales of WebMD
Business Services products into the WebMD Practice Services
customer base and are reflected at rates comparable to those
charged to third parties for comparable products. Inter-segment
revenues are eliminated in consolidation.
63
The following table presents the results of our operations for
each of our reportable segments and a reconciliation to net
income (loss):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WebMD Business Services
|
|
$ |
686,585 |
|
|
$ |
505,729 |
|
|
$ |
466,810 |
|
|
WebMD Practice Services
|
|
|
296,115 |
|
|
|
302,640 |
|
|
|
275,306 |
|
|
WebMD Health
|
|
|
134,317 |
|
|
|
110,665 |
|
|
|
84,296 |
|
|
Porex
|
|
|
77,099 |
|
|
|
71,940 |
|
|
|
65,811 |
|
|
Inter-segment eliminations
|
|
|
(33,765 |
) |
|
|
(26,994 |
) |
|
|
(20,527 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
1,160,351 |
|
|
$ |
963,980 |
|
|
$ |
871,696 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) before restructuring, taxes, non-cash and other
items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WebMD Business Services
|
|
$ |
131,834 |
|
|
$ |
94,218 |
|
|
$ |
85,154 |
|
|
WebMD Practice Services
|
|
|
14,533 |
|
|
|
20,924 |
|
|
|
26,685 |
|
|
WebMD Health
|
|
|
32,898 |
|
|
|
24,898 |
|
|
|
5,574 |
|
|
Porex
|
|
|
22,650 |
|
|
|
20,532 |
|
|
|
19,891 |
|
|
Corporate
|
|
|
(58,382 |
) |
|
|
(50,251 |
) |
|
|
(51,272 |
) |
|
Interest income
|
|
|
18,717 |
|
|
|
22,901 |
|
|
|
19,590 |
|
|
Interest expense
|
|
|
(19,253 |
) |
|
|
(15,214 |
) |
|
|
(8,491 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
142,997 |
|
|
|
118,008 |
|
|
|
97,131 |
|
|
Restructuring, taxes, non-cash and other items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization and other
|
|
|
(57,765 |
) |
|
|
(62,434 |
) |
|
|
(125,593 |
) |
|
Non-cash content and distribution services and stock compensation
|
|
|
(27,801 |
) |
|
|
(36,747 |
) |
|
|
(50,971 |
) |
|
Restructuring and integration (charge) benefit
|
|
|
(4,535 |
) |
|
|
— |
|
|
|
5,850 |
|
|
Legal expense
|
|
|
(9,230 |
) |
|
|
(3,959 |
) |
|
|
— |
|
|
Gain on investments
|
|
|
457 |
|
|
|
1,659 |
|
|
|
6,547 |
|
|
Other income, net
|
|
|
121 |
|
|
|
4,218 |
|
|
|
3,844 |
|
|
Income tax (provision) benefit
|
|
|
(4,910 |
) |
|
|
(4,140 |
) |
|
|
10,079 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
39,334 |
|
|
|
16,605 |
|
|
|
(53,113 |
) |
|
Income (loss) from discontinued operations
|
|
|
— |
|
|
|
(33,611 |
) |
|
|
3,411 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Net income (loss)
|
|
$ |
39,334 |
|
|
$ |
(17,006 |
) |
|
$ |
(49,702 |
) |
| |
|
|
|
|
|
|
|
|
|
The following discussion is a comparison of the results of
operations for each of our operating segments for the year ended
December 31, 2004 to the year ended December 31, 2003.
WebMD Business Services. Revenues were $686,585 in 2004,
an increase of $180,856 or 35.8% from 2003. Revenues from
customers acquired through the 2004 Acquisitions contributed
$141,817 to the increase in revenue. The remaining increase of
$39,039 for 2004 was primarily the result of increased sales of
our paid-claims communication services and automated
print-and-mail services.
Income before restructuring, taxes, non-cash and other items was
$131,834 in 2004, an increase of $37,616 or 39.9% from 2003. As
a percentage of revenue, income before restructuring, taxes,
non-cash and other items was 19.2% in 2004, compared to 18.6% in
2003. The acquisitions of Medifax and ABF had a favorable impact
on operating margins for 2004. Offsetting the higher
margins of these acquisitions were
64
higher sales commissions paid to our channel partners and
increased costs related to our implementation efforts with
respect to the HIPAA Transaction Standards and our
“all-payer” transaction services.
WebMD Practice Services. Revenues were $296,115 in 2004,
compared to $302,640 for 2003. The decrease in revenue
is the result of system sales being impacted by longer and more
complex sales cycles and from HIPAA implementation and
other transition challenges related to our “all-payer”
transaction services. This decrease in revenue was partially
offset by an increase in our Network Services revenues and, to a
lesser extent, from customers acquired through the
2004 Acquisitions in the amount of $1,459.
Income before restructuring, taxes, non-cash and other items
was $14,533 in 2004, a decrease of $6,391
from 2003. As a percentage of revenue, income before
restructuring, taxes, non-cash and other items was 4.9% in
2004, compared to 6.9% in 2003. Lower systems sales
combined with higher operating expenses largely due to increased
development and engineering, marketing and training expenses
were primarily responsible for the lower operating margin for
2004.
WebMD Health. Revenues were $134,317 in 2004, an increase
of $23,652 or 21.4% from 2003. The increase in
revenues for 2004, compared to a year ago, is the result of
growth in online revenues from pharmaceutical and medical
companies and increased revenues from large employers and
commercial payers. Revenues from customers acquired through the
2003 Acquisitions contributed $500 to the increase in
revenue for 2004.
Income before restructuring, taxes, non-cash and other items in
2004 was $32,898, an increase of $8,000 from 2003. As
a percentage of revenue, the income before restructuring, taxes,
non-cash and other items improved to 24.5% in 2004,
compared to 22.5% in 2003. The increase as a percentage of
revenue for 2004, compared to a year ago, was primarily the
result of reduced marketing expenses, partially offset by
increased personnel costs. In addition, $1,863 of expenses
related to the acquisition of certain resources of Physician
Online reduced operating margins in 2003.
Porex. Revenues were $77,099 for 2004, compared
to $71,940 for 2003. The increase for 2004, compared
to a year ago, was primarily due to increased sales of
filtration products, writing instrument components and surgical
products. Also contributing to the increase in revenues for
2004, compared to a year ago, was the favorable impact of
foreign exchange rates on the translation of foreign operations.
Revenues from customers acquired through the 2004 Acquisitions
contributed $364 to the increase in revenue in 2004.
Income before restructuring, taxes, non-cash and other items
was $22,650 for 2004, compared to $20,532
for 2003. As a percentage of revenue, income before
restructuring, taxes, non-cash and other items was 29.4%
for 2004, compared to 28.5% for 2003. This
increase was due primarily to the increase in revenue discussed
above and the leveraging effect of certain fixed manufacturing
costs.
Corporate includes expenses shared across all operating
segments, such as executive, corporate finance, legal, human
resources and risk management. Corporate expenses increased
to $58,382 for 2004, compared to $50,251
for 2003. As a percentage of consolidated revenue,
corporate expenses were 5.0% and 5.2% for 2004
and 2003, respectively. While the dollar amount of
corporate expenses has increased when compared to a year ago,
these expenses comprise a slightly lower percentage of revenue
during 2004 as compared to 2003. Contributing to the
increase in the dollar amount of these expenses, when compared
to a year ago, were higher compensation and professional
services costs related to our efforts related to
Section 404 of the Sarbanes-Oxley Act of 2002.
Inter-Segment Eliminations. The increase in inter-segment
eliminations for 2004, compared to 2003, resulted from
higher sales of WebMD Business Services products into the
WebMD Practice Services customer base.
The following discussion is a comparison of the results of
operations for each of our operating segments for the year ended
December 31, 2003 to the year ended December 31, 2002.
65
WebMD Business Services. Revenues were $505,729 in 2003,
an increase of $38,919 or 8.3% from 2002. Revenues from
customers acquired through the 2003 Acquisitions contributed
$37,870 to the increase in WebMD Business Services revenue.
Additionally, revenues for 2002 include $7,460 of revenues
associated with terminated laboratory connectivity products and
relationships exited. Excluding the impact of the 2003
Acquisitions and terminated products and relationships, revenues
for 2003 increased by $8,509, primarily the result of a postal
rate increase that went into effect on July 1, 2002.
Income before restructuring, taxes, non-cash and other items was
$94,218 in 2003, an increase of $9,064 or 10.6% from 2002. As a
percentage of revenue, income before restructuring, taxes,
non-cash and other items was 18.6% in 2003, compared to 18.2% in
2002. The slight improvement in income as a percentage of
revenue was due to lower data communication costs and the
elimination of costs associated with the terminated products and
relationship discussed above, offset by higher sales commissions
paid to our channel partners, and increased costs related to our
implementation efforts with respect to the HIPAA Transaction
Standards and our “all-payer” transaction services.
WebMD Practice Services. Revenues were $302,640 in 2003,
an increase of $27,334 or 9.9% from 2002. The increase was
primarily attributable to an increase in Network Services
revenues. Systems sales and maintenance revenues also increased,
primarily as a result of revenues from customers acquired. Those
customers contributed $8,180 to the increase in revenues in 2003.
Income before restructuring, taxes, non-cash and other items was
$20,924 in 2003, a decrease of $5,761 from 2002. As a percentage
of revenue, income before restructuring, taxes, non-cash and
other items was 6.9% in 2003, compared to 9.7% in 2002. This
decrease in income as a percentage of revenue was primarily
attributable to increased costs related to our implementation
efforts with respect to the HIPAA Transaction Standards and our
“all-payer” transaction services, as well as a shift
in sales focus to larger accounts in 2003, which generally carry
lower margins as a percentage of sales.
WebMD Health. Revenues were $110,665 in 2003, an increase
of $26,369 or 31.3% from 2002. Revenues from customers acquired
through 2003 Acquisitions and 2002 Acquisitions contributed
$9,579 to the increase in WebMD Health revenue for 2003.
Excluding the 2003 Acquisitions and 2002 Acquisitions, the
increase was primarily attributable to growth in advertising and
sponsorship revenues on our consumer and professional sites,
and, to a lesser extent, an increase in revenues from health
plans and employers.
Income before restructuring, taxes, non-cash and other items in
2003 was $24,898, compared to $5,574 in 2002. As a percentage of
revenue, the income before restructuring, taxes, non-cash and
other items improved to 22.5% in 2003, compared to 6.6% in 2002.
This improvement was the result of fixed cost leverage related
to the increased revenues discussed above and reduced sales and
marketing related costs during 2003 compared to 2002. Also
included in income before restructuring, taxes, non-cash and
other items in 2003 was $1,863 of expense related to the
acquisition of certain resources of Physicians Online.
Porex. Revenues were $71,940 in 2003, an increase of
$6,129 or 9.3% from 2002. The increase was primarily due to a
favorable impact of foreign exchange rates, higher sales of our
computer printing and writing instrument components and higher
sales of our surgical products.
Income before restructuring, taxes, non-cash and other items in
2003 was $20,532, an increase of $641 from 2002. As a percentage
of revenue, income before restructuring, taxes, non-cash and
other items was 28.5% in 2003, compared to 30.2% in 2002. This
decrease in income as a percentage of revenue was due to higher
sales and marketing and product development expenses.
Corporate. Corporate includes expenses shared across all
segments, such as executive personnel, corporate finance, legal,
human resources and risk management. Corporate and other
expenses declined to $50,251 or 5.2% of consolidated revenue in
2003 from $51,272 or 5.9% of consolidated revenue in 2002 due to
lower personnel and facility costs, partially offset by higher
insurance expenses and higher professional services expenses.
66
Inter-Segment eliminations. The increase of $6,467 in
inter-segment eliminations from 2002 resulted from higher sales
of WebMD Business Services products into the WebMD Practice
Services customer base.
Liquidity and Capital Resources
We have incurred significant operating and net losses since we
began operations and, as of December 31, 2004, we had an
accumulated deficit of approximately $10.2 billion. We plan
to continue to invest in acquisitions, strategic relationships,
infrastructure and product development.
As of December 31, 2004, we had approximately $107,694 in
cash and cash equivalents and short-term investments and working
capital of $48,295. Additionally, we had long-term investments
of $511,864 in marketable debt securities and $4,017 in
marketable equity securities. We invest our excess cash
principally in U.S. Treasury obligations and federal agency
notes and expect to do so in the future. During 2004, all our
marketable securities were classified as available-for-sale.
Cash provided by operating activities was $90,044 in 2004,
compared to cash provided by operating activities of $82,239 in
2003. The cash provided by operating activities in 2004 was
attributable to net income of $39,334 and non-cash charges of
$91,569, partially offset by net changes in operating assets and
liabilities of $40,859. The impact of changes in operating
assets and liabilities may change in future periods, depending
on the timing of each period end in relation to items such as
internal payroll and billing cycles, payments from customers,
payments to vendors, interest payments relating to our
31/4% Convertible
Subordinated Notes and our 1.75% Convertible Subordinated
Notes and interest receipts relating to our investments in
marketable securities. The cash provided by operating activities
in 2003 was attributable to a net loss of $17,006 and net
changes in operating assets and liabilities of $42,492, offset
by non-cash charges of $102,996 and the loss from discontinued
operations of $33,611. The non-cash charges consist of
depreciation and amortization, non-cash expenses related to
content and distribution services, and stock compensation, bad
debt expense, amortization of debt issuance costs and gains on
investments and sales of property and equipment.
Cash used in investing activities was $188,152 in 2004, compared
to cash used in investing activities of $476,276 in 2003. Cash
used in investing activities during 2004 included $1,153,703 of
purchases of available-for-sale securities offset by $1,253,491
of proceeds from maturities and sales of available-for-sale
securities. Cash paid for business acquisitions, net of the cash
acquired, was $249,557, primarily related to the 2004
Acquisitions of ViPS and Dakota. Cash used in investing
activities during 2003 included $1,350,720 of purchases of
held-to-maturity and available-for-sale securities, partially
offset by $1,237,816 of proceeds from the maturities, sales and
redemptions of available-for-sale and held-to-maturity
securities. The 2003 Acquisitions consumed cash of $400,491, net
of the cash acquired, primarily related to the Medifax and ABF
acquisitions. Investments in property and equipment were $38,800
in 2004, compared to $18,385 in 2003. Additionally, in 2003 we
received proceeds of $56,279 related to the sale of our
discontinued operations and the sale of certain property,
primarily land and buildings.
Cash provided by financing activities was $103,455 in 2004,
compared to cash provided by financing activities of $356,621 in
2003. Cash provided by financing activities for 2004 principally
related to the net proceeds of $98,115 from the issuance of our
Convertible Redeemable Exchangeable Preferred Stock and proceeds
of $38,052 related to the issuance of common stock, primarily
related to exercises of employee stock options. Cash provided by
financing activities for 2003 principally related to net
proceeds of $339,125 from the issuance of the
1.75% Convertible Subordinated Notes on June 25, 2003
and July 7, 2003, and $44,719 related to the issuance of
common stock, primarily resulting from exercises of employee
stock options. During 2004 and 2003, $32,110 and $20,316,
respectively, was used for repurchases of our common stock.
Our principal commitments at December 31, 2004 consisted
primarily of our commitments related to the $350,000 of
1.75% Convertible Subordinated Notes due in June of 2023
and the $299,999 of
31/4% Convertible
Subordinated Notes due in April of 2007, obligations under
operating leases and contingent consideration payments of up to
an aggregate of $183,295 related to certain acquisitions
67
|
|
|
|
|
|
achieving certain milestones. In addition, we expect capital
expenditures to be between $70,000 and $80,000
in 2005. |
The following table summarizes our principal commitments as of
December 31, 2004, as well as management’s estimates
of the timing of the cash flows associated with these
commitments. Management’s estimates of the timing of future
cash flows are largely based on historical experience, and
accordingly, actual timing of cash flows may vary from these
estimates. The contingent consideration payments of up to an
aggregate of $183,295, have not been included in the table below
as it is impracticable to estimate the timing or amount of any
payments related to these commitments. Also, the expected cash
payment of $43,500 related to ABF’s achievement of certain
financial milestones during 2004 has not been included in the
table below.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Less Than | |
|
|
|
|
|
More Than | |
| |
|
Total | |
|
1 Year | |
|
1-3 Years | |
|
4-5 Years | |
|
5 Years | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Long-term debt(a)
|
|
$ |
784,994 |
|
|
$ |
15,875 |
|
|
$ |
324,437 |
|
|
$ |
12,251 |
|
|
$ |
432,431 |
|
|
Leases(b)
|
|
|
119,987 |
|
|
|
24,252 |
|
|
|
42,121 |
|
|
|
27,612 |
|
|
|
26,002 |
|
|
Purchase obligations(c)
|
|
|
29,772 |
|
|
|
21,033 |
|
|
|
8,739 |
|
|
|
— |
|
|
|
— |
|
|
Strategic relationships
|
|
|
1,379 |
|
|
|
754 |
|
|
|
625 |
|
|
|
— |
|
|
|
— |
|
|
Other long-term liabilities
|
|
|
890 |
|
|
|
— |
|
|
|
700 |
|
|
|
190 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
937,022 |
|
|
$ |
61,914 |
|
|
$ |
376,622 |
|
|
$ |
40,053 |
|
|
$ |
458,433 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Long-term debt includes our $350,000 1.75% Convertible
Subordinated Notes due 2023 and our $300,000
31/4%
Convertible Subordinated Notes due 2007. Amounts include our
contractual interest payments. |
|
(b) |
|
The lease amounts are net of sublease income. |
|
(c) |
|
Purchase obligations include amounts committed under legally
enforceable contracts or purchase orders for goods and services
with defined terms as to price, quantity and delivery. |
We believe that, for the foreseeable future, we will have
sufficient cash resources to meet the commitments described
above and our current anticipated working capital and capital
expenditure requirements, including the capital requirements
related to the roll-out of new or updated products in 2005 and
2006. Our future liquidity and capital requirements will depend
upon numerous factors, including retention of customers at
current volume and revenue levels, our existing and new
application and service offerings, competing technological and
market developments, potential future acquisitions and
additional repurchases of our common stock. In addition, we have
been incurring, and may continue to incur, costs relating to our
own implementation of the HIPAA Transaction Standards and for
assistance we provide to our customers in their implementation
efforts. We may need to raise additional funds to support
expansion, develop new or enhanced applications and services,
respond to competitive pressures, acquire complementary
businesses or technologies or take advantage of unanticipated
opportunities. If required, we may raise such additional funds
through public or private debt or equity financing, strategic
relationships or other arrangements. There can be no assurance
that such financing will be available on acceptable terms, if at
all, or that such financing will not be dilutive to our
stockholders.
The information in this section, including the chart showing our
principal commitments, does not take into consideration the
previously announced plan to establish WebMD Health as a
separate publicly traded company. Our Board of Directors
continues to evaluate the two previously announced alternatives
it has been considering — a one-step split-off of
WebMD Health equity through an exchange offer transaction with
WebMD’s stockholders or an initial public offering of a
minority interest in WebMD Health. For additional discussion,
see “— Introduction — Evaluation of
WebMD Health Transaction Alternatives.” As part of either
of the two alternatives, WebMD Health will become a separate
public company. In the case of a one-step split-off transaction,
WebMD Health’s financial results will no longer be
consolidated with those of WebMD. Neither of the two
alternatives will result in any significant increase in
WebMD’s long-term debt or other principal commitments and,
in either case, WebMD believes that it will continue, for the
foreseeable future, to have sufficient cash resources to meet
the commitments described above in this section that remain with
WebMD and our current anticipated working capital and capital
expenditure
68
requirements, even after structuring WebMD Health as a separate
public company, with sufficient cash resources to meet its
commitments and anticipated working capital and capital
expenditure requirements.
Recent Accounting Pronouncements
In December 2004, we adopted Emerging Issues Task
Force (“EITF”) Issue 04-08, “The Effect
of Contingently Convertible Debt on Diluted Earnings per
Share” (“EITF 04-08”). EITF 04-08
requires that an entity include the effect of contingently
convertible instruments in diluted earnings per share regardless
of whether any contingent features of those instruments have
been met. In addition, EITF 04-08 requires retroactive
restatement of previously reported diluted shares. While our
1.75% Convertible Subordinated Notes include a contingent
conversion feature, the adoption of EITF 04-08 did not have
an impact on diluted earnings per share, as these instruments
were anti-dilutive for all periods presented.
In December 2004, the Financial Accounting Standards Board
(“FASB”) issued SFAS No. 123, “(Revised
2004): Share-Based Payment” (“SFAS 123R”),
which replaces SFAS No. 123, “Accounting for
Stock-Based Compensation,” (“SFAS 123”) and
supersedes APB Opinion No. 25, “Accounting for
Stock Issued to Employees.” SFAS 123R requires all
share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements
based on their fair values beginning with the first interim or
annual period after June 15, 2005. The pro forma
disclosures previously permitted under SFAS 123 no longer
will be an alternative to financial statement recognition. We
are required to adopt SFAS 123R in the third quarter of
fiscal 2005, beginning July 1, 2005. Under SFAS 123R,
we must determine the appropriate fair value model to be used
for valuing share-based payments, the amortization method for
compensation cost and the transition method to be used at date
of adoption. The transition methods include prospective and
retroactive adoption options. Under the retroactive option,
prior periods may be restated either as of the beginning of the
year of adoption or for all periods presented. The prospective
method requires that compensation expense be recorded for all
unvested stock options and restricted stock at the beginning of
the first quarter of adoption of SFAS 123R. We are
evaluating the requirements of SFAS 123R and expect that
the adoption of SFAS 123R will have a material impact on
the consolidated results of operations and earnings per share.
We have not yet determined the method of adoption or the effect
of adopting SFAS 123R.
In December 2004, the FASB issued SFAS No. 151,
“Inventory Costs-An Amendment of ARB No. 43,
Chapter 4” (“SFAS No. 151”).
SFAS No. 151 requires abnormal amounts of inventory
costs related to idle facility, freight handling and wasted
material expenses to be recognized as current period charges.
Additionally, SFAS No. 151 requires that allocation of
fixed production overhead to the costs of conversion be based on
the normal capacity of the production facilities. The standard
is effective for fiscal years beginning after June 15,
2005. We believe the adoption of SFAS No. 151 will not
have a material impact on our consolidated financial position or
results of operations.
In March 2004, the FASB issued EITF No. 03-01, “The
Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments,” (“EITF No. 03-01”)
which provides new guidance for assessing impairment losses on
debt and equity investments. The new impairment model applies to
investments accounted for under the cost or equity method and
investments accounted for under SFAS 115, “Accounting
for Certain Investments in Debt and Equity Securities.”
EITF No. 03-01 also includes new disclosure requirements
for cost method investments and for all investments that are in
an unrealized loss position. In September 2004, the FASB delayed
the accounting provisions of EITF No. 03-01; however the
disclosure requirements remain effective and those applicable
have been adopted. We will evaluate the effect, if any, of
EITF 03-01 when final guidance is issued.
69
Key Trends Affecting Our Businesses and Our Healthcare
Customers
Several key trends in the healthcare marketplace are influencing
the use of healthcare information services and technology
solutions of the types we provide or are developing. Those
trends, and the strategies we have developed in response, are
described briefly below:
|
|
|
| |
• |
High Rates of Increase in Healthcare Costs.
According to the Centers for Medicare & Medicaid
Services, or CMS, healthcare spending in the United States rose
to $1.7 trillion in 2003, up from $1.6 trillion in
2002, $1.4 trillion in 2001 and $1.3 trillion in 2000.
The CMS report indicated a growth rate in healthcare spending of
7.7% for 2003, compared to 9.3% for 2002, and 8.5% for 2001. The
7.7% rate of increase in 2003 was three percentage points
higher than the 2003 increase gross domestic product for the
United States. The rate of increase in private spending for
physician services, which accounts for two-thirds of payments
for physician services, accelerated 1.2 percentage points
to 9.4%. CMS indicated that healthcare’s share of gross
domestic product was 15.3% for 2004. The difficulties involved
in controlling healthcare costs have resulted in the following
key trends: |
|
|
|
| |
— |
Cost-Shifting by Employers to their Employees and Changes in
Plan Design. Employers are seeking to shift a greater
portion of healthcare costs onto their employees and to redefine
traditional health benefits. People in employer-sponsored health
plans are paying much more out of their own pockets than they
did a few years ago and are likely to see their share continue
to increase significantly in the near future. With the shift in
financial burdens, consumers are assuming a more active role in
managing their health and need information to make educated
benefit, provider and treatment decisions. We are continuing the
process of transforming WebMD Health, our consumer portal, from
an online place that consumers go for information to a place
where they can actively manage their health. In addition,
through our WebMD Health Services business, we help employers
and plans provide employees and plan members with answers to
healthcare and plan benefit questions, decision-support tools
and personalized information and feedback. WebMD Health intends
to continue to make significant investments in its
infrastructure, as well as in new products and services, to
position ourselves to provide additional interactive online
services. |
| |
| |
— |
Increased Use of Information Technology for Clinical
Purposes. Governmental and commercial payers continue to
exert considerable pricing pressure on providers. As a result,
in order to maintain their incomes, providers need to see more
patients and increase productivity and/or reduce their operating
costs. Use of information technology can assist providers in
these efforts. Healthcare providers are also under pressure to
increase quality and reduce medical errors. While information
technology systems and electronic transaction services are used
by many physician offices for administrative and financial
applications, their use in clinical workflow is much more
limited, especially in smaller practices. We believe that is
changing and we are continuing to target the market for clinical
applications as one of our priorities for the next several
years. While it will be a long time before most physicians go to
a “paperless office,” more physicians are beginning to
incorporate information technology into their clinical workflow,
and our products allow them to make this shift in a gradual way.
In 2004, WebMD Practice Services released a new suite of
clinical software called Intergy EHR. We believe that, in light
of the increasing importance of clinical software to healthcare
providers, WebMD Practice Services’ success in retaining
existing practice management system customers and attracting new
customers may depend, in substantial part, on their response to
Intergy EHR. |
|
|
|
| |
• |
Improving Quality of Care Through Use of Information
Technology |
|
|
|
| |
— |
Quality Initiatives. Health plans recognize that
encouraging the good health of their members not only benefits
the members but also has financial benefits for the health
plans. Healthier people need less care and fewer costly
services. Thus, controlling costs by keeping people healthier
and better managing chronic conditions has become a significant
focus for America’s healthcare system. Managed care emerged
in the 1990s as a new approach to healthcare |
70
|
|
|
| |
|
delivery, combining a greater emphasis on preventive care with
careful monitoring of resource utilization and provider
performance. However, while managed care produced some important
cost reductions, it also met with consumer resistance to what
was perceived as its excessive restrictions. Then, in 1999 and
2000, a series of major studies suggested that the nation’s
healthcare system should be fundamentally redirected to focus on
continuous quality improvement and anticipating healthcare
needs, rather than controlling access to services. To achieve
this, the healthcare industry required both new thinking and new
techniques. Today, health plans seek to understand the needs of
their members, including those whose medical conditions are
likely to generate the greatest cost of services, and are
working to offer both providers and members timely information
to improve their health through appropriate care. Health plans
and employer sponsors also seek to anticipate member and
employee needs and to reach out to them with personalized
communications. Finally, health plans and employers want to be
able to determine the effectiveness of these efforts. ViPS,
which we acquired in 2004, provides software and services that
helps health plans identify and serve members who need the most
care and to anticipate the future needs of member populations.
In addition, WebMD Health provides online private portals that
assist employers and health plans in educating and encouraging
employees and plan members to lower health risks and to take a
more active role in their healthcare. |
|
|
|
| |
— |
Pay-for-Performance Initiatives. Both governmental and
commercial payers have begun to reassess current healthcare
provider compensation arrangements, which generally reimburse
physicians and other healthcare providers based on the number
and complexity of the services provided to patients.
Pay-for-performance initiatives reward healthcare providers for
better outcomes and adherence to evidence-based guidelines.
These initiatives typically create incentives for improvements
in the quality of care and for an increased focus on preventive
medicine and appropriate management of chronic illnesses. The
goal is both better outcomes and reductions in hospitalizations
and expensive procedures. Information technology plays an
important role in pay-for-performance initiatives, including
with respect to the delivery of quality care by providers and
quality measurement by payers. Some pay-for-performance programs
provide incentives for use of electronic medical record systems,
such as Intergy EHR, by providers. ViPS provides software and
services that can be used to support
“pay-for-performance” initiatives by payers. In
addition, WebMD Health is working with Bridges to Excellence
(BTE), a consortium of employers, providers and plans focused on
improving outcomes and the quality of care through incentive
programs. WebMD Health created and maintains the patient
component of BTE’s Diabetes Care Link program, which
provides tools to help patients make treatment and provider
decisions in connection with managing their disease, and it is
integrated into an outcomes-based physician incentive program. |
|
|
|
| |
• |
Increasing Automation of the Healthcare Reimbursement
Cycle. Submission of claims electronically assists
payers in reducing the cost of processing and servicing claims
and can expedite the reimbursement process for providers.
However, this is just a starting point for increasing
administrative efficiency. We are continuing our efforts to
transform WebMD Business Services (whose name was changed in
2004 from WebMD Envoy) from an electronic transactions
clearinghouse to a provider of more complete reimbursement cycle
management services for healthcare providers and
transaction-related administrative services for healthcare
payers. The new name is intended to reflect this transformation,
which in turn is intended to allow us to provide the benefits of
economies of scale to our customers in various stages of the
healthcare reimbursement cycle. In order to be more efficient,
many healthcare payers are focusing upon core
activities — building cost-effective provider
networks, marketing their services to employers, and
adjudicating claims payment — and are outsourcing pre-
and post-adjudication administrative activities, such as
printing and mailing checks and explanation of benefits and
other document management activities, including conversion of
paper claims to electronic form. By outsourcing these services
to us, payers can reduce operating costs and capital
expenditures. Our acquisitions of Advanced Business Fulfillment
and Medifax-EDI in 2003 and Dakota Imaging in April 2004 support
our ability to |
71
|
|
|
| |
|
provide more comprehensive business process outsourcing
services. Through ViPS, which we acquired in August 2004, we
provide healthcare payers with information technology solutions
and related services for claims processing, provider performance
measurement, quality improvement, fraud detection, disease
management and predictive modeling. We are working to cross-sell
our additional services to healthcare payers. |
We expect that, over time, our revenue and earnings from
providing basic electronic clearinghouse services for routing
healthcare transactions, on their own, will decline. However, we
believe that the revenue and earnings of our business process
outsourcing and other transaction-related services, in
conjunction with our clearinghouse services, is likely to, over
time, offset any such decline. Nonetheless, we believe that it
is possible that, during certain reporting periods, revenue from
basic clearinghouse services could decline faster than we are
able to increase the revenue from our additional services, in
part because of the length of the implementation cycle for the
additional services.
We intend to continue the transformation of WebMD Business
Services by developing or acquiring additional
transaction-related services and updating our existing ones. Our
strategy is to continue to increase the value we are able to
provide our payer and provider customers in all aspects of their
adoption and implementation of information technology solutions
for healthcare transactions.
|
|
|
| |
• |
Increased Use of the Internet by Physicians and as a
Source of Health Information for Consumers. A study
published in 2003 by the Pew Internet and American Life Project
estimated that approximately half of all American adults in the
United States have accessed the Internet for health information,
with nearly three-quarters of those who use the Internet
reporting use of the Internet for health information. WebMD
Health is a leading destination on the Internet for these
consumers. See “Healthcare Information Services and
Technology Solutions — WebMD Health” below. The
Internet allows us to offer consumers the resources they are
looking for, with immediate access to searchable information and
dynamic interactive content. Physicians are also increasingly
turning to the Internet for professional activities. In 2004,
approximately 927,000 physicians and healthcare professional
participants earned approximately 827,000 continuing medical
education credits at Medscape, an increase of approximately 59%
and 31% over 2003 respectively. As a result, WebMD Health
enables its sponsors, including pharmaceutical, medical device
and consumer products companies, to reach targeted consumers
when they are looking for answers to healthcare questions and to
reach physicians when they are exploring new treatment options.
However, pharmaceutical companies and medical device
manufacturers currently spend only a very small portion of their
marketing and educational budgets on online media. Our strategy
is to seek a greater portion of these budgets and to increase
sponsorship of our portals by consumer products companies whose
products have health claims. |
| |
| |
• |
Governmental Initiatives Relating to Healthcare
Information Technology. There are currently numerous
federal, state and private initiatives seeking ways to increase
the use of information technology in healthcare, including in
the physician’s office. Most significantly, in April 2004,
Executive Order 13335 directed the appointment of a National
Coordinator for Health Information Technology to coordinate
programs and policies regarding health information technology
across the Federal government. |
|
|
|
| |
— |
The National Coordinator is charged with directing the health
information technology programs within the Department of Health
and Human Services, or HHS, and coordinating them with those of
other relevant Executive Branch agencies. In May 2004,
David J. Brailer M.D., Ph.D., was appointed to serve
in this new position. Also in accordance with that Executive
Order, HHS issued a report during 2004 entitled “The Decade
of Health Information Technology: Delivering Consumer-centric
and Information-rich Health Care.” At WebMD, an important
part of our mission has been fostering adoption of information
technology and electronic communications in healthcare.
Accordingly, we welcome governmental and private initiatives
designed to achieve the same goals. However, these initiatives
may encourage more companies |
72
|
|
|
| |
|
to enter our markets or result in the development of technology
solutions that compete with ours. The National Coordinator has
indicated that he intends to encourage widespread adoption of
health information technology throughout the healthcare system
and, to do that, intends to facilitate the development and
transfer of knowledge and technology used by the federal
government to the private sector. |
|
|
|
| |
— |
In November 2004, the National Coordinator published a Request
for Information seeking public comment regarding considerations
in implementing a national health information network (NHIN). We
are committed to promoting the development and adoption of
interoperable health care information services and technology
solutions and were one of many healthcare information technology
companies that responded to the Request for Information. We
believe that our experience in processing large volumes of
electronic healthcare transactions, together with our experience
in providing electronic health records and practice management
software to medical practices and clinics and providing IT
services to private and governmental healthcare payers, makes us
a good candidate to work with HHS on NHIN-related initiatives
and projects. |
The effect that governmental initiatives relating to healthcare
information technology may have on our businesses is difficult
to predict and there can be no assurances that we will
adequately address the risks created by these initiatives or
that we will be able to take advantage of any resulting
opportunities.
We intend to continue to invest in new products and services and
in improving our existing products and services, both through
internal development activities and, in certain cases, through
acquisitions. We make these investments based on our assessments
of the needs of our customers and potential customers, including
the trends described above. However, the market for healthcare
in the United States is highly complicated and there can be no
assurance that the trends identified above will continue or that
the expected benefits to WebMD from our responses to those
trends will be achieved. In addition, the markets for healthcare
information services and technology solutions are highly
competitive and not only are our existing competitors seeking to
benefit from these same trends, but the trends may also attract
additional competitors.
Factors That May Affect Our Future Financial Condition or
Results of Operations
This section describes circumstances or events that could have a
negative effect on our financial results or operations or that
could change, for the worse, existing trends in some or all of
our businesses. The occurrence of one or more of the
circumstances or events described below could have a material
adverse effect on our financial condition, results of operations
and cash flows or on the trading prices of the common stock and
convertible notes that we have issued. The risks and
uncertainties described below are not the only ones facing
WebMD. Additional risks and uncertainties that are not currently
known to us or that we currently believe are immaterial may also
adversely affect our business and operations.
Risks Related to Our Relationships with Customers of
WebMD Business Services and WebMD Practice Services
|
|
|
The financial results of WebMD Business Services could be
adversely affected if payers conduct electronic data
interchange, or EDI, transactions without using a clearinghouse
or if their ability to do so allows them to terminate or modify
their relationships with us |
There can be no assurance that healthcare payers will continue
to use WebMD Business Services and other independent companies
to transmit healthcare transactions. Some payers currently offer
electronic data transmission services to healthcare providers
that bypass third-party EDI service providers such as WebMD
Business Services. In addition, some payers currently offer
electronic data transmission services through affiliated
clearinghouses that compete with WebMD Business Services. See
“Some of our customers compete with us and some, instead of
using a third party provider, perform internally some of the
services that we offer” below. We cannot provide assurance
that we will be able to maintain our
73
existing relationships with payers or develop new relationships
on satisfactory terms, if at all. Although we believe the use of
clearinghouses will continue to be the most efficient way for
most providers to transact electronically with multiple payers,
the HIPAA transaction standards may facilitate use of EDI links
for transmission of transactions between a greater number of
healthcare payers and providers without use of a clearinghouse.
Any significant increase in the utilization of links between
healthcare providers and payers without use of a third party
clearinghouse could have a material adverse effect on WebMD
Business Services’ transaction volume and financial
results. In addition, any increase in the ability of payers to
bypass third party EDI service providers may adversely affect
the terms and conditions we are able to negotiate in our
agreements with them, which could also have a material adverse
impact on WebMD Business Services’ business and financial
results.
|
|
|
Some of our customers compete with us and some, instead of
using a third party provider, perform internally some of the
services that we offer |
Some of our existing payer and provider customers and some of
our strategic partners compete with us or may plan to do so or
belong to alliances that compete with us or plan to do so,
either with respect to the same products and services we provide
to them or with respect to some of our other lines of business.
See “Business — Competition for Our Healthcare
Information Services and Technology Solutions” above. For
example, some payers currently offer, through affiliated
clearinghouses, Web portals and other means, electronic data
transmission services to healthcare providers that allow the
provider to bypass third party EDI service providers such as
WebMD Business Services, and additional payers may do so in the
future. The ability of payers to do so may adversely affect the
terms and conditions we are able to negotiate in our
connectivity agreements with them and our transaction volume. We
cannot provide assurance that we will be able to maintain our
existing relationships for connectivity services with payers or
develop new relationships on satisfactory terms, if at all. In
addition, some of our services allow healthcare payers to
outsource business processes that they have been or could be
performing internally and, in order for us to be able to
compete, use of our services must be more efficient for them
than use of internal resources.
|
|
|
WebMD Business Services’ transaction volume and
financial results could be adversely affected if we do not
maintain relationships with practice management system vendors
and large submitters of healthcare EDI transactions |
We have developed relationships with practice management system
vendors and large submitters of healthcare claims to increase
the usage of our WebMD Business Services transaction services.
WebMD Practice Services is a competitor of these practice
management system vendors. Some of these vendors have, as a
result of our ownership of WebMD Practice Services or for other
reasons, chosen to diminish or terminate their relationships
with WebMD Business Services, and others may do so in the
future. Some other large submitters of claims compete with, or
may have significant relationships with entities that compete
with, WebMD Business Services or WebMD Health. We could also
lose transaction volume from practice management system vendors
and other large submitters of claims if the payments we offer
them as an inducement to use our transaction services are not
competitive with other alternatives available to them. To the
extent that we are not able to maintain mutually satisfactory
relationships with the larger practice management system vendors
and large submitters of healthcare EDI transactions, WebMD
Business Services’ transaction volume and financial results
could be adversely affected.
74
|
|
|
Contractual relationships with governmental customers may
impose special burdens on us and provide special benefits to
those customers, including the right to change or terminate the
contract in response to budgetary constraints or policy
changes |
A portion of WebMD Business Services’ revenues comes from
customers that are governmental agencies. The recent acquisition
of ViPS has increased that portion and we intend to seek
additional government contracts and subcontracts. Government
contracts and subcontracts may be subject to some or all of the
following:
|
|
|
| |
• |
termination when appropriated funding for the current fiscal
year is exhausted; |
| |
| |
• |
termination for the governmental customer’s convenience,
subject to a negotiated settlement for costs incurred and profit
on work completed, along with the right to place contracts out
for bid before the full contract term, as well as the right to
make unilateral changes in contract requirements, subject to
negotiated price adjustments; |
| |
| |
• |
“most-favored” pricing disclosure requirements that
are designed to ensure that the government can negotiate and
receive pricing akin to that offered commercially and
requirements to submit proprietary cost or pricing data to
ensure that government contract pricing is fair and reasonable; |
| |
| |
• |
commercial customer price tracking requirements that require
contractors to monitor pricing offered to a specified class of
customers and to extend price reductions offered to that class
of customers to the government; |
| |
| |
• |
reporting and compliance requirements related to, among other
things: equal employment opportunity, affirmative action for
veterans and for workers with disabilities, and accessibility
for the disabled; |
| |
| |
• |
broader audit rights than we would usually grant to
non-governmental customers; and |
| |
| |
• |
specialized remedies for breach and default, including setoff
rights, retroactive price adjustments, and civil or criminal
fraud penalties, as well as mandatory administrative dispute
resolution procedures instead of state contract law remedies. |
In addition, certain violations of federal law may subject
government contractors to having their contracts terminated and,
under certain circumstances, suspension and/or debarment from
future government contracts. Finally, some of our governmental
contracts are priced based on our cost of providing products and
services. Those contracts are subject to regulatory
cost-allowability standards and a specialized system of cost
accounting standards.
|
|
|
Long sales, installation and implementation cycles for
some WebMD Business Services applications and some
WebMD Practice Services applications may result in
unanticipated fluctuations in their revenues |
WebMD Practice Services. WebMD Practice Services is
seeking to increase its sales to larger physician groups and
clinics. These sales are typically not only larger in size, but
also involve more complex practice management and electronic
medical records applications. As a result, we expect longer
sales, contracting and implementation cycles for these
customers. These sales may be subject to delays due to
customers’ internal procedures for approving large
expenditures and for deploying new technologies; implementation
may be subject to delays based on the availability of the
internal customer resources needed. We are unable to control
many of the factors that will influence the timing of the buying
decisions of potential customers or the pace at which
installation and training may occur. Unexpected delays in these
sales or in their implementation may result in unanticipated
fluctuations in the revenues of WebMD Practice Services.
ViPS. ViPS provides licensed software products and
related services to payers and information technology services
to government customers. The period from our initial contact
with a potential ViPS client and the purchase of our solution by
the client is difficult to predict. In the past, it has
generally ranged from six to 12 months, but in some cases
has extended much longer. Sales by ViPS may be subject
75
to delays due to customers’ internal procedures for
approving large expenditures, to delays in government funding
and other factors outside of our control. The time it takes to
implement a licensed software solution is also difficult to
predict and has lasted as long as 12 months from contract
execution to the commencement of live operation. Implementation
may be subject to delays based on the availability of the
internal resources of the client that are needed and other
factors outside of our control. As a result, we have only
limited ability to forecast the timing of revenue from new ViPS
sales. During the sales cycle and the implementation period, we
may expend substantial time, effort and money preparing contract
proposals and negotiating the contract without receiving any
related revenue.
|
|
|
WebMD Practice Services faces competition in providing
support services to owners of The Medical Manager and other
systems |
WebMD Practices Services faces competition for the support
services it markets to owners of The Medical Manager systems, as
well as for similar services that we market to owners of certain
other practice management systems that we have acquired.
Physician practices may seek such support from third parties,
including businesses that support or manage information
technology for various types of clients and businesses that
specialize in systems for physicians, some of whom may formerly
have been independent dealers of The Medical Manager software or
of practice management systems we have acquired. We cannot
provide assurance that we will be able to compete successfully
against these service providers. In addition, some physician
practices, especially larger ones, may use their own employees
and other internal resources to support their practice
management systems. Some of our clients have terminated their
support services contracts in the past and we expect such
terminations to occur in the future.
Risks Related to the Development and Performance of Our
WebMD Business Services and WebMD Practice Services
Solutions
|
|
|
Our ability to generate revenue could suffer if we do not
continue to update and improve our existing products and
services and develop new ones |
We must introduce new healthcare information services and
technology solutions and improve the functionality of our
existing products and services in a timely manner in order to
retain existing customers and attract new ones. However, we may
not be successful in responding to technological and regulatory
developments and changing customer needs. The pace of change in
the markets we serve is rapid, and there are frequent new
product and service introductions by our competitors and by
vendors whose products and services we use in providing our own
products and services. If we do not respond successfully to
technological and regulatory changes and evolving industry
standards, our products and services may become obsolete.
Technological changes may also result in the offering of
competitive products and services at lower prices than we are
charging for our products and services, which could result in
our losing sales unless we lower the prices we charge. In
addition, there can be no assurance that the products we develop
or license will be able to compete with the alternatives
available to our customers. For more information about the
competition we face, see “Business — Healthcare
Information Services and Technology Solutions —
Competition for Our Healthcare Information Services and
Technology Solutions” above.
|
|
|
Developing and implementing new or updated products and
services may take longer and cost more than expected |
We rely on a combination of internal development, strategic
relationships, licensing and acquisitions to develop our
products and services. The cost of developing new healthcare
information services and technology solutions is inherently
difficult to estimate. Our development and implementation of
proposed products and services may take longer than originally
expected, require more testing than originally anticipated and
require the acquisition of additional personnel and other
resources. If we are unable to develop new or updated products
and services on a timely basis and implement them without
significant
76
disruptions to the existing systems and processes of our
customers, we may lose potential sales and harm our
relationships with current or potential customers.
|
|
|
New or updated products and services will not become
profitable unless they achieve sufficient levels of market
acceptance |
There can be no assurance that healthcare providers and payers
will accept from us new or updated products and services or
products and services that result from integrating existing
and/or acquired products and services, including:
|
|
|
| |
• |
our updated electronic medical records products; |
| |
| |
• |
the business process outsourcing services for payers we have
developed internally and through acquisition; and |
| |
| |
• |
our updated clinical transaction services. |
The future results of WebMD Practice Services and WebMD Business
Services will depend, in significant part, on the success of
these products and services and on our ability to keep our other
information technology and connectivity products up to date.
Providers and payers may choose to use similar products and
services offered by our competitors if they are already using
products and services of those competitors and have made
extensive investments in hardware, software and training
relating to the competitors’ existing products and
services. Even providers and payers who are already our
customers may not purchase new or updated products or services,
especially when they are initially offered and if they require
changes in equipment or workflow. In addition, there can be no
assurance that payers who use our services for sending and
receiving claims will use our other pre- and post-adjudication
services.
For services we are developing or may develop in the future,
there can be no assurance that we will attract sufficient
customers or that such services will generate sufficient
revenues to cover the costs of developing, marketing and
providing those services. Furthermore, there can be no assurance
that any pricing strategy that we implement for any new 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 updated products and services
could have a material adverse effect on our business prospects.
|
|
|
Achieving market acceptance of new or updated products and
services is likely to require significant efforts and
expenditures |
Achieving market acceptance for new or updated 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 updated products and services 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
updated products and services will justify amounts spent for
their development, marketing and roll-out.
|
|
|
We could be subject to breach of warranty, product
liability or other claims if our software products, information
technology systems or transmission systems contain errors or
experience failures |
Undetected errors in the software and systems we provide to
customers or the software and systems we use to provide services
could cause serious problems for our customers. For example,
errors in our transaction processing systems can result in
healthcare payers paying the wrong amount or making payments to
the wrong payee. If problems like these occur, our customers may
seek compensation from us or may seek to terminate their
agreements with us, withhold payments due to us, seek refunds
from us of part or all of the fees charged under those
agreements or initiate litigation or other dispute resolution
procedures. We also provide products and services that assist in
healthcare decision-making, including some that relate to
patient medical histories and treatment plans. If these products
malfunction or fail to provide accurate and timely information,
we could be subject to product liability claims. In addition, we
77
could face breach of warranty or other claims or additional
development costs if our software and systems do not meet
contractual performance standards, do not perform in accordance
with their documentation, or do not meet the expectations that
our customers have for them. Our software and systems are
inherently complex and, despite testing and quality control, we
cannot be certain that errors will not be found in prior
versions, current versions or future versions or enhancements.
See also “During times when we are making significant
changes to our products and services, there are increased risks
of performance problems” below.
We attempt to limit, by contract, our liability for damages
arising from negligence, errors or mistakes. However,
contractual limitations on liability may not be enforceable in
certain circumstances or may otherwise not provide sufficient
protection to us from liability for damages. We maintain
liability insurance coverage, including coverage for errors and
omissions. However, it is possible that claims could exceed the
amount of our applicable insurance coverage or that this
coverage may not continue to be available on acceptable terms or
in sufficient amounts. Even if these claims do not result in
liability to us, investigating and defending against them could
be expensive and time consuming and could divert
management’s attention away from our operations. In
addition, negative publicity caused by these events may delay
market acceptance of our products and services, including
unrelated products and services.
|
|
|
Performance problems with WebMD Business Services’
systems or system failures could cause us to lose customers or
cause customers to reduce the number of transactions we process
for them |
We process payer and provider transactions and data at our own
facilities and at a data center in Tampa, Florida that is
operated by an independent third party. We have contingency
plans 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
third-party facility could interrupt data processing or result
in the loss of stored data, which could have a material adverse
impact on our business.
Our payer and provider customer satisfaction and our business
could be harmed if WebMD Business Services experiences
transmission delays or failures or loss of data in its
transaction processing systems. Similarly, performance problems
with the systems we use to provide our other transaction-related
administrative services, including our print-and-mail services
and scanning and imaging services, or any system failures
affecting those services, could harm our business and adversely
affect our customer relationships. WebMD Business Services’
systems are complex and, despite testing and quality control, we
cannot be certain that problems will not occur or that they will
be detected and corrected promptly if they do occur. See also
“During times when we are making significant changes to our
products and services, there are increased risks of performance
problems” below.
|
|
|
During times when we are making significant changes to our
products and services, there are increased risks of performance
problems |
If we do not respond successfully to technological and
regulatory changes and evolving industry standards, our products
and services may become obsolete. See “Our ability to
generate revenue could suffer if we do not continue to update
and improve our existing products and services and develop new
ones” above. The software and systems that we sell and that
we use to provide services are inherently complex and, despite
testing and quality control, we cannot be certain that errors
will not be found in any enhancements, updates and new versions
that we market or use. Even if new products and services do not
have performance problems, our technical and customer service
personnel may have difficulties in installing them or in their
efforts to provide any necessary training and support to
customers.
For example, we have had and may continue to have transmission
or processing problems relating to implementation of the HIPAA
Transaction Standards and our “all-payer” suite of
services. These problems included: transmission failures
resulting from sending large batches of electronic transactions
to non-commercial payers who have been accustomed to receiving
transactions through a greater number of smaller batches;
enrollment and other set-up errors resulting from initiating
services to large numbers of
78
customers simultaneously; and various other transmission,
processing, interfacing and service problems resulting from the
implementation of new software and new business processes.
We expect to make significant additional changes in 2005 to the
hardware and software WebMD Business Services uses to provide
connectivity services. While the new hardware and software will
be tested before it is used in production, we cannot be sure
that the testing will uncover all problems that may occur in
actual use. Any significant problems that occur could have
material adverse effect on our relationships with customers of
both WebMD Business Services and WebMD Practice Services.
|
|
|
If our systems or the Internet experience security
breaches or are otherwise perceived to be insecure, our business
could suffer |
A significant security breach could damage our reputation or
result in liability. We retain and transmit confidential
information, including patient health information, in our
processing centers and other facilities. 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 and hackers or to alleviate problems
caused by breaches. Despite the implementation of security
measures, this infrastructure or other systems that we interface
with, including the Internet and related systems, may be
vulnerable to physical break-ins, hackers, improper employee or
contractor access, computer viruses, programming errors, attacks
by third parties or similar disruptive problems. Any compromise
of our security, whether as a result of our own systems or
systems that they interface with, could reduce demand for our
services. See also “Business — Government
Regulation — Health Insurance Portability and
Accountability Act of 1996 — Security Standards”
above.
|
|
|
Performance problems with WebMD Business Services’
systems could affect our relationships with customers of our
Practice Services business |
WebMD Business Services provides the transaction services,
including the “all-payer” transaction services, used
by the WebMD Network Services customers of our Practice Services
business. As an increasing number of our WebMD Practice Services
customers rely on us to provide our “all-payer” suite
of transaction services, disruptions to those services could
cause some of those customers to obtain some or all of their
software support requirements from competitors of ours or could
cause some customers to switch to a competing physician practice
management or billing software solution.
|
|
|
WebMD Business Services’ ability to provide
transaction services depends on services provided by
telecommunications companies |
WebMD Business Services relies on a limited number of suppliers
to provide some of the telecommunications services necessary for
its transaction services. The telecommunications industry has
been subject to significant changes as a result of changes in
technology, regulation and the underlying economy. Recently,
many telecommunications companies have experienced financial
problems and some have sought bankruptcy protection. Some of
these companies have discontinued telecommunications services
for which they had contractual obligations to WebMD Business
Services. WebMD Business Services’ inability to source
telecommunications services at reasonable prices due to a loss
of competitive suppliers could affect its ability to maintain
its margins until it is able to raise its prices to its
customers and, if it is not able to raise its prices, could have
a material adverse effect on its financial results.
Risks Related to the Operations of WebMD Health’s Public
Web Sites
|
|
|
Our advertising and sponsorship revenues may vary
significantly from quarter to quarter |
Our advertising and sponsorship revenues may vary significantly
from quarter to quarter due to a number of factors, not all of
which are in our control, and may be difficult to forecast
accurately. The majority of our sponsorship contracts are for
terms of approximately four to 12 months in length, with
79
relatively few longer-term contracts. We cannot assure you that
our current sponsors will continue existing programs beyond the
term of the existing contract or that they will enter into any
additional contracts for new programs. In addition, the time
between the date of initial contact with a potential advertiser
or sponsor regarding a specific program and the execution of a
contract with the advertiser or sponsor for that program may be
lengthy, especially for larger contracts, and may be subject to
delays over which we have little or no control, including as a
result of budgetary constraints of the advertiser or sponsor or
their need for internal approvals. Other factors that could
affect the timing of our revenues from advertisers and sponsors
include:
|
|
|
| |
• |
timing of FDA approval for new products or for new approved uses
for existing products; |
| |
| |
• |
seasonal factors relating to the prevalence of specific health
conditions and other seasonal factors that may affect the timing
of promotional campaigns for specific products; and |
| |
| |
• |
scheduling of conferences for physicians and other healthcare
professionals. |
Many of the expenses related to our Web sites are relatively
fixed in the short-term, including personnel costs and
technology and infrastructure costs. As a result, we may be
unable to adjust spending quickly enough to offset any
unexpected revenue shortfall or delay, in which case our results
of operations would suffer. In addition, in an attempt to
enhance our long-term competitive position, we may from time to
time make decisions regarding pricing, marketing, services and
technology that could have a near-term adverse effect on our
operating results.
|
|
|
Our ability to maintain or increase our advertising and
sponsorship revenues depends on our ability to retain or
increase usage of our online offerings by consumers and
physicians |
We generate revenues by, among other things, selling
sponsorships of specific pages, sections or events on our online
Web sites for healthcare providers and consumers and related
e-mailed newsletters. Our advertisers and sponsors include
pharmaceutical, biotech, medical device and consumer products
companies that are interested in communicating with and
educating our audience or parts of our audience. While we
currently attract a large audience of health-involved consumers
and clinically active healthcare professionals to our online
offerings, we cannot provide assurance that we will continue to
do so. Users of our Web sites have numerous other online and
offline sources of healthcare information services. It is
difficult to predict the rate at which users will sample our
offerings and the extent to which they will become members
and/or return users. In addition, some of our traffic and new
members come to us through relationships with third parties and,
as a result, our traffic may vary based on the amount of traffic
to Web sites of these third parties and other factors outside
our control. A decline in user traffic levels or a reduction in
the number of pages viewed by users may cause our revenues to
decrease and could have a material adverse affect on our results
of operations.
|
|
|
Our ability to retain or increase usage of our Web sites
depends on our ability to create or license high quality health
content, interactive tools and other features |
In order to attract and retain users to our Web sites, we need
to continue to provide high quality, informative content and
tools. We must also properly anticipate and respond to user
interests and preferences regarding content. Our writers and
editors create some of the content we use. We also purchase or
license content from other companies. There can be no assurance
that we will continue to be able to get needed content at
reasonable cost. If we fail to provide high quality content of
the types our users are seeking, our business will suffer as a
result of decreased interest in our Web sites and a reduction in
advertising and sponsorship revenues.
The addition of new interactive tools and other features will
require that we continue to improve the technology underlying
our Web site. The required changes may be significant and
expensive, and there can be no assurance that we will be able to
execute them quickly and efficiently.
80
|
|
|
Changes in government regulation or industry guidelines
could adversely affect our online continuing medical education
offerings |
Our Medscape physician portal is a leading provider of online
continuing medical education, or CME, to physicians and other
healthcare professionals, offering a wide selection of free,
regularly updated online CME activities. We receive funding from
pharmaceutical and medical device companies for these CME
programs. See “Business — WebMD
Health — Continuing Medical Education (CME)”
above.
Our CME activities are planned and implemented in accordance
with the Essential Areas and Policies of the Accreditation
Council for Continuing Medical Education, or ACCME, which
oversees providers of CME credit, and other applicable
accreditation standards. In September 2004, ACCME revised
its standards for commercial support of CME. The revised
standards are intended to ensure, among other things,
that CME activities of ACCME-accredited providers are
independent of providers of healthcare goods and services that
fund the development of CME. ACCME expects accredited
providers to implement these standards by May 2005.
Implementation has required additional disclosures to CME
participants about those in a position to influence content and
other adjustments to the management and operations of
our CME programs. Medscape believes it has modified its
procedures as appropriate to meet the revised standards.
However, we cannot be certain whether these adjustments will
ensure that we meet the new standards or predict whether ACCME
may impose additional requirements.
Provision of CME may also be subject to government regulation by
the Food and Drug Administration, or FDA, and the Office of
Inspector General, or OIG, of the United States Department
of Health and Human Services, a federal agency responsible for
interpreting certain federal laws relating to healthcare. See
“Business — Government Regulation —
Regulation of Healthcare Relationships” and
“— Regulation of Drug and Medical Device
Advertising and Promotion” above.
Increased regulatory scrutiny of CME sponsorship by
pharmaceutical or medical device companies, changes to existing
regulations or accreditation standards, or changes in internal
compliance procedures of potential sponsors may require Medscape
to make changes in the way it offers or provides CME programs,
may slow sponsors’ internal approval processes for CME, and
may reduce the volume of sponsored CME programs implemented by
Medscape to levels that are lower than expected.
|
|
|
Loss of a small number of sponsors could have a material
adverse effect on our advertising and sponsorship
revenues |
A substantial portion of our advertising and sponsorship
revenues come from a relatively small number of companies. Thus,
the loss of a small number of these relationships or a reduction
in the purchases by a portion of these sponsors could have a
material adverse effect on our advertising and sponsorship
revenues. We may lose such relationships or experience a
reduction in purchases if customers decide not to renew their
commitments or renew at lower levels, which may occur if we fail
to meet our customers’ expectations or needs or fail to
keep up with our competition or for reasons outside our control,
including changes in economic and regulatory conditions
affecting the healthcare industry or changes specific to the
businesses of particular customers. For more information, see
“Risks Related to Providing Products and Services to the
Healthcare Industry — Developments in the healthcare
industry could adversely affect our business” and
“Business — Government Regulation” above.
|
|
|
We may be unsuccessful in our efforts to increase
advertising and sponsorship revenue from consumer products
companies |
Most of our advertising and sponsorship revenues have, in the
past, come from pharmaceutical and medical device companies.
During the past year, we have begun to focus on increasing
sponsorship from consumer products companies that are interested
in communicating health-related or safety-related information
about their products to our audience. However, while a number of
consumer products companies have indicated an intent to increase
the portion of their promotional spending used on the Internet,
there can be no assurance that these advertisers and sponsors
will find our consumer Web site to be as effective for promoting
their products and services as other on-line offerings available
to them or as
81
traditional advertising media. If we encounter difficulties in
competing with the other alternatives available to consumer
products companies, this portion of our business may develop
more slowly than we expect or may fail to develop.
|
|
|
Performance problems with the systems of our content
providers could disrupt our Web sites |
We depend on content providers to provide information and data
feeds on a timely basis. We could experience disruptions or
interruptions in service due to the failure or delay in the
transmission or receipt of this information.
Risks Related to Our Private Online Portals
WebMD Health Services provides private online portals to
employers and payers for use by their employees and members.
These private online portals are subject to many of the same
risks as WebMD Health’s public Web sites, particularly the
risks relating to sourcing and providing healthcare-related
content. In addition, the following risks are specific to our
private online portals business:
|
|
| |
Lengthy sales and implementation cycles for our private
online portals make it difficult to forecast our revenues from
these applications |
WebMD Health Services provides private online portals to
employers and payers for use by their employees and members. The
period from our initial contact with a potential WebMD Health
Services client and the first purchase of our solution by the
client is difficult to predict. In the past, it has generally
ranged from six to 12 months, but in some cases has
extended much longer. Sales by WebMD Health Services may be
subject to delays due to customers’ internal procedures for
approving large expenditures and other factors outside of our
control. The time it takes to implement a customized private
online portal is also difficult to predict and has lasted as
long as six months from contract execution to the commencement
of live operation. Implementation may be subject to delays based
on the availability of the internal resources of the client that
are needed and other factors outside of our control. As a
result, we have only limited ability to forecast the timing of
revenue from new customers. This, in turn, makes it more
difficult to predict quarterly financial performance.
During the sales cycle and the implementation period, we may
expend substantial time, effort and money preparing contract
proposals, negotiating the contract and implementing the private
online portal without receiving any related revenue. In
addition, many of the expenses related to WebMD Health
Services are relatively fixed in the short-term, including
personnel costs and technology and infrastructure costs.
If WebMD Health Services has lower revenue than expected,
we may not be able to reduce spending in the short-term in
response. Any shortfall in revenue would have a direct impact on
our results of operations.
|
|
|
We must continue to upgrade our technology infrastructure,
both hardware and software, to effectively meet demand for our
private online portals |
We must continue to add hardware and enhance software to
accommodate increased usage of our private online portals. In
order to make timely decisions about hardware and software
enhancements, we must be able to accurately forecast the growth
in demand for our services. This growth in demand for our
private online portals is difficult to forecast. If we are
unable to increase the data storage and processing capacity of
our systems at least as fast as the growth in demand, our
systems may become unstable and our customers may encounter
delays or disruptions in their service. Unscheduled downtime
could harm our business and also could discourage current and
potential customers and reduce future revenues.
82
|
|
|
If the systems WebMD Health Services uses to provide
private online portals experience security breaches or are
otherwise perceived to be insecure, its business could
suffer |
We retain and transmit confidential information, including
health records of individuals, in WebMD Health Services’
processing centers and other facilities. It is critical that
these facilities and infrastructure remain secure and be
perceived by the marketplace as secure. A significant security
breach could damage our reputation or result in liability. We
may be required to expend significant capital and other
resources to protect against security breaches and hackers or to
alleviate problems caused by breaches. Despite the
implementation of security measures, this infrastructure or
other systems that we interface with, including the Internet and
related systems, may be vulnerable to physical break-ins,
hackers, improper employee or contractor access, computer
viruses, programming errors, attacks by third parties or similar
disruptive problems. Any compromise of our security, whether as
a result of our own systems or systems that they interface with,
could reduce demand for our services.
|
|
|
We could be subject to breach of warranty or other claims
if our private online portals or the software and systems we use
to provide them contain errors or experience failures |
Our private online portals are made available by employers and
payers to their employees and members in order to provide
assistance in making informed benefit, provider and treatment
choices. Undetected errors in the software and systems we use to
provide these private online portals to clients could cause
serious problems for our clients and their employees and
members. If problems occur, our clients may seek compensation
from us or may seek to terminate their agreements with us,
withhold payments due to us, seek refunds from us of part or all
of the fees charged under those agreements or initiate
litigation or other dispute resolution procedures. In addition,
we could face breach of warranty or other claims or additional
development costs if our software and systems do not meet
contractual performance standards or do not meet the
expectations that our clients have for them. Our software and
systems are inherently complex and, despite testing and quality
control, we cannot be certain that errors will not be found.
We attempt to limit, by contract, our liability for damages
arising from negligence, errors or mistakes. However,
contractual limitations on liability may not be enforceable in
certain circumstances or may otherwise not provide sufficient
protection to us from liability for damages. We maintain
liability insurance coverage, including coverage for errors and
omissions. However, it is possible that claims could exceed the
amount of our applicable insurance coverage or that this
coverage may not continue to be available on acceptable terms or
in sufficient amounts. Even if these claims do not result in
liability to us, investigating and defending against them could
be expensive and time consuming and could divert
management’s attention away from our operations. In
addition, negative publicity caused by these events may delay
market acceptance of our services, including unrelated services.
Risks Applicable to Our Use of the Internet
Most of WebMD Health’s services are provided through the
Internet. In addition, WebMD Business Services and WebMD
Practice Services provide some Internet-based services and use
the Internet to receive some data from customers. The following
risks apply to our use of the Internet in our businesses:
|
|
|
Our Internet-based services are dependent on the
development and maintenance of the Internet
infrastructure |
Our ability to deliver our Internet-based services is dependent
on the development and maintenance of the infrastructure of the
Internet by third parties. This includes maintenance of a
reliable network backbone with the necessary speed, data
capacity and security, as well as timely development of
complementary 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
usage, the Internet
83
infrastructure may be unable to support the demands placed on
it. In addition, the performance of the Internet may be harmed
by increased usage.
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, 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.
|
|
|
Delivery of web-based services requires uninterrupted
communications and computer service from third-party service
providers and our own systems |
Our web-based services, including WebMD Health’s public Web
sites and private online portals, are designed to operate
24 hours a day, seven days a week, without interruption. To
do so, we rely on internal systems as well as communications and
hosting services provided by third parties. We do not maintain
redundant systems or facilities for some of these services. To
operate without interruption, both we and our service providers
must guard against:
|
|
|
| |
• |
damage from fire, power loss and other natural disasters; |
| |
| |
• |
communications failures; |
| |
| |
• |
software and hardware errors, failures or crashes; |
| |
| |
• |
security breaches, computer viruses and similar disruptive
problems; and |
| |
| |
• |
other potential interruptions. |
We have experienced periodic system interruptions in the past,
and we cannot guarantee that they will not occur again. In
addition, some of our Web-based services may, at times, be
required to accommodate higher than expected volumes of traffic.
At those times, we may experience slower response times or
system failures. Any sustained or repeated interruptions or
disruptions in these systems or increase in their response times
could damage our relationships with clients, customers,
advertisers and sponsors. Although we maintain insurance for our
business, we cannot guarantee that our insurance will be
adequate to compensate us for all losses that may occur or to
provide for costs associated with business interruptions.
|
|
|
Implementation of changes in hardware and software
platforms used to deliver our Web-based services may result in
performance problems |
From time to time, we implement changes to the hardware and
software platforms we use for providing Web-based services,
including those that WebMD Health uses to create and deliver our
public Web sites and private online portals. During and after
the implementation of those changes, a platform may not perform
as expected, which could result in interruptions in operations,
an increase in response time or an inability to track
performance metrics. Any significant interruption in our ability
to operate our Web-based services, including WebMD Health’s
public Web sites and private online portals, could have an
adverse effect on our relationship with users, clients and
sponsors and, as a result, on our financial results.
|
|
|
Government 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
laws and regulations affecting our products and services and the
manner in which we deliver them, or any other failure to comply,
could create liability for us, result in adverse publicity, or
negatively affect our business. In addition, new laws
84
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 these laws or regulations will change or how
such changes will affect our business. For more information
regarding government regulation of the Internet to which we are
or may be subject, see “Business — Government
Regulation” above.
Other Risks Applicable to WebMD Health
|
|
|
WebMD Health’s primary businesses are difficult to
evaluate because they have a limited operating history |
WebMD Health’s primary businesses have a limited operating
history and participate in relatively new and rapidly evolving
markets. As a result, each of these businesses has undergone
significant changes during its short history and is continuing
to change. We cannot assure you that the business strategies
WebMD Health currently relies on will be successful in the long
term.
Many companies with business plans based on providing healthcare
information through the Internet have failed to be profitable
and some have filed for bankruptcy and/or ceased operations.
There can be no assurance that WebMD Health’s services,
even if demand from users exists, will continue to be profitable
for us to provide.
|
|
|
Third parties may bring claims against us as a result of
content we provide, which may be expensive and time consuming to
defend |
Consumers access health-related information on our public Web
sites and through our private online portals, including
information regarding particular medical conditions and possible
adverse reactions or side effects from medications. If our
content contains inaccuracies, it is possible that consumers or
other third parties may seek to sue us for various causes of
action. We have editorial procedures in place to provide quality
control of the information that we publish or provide. However,
there can be no assurance that our editorial and other quality
control procedures will be sufficient to ensure that there are
no errors or omissions in particular content. Even if potential
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
our operations. In addition, our business is based on
establishing WebMD as trustworthy and dependable sources of
healthcare information. Allegations of impropriety, even if
unfounded, could therefore harm our reputation and business.
We could also be subject to third-party claims based on the
nature and content of information supplied to us by third
parties. We seek to protect WebMD from liability for acts or
omissions by our content providers by including customary
indemnification provisions in our contracts. However, we cannot
provide assurance that any such indemnification will be
sufficient to protect against third party claims.
|
|
| |
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 United States and abroad. We have privacy policies posted on
our public Web sites and our private online portals 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
is still 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 public Web sites
and our licensed online services and could harm our business.
Further, we can give no assurance that the privacy policies and
other statements on our Web sites, or our practices, will be
found sufficient to protect us from liability or adverse
publicity in this area.
85
|
|
|
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 public Web sites are
unenforceable. A finding by a court that these agreements are
invalid could harm our business and require costly changes to
our business.
Risks Related to Providing Products and Services to the
Healthcare Industry
|
|
|
Developments in the healthcare industry could adversely
affect our business |
Almost all of the revenues of WebMD Health, WebMD Business
Services and WebMD Practice Services come from customers in
various parts of the healthcare industry. In addition, a
significant portion of Porex’s revenues come from products
used in healthcare or related applications. Developments that
result in a reduction of expenditures by customers or potential
customers in the healthcare industry could have a material
adverse effect on our business. General reductions in
expenditures by healthcare industry participants could result
from, among other things:
|
|
|
| |
• |
government regulation or private initiatives that affect the
manner in which healthcare providers interact with patients,
payers or other healthcare industry participants, including
changes in pricing or means of delivery of healthcare products
and services (for additional discussion of the potential effects
of regulatory matters on our business and on participants in the
healthcare industry, see the other “Risks Related to
Providing Products and Services to the Healthcare Industry”
described below in this section and “Business —
Government Regulation” above); |
| |
| |
• |
consolidation of healthcare industry participants; |
| |
| |
• |
reductions in governmental funding for healthcare; and |
| |
| |
• |
adverse changes in business or economic conditions affecting
healthcare payers or providers, pharmaceutical companies,
medical device manufacturers or other healthcare industry
participants. |
Even if general expenditures by industry participants remain the
same or increase, developments in the healthcare industry may
result in reduced spending on information technology and
services or in some or all of the specific segments of that
market we serve or are planning to serve. For example, use of
our products and services could be affected by:
|
|
|
| |
• |
changes in the billing patterns of healthcare providers; |
| |
| |
• |
changes in the design of health insurance plans; |
| |
| |
• |
changes in the contracting methods payers use in their
relationships with providers; and |
| |
| |
• |
decreases in marketing expenditures by pharmaceutical companies
or medical device manufacturers, including as a result of
governmental regulation or private initiatives that discourage
or prohibit promotional activities by pharmaceutical or medical
device companies. |
In addition, expectations of our customers regarding pending or
potential industry developments may also affect their budgeting
processes and spending plans with respect to products and
services of the types we provide. See also “Governmental
and private initiatives to support adoption of healthcare
information technology may encourage additional companies to
enter our markets or result in the development of technology
solutions that compete with ours” below.
The healthcare industry has changed significantly in recent
years and we expect that significant changes will continue to
occur. However, the timing and impact of developments in the
healthcare industry are difficult to predict. We cannot provide
assurance that the markets for our products and
86
services will continue to exist at current levels or that we
will have adequate technical, financial and marketing resources
to react to changes in those markets.
|
|
|
Governmental and private initiatives to support adoption
of healthcare information technology may encourage additional
companies to enter our markets or result in the development of
technology solutions that compete with ours |
There are currently numerous federal, state and private
initiatives and studies seeking ways to increase the use of
information technology in healthcare, including in the
physician’s office, as a means of improving care and
reducing costs. For example, the Department of Health and Human
Services issued a report during 2004 entitled “The Decade
of Health Information Technology: Delivering Consumer-centric
and Information-rich Health Care.” At WebMD, an important
part of our mission has been fostering adoption of information
technology and electronic communications in healthcare.
Accordingly, we welcome governmental and private initiatives
designed to achieve the same goals. However, these initiatives
may encourage more companies to enter our markets or result in
the development of technology solutions that compete with ours.
The effect that these initiatives may have on our business is
difficult to predict and there can be no assurances that we will
adequately address the risks created by these initiatives or
that we will be able to take advantage of any resulting
opportunities.
|
|
|
Government regulation of healthcare creates risks and
challenges with respect to our compliance efforts and our
business strategies |
The healthcare industry is highly regulated and is subject to
changing political, legislative, regulatory and other
influences. Existing and new laws and regulations affecting the
healthcare industry could create unexpected liabilities for us,
cause us to incur additional costs and could restrict our
operations. Many healthcare laws are complex and their
application to specific products and services may not be clear.
In particular, many existing healthcare laws and regulations,
when enacted, did not anticipate the healthcare information
services and technology solutions that we provide. However,
these laws and regulations may nonetheless be applied to our
products and services. Our failure to accurately anticipate the
application of these laws and regulations, or other failure to
comply, could create liability for us, result in adverse
publicity and negatively affect our businesses. Some of the key
risks we face from healthcare regulation are as follows:
|
|
|
| |
• |
because we are in the business of applying information
technology to healthcare, various aspects of HIPAA have had and
are expected to continue to have significant consequences for
WebMD Business Services and WebMD Practice Services and, to a
lesser extent, WebMD Health; |
| |
| |
• |
because our WebMD Health business involves advertising and
promotion of prescription and over-the-counter drugs and medical
devices, any increase in regulation of these areas by the
Federal Drug Administration or the Federal Trade Commission
could make it more difficult for us to contract for sponsorships
and advertising; |
| |
| |
• |
because we sell items and services to healthcare providers and
physicians, our sales and promotional practices must comply with
federal and state anti-kickback laws; |
| |
| |
• |
our healthcare connectivity and transaction-related
administrative services must be provided in compliance with
federal and state false claims laws; and |
| |
| |
• |
in providing health information to consumers, we must comply
with corporate practice of medicine rules and not offer
professional medical advice, diagnosis or treatment. |
For more information regarding the risks that healthcare
regulation creates for our businesses, see
“Business — Government Regulation” above.
87
Risks Related to Porex’s Business and Industry
|
|
|
Porex’s success depends upon demand for its products,
which in some cases ultimately depends upon end-user demand for
the products of its customers |
Demand for our Porex products may change materially as a result
of economic or market conditions and other trends that affect
the industries in which Porex participates. In addition, because
a significant portion of our Porex products are components that
are eventually integrated into or used with products
manufactured by customers for resale to end-users, the demand
for these product components is dependent on product development
cycles and marketing efforts of these other manufacturers, as
well as variations in their inventory levels, which are factors
that we are unable to control. Accordingly, the amount of
Porex’s sales to manufacturer customers can be difficult to
predict and subject to wide quarter-to-quarter variances.
|
|
|
Porex’s success may depend on satisfying rapidly
changing customer requirements |
A significant portion of our Porex products are integrated into
end products used in various industries, some of which are
characterized by rapidly changing technology, evolving industry
standards and practices and frequent new product introductions.
Accordingly, Porex’s success depends to a substantial
degree on our ability to develop and introduce in a timely
manner products that meet changing customer requirements and to
differentiate our offerings from those of our competitors. If we
do not introduce new Porex products in a timely manner and make
enhancements to existing products to meet the changing needs of
our Porex customers, some of our products could become obsolete
over time, in which case our customer relationships, revenue and
operating results would be negatively impacted.
|
|
|
Potential new or enhanced Porex products may not achieve
sufficient sales to be profitable or justify the cost of their
development |
We cannot be certain, when we engage in Porex research and
development activities, whether potential new products or
product enhancements will be accepted by the customers for which
they are intended. Achieving market acceptance for new or
enhanced products may require substantial marketing efforts and
expenditure of significant funds to create awareness and demand
by potential customers. In addition, sales and marketing efforts
with respect to these products may require the use of additional
resources for training our existing Porex sales forces 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
enhanced products will justify amounts spent for their
development and marketing. In addition, there can be no
assurance that any pricing strategy that we implement for any
new or enhanced Porex products will be economically viable or
acceptable to the target markets.
|
|
|
Porex may not be able to source the raw materials it needs
or may have to pay more for those raw materials |
Some of Porex’s products require high-grade plastic resins
with specific properties as raw materials. While Porex has not
experienced any material difficulty in obtaining adequate
supplies of high-grade plastic resins that meet its
requirements, it relies on a limited number of sources for some
of these plastic resins. If Porex experiences a reduction or
interruption in supply from these sources, it may not be able to
access alternative sources of supply within a reasonable period
of time or at commercially reasonable rates, which could have a
material adverse effect on its business and financial results.
|
|
|
Disruptions in Porex’s manufacturing operations could
have a material adverse effect on its business and financial
results |
Any significant disruption in Porex’s manufacturing
operations, including as a result of fire, power interruptions,
equipment malfunctions, labor disputes, material shortages,
earthquakes, floods, computer
88
viruses, sabotage, terrorist acts or other force majeure, could
have a material adverse effect on Porex’s ability to
deliver products to customers and, accordingly, its financial
results.
|
|
|
Porex may not be able to keep third parties from using
technology it has developed |
Porex uses proprietary technology for manufacturing its porous
plastics products and its success is dependent, to a significant
extent, on its ability to protect the proprietary and
confidential aspects of its technology. Although Porex owns
certain patents, it relies primarily on non-patented proprietary
manufacturing processes. To protect its proprietary processes,
Porex relies on a combination of trade secret laws, license
agreements, nondisclosure and other contractual provisions and
technical measures, including designing and manufacturing its
porous molding equipment and most of its molds in-house. Trade
secret laws do not afford the statutory exclusivity possible for
patented processes. There can be no assurance that the legal
protections afforded to Porex or the steps taken by Porex will
be adequate to prevent misappropriation of its technology. In
addition, these protections do not prevent independent
third-party development of competitive products or services.
|
|
|
The nature of Porex’s products exposes it to product
liability claims that may not be adequately covered by indemnity
agreements or insurance |
The products sold by Porex, whether sold directly to end-users
or sold to other manufacturers for inclusion in the products
that they sell, expose it to potential risk of product liability
claims, particularly with respect to Porex’s life sciences,
clinical, surgical and medical products. Some of Porex’s
products are designed to be permanently implanted in the human
body. Design defects and manufacturing defects with respect to
such products sold by Porex or failures that occur with the
products of Porex’s manufacturer customers that contain
components made by Porex could result in product liability
claims and/or a recall of one or more of Porex’s products.
Porex believes that it 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, we cannot assure you that Porex will continue
to be able to obtain adequate insurance coverage at an
acceptable cost.
In most instances, Porex enters into indemnity agreements with
its manufacturing customers. These indemnity agreements
generally provide that these customers would indemnify Porex
from liabilities that may arise from the sale of their products
that incorporate Porex components to, or the use of such
products by, end-users. While Porex generally seeks contractual
indemnification from its customers, any such indemnification is
limited, as a practical matter, to the creditworthiness of the
indemnifying party. If Porex does not have adequate contractual
indemnification available, product liability claims, to the
extent not covered by insurance, could have a material adverse
effect on its business, operating results and financial
condition.
Since March 1991, Porex has been named as one of many
co-defendants in a number of actions brought by recipients of
mammary implants distributed by Porex in the United States. For
a description of these actions, see the information under
“Legal Proceedings — Porex Mammary Implant
Litigation” above.
|
|
| |
Economic, political and other risks associated with
Porex’s international sales and geographically diverse
operations could adversely affect Porex’s operations and
financial results |
Since Porex sells its products worldwide, its business is
subject to risks associated with doing business internationally.
In addition, Porex has manufacturing facilities in the United
Kingdom, Germany and
89
Malaysia. Accordingly, Porex’s operations and financial
results could be harmed by a variety of factors, including:
|
|
|
| |
• |
changes in foreign currency exchange rates; |
| |
| |
• |
changes in a specific country’s or region’s political
or economic conditions, particularly in emerging markets; |
| |
| |
• |
trade protection measures and import or export licensing
requirements; |
| |
| |
• |
potentially negative consequences from changes in tax laws; |
| |
| |
• |
differing protection of intellectual property; and |
| |
| |
• |
unexpected changes in regulatory requirements. |
|
|
|
Environmental regulation could adversely affect
Porex’s business |
Porex is subject to foreign and domestic environmental laws and
regulations and is subject to scheduled and random checks by
environmental authorities. Porex’s business involves the
handling, storage and disposal of materials that are classified
as hazardous. Although Porex’s safety procedures for
handling, storage and disposal of these materials are designed
to comply with the standards prescribed by applicable laws and
regulations, Porex may be held liable for any environmental
damages that result from Porex’s operations. Porex may be
required to pay fines, remediation costs and damages, which
could have a material adverse effect on its results of
operations.
Risks Applicable to Our Entire Company
|
|
|
The ongoing investigations by the United States Attorney
for the District of South Carolina and the SEC could negatively
impact our company and divert management attention from our
business operations |
The United States Attorney for the District of South Carolina is
conducting an investigation of our company. Based on the
information available to WebMD as of the date of this Annual
Report, we believe that the investigation relates principally to
issues of financial accounting improprieties for Medical Manager
Corporation, a predecessor of WebMD (by its merger into WebMD in
September 2000), and our Medical Manager Health Systems
subsidiary; however, we cannot be sure of the
investigation’s exact scope or how long it may continue. In
addition, WebMD understands that the SEC is conducting a formal
investigation into this matter. Adverse developments in
connection with the investigations, if any, including as a
result of matters that the authorities or WebMD may discover,
could have a negative impact on our company and on how it is
perceived by investors and potential investors and customers and
potential customers. In addition, the management effort and
attention required to respond to the investigations and any such
developments could have a negative impact on our business
operations. For additional information, see “Legal
Proceedings” above.
WebMD intends to continue to fully cooperate with the
authorities in this matter. While we are not able to estimate,
at this time, the amount of the expenses that we will incur in
connection with the investigations, we expect that they may
continue to be significant.
|
|
|
We face significant competition for our products and
services |
The markets in which we operate are intensely competitive,
continually evolving and, in some cases, subject to rapid
technological change. 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. For more information about the competition we face,
see “Business — Healthcare Information Services
and
90
Technology Solutions — Competition for Our Healthcare
Information Services and Technology Solutions” and
“Business — Porex — Competition”
above.
|
|
|
Third parties may bring claims as a result of the
activities of our strategic partners or resellers of our
products and services |
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 or resellers of our products and
services. 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.
|
|
|
The performance of our businesses depends on attracting
and retaining qualified executives and employees |
Our performance depends on attracting and retaining key
personnel, including executives, product managers, software
developers and other technical personnel and sales and marketing
personnel. Failure to do so could have a material adverse effect
on the performance of our business and the results of our
operations.
|
|
|
We may not be successful in protecting our intellectual
property and proprietary rights |
Our intellectual property is important to all of our businesses.
We rely on a combination of trade secret, patent and other
intellectual property laws and confidentiality procedures and
non-disclosure contractual provisions to protect our
intellectual property. We believe that our non-patented
proprietary technologies and business and manufacturing
processes are protected under trade secret, contractual and
other intellectual property rights. However, those rights do not
afford the statutory exclusivity provided by patented processes.
In addition, the steps that we take to protect our intellectual
property, proprietary information and trade secrets may prove to
be inadequate and, whether or not adequate, may be expensive.
There can be no assurance that we will be able to detect
potential or actual misappropriation or infringement of our
intellectual property, proprietary information or trade secrets.
Even if we detect misappropriation or infringement by a third
party, there can be no assurance that we will be able to enforce
our rights at a reasonable cost, or at all. In addition, our
rights to intellectual property, proprietary information and
trade secrets may not prevent independent third-party
development and commercialization of competing products or
services.
|
|
|
Third parties may claim that we are infringing their
intellectual property, and we could suffer significant
litigation or licensing expenses or be prevented from selling
products or services |
We could be subject to claims that we are misappropriating or
infringing intellectual property or other proprietary rights of
others. These claims, even if not meritorious, could be
expensive to defend and divert management’s attention from
our operations. If we become liable to third parties for
infringing these rights, we could be required to pay a
substantial damage award and to develop non-infringing
technology, obtain a license or cease selling the products or
services that use or contain the infringing intellectual
property. We may be unable to develop non-infringing products or
services or obtain a license on commercially reasonable terms,
or at all. We may also be required to indemnify our customers if
they become subject to third-party claims relating to
intellectual property that we license or otherwise provide to
them, which could be costly.
|
|
|
We have incurred and may continue to incur losses |
We began operations in January 1996 and, until 2004, had
incurred net losses in each year since our inception and, as of
December 31, 2004, we had an accumulated deficit of
approximately $10.2 billion. We currently intend to
continue to invest in infrastructure development, applications
development, marketing and acquisitions. Whether we continue to
incur losses in a particular period will depend on, among other
things, the amount of such investments and whether those
investments lead to increased revenues.
91
|
|
|
We 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 “Legal
Proceedings” above.
|
|
|
Acquisitions, business combinations and other transactions
may be difficult to complete and, if completed, may have
negative consequences for our business and our
securityholders |
Our company has been built, in part, through a series of
acquisitions. We intend to continue to seek to acquire or to
engage in business combinations with companies engaged in
complementary businesses. In addition, we may enter into joint
ventures, strategic alliances or similar arrangements with third
parties. These transactions may result in changes in the nature
and scope of our operations and changes in our financial
condition. Our success in completing these types of transactions
will depend on, among other things, our ability to locate
suitable candidates and negotiate mutually acceptable terms with
them, as well as the availability of financing. Significant
competition for these opportunities exists, which may increase
the cost of and decrease the opportunities for these types of
transactions. Financing for these transactions may come from
several sources, including:
|
|
|
| |
• |
cash and cash equivalents on hand and marketable securities, |
| |
| |
• |
proceeds from the incurrence of indebtedness, and |
| |
| |
• |
proceeds from the issuance of additional common stock, preferred
stock, convertible debt or other securities. |
Our issuance of additional securities could:
|
|
|
| |
• |
cause substantial dilution of the percentage ownership of our
stockholders at the time of the issuance, |
| |
| |
• |
cause substantial dilution of our earnings per share, and |
| |
| |
• |
adversely affect the prevailing market price for our outstanding
securities. |
We do not intend to seek securityholder approval for any such
acquisition or security issuance unless required by applicable
law or regulation or the terms of existing securities.
|
|
|
Our business will suffer if we fail to successfully
integrate acquired businesses and technologies or to assess the
risks in particular transactions |
We have in the past acquired, and may in the future acquire,
businesses, technologies, services, product lines and other
assets. The successful integration of the acquired businesses
and assets into our operations, on a cost-effective basis, can
be critical to our future performance. The amount and timing of
the expected benefits of any acquisition, including potential
synergies between WebMD and the acquired business, are subject
to significant risks and uncertainties. These risks and
uncertainties include, but are not limited to, those relating to:
|
|
|
| |
• |
our ability to maintain relationships with the customers of the
acquired business; |
| |
| |
• |
our ability to cross-sell products and services to customers
with which we have established relationships and those with
which the acquired businesses have established relationships; |
| |
| |
• |
our ability to retain or replace key personnel; |
| |
| |
• |
potential conflicts in payer, provider, strategic partner,
sponsor or advertising relationships; |
| |
| |
• |
our ability to coordinate organizations that are geographically
diverse and may have different business cultures; and |
| |
| |
• |
compliance with regulatory requirements. |
92
We cannot guarantee that any acquired businesses will be
successfully integrated with our operations in a timely or
cost-effective manner, or at all. Failure to successfully
integrate acquired businesses or to achieve anticipated
operating synergies, revenue enhancements or cost savings could
have a material adverse effect on our business, financial
condition and results of operations.
Although our management attempts to evaluate the risks inherent
in each transaction and to value acquisition candidates
appropriately, we cannot assure you that we will properly
ascertain all such risks or that acquired businesses and assets
will perform as we expect or enhance the value of our company as
a whole. In addition, acquired companies or businesses may have
larger than expected liabilities that are not covered by the
indemnification, if any, that we are able to obtain from the
sellers.
|
|
|
We may not be able to raise additional funds when needed
for our business or to exploit opportunities |
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 complementary
businesses or technologies or take advantage of unanticipated
opportunities. If required, we may raise such additional funds
through public or private debt or equity financing, strategic
relationships or other arrangements. There can be no assurance
that such financing will be available on acceptable terms, if at
all, or that such financing will not be dilutive to our
stockholders.
|
|
| |
We expect that accounting for employee stock options using
the fair value method will have a material impact on our
consolidated results of operations and earnings per share |
In December 2004, FASB issued SFAS 123R, which requires all
share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements
based on their fair values beginning with the first interim or
annual period after June 15, 2005. WebMD expects that the
adoption of SFAS 123R will have a material impact on our
consolidated results of operations and earnings per share. See
Note 1 to the Consolidated Financial Statements included in
this Annual Report for more information regarding accounting for
stock-based compensation plans. We cannot predict what effect
the reduction in our net income may have on the market prices of
WebMD’s securities.
|
|
| |
The separation of WebMD Health from WebMD Corporation
currently being considered by our Board of Directors will expose
you to additional risks and those risks may outweigh the
potential benefits |
As previously announced, we are continuing to pursue a plan to
establish WebMD Health as a separate publicly traded company.
See “Business — Recent Developments —
Evaluation of WebMD Health Transaction Alternatives” above.
Our Board of Directors continues to evaluate the two previously
announced alternatives it has been considering:
|
|
|
| |
• |
a one-step split-off of WebMD Health equity through an exchange
offer transaction with WebMD Corporation’s stockholders; or |
| |
| |
• |
an initial public offering of a minority interest in WebMD
Health. |
If a split-off transaction is completed, WebMD Health will be a
new public company, initially owned by those stockholders of
WebMD Corporation who choose to exchange shares of WebMD
Corporation common stock in the split-off transaction. It will
no longer be a part of WebMD Corporation. Holders of WebMD
Corporation common stock after a split-off will continue to be
subject to the risks applicable to our other segments and those
risks will, inherently, be more significant to WebMD Corporation
because WebMD Corporation will no longer have access to WebMD
Health’s cash flows, assets or operations.
We are not able to predict what the market prices of the two
companies would be after either alternative transaction and we
cannot provide assurance that either of the alternative
transactions will produce any increase, for our stockholders, in
the market value of their holdings. In addition, the market
93
prices of WebMD Corporation common stock and WebMD Health common
stock could be highly volatile for several months after either
alternative transaction and may each continue to be more
volatile than WebMD Corporation common stock would have been if
a transaction had not occurred. Finally, if a decision is made
not to pursue the separation of WebMD Health from WebMD
Corporation or if a split-off or initial public offering cannot
be successfully completed, the market price of WebMD Corporation
shares may also be adversely impacted.
94
|
|
| Item 7A. |
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 types
of 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 United States Treasury notes. We view these high grade
securities within our portfolio as having similar market risk
characteristics.
Principal amounts expected to mature are $62.0 million,
$398.7 million and $115.0 million during 2005, 2006
and 2007, respectively. These include investments totaling
$432.6 million in Federal Agency Notes that are callable
subjecting us to interest rate risk on the reinvestment of these
securities. We believe that the impact of any call and resulting
reinvestment of proceeds would not have a material effect on our
financial condition or results of operations.
Our convertible subordinated notes have fixed interest rates;
changes in interest rates will not impact our financial
condition or results of operations.
We have not utilized derivative financial instruments in our
investment portfolio.
Exchange Rate Sensitivity
Currently, substantially all of our sales and expenses are
denominated in United States dollars; however, Porex is exposed
to fluctuations in foreign currency exchange rates, primarily
the rate of exchange of the United States dollar against the
Euro. This exposure arises primarily as a result of translating
the results of Porex’s foreign operations to the United
States dollar at exchange rates that have fluctuated from the
beginning of the accounting period. Porex has not engaged in
foreign currency hedging activities to date. Foreign currency
translation gains were $2.1 million, $3.3 million and
$2.5 million, in 2004, 2003 and 2002, respectively. We
believe that future exchange rate sensitivity related to Porex
will not have a material effect on our financial condition or
results of operations.
|
|
| Item 8. |
Financial Statements and Supplementary Data |
Financial Statements
Our financial statements required by this item are contained on
pages F-1 through F-49 of this Annual Report on Form 10-K.
See Item 15(a)(1) for a listing of financial statements
provided.
|
|
| Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure |
None.
|
|
| Item 9A. |
Controls and Procedures |
As required by Exchange Act Rule 13a-15(b), WebMD
management, including the Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness
of WebMD’s disclosure controls and procedures, as defined
in Exchange Act Rule 13a-15(e), as of December 31,
2004. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that WebMD’s disclosure
controls and procedures provided reasonable assurance that all
material information required to be filed in this Annual Report
has been made known to them in a timely fashion.
95
In connection with the evaluation required by Exchange Act
Rule 13a-15(d), WebMD management, including the Chief
Executive Officer and Chief Financial Officer, concluded that no
changes in WebMD’s internal control over financial
reporting occurred during the fourth quarter of 2004 that
have materially affected, or are reasonably likely to materially
affect, WebMD’s internal control over financial
reporting.
Management’s report on internal control over financial
reporting is located on page F-2 of this Annual Report and
Ernst & Young LLP’s Report of Independent
Registered Public Accounting Firm on Internal Control Over
Financial Reporting is located on page F-4 of this Annual Report.
Item 9B. Other
Information
None.
96
PART III
Information required by Items 10, 11, 12, 13 and 14 of
Part III is omitted from this Annual Report and will be
filed in a definitive proxy statement or by an amendment to this
Annual Report not later than 120 days after the end of the
fiscal year covered by this Annual Report.
|
|
| Item 10. |
Directors and Executive Officers of the Registrant |
We will provide information that is responsive to this
Item 10 in our definitive proxy statement or in an
amendment to this Annual Report not later than 120 days
after the end of the fiscal year covered by this Annual Report,
in either case under the caption “Directors and Executive
Officers,” and possibly elsewhere therein. That information
is incorporated in this Item 10 by reference.
|
|
| Item 11. |
Executive Compensation |
We will provide information that is responsive to this
Item 11 in our definitive proxy statement or in an
amendment to this Annual Report not later than 120 days
after the end of the fiscal year covered by this Annual Report,
in either case under the caption “Executive
Compensation,” and possibly elsewhere therein. That
information is incorporated in this Item 11 by reference.
|
|
| Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
We will provide information that is responsive to this
Item 12 in our definitive proxy statement or in an
amendment to this Annual Report not later than 120 days
after the end of the fiscal year covered by this Annual Report,
in either case under the caption “Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters,” and possibly elsewhere therein. That information
is incorporated in this Item 12 by reference.
|
|
| Item 13. |
Certain Relationships and Related Transactions |
We will provide information that is responsive to this
Item 13 in our definitive proxy statement or in an
amendment to this Annual Report not later than 120 days
after the end of the fiscal year covered by this Annual Report,
in either case under the caption “Certain Relationships and
Related Transactions,” and possibly elsewhere therein. That
information is incorporated in this Item 13 by reference.
|
|
| Item 14. |
Principal Accountant Fees and Services |
We will provide information that is responsive to this
Item 14 in our definitive proxy statement or in an
amendment to this Annual Report not later than 120 days
after the end of the fiscal year covered by this Annual Report,
in either case under the caption “Principal Accountant Fees
and Services,” and possibly elsewhere therein. That
information is incorporated in this Item 14 by reference.
97
PART IV
|
|
| Item 15. |
Exhibits and Financial Statement Schedules |
(a)(1)-(2) Financial Statements and Schedules
The financial statements and schedules listed in the
accompanying Index to Consolidated Financial Statements and
Supplemental Data on page F-1 are filed as part of this Report.
(a)(3) Exhibits
See “Index to Exhibits” beginning on page E-1, which
is incorporated by reference herein. The Index to Exhibits lists
all exhibits filed with this Report and identifies which of
those exhibits are management contracts and compensation plans.
98
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this Annual Report to be signed on its behalf by the
undersigned, thereto duly authorized, on the 16th day of
March, 2005.
|
|
| |
|
| |
Andrew C. Corbin |
| |
Executive Vice President and |
| |
Chief Financial Officer |
POWER OF ATTORNEY
KNOW BY ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints jointly and
severally, Andrew C. Corbin, Lewis H. Leicher and Charles A.
Mele, and each one of them, his attorneys-in-fact, each with the
power of substitution, for him in any and all capacities, to
sign any and all amendments to this Annual Report on
Form 10-K and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that
each said attorneys-in-fact, or his substitute or substitutes,
may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this Annual Report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated.
| |
|
|
|
|
|
|
| Signature |
|
Capacity |
|
Date |
| |
|
|
|
|
| |
/s/ Kevin M. Cameron
Kevin
M. Cameron |
|
Director; Chief Executive Officer (principal executive officer) |
|
March 16, 2005 |
| |
/s/ Andrew C. Corbin
Andrew
C. Corbin |
|
Executive Vice President and Chief Financial Officer (principal
financial and accounting officer) |
|
March 16, 2005 |
| |
/s/ Mark J. Adler
Mark
J. Adler, M.D. |
|
Director |
|
March 16, 2005 |
| |
/s/ Paul A. Brooke
Paul
A. Brooke |
|
Director |
|
March 16, 2005 |
| |
/s/ Neil F. Dimick
Neil
F. Dimick |
|
Director |
|
March 16, 2005 |
| |
/s/ Roger C. Holstein
Roger
C. Holstein |
|
Director |
|
March 16, 2005 |
| |
/s/ James V. Manning
James
V. Manning |
|
Director |
|
March 16, 2005 |
99
| |
|
|
|
|
|
|
| Signature |
|
Capacity |
|
Date |
| |
|
|
|
|
| |
/s/ Herman Sarkowsky
Herman
Sarkowsky |
|
Director |
|
March 16, 2005 |
| |
/s/ Joseph E. Smith
Joseph
E. Smith |
|
Director |
|
March 16, 2005 |
| |
/s/ Martin J. Wygod
Martin
J. Wygod |
|
Director |
|
March 16, 2005 |
100
WebMD Corporation
Index to Consolidated Financial Statements and Supplemental
Data
The following financial statements of the Company and its
subsidiaries required to be included in Item 15(a)(1) of
Form 10-K are listed below:
| |
|
|
|
|
|
| |
|
Page | |
| |
|
| |
|
Historical Financial Statements:
|
|
|
|
|
| |
Report of Management on Internal Control Over Financial Reporting
|
|
|
F-2 |
|
| |
Report of Independent Registered Public Accounting Firm
|
|
|
F-3 |
|
| |
Report of Independent Registered Public Accounting Firm on
Internal Control Over Financial Reporting
|
|
|
F-4 |
|
| |
Consolidated Balance Sheets at December 31, 2004 and 2003
|
|
|
F-5 |
|
| |
Consolidated Statements of Operations for the Years Ended
December 31, 2004, 2003 and 2002
|
|
|
F-6 |
|
| |
Consolidated Statements of Stockholders’ Equity for the
Years Ended December 31, 2004, 2003 and 2002
|
|
|
F-7 |
|
| |
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004, 2003 and 2002
|
|
|
F-8 |
|
| |
Notes to Consolidated Financial Statements
|
|
|
F-10 |
|
|
Supplemental Financial Data:
|
|
|
|
|
| |
The following supplementary financial data of the Registrant and
its subsidiaries required to be included in Item 15(a)(2)
of Form 10-K are listed below:
|
|
|
|
|
| |
Schedule II — Valuation and Qualifying Accounts
|
|
|
S-1 |
|
All other schedules not listed above have been omitted as not
applicable or because the required information is included in
the Consolidated Financial Statements or in the notes thereto.
Columns omitted from the schedule filed have been omitted
because the information is not applicable.
F-1
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
Management of WebMD Corporation is responsible for establishing
and maintaining adequate internal control over financial
reporting. Internal control over financial reporting is defined
in Rules 13a-15(f) and 15d-15(f) promulgated under the
Securities Exchange Act of 1934 (the Exchange Act) as a process
designed by, or under the supervision of, a company’s
principal executive and principal financial officers and
effected by its board of directors, management and other
personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. Internal control over
financial reporting includes those policies and procedures that:
|
|
|
| |
• |
pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; |
| |
| |
• |
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made
only in accordance with authorizations of management and
directors of the company; and |
| |
| |
• |
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of
the company’s assets that could have a material effect on
the financial statements. |
Internal control over financial reporting includes the controls
themselves, monitoring and internal auditing practices and
actions taken to correct deficiencies as identified.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
WebMD’s management assessed the effectiveness of
WebMD’s internal control over financial reporting as of
December 31, 2004. In making this assessment, WebMD
management used the criteria set forth in Internal
Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Based on that assessment and those criteria, WebMD
management concluded that WebMD maintained effective internal
control over financial reporting as of December 31, 2004.
The audited consolidated financial statements of WebMD included
in this Annual Report on Form 10-K (the Financial
Statements) include the results of VIPS, Inc. from the date of
its acquisition by WebMD on August 11, 2004. The
acquisition is described in Note 2 of the Financial
Statements under the caption “2004 Acquisitions” and
because of its significance (within the meaning of
Rule 11-01(b) of Regulation S-X) to WebMD’s
consolidated financial statements, is also described in a
Current Report on Form 8-K, dated August 11, 2004 and
amended on October 25, 2004. However, WebMD
management’s assessment of internal control over financial
reporting of WebMD does not include an assessment of internal
control over financial reporting of VIPS, Inc. VIPS, Inc.
constituted 7.5% of total assets as of December 31, 2004
and 2.1% and (1.8)% of revenues and net income (loss),
respectively, for the year then ended.
Ernst & Young, LLP, the independent registered public
accounting firm that audited and reported on the Financial
Statements included in this Annual Report on Form 10-K, has
issued a report on WebMD management’s assessment of
WebMD’s internal control over financial reporting. That
report appears on page F-4.
March 16, 2005
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
WebMD Corporation
We have audited the accompanying consolidated balance sheets of
WebMD Corporation as of December 31, 2004 and 2003, and the
related consolidated statements of operations,
stockholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2004. Our audits
also included the financial statement schedule listed in the
Index at Item 15(a). These financial statements and
schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of WebMD Corporation at December 31,
2004 and 2003, and the consolidated results of its operations
and its cash flows for each of the three years in the period
ended December 31, 2004, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of WebMD Corporation’s internal control over
financial reporting as of December 31, 2004, based on
criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated March 16, 2005
expressed an unqualified opinion thereon.
MetroPark, New Jersey
March 16, 2005
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Stockholders of
WebMD Corporation
We have audited management’s assessment, included in the
accompanying Report of Management on Internal Control Over
Financial Reporting, that WebMD Corporation maintained effective
internal control over financial reporting as of
December 31, 2004, based on criteria established in
Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). WebMD Corporation’s management is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express an opinion on management’s assessment and an
opinion on the effectiveness of the company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Report of Management on
Internal Control Over Financial Reporting, management’s
assessment of and conclusion on the effectiveness of internal
control over financial reporting did not include the internal
controls of VIPS, Inc., which is included in the 2004
consolidated financial statements of WebMD Corporation from the
date of its acquisition on August 11, 2004 and constituted
7.5% of total assets as of December 31, 2004 and 2.1% and
(1.8)% of revenues and net income (loss), respectively, for the
year then ended. Our audit of internal control over financial
reporting of WebMD Corporation also did not include an
evaluation of the internal control over financial reporting of
VIPS, Inc.
In our opinion, management’s assessment that WebMD
Corporation maintained effective internal control over financial
reporting as of December 31, 2004, is fairly stated, in all
material respects, based on the COSO criteria. Also, in our
opinion, WebMD Corporation maintained, in all material respects,
effective internal control over financial reporting as of
December 31, 2004, based on the COSO criteria.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of WebMD Corporation as of
December 31, 2004 and 2003, and the related consolidated
statements of operations, stockholders’ equity, and cash
flows for each of the three years in the period ended
December 31, 2004 of WebMD Corporation and our report dated
March 16, 2005 expressed an unqualified opinion thereon.
MetroPark, New Jersey
March 16, 2005
F-4
WebMD Corporation
Consolidated Balance Sheets
(In thousands, except share and per share data)
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
46,019 |
|
|
$ |
39,648 |
|
| |
Short-term investments
|
|
|
61,675 |
|
|
|
231,033 |
|
| |
Accounts receivable, net of allowance for doubtful accounts of
$13,433 in 2004 and $20,500 in 2003
|
|
|
214,437 |
|
|
|
181,173 |
|
| |
Inventory
|
|
|
13,476 |
|
|
|
12,158 |
|
| |
Prepaid expenses and other current assets
|
|
|
41,115 |
|
|
|
44,089 |
|
| |
|
|
|
|
|
|
| |
|
|
Total current assets
|
|
|
376,722 |
|
|
|
508,101 |
|
|
Marketable debt securities
|
|
|
511,864 |
|
|
|
451,290 |
|
|
Marketable equity securities
|
|
|
4,017 |
|
|
|
4,744 |
|
|
Property and equipment, net
|
|
|
89,677 |
|
|
|
77,278 |
|
|
Goodwill
|
|
|
1,010,564 |
|
|
|
844,448 |
|
|
Intangible assets, net
|
|
|
260,509 |
|
|
|
184,130 |
|
|
Other assets
|
|
|
48,871 |
|
|
|
65,315 |
|
| |
|
|
|
|
|
|
| |
|
$ |
2,302,224 |
|
|
$ |
2,135,306 |
|
| |
|
|
|
|
|
|
| |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
| |
Accounts payable
|
|
$ |
17,366 |
|
|
$ |
10,390 |
|
| |
Accrued expenses
|
|
|
201,528 |
|
|
|
208,430 |
|
| |
Deferred revenue
|
|
|
109,533 |
|
|
|
86,708 |
|
| |
|
|
|
|
|
|
| |
|
|
Total current liabilities
|
|
|
328,427 |
|
|
|
305,528 |
|
|
31/4% convertible
subordinated notes due 2007
|
|
|
299,999 |
|
|
|
299,999 |
|
|
1.75% convertible subordinated notes due 2023
|
|
|
350,000 |
|
|
|
350,000 |
|
|
Other long-term liabilities
|
|
|
1,283 |
|
|
|
1,182 |
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Convertible redeemable exchangeable preferred stock,
$0.0001 par value; 10,000 shares authorized, issued
and outstanding at December 31, 2004
|
|
|
98,299 |
|
|
|
— |
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
| |
Preferred stock, $0.0001 par value; 4,990,000 shares
authorized; no shares issued
|
|
|
— |
|
|
|
— |
|
| |
|
Common stock, $0.0001 par value; 900,000,000 shares
authorized; 394,041,320 shares issued at December 31,
2004; 384,751,705 shares issued at December 31, 2003
|
|
|
39 |
|
|
|
38 |
|
| |
Additional paid-in capital
|
|
|
11,776,911 |
|
|
|
11,726,734 |
|
| |
Deferred stock compensation
|
|
|
(7,819 |
) |
|
|
(4,683 |
) |
| |
Treasury stock, at cost; 80,849,495 shares at
December 31, 2004; 76,576,865 shares at
December 31, 2003
|
|
|
(379,968 |
) |
|
|
(347,858 |
) |
| |
Accumulated deficit
|
|
|
(10,172,904 |
) |
|
|
(10,212,054 |
) |
| |
Accumulated other comprehensive income
|
|
|
7,957 |
|
|
|
16,420 |
|
| |
|
|
|
|
|
|
| |
|
|
Total stockholders’ equity
|
|
|
1,224,216 |
|
|
|
1,178,597 |
|
| |
|
|
|
|
|
|
| |
|
$ |
2,302,224 |
|
|
$ |
2,135,306 |
|
| |
|
|
|
|
|
|
See accompanying notes.
F-5
WebMD Corporation
Consolidated Statements of Operations
(In thousands, except per share data)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Revenue
|
|
$ |
1,160,351 |
|
|
$ |
963,980 |
|
|
$ |
871,696 |
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cost of operations
|
|
|
666,431 |
|
|
|
564,939 |
|
|
|
509,744 |
|
| |
Development and engineering
|
|
|
54,161 |
|
|
|
42,985 |
|
|
|
43,467 |
|
| |
Sales, marketing, general and administrative
|
|
|
324,027 |
|
|
|
282,482 |
|
|
|
283,424 |
|
| |
Depreciation, amortization and other
|
|
|
57,765 |
|
|
|
62,434 |
|
|
|
125,593 |
|
| |
Legal expense
|
|
|
9,230 |
|
|
|
3,959 |
|
|
|
— |
|
| |
Restructuring and integration charge (benefit)
|
|
|
4,535 |
|
|
|
— |
|
|
|
(5,850 |
) |
| |
Gain on investments
|
|
|
457 |
|
|
|
1,659 |
|
|
|
6,547 |
|
| |
Interest income
|
|
|
18,717 |
|
|
|
22,901 |
|
|
|
19,590 |
|
| |
Interest expense
|
|
|
19,253 |
|
|
|
15,214 |
|
|
|
8,491 |
|
| |
Other income, net
|
|
|
121 |
|
|
|
4,218 |
|
|
|
3,844 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income tax
provision (benefit)
|
|
|
44,244 |
|
|
|
20,745 |
|
|
|
(63,192 |
) |
| |
Income tax provision (benefit)
|
|
|
4,910 |
|
|
|
4,140 |
|
|
|
(10,079 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Income (loss) from continuing operations
|
|
|
39,334 |
|
|
|
16,605 |
|
|
|
(53,113 |
) |
| |
Income (loss) from discontinued operations, net of income taxes
|
|
|
— |
|
|
|
(33,611 |
) |
|
|
3,411 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
39,334 |
|
|
$ |
(17,006 |
) |
|
$ |
(49,702 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income (loss) from continuing operations
|
|
$ |
0.12 |
|
|
$ |
0.05 |
|
|
$ |
(0.17 |
) |
| |
Income (loss) from discontinued operations
|
|
|
— |
|
|
|
(0.11 |
) |
|
|
0.01 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
0.12 |
|
|
$ |
(0.06 |
) |
|
$ |
(0.16 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income (loss) from continuing operations
|
|
$ |
0.12 |
|
|
$ |
0.05 |
|
|
$ |
(0.17 |
) |
| |
Income (loss) from discontinued operations
|
|
|
— |
|
|
|
(0.10 |
) |
|
|
0.01 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
0.12 |
|
|
$ |
(0.05 |
) |
|
$ |
(0.16 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding used in computing income
(loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
320,080 |
|
|
|
304,858 |
|
|
|
304,168 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Diluted
|
|
|
333,343 |
|
|
|
325,811 |
|
|
|
304,168 |
|
| |
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-6
WebMD Corporation
Consolidated Statements of Stockholders’ Equity
(In thousands, except share data)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Stockholders’ Equity | |
| |
|
| |
| |
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
| |
|
Common Stock | |
|
Additional | |
|
Deferred | |
|
Treasury Stock | |
|
|
|
Other | |
|
Total | |
| |
|
| |
|
Paid-In | |
|
Stock | |
|
| |
|
Accumulated | |
|
Comprehensive | |
|
Stockholders’ | |
| |
|
Shares | |
|
Amount | |
|
Capital | |
|
Compensation | |
|
Shares | |
|
Amount | |
|
Deficit | |
|
Income | |
|
Equity | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Balances at December 31, 2001
|
|
|
366,956,160 |
|
|
$ |
37 |
|
|
$ |
11,652,743 |
|
|
$ |
(42,173 |
) |
|
|
56,091,935 |
|
|
$ |
(222,582 |
) |
|
$ |
(10,145,346 |
) |
|
$ |
12,833 |
|
|
$ |
1,255,512 |
|
|
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(49,702 |
) |
|
|
— |
|
|
|
(49,702 |
) |
|
Net decrease in unrealized gains on securities
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3,640 |
) |
|
|
(3,640 |
) |
|
Foreign currency translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,523 |
|
|
|
2,523 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(50,819 |
) |
|
Issuance of common stock for option exercises, ESPP, 401(k) and
other issuances
|
|
|
7,704,904 |
|
|
|
— |
|
|
|
28,774 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
28,774 |
|
|
Issuance, net of repurchase, of warrants in connection with
strategic alliances and services
|
|
|
— |
|
|
|
— |
|
|
|
29 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
29 |
|
|
Deferred stock compensation
|
|
|
— |
|
|
|
— |
|
|
|
2,500 |
|
|
|
(2,500 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Stock compensation expense
|
|
|
— |
|
|
|
— |
|
|
|
392 |
|
|
|
24,873 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
25,265 |
|
|
Purchase of treasury stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
18,162,734 |
|
|
|
(104,960 |
) |
|
|
— |
|
|
|
— |
|
|
|
(104,960 |
) |
|
Adjustment to deferred stock compensation for terminations
|
|
|
— |
|
|
|
— |
|
|
|
(1,995 |
) |
|
|
1,995 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
Balances at December 31, 2002
|
|
|
374,661,064 |
|
|
|
37 |
|
|
|
11,682,443 |
|
|
|
(17,805 |
) |
|
|
74,254,669 |
|
|
|
(327,542 |
) |
|
|
(10,195,048 |
) |
|
|
11,716 |
|
|
|
1,153,801 |
|
|
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(17,006 |
) |
|
|
— |
|
|
|
(17,006 |
) |
|
Net increase in unrealized gains on securities
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,419 |
|
|
|
1,419 |
|
|
Foreign currency translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,285 |
|
|
|
3,285 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(12,302 |
) |
|
Issuance of common stock for option exercises, ESPP, 401(k) and
other issuances
|
|
|
10,090,641 |
|
|
|
1 |
|
|
|
44,718 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
44,719 |
|
|
Issuance of warrants in connection with strategic alliances and
services
|
|
|
— |
|
|
|
— |
|
|
|
67 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
67 |
|
|
Deferred stock compensation
|
|
|
— |
|
|
|
— |
|
|
|
25 |
|
|
|
(25 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Stock compensation expense
|
|
|
— |
|
|
|
— |
|
|
|
335 |
|
|
|
12,293 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
12,628 |
|
|
Purchase of treasury stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,322,196 |
|
|
|
(20,316 |
) |
|
|
— |
|
|
|
— |
|
|
|
(20,316 |
) |
|
Adjustment to deferred stock compensation for terminations
|
|
|
— |
|
|
|
— |
|
|
|
(854 |
) |
|
|
854 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
Balances at December 31, 2003
|
|
|
384,751,705 |
|
|
|
38 |
|
|
|
11,726,734 |
|
|
|
(4,683 |
) |
|
|
76,576,865 |
|
|
|
(347,858 |
) |
|
|
(10,212,054 |
) |
|
|
16,420 |
|
|
|
1,178,597 |
|
|
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
39,334 |
|
|
|
|
|
|
|
39,334 |
|
|
Net decrease in unrealized gains on securities
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(10,581 |
) |
|
|
(10,581 |
) |
|
Foreign currency translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,118 |
|
|
|
2,118 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
30,871 |
|
|
Issuance of common stock for option exercises, ESPP, 401(k) and
other issuances
|
|
|
9,289,615 |
|
|
|
1 |
|
|
|
38,051 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
38,052 |
|
|
Issuance of warrants in connection with strategic alliances and
services
|
|
|
— |
|
|
|
— |
|
|
|
15 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
15 |
|
|
Accretion of convertible redeemable exchangeable preferred stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(184 |
) |
|
|
— |
|
|
|
(184 |
) |
|
Deferred stock compensation
|
|
|
— |
|
|
|
— |
|
|
|
13,001 |
|
|
|
(13,001 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Stock compensation expense
|
|
|
— |
|
|
|
— |
|
|
|
70 |
|
|
|
8,905 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
8,975 |
|
|
Purchase of treasury stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,272,630 |
|
|
|
(32,110 |
) |
|
|
— |
|
|
|
— |
|
|
|
(32,110 |
) |
|
Adjustment to deferred stock compensation for terminations
|
|
|
— |
|
|
|
— |
|
|
|
(960 |
) |
|
|
960 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
Balances at December 31, 2004
|
|
|
394,041,320 |
|
|
$ |
39 |
|
|
$ |
11,776,911 |
|
|
$ |
(7,819 |
) |
|
|
80,849,495 |
|
|
$ |
(379,968 |
) |
|
$ |
(10,172,904 |
) |
|
$ |
7,957 |
|
|
$ |
1,224,216 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-7
WebMD Corporation
Consolidated Statements of Cash Flows
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
39,334 |
|
|
$ |
(17,006 |
) |
|
$ |
(49,702 |
) |
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Loss (income) from discontinued operations
|
|
|
— |
|
|
|
33,611 |
|
|
|
(3,411 |
) |
| |
Depreciation, amortization and other
|
|
|
57,765 |
|
|
|
62,434 |
|
|
|
125,593 |
|
| |
Amortization of debt issuance costs
|
|
|
2,975 |
|
|
|
2,246 |
|
|
|
1,109 |
|
| |
Non-cash content and distribution services
|
|
|
18,826 |
|
|
|
24,298 |
|
|
|
25,706 |
|
| |
Non-cash stock-based compensation
|
|
|
8,975 |
|
|
|
12,449 |
|
|
|
25,265 |
|
| |
Bad debt expense
|
|
|
3,606 |
|
|
|
6,328 |
|
|
|
11,305 |
|
| |
Gain on investments
|
|
|
(457 |
) |
|
|
(1,659 |
) |
|
|
(6,547 |
) |
| |
Gain on sale of property and equipment
|
|
|
(121 |
) |
|
|
(3,100 |
) |
|
|
— |
|
| |
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Accounts receivable
|
|
|
(20,477 |
) |
|
|
(813 |
) |
|
|
(13,936 |
) |
| |
|
Inventory
|
|
|
(1,041 |
) |
|
|
(2,176 |
) |
|
|
(872 |
) |
| |
|
Prepaid expenses and other, net
|
|
|
3,478 |
|
|
|
3,792 |
|
|
|
(3,663 |
) |
| |
|
Accounts payable
|
|
|
5,577 |
|
|
|
(651 |
) |
|
|
(7,541 |
) |
| |
|
Accrued expenses
|
|
|
(43,703 |
) |
|
|
(42,419 |
) |
|
|
(32,651 |
) |
| |
|
Deferred revenue
|
|
|
15,307 |
|
|
|
(225 |
) |
|
|
12,530 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net cash provided by continuing operations
|
|
|
90,044 |
|
|
|
77,109 |
|
|
|
83,185 |
|
| |
|
|
Net cash provided by discontinued operations
|
|
|
— |
|
|
|
5,130 |
|
|
|
9,912 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net cash provided by operating activities
|
|
|
90,044 |
|
|
|
82,239 |
|
|
|
93,097 |
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from maturities and sales of available-for-sale
securities
|
|
|
1,253,491 |
|
|
|
1,079,897 |
|
|
|
949,920 |
|
|
Proceeds from maturities and redemptions of held-to-maturity
securities
|
|
|
— |
|
|
|
157,919 |
|
|
|
59,095 |
|
|
Purchases of available-for-sale securities
|
|
|
(1,153,703 |
) |
|
|
(760,607 |
) |
|
|
(1,067,362 |
) |
|
Purchases of held-to-maturity securities
|
|
|
— |
|
|
|
(590,113 |
) |
|
|
(300,970 |
) |
|
Purchases of property and equipment
|
|
|
(38,800 |
) |
|
|
(18,385 |
) |
|
|
(26,267 |
) |
|
Proceeds received from sale of discontinued operations
|
|
|
— |
|
|
|
46,500 |
|
|
|
— |
|
|
Proceeds received from sale of property and equipment
|
|
|
417 |
|
|
|
9,779 |
|
|
|
— |
|
|
Other changes in equity of discontinued operations
|
|
|
— |
|
|
|
1,754 |
|
|
|
10,369 |
|
|
Cash paid in business combinations, net of cash acquired
|
|
|
(249,557 |
) |
|
|
(400,491 |
) |
|
|
(33,471 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net cash used in continuing operations
|
|
|
(188,152 |
) |
|
|
(473,747 |
) |
|
|
(408,686 |
) |
| |
|
|
Net cash used in discontinued operations
|
|
|
— |
|
|
|
(2,529 |
) |
|
|
(12,577 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net cash used in investing activities
|
|
|
(188,152 |
) |
|
|
(476,276 |
) |
|
|
(421,263 |
) |
F-8
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
38,052 |
|
|
|
44,719 |
|
|
|
28,765 |
|
|
Purchase of treasury stock
|
|
|
(32,110 |
) |
|
|
(20,316 |
) |
|
|
(104,960 |
) |
|
Payment of notes payable and other
|
|
|
(602 |
) |
|
|
(361 |
) |
|
|
(2,904 |
) |
|
Net proceeds from issuance of convertible debt
|
|
|
— |
|
|
|
339,125 |
|
|
|
292,000 |
|
|
Net proceeds from issuance of convertible redeemable
exchangeable preferred stock
|
|
|
98,115 |
|
|
|
— |
|
|
|
— |
|
|
Redemption of Series B Preferred Stock
|
|
|
— |
|
|
|
— |
|
|
|
(10,000 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Net cash provided by continuing operations
|
|
|
103,455 |
|
|
|
363,167 |
|
|
|
202,901 |
|
| |
Net cash used in discontinued operations
|
|
|
— |
|
|
|
(6,546 |
) |
|
|
(1,150 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Net cash provided by financing activities
|
|
|
103,455 |
|
|
|
356,621 |
|
|
|
201,751 |
|
|
Effect of exchange rates on cash
|
|
|
1,024 |
|
|
|
1,423 |
|
|
|
1,083 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
6,371 |
|
|
|
(35,993 |
) |
|
|
(125,332 |
) |
|
Changes in cash attributable to discontinued operations
|
|
|
— |
|
|
|
3,945 |
|
|
|
3,815 |
|
|
Cash and cash equivalents at beginning of year
|
|
|
39,648 |
|
|
|
71,696 |
|
|
|
193,213 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$ |
46,019 |
|
|
$ |
39,648 |
|
|
$ |
71,696 |
|
| |
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-9
WebMD Corporation
Notes to Consolidated Financial Statements
December 31, 2004
(In thousands, except share and per share data)
|
|
| 1. |
Summary of Significant Accounting Policies |
Basis of Presentation
WebMD Corporation is a Delaware corporation that was
incorporated in December 1995 and commenced operations in
January 1996 as Healtheon Corporation. The Company changed its
name to Healtheon/ WebMD Corporation in November 1999 and to
WebMD Corporation in September 2000. The Company’s common
stock has traded on the Nasdaq National Market under the symbol
“HLTH” since February 11, 1999. The accompanying
consolidated financial statements include the consolidated
accounts of WebMD Corporation and its subsidiaries (the
“Company”) and have been prepared in United States
dollars, and in accordance with accounting principles generally
accepted in the United States (“GAAP”). As described
in Note 5, on August 1, 2003 the Company completed the
sale of two operating units of its Porex segment. Accordingly,
the results of these two operating units, including the loss
related to the divestitures, have been presented as discontinued
operations in the accompanying consolidated financial statements.
Business
The Company has aligned its business into four operating
segments as follows:
|
|
|
| |
• |
WebMD Business Services. Through WebMD Business Services,
the Company provides healthcare reimbursement cycle management
services for healthcare providers and transaction-related
administrative services for healthcare payers, together with
related technology solutions. The Company transmits transactions
electronically between healthcare payers and providers and
provides healthcare payers with transaction processing
technology, decision support and data warehousing solutions,
consulting services and outsourcing services, including document
management services for transaction processing and
print-and-mail services for the distribution of checks,
remittance advice and explanation of benefits. The Company also
provides automated patient billing services to healthcare
providers, including statement printing and mailing services. |
| |
| |
• |
WebMD Practice Services. Through WebMD Practice Services,
the Company develops and markets information technology systems
for healthcare providers and related services, primarily under
The Medical Manager, Intergy and WebMD Network Services brands.
These systems and services allow physician offices to automate
their scheduling, billing and other administrative tasks, to
transmit transactions electronically, to maintain electronic
medical records and to automate documentation of patient
encounters. |
| |
| |
• |
WebMD Health. Through WebMD Health, the Company provides
health information, health and benefit decision-support tools,
continuing medical education (“CME”) services, and
interactive communications services through its public online
portals for consumers and physicians, through syndication and
distribution relationships, through customized private online
portals for employers and payers and, to a lesser extent,
through offline publishing services. WebMD Health’s public
portals sell advertising and sponsorship programs to companies
interested in reaching consumers and physicians online,
including pharmaceutical, biotech, medical device and consumer
products companies. |
| |
| |
• |
Porex. The Company develops, manufactures and distributes
proprietary porous plastic products and components used in
healthcare, industrial and consumer applications, as well as in
finished products used in the medical device and surgical
markets. |
F-10
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries. The results of
operations for companies acquired or disposed of are included in
the consolidated financial statements from the effective date of
acquisition or up to the date of disposal. All material
intercompany accounts and transactions have been eliminated in
consolidation.
Accounting Estimates
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying notes.
The Company is subject to uncertainties such as the impact of
future events, economic, environmental and political factors and
changes in the Company’s business environment; therefore,
actual results could differ from these estimates. Accordingly,
the accounting estimates used in the preparation of the
Company’s financial statements will change as new events
occur, as more experience is acquired, as additional information
is obtained and as the Company’s operating environment
changes. Changes in estimates are made when circumstances
warrant. Such changes in estimates and refinements in estimation
methodologies are reflected in reported results of operations;
if material, the effects of changes in estimates are disclosed
in the notes to the consolidated financial statements.
Significant estimates and assumptions by management affect: the
allowance for doubtful accounts, the carrying value of
inventory, the carrying value of prepaid content and
distribution services, the carrying value of long-lived assets
(including goodwill and intangible assets), the amortization
period of long-lived assets (excluding goodwill), the carrying
value, capitalization and amortization of software development
costs, the carrying value of short-term and long-term
investments, the provision for income taxes and related deferred
tax accounts, certain accrued expenses, revenue recognition,
contingencies, litigation and the value attributed to warrants
issued for services.
Cash and Cash Equivalents
All highly liquid investments with an original maturity from the
date of purchase of three months or less are considered to be
cash equivalents. These short-term investments are stated at
cost, which approximates market. The Company’s cash and
cash equivalents are invested in various investment-grade
commercial paper, money market accounts and federal agency notes.
Marketable Securities
The Company classifies its investments in marketable securities
as available-for-sale or held-to-maturity at the time of
purchase and re-evaluates such classifications 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. Held-to-maturity securities are carried
at amortized cost. Debt securities that the Company does not
have the intent or ability to hold to maturity are classified as
available-for-sale. Investments in marketable equity securities
are classified as available-for-sale. Available-for-sale
securities are carried at fair value as of the balance sheet
date. Realized gains and losses and declines in value judged to
be other-than-temporary on available-for-sale securities are
recorded in the accompanying consolidated statements of
operations, and unrealized gains and losses are recorded as a
component of accumulated other comprehensive income in
stockholders’ equity. The cost of securities is based on
the specific identification method. As of December 31, 2004
and 2003, all marketable securities were classified as
available-for-sale.
F-11
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
Allowance for Doubtful Accounts
The allowance for doubtful accounts receivable reflects the
Company’s best estimate of probable losses inherent in the
Company’s receivable portfolio determined on the basis of
historical experience, specific allowances for known troubled
accounts and other currently available evidence.
Inventory
Inventory is stated at the lower of cost or market value using
the first-in, first-out basis. Cost includes raw materials,
direct labor and manufacturing overhead. Market value is based
on current replacement cost for raw materials and supplies and
on net realizable value for work-in-process and finished goods.
Inventory consisted of the following:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Raw materials and supplies
|
|
$ |
3,925 |
|
|
$ |
3,142 |
|
|
Work-in-process
|
|
|
1,335 |
|
|
|
1,394 |
|
|
Finished goods and other
|
|
|
8,216 |
|
|
|
7,622 |
|
| |
|
|
|
|
|
|
| |
|
$ |
13,476 |
|
|
$ |
12,158 |
|
| |
|
|
|
|
|
|
Long-Lived Assets
Property and
Equipment
Property and equipment are stated at cost, net of accumulated
depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the related assets.
The useful lives are generally as follows:
| |
|
|
|
|
|
Computer equipment
|
|
|
3 to 5 years |
|
|
Buildings
|
|
|
Up to 40 years |
|
|
Office equipment, furniture and fixtures
|
|
|
3 to 7 years |
|
|
Software
|
|
|
3 years |
|
|
Leasehold improvements
|
|
|
Shorter of useful life or lease term |
|
Expenditures for maintenance, repair and renewals of minor items
are charged to expense as incurred. Major betterments are
capitalized.
|
|
|
Goodwill and Intangible Assets |
Goodwill and intangible assets result from acquisitions
accounted for under the purchase method. Goodwill is subject to
impairment by applying a fair value based test. Intangible
assets with definite lives are amortized on a straight-line
basis over the estimated useful lives of the related assets as
follows:
| |
|
|
|
|
|
Customer lists
|
|
|
3 to 15 years |
|
|
Trade names
|
|
|
1 to 10 years |
|
|
Technology and patents
|
|
|
3 to 40 years |
|
|
Non-compete agreements and other
|
|
|
3 to 5 years |
|
In accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 142, “Goodwill and Other
Intangible Assets” (“SFAS No. 142”),
the Company reviews the carrying value of goodwill and
F-12
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
intangible assets with indefinite lives annually. The Company
measures impairment losses by comparing the carrying value of
its reporting units to the fair value of its reporting units
determined using an income approach valuation. The
Company’s reporting units are determined in accordance with
SFAS No. 142, which defines a reporting unit as an
operating segment or one level below an operating segment.
Goodwill is assigned to individual reporting units based on
their relative fair values.
In accordance with SFAS No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets,”
long-lived assets used in operations are reviewed for impairment
whenever events or changes in circumstances indicate that
carrying amounts may not be recoverable. For long-lived assets
to be held and used, the Company recognizes an impairment loss
only if its carrying amount is not recoverable through its
undiscounted cash flows and measures the impairment loss based
on the difference between the carrying amount and fair value.
Long-lived assets held for sale are reported at the lower of
cost or fair value less costs to sell.
Software Development Costs
|
|
|
Software to be Sold, Leased or Otherwise Marketed |
SFAS No. 86, “Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise
Marketed,” requires the capitalization of certain software
development costs subsequent to the establishment of
technological feasibility. Based upon the Company’s product
development process, technological feasibility is established
upon the completion of a working model. The costs incurred from
the time a working model is available until general release are
immaterial.
The Company accounts for internal use software development costs
in accordance with Statement of Position (“SOP”)
No. 98-1, “Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use”
(“SOP 98-1”). Software development costs that are
incurred in the preliminary project stage are expensed as
incurred. Once certain criteria of SOP 98-1 have been met,
internal and external direct costs incurred in developing or
obtaining computer software are capitalized. Training and data
conversion costs are expensed as incurred. Capitalized software
costs are amortized over a three-year period.
Restricted Cash
The Company’s restricted cash primarily relates to
collateral for letters of credit obtained to support the
Company’s operations. As of December 31, 2004 and
2003, the total restricted cash was $15,463 and $12,939,
respectively, and is included in other assets in the
accompanying consolidated balance sheets.
Deferred Charges
Other assets includes costs associated with the issuance of the
convertible subordinated notes that are amortized to interest
expense in the accompanying consolidated statements of
operations, using the effective interest method over the lives
of the related notes. The Company capitalized $10,354 of
issuance costs in connection with the issuance of the $350,000
1.75% Convertible Subordinated Notes due 2023 and $7,654 of
issuance costs in connection with the issuance of the $300,000
31/4% Convertible
Subordinated Notes due 2007. As of December 31, 2004 and
2003, the total unamortized issuance costs for both convertible
subordinated notes were $11,678 and $15,520, respectively.
Revenue Recognition
Revenue is derived from the Company’s WebMD Business
Services, WebMD Practice Services, WebMD Health and Porex
segments.
F-13
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
Through WebMD Business Services, the Company generates revenue
by selling transaction services to healthcare payers and
providers, generally on either a per transaction basis or, in
the case of some providers, on a monthly fixed fee basis. The
Company also generates revenue by selling its patient statement
and paid-claims communication services, typically on a per
statement or per communication basis. Additionally, the Company
generates revenue by licensing decision support software and
providing related support and maintenance for that decision
support software, and by providing information technology
consulting services to payers, including governmental payers.
The Company charges healthcare payers annual license fees, which
are based on the number of covered members, for use of its
software and provides business and information technology
consulting services to them on a time and materials basis. The
consulting services the Company provides to certain governmental
agencies are typically billed on a cost-plus fee structure.
Revenue for transaction services, patient statement and
paid-claims communication services is recognized as the services
are provided. Decision support software and the related support
and maintenance agreements are generally sold as bundled
time-based license agreements and accordingly, the revenue for
both the software and related support and maintenance is
recognized ratably over the term of the license and maintenance
agreement. Revenue for consulting services is recognized as the
services are provided.
Through WebMD Practice Services, the Company licenses The
Medical Manager and Intergy practice management systems and
Intergy EHR electronic medical records system. The
Company’s practice management systems are sold as
multiple-element arrangements as these software arrangements
typically include related hardware, support and maintenance
agreements and implementation and training services. The Company
also charges healthcare providers fees for transmitting, through
WebMD Network Services, transactions to payers and billing
statements to patients. Revenue is recognized from these fees,
which are generally paid on a per transaction or monthly basis,
when the services are provided.
Software revenue is recognized in accordance with SOP
No. 97-2, “Software Revenue Recognition,” as
amended by SOP 98-9, “Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain
Transactions.” Software license revenue is recognized when
a customer enters into a non-cancelable license agreement, the
software product has been delivered, there are no uncertainties
surrounding product acceptance, there are no significant future
performance obligations, the license fees are fixed or
determinable and collection of the license fee is considered
probable. Amounts received in advance of meeting these criteria
are deferred. As required by SOP 98-9, the Company
determines the value of the software component of its
multiple-element arrangements using the residual method as
vendor specific objective evidence (“VSOE”) of fair
value exists for the undelivered elements such as the support
and maintenance agreements and related implementation and
training services, but not for all the delivered elements such
as the software itself. The residual method requires revenue to
be allocated to the undelivered elements based on the fair value
of such elements, as indicated by VSOE. VSOE is based on the
price charged when an element is sold separately.
The vast majority of the Company’s practice management and
medical records systems include support and maintenance
agreements of the underlying software and hardware. These
arrangements provide customers with rights to unspecified
software product upgrades released during the term of the
support period, as well as Internet and telephone access to
technical support personnel. Revenue from support and
maintenance agreements is recognized ratably over the term of
the arrangement, typically one year or less. Additionally, many
of the Company’s software arrangements include
implementation and training services. Revenues from these
services are accounted for separately from the software revenue,
as they are not essential to the functionality of any other
element of the software arrangement, and are generally
recognized as the services are performed.
F-14
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
Through WebMD Health, the Company provides health information,
health and benefit decision-support tools, continuing medical
education (“CME”) services, and interactive
communications services through its public online portals for
consumers and physicians, through syndication and distribution
relationships, through customized private online portals for
employers and payers and, to a lesser extent, through offline
publishing. In addition, the Company licenses private online
portals to employers and healthcare payers that provide online
health and wellness content and health and benefit management
tools for their employees and members. The Company generates
revenue from advertising, sponsorship, content syndication and
distribution and licenses of private online portals. Revenue
from advertising is recognized as advertisements are delivered.
Revenue from sponsorship arrangements and licenses of private
online portals are recognized ratably over the term of the
applicable agreement. Revenue from CME arrangements is
recognized over the period the Company satisfies the minimum
credit hour requirements of the applicable agreements. Revenue
from fixed fee content license or carriage fees is recognized
ratably over the term of the applicable agreement. E-commerce
revenue is recognized when a subscriber or consumer utilizes the
Company’s Internet-based services or purchases goods or
services through the Company’s Web site or co-branded Web
site with one of its strategic partners. When contractual
arrangements contain multiple elements, revenue is allocated to
the elements based on their relative fair values, determined
using prices charged when elements are sold separately.
Through Porex, the Company develops, manufactures and
distributes porous plastic products and components. For standard
products, revenue is recognized upon shipment of product, net of
sales returns and allowances, in accordance with Staff
Accounting Bulletin No. 104, “Revenue
Recognition”, which supersedes Staff Accounting
Bulletin No. 101, “Revenue Recognition in
Financial Statements”, and SFAS No. 48
“Revenue Recognition When Right of Return Exists.”
These statements establish that revenue can be recorded when
persuasive evidence of an arrangement exists, delivery has
occurred and all significant obligations have been satisfied,
the fee is fixed or determinable and collection is considered
probable. Appropriate reserves are established for anticipated
returns and allowances based on past experience. For sales of
certain custom products, revenue is recognized upon completion
and customer acceptance.
Cash receipts or billings in advance of revenue recognition are
recorded as deferred revenue in the accompanying consolidated
balance sheets. The deferred revenue is reversed at the time
revenue is recognized.
Advertising Costs
Advertising costs are generally expensed as incurred and
included in sales, marketing, general and administrative expense
in the accompanying consolidated statements of operations.
Advertising expense totaled $32,699, $36,451 and $36,094 in
2004, 2003 and 2002, respectively. Included in advertising
expense were non-cash advertising costs of $17,925, $21,942 and
$20,941 in 2004, 2003 and 2002, respectively. These non-cash
advertising costs resulted from the issuance of the
Company’s equity securities in connection with past
advertising agreements with certain service providers. The
values of the equity securities issued were capitalized and are
being amortized as the advertisements are broadcast or over the
term of the underlying agreement. As of December 31, 2004
and 2003, the current portion of unamortized prepaid advertising
costs was $10,630 and $17,637, respectively, and is included in
prepaid expenses and other current assets. As of
December 31, 2004 and 2003, the long-term portion of
unamortized prepaid advertising costs was $19,958 and $31,967,
respectively, and is included in other assets.
Foreign Currency
The financial statements and transactions of the Company’s
foreign facilities are maintained in their local currency. In
accordance with SFAS No. 52, “Foreign Currency
Translation,” the translation of foreign currencies into
United States dollars is performed for balance sheet accounts
using current
F-15
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
exchange rates in effect at the balance sheet date and for
revenue and expense accounts using an average exchange rate for
the period. The gains or losses resulting from translation are
included as a component of accumulated other comprehensive
income within stockholders’ equity. Foreign currency
transaction gains and losses are included in net income (loss)
and were not material in any of the periods presented.
Concentration of Credit Risk
None of the Company’s customers individually accounted for
more than 10% of the Company’s consolidated revenues in
2004, 2003 or 2002.
The Company’s revenues are principally generated in the
United States. An adverse change in economic conditions in the
United States could negatively affect the Company’s
revenues and results of operations.
The Company places its short-term investments in a variety of
financial instruments and, by policy, limits the amount of
credit exposure through diversification and by restricting its
investments to highly rated securities.
Income Taxes and Tax Contingencies
Income taxes are accounted for using the liability method in
accordance with SFAS No. 109, “Accounting for
Income Taxes.” Under this method, deferred income taxes are
recognized for the future tax consequence of differences between
the tax and financial reporting basis of assets and liabilities
at each reporting period. A valuation allowance is established
to reduce deferred tax assets to the amounts expected to be
realized. Tax contingencies are recorded to address potential
exposures involving tax positions the Company has taken that
could be challenged by tax authorities. These potential
exposures result from the varying application of statutes,
rules, regulations and interpretations. The Company’s
estimates of tax contingencies contain assumptions and judgments
about potential actions by taxing jurisdictions.
Accounting for Stock-Based Compensation
The Company accounts for its stock-based employee compensation
plans using the intrinsic value method under the recognition and
measurement principles of APB Opinion No. 25,
“Accounting for Stock Issued to Employees” (“APB
No. 25”), and related interpretations. No stock-based
employee compensation cost is reflected in net income (loss)
with respect to options granted with an exercise price equal to
the market value of the underlying common stock on the date of
grant. Stock-based awards to non-employees are accounted for
based on provisions of SFAS No. 123, “Accounting
for Stock-Based Compensation”
(“SFAS No. 123”), and EITF 96-18,
“Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services.” The following table illustrates the
effect on net income (loss) and net income (loss) per common
share if the
F-16
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
Company had applied the fair value recognition provisions of
SFAS No. 123 to stock-based employee compensation:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Net income (loss) as reported
|
|
$ |
39,334 |
|
|
$ |
(17,006 |
) |
|
$ |
(49,702 |
) |
|
Add: Stock-based employee compensation expense included in
reported net income (loss) (including stock-based employee
compensation expense related to discontinued operations)
|
|
|
8,975 |
|
|
|
12,628 |
|
|
|
25,265 |
|
|
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards
|
|
|
(67,569 |
) |
|
|
(76,483 |
) |
|
|
(119,670 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$ |
(19,260 |
) |
|
$ |
(80,861 |
) |
|
$ |
(144,107 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic — as reported
|
|
$ |
0.12 |
|
|
$ |
(0.06 |
) |
|
$ |
(0.16 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Diluted — as reported
|
|
$ |
0.12 |
|
|
$ |
(0.05 |
) |
|
$ |
(0.16 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Basic and Diluted — pro forma
|
|
$ |
(0.06 |
) |
|
$ |
(0.27 |
) |
|
$ |
(0.47 |
) |
| |
|
|
|
|
|
|
|
|
|
The pro forma results above are not intended to be indicative of
or a projection of future results. Refer to Note 14 for
assumptions used in computing the fair value amounts above.
Net Income (Loss) Per Common Share
Basic income (loss) per common share and diluted income (loss)
per common share are presented in conformity with
SFAS No. 128, “Earnings Per Share”
(“SFAS No. 128”). In accordance with
SFAS No. 128, basic income (loss) per common share has
been computed using the weighted-average number of shares of
common stock outstanding during the period, increased to give
effect to the assumed conversion of the Convertible Redeemable
Exchangeable Preferred Stock. Diluted income (loss) per common
share has been computed using the weighted-average number of
shares of common stock
F-17
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
outstanding during the period, increased to give effect to
potentially dilutive securities. The following table presents
the calculation of basic and diluted income (loss) per common
share (shares in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Income (loss) from continuing operations
|
|
$ |
39,334 |
|
|
$ |
16,605 |
|
|
$ |
(53,113 |
) |
| |
|
Income (loss) from discontinued operations
|
|
|
— |
|
|
|
(33,611 |
) |
|
|
3,411 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
39,334 |
|
|
$ |
(17,006 |
) |
|
$ |
(49,702 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Common stock
|
|
|
311,721 |
|
|
|
304,858 |
|
|
|
304,168 |
|
| |
|
Convertible redeemable exchangeable preferred stock
|
|
|
8,359 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Weighted-average shares — Basic
|
|
|
320,080 |
|
|
|
304,858 |
|
|
|
304,168 |
|
| |
|
Employee stock options, restricted stock and warrants
|
|
|
13,263 |
|
|
|
20,953 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Adjusted weighted-average shares after assumed
conversions —
Diluted
|
|
|
333,343 |
|
|
|
325,811 |
|
|
|
304,168 |
|
| |
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income (loss) from continuing operations
|
|
$ |
0.12 |
|
|
$ |
0.05 |
|
|
$ |
(0.17 |
) |
| |
Income (loss) from discontinued operations
|
|
|
— |
|
|
|
(0.11 |
) |
|
|
0.01 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
0.12 |
|
|
$ |
(0.06 |
) |
|
$ |
(0.16 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income (loss) from continuing operations
|
|
$ |
0.12 |
|
|
$ |
0.05 |
|
|
$ |
(0.17 |
) |
| |
Income (loss) from discontinued operations
|
|
|
— |
|
|
|
(0.10 |
) |
|
|
0.01 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
0.12 |
|
|
$ |
(0.05 |
) |
|
$ |
(0.16 |
) |
| |
|
|
|
|
|
|
|
|
|
The Company has excluded convertible subordinated notes, as well
as certain outstanding warrants and stock options, from the
calculation of diluted income (loss) per common share because
such securities were anti-dilutive during the periods presented.
The following table presents the total number of shares that
could potentially dilute basic income (loss) per common share in
the future that were not included in the computation of diluted
income (loss) per common share during the periods presented
(shares in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Options and warrants
|
|
|
83,986 |
|
|
|
82,267 |
|
|
|
136,147 |
|
|
Convertible notes
|
|
|
55,129 |
|
|
|
55,129 |
|
|
|
32,387 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
139,115 |
|
|
|
137,396 |
|
|
|
168,534 |
|
| |
|
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements
In December 2004, the Company adopted Emerging Issues Task Force
(“EITF”) Issue 04-08, “The Effect of
Contingently Convertible Debt on Diluted Earnings per
Share” (“EITF 04-08”). EITF 04-08
requires that an entity include the effect of contingently
convertible instruments in diluted earnings per share regardless
of whether any contingent features of those instruments have
been met. In addition,
F-18
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
EITF 04-08 requires retroactive restatement of previously
reported diluted shares. While the Company’s
1.75% Convertible Subordinated Notes include a contingent
conversion feature, the adoption of EITF 04-08 did not have
an impact on diluted earnings per share, as these instruments
were anti-dilutive for all periods presented.
In December 2004, the Financial Accounting Standards Board
(“FASB”) issued SFAS No. 123, “(Revised
2004): Share-Based Payment” (“SFAS 123R”),
which replaces SFAS No. 123, “Accounting for
Stock-Based Compensation,” (“SFAS 123”) and
supersedes APB Opinion No. 25, “Accounting for Stock
Issued to Employees.” SFAS 123R requires all
share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements
based on their fair values beginning with the first interim or
annual period after June 15, 2005. The pro forma
disclosures previously permitted under SFAS 123 no longer
will be an alternative to financial statement recognition. The
Company is required to adopt SFAS 123R in the third quarter
of fiscal 2005, beginning July 1, 2005. Under
SFAS 123R, the Company must determine the appropriate fair
value model to be used for valuing share-based payments, the
amortization method for compensation cost and the transition
method to be used at date of adoption. The transition methods
include prospective and retroactive adoption options. Under the
retroactive option, prior periods may be restated either as of
the beginning of the year of adoption or for all periods
presented. The prospective method requires that compensation
expense be recorded for all unvested stock options and
restricted stock at the beginning of the first quarter of
adoption of SFAS 123R. The Company is evaluating the
requirements of SFAS 123R and expects that the adoption of
SFAS 123R will have a material impact on the consolidated
results of operations and earnings per share. The Company has
not yet determined the method of adoption or the effect of
adopting SFAS 123R.
In December 2004, the FASB issued SFAS No. 151,
“Inventory Costs — An Amendment of ARB
No. 43, Chapter 4”
(“SFAS No. 151”). SFAS No. 151
requires abnormal amounts of inventory costs related to idle
facility, freight handling and wasted material expenses to be
recognized as current period charges. Additionally,
SFAS No. 151 requires that allocation of fixed
production overhead to the costs of conversion be based on the
normal capacity of the production facilities. The standard is
effective for fiscal years beginning after June 15, 2005.
The Company believes the adoption of SFAS No. 151 will
not have a material impact on its consolidated financial
position or results of operations.
In March 2004, the FASB issued EITF No. 03-01, “The
Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments,” (“EITF No. 03-01”)
which provides new guidance for assessing impairment losses on
debt and equity investments. The new impairment model applies to
investments accounted for under the cost or equity method and
investments accounted for under SFAS 115, “Accounting
for Certain Investments in Debt and Equity Securities.”
EITF No. 03-01 also includes new disclosure requirements
for cost method investments and for all investments that are in
an unrealized loss position. In September 2004, the FASB delayed
the accounting provisions of EITF No. 03-01; however the
disclosure requirements remain effective and those applicable
have been included in Note 16. The Company will evaluate
the effect, if any, of EITF 03-01 when final guidance is
issued.
Reclassifications
Certain reclassifications have been made to the prior period
financial statements to conform to the current year
presentation, including the classification of auction rate
securities as available-for-sale securities, which are reported
as short-term investments, instead of cash and cash equivalents.
As of December 31, 2004, the Company held $6,000 of
investments in auction rate securities that are classified as
short-term investments. The Company reclassified $23,650 and
$103,900 of investments in auction rate securities that were
previously included in cash and cash equivalents to short-term
investments as of December 31, 2003 and 2002, respectively.
The Company has included purchases and sales of auction rate
securities in the accompanying consolidated statements of cash
flows as a component of its investing
F-19
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
activities. This reclassification had no impact on the
Company’s results of operations, cash flow from operating
activities, or changes in its stockholders’ equity.
2004 Acquisitions
On December 24, 2004, the Company acquired MedicineNet,
Inc. (“MedicineNet”), a privately held company that
provides online healthcare content for consumers. The total
purchase consideration of MedicineNet was approximately $17,034
comprised of $16,394 in cash, net of the cash acquired, $338 to
be paid in 2005 and $302 of estimated acquisition costs.
Additionally, the Company agreed to pay up to $15,000 beginning
in April 2006 if certain milestones are achieved. The
acquisition was accounted for using the purchase method of
accounting and, accordingly, the purchase price was allocated to
the tangible and intangible assets acquired and the liabilities
assumed on the basis of their respective fair values. In
connection with the preliminary allocation of the purchase price
and intangible asset valuation, goodwill of $10,484 and an
intangible asset subject to amortization of $5,645 were
recorded. The Company does not expect that the goodwill or
intangible asset recorded will be deductible for tax purposes.
The intangible asset is content with an estimated useful life of
three years. The results of operations of MedicineNet will be
included in the WebMD Health segment. The results of operations
of MedicineNet from the closing date of the acquisition through
December 31, 2004 were not material.
During October 2004, the Company acquired Esters Filtertechnik
GmbH (“Esters”), a privately held distributor of
porous plastic products and components. The total purchase
consideration of Esters was approximately $3,333 comprised of
$3,160 in cash, net of the cash acquired, and $173 of estimated
acquisition costs. The acquisition was accounted for using the
purchase method of accounting and, accordingly, the purchase
price was allocated to the tangible and intangible assets
acquired and the liabilities assumed on the basis of their
respective fair values. In connection with the preliminary
allocation of the purchase price, goodwill of $1,798 and an
intangible asset subject to amortization of $1,200 were
recorded. The Company does not expect that the goodwill or
intangible asset recorded will be deductible for tax purposes.
The intangible asset is customer relationships with an estimated
useful life of eleven years. The results of operations of Esters
have been included in the financial statements of the Company
from the closing date of the acquisition and are included in the
Porex segment.
On October 1, 2004, the Company acquired RxList, LLC
(“RxList”), a privately held partnership that operates
a drug index Web site that provides health related information
to consumers and healthcare professionals. The total purchase
consideration was approximately $5,455 comprised of $4,500 in
cash, $500 to be paid in 2006 and $455 of estimated acquisition
costs. Additionally, the Company agreed to pay up to an
additional $5,000 beginning in February 2006 if certain
milestones are achieved. The acquisition was accounted for using
the purchase method of accounting and, accordingly, the purchase
price was allocated to the tangible and intangible assets
acquired and the liabilities assumed on the basis of their
respective fair values. In connection with the preliminary
allocation of the purchase price and intangible asset valuation,
goodwill of $4,458 and an intangible asset subject to
amortization of $1,015 were recorded. The Company expects that
substantially all of the goodwill and intangible asset recorded
will be deductible for tax purposes. The intangible asset is
content with an estimated useful life of five years. The results
of operations of RxList have been included in the financial
statements of the Company from October 1, 2004, the closing
date of the acquisition, and are included in the WebMD Health
segment.
On August 11, 2004, the Company completed its acquisition
of VIPS, Inc. (“ViPS”), a privately held provider of
information technology, decision support solutions and
consulting services to government, Blue Cross Blue Shield and
commercial healthcare payers. ViPS develops and provides a broad
range of solutions for claims processing, provider performance
measurement, quality improvement, fraud detection, disease
management and predictive modeling. The total purchase
consideration for ViPS was approxi-
F-20
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
mately $166,608 comprised of $165,208 in cash, net of the cash
acquired, and $1,400 of estimated acquisition costs. The
acquisition was accounted for using the purchase method of
accounting and, accordingly, the purchase price was allocated to
the tangible and intangible assets acquired and the liabilities
assumed on the basis of their respective fair values. In
connection with the preliminary allocation of the purchase
price, goodwill of $71,449 and intangible assets subject to
amortization of $84,000 were recorded. The Company does not
expect that the goodwill or intangible assets recorded will be
deductible for tax purposes. The intangible assets are comprised
of $38,800 relating to customer relationships with estimated
useful lives ranging from ten to fifteen years, $34,800 relating
to acquired technology with estimated useful lives of five years
and $10,400 relating to a trade name with an estimated useful
life of ten years. The results of operations of ViPS have been
included in the financial statements of the Company from
August 11, 2004, the closing date of the acquisition, and
are included in the WebMD Business Services segment.
On July 15, 2004, the Company acquired the assets of Epor,
Inc. (“Epor”), a privately held company based in Los
Angeles, California. Epor manufactures porous plastic implant
products for use in aesthetic and reconstructive surgery of the
head and face. The total purchase consideration for Epor was
approximately $2,547 comprised of $2,000 in cash, $490 to be
paid over five years and $57 of estimated acquisition costs. The
acquisition was accounted for using the purchase method of
accounting and, accordingly, the purchase price was allocated to
the tangible and intangible assets acquired and the liabilities
assumed on the basis of their respective fair values. In
connection with the preliminary allocation of the purchase
price, goodwill of $2,324 and an intangible asset subject to
amortization of $200 were recorded. The Company expects that
substantially all of the goodwill and intangible asset recorded
will be deductible for tax purposes. The intangible asset is a
non-compete agreement with an estimated useful life of five
years. The results of operations of Epor have been included in
the financial statements of the Company from July 15, 2004,
the closing date of the acquisition, and are included in the
Porex segment.
On April 30, 2004, the Company acquired Dakota Imaging,
Inc. (“Dakota”), a privately held provider of
automated healthcare claims processing technology and business
process outsourcing services. Dakota’s technology and
services assist its customers in reducing costly manual
processing of healthcare documents and increase auto-payment of
medical claims through advanced data scrubbing. The Company paid
approximately $39,035 in cash, net of the cash acquired, $583 of
estimated acquisition costs and has agreed to pay up to an
additional $25,000 in cash over a three-year period beginning in
April 2005 if certain financial milestones are achieved. The
acquisition was accounted for using the purchase method of
accounting and, accordingly, the purchase price was allocated to
the tangible and intangible assets acquired and the liabilities
assumed on the basis of their respective fair values. In
connection with the preliminary allocation of the purchase
price, goodwill of $28,380 and intangible assets subject to
amortization of $13,100 were recorded. The Company does not
expect that the goodwill or intangible assets recorded will be
deductible for tax purposes. The intangible assets are comprised
of $4,500 relating to customer relationships with estimated
useful lives of ten years and $8,600 relating to acquired
technology with an estimated useful life of five years. The
results of operations of Dakota have been included in the
financial statements of the Company from April 30, 2004,
the closing date of the acquisition, and are included in the
WebMD Business Services segment.
In 2004, the Company acquired one practice services company for
an aggregate cost of $70, which was paid in cash, and agreed to
pay up to $30 beginning in 2005 if the acquired company meets
certain financial milestones. In connection with the preliminary
allocation of the purchase price, intangible assets subject to
amortization of $85 were recorded, principally related to
customer relationships and non-compete agreements. The results
of operations of this company have been included in the
financial statements of the Company from the acquisition closing
date and are included in the WebMD Practice Services segment.
F-21
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
2003 Acquisitions
On December 22, 2003, the Company completed its acquisition
of Medifax-EDI, Inc. (“Medifax”), a privately held
company based in Nashville, Tennessee. Medifax provides
real-time medical eligibility transaction services and other
claims management solutions to hospitals, medical centers,
physician practices and other medical organizations throughout
the United States. These services enable healthcare providers to
verify insurance coverage for their patients on a real-time
basis. The total purchase consideration was $268,428, comprised
of $266,457 in cash, net of the cash acquired, and $1,971 of
acquisition costs, for all of the outstanding capital stock of
Medifax. Prior to closing, Medifax distributed its Pharmacy
Services companies to its owner and these companies were not
included in the transaction. The acquisition was accounted for
using the purchase method of accounting and, accordingly, the
purchase price was allocated to the tangible and intangible
assets acquired and the liabilities assumed on the basis of
their respective fair values. In connection with the allocation
of the purchase price, goodwill of $178,148 and intangible
assets subject to amortization of $92,700 were recorded. The
Company does not expect that the goodwill or intangible assets
recorded will be deductible for tax purposes. The intangible
assets are comprised of $72,600 relating to customer
relationships with estimated useful lives of fifteen years,
$8,600 relating to acquired technology with an estimated useful
life of five years, $8,400 relating to payer connections with
estimated useful lives of fifteen years and $3,100 relating to a
trade name with an estimated useful life of one year. The
results of operations of Medifax from the closing date of the
acquisition to December 31, 2003 were not material, thus
the results of operations of Medifax have been included in the
financial statements of the Company from January 1, 2004,
and are included in the WebMD Business Services segment.
On September 25, 2003, the Company completed its
acquisition of a privately held dental clearinghouse based in
Hartford, Connecticut. The Company paid $5,583 in cash, net of
the cash acquired, and $70 of acquisition costs for all of the
outstanding capital stock of the acquired company and agreed to
pay up to an additional $4,200 beginning in 2005 if certain
revenue related milestones are achieved. The additional payment
may be made over a three-year period by issuing shares of the
Company’s common stock or in cash. The additional payment
may exceed $4,200 if all or a portion of the additional payment
is made by issuing shares of the Company’s stock and if the
value of the Company’s stock exceeds certain price levels.
The acquisition was accounted for using the purchase method of
accounting and, accordingly, the purchase price was allocated to
the tangible and intangible assets acquired and the liabilities
assumed on the basis of their respective fair values. In
connection with initial allocation of the purchase price,
goodwill of $3,482 and an intangible asset subject to
amortization of $2,392 were recorded. The Company does not
expect that the goodwill or intangible asset recorded will be
deductible for tax purposes. The intangible asset is acquired
technology with an estimated useful life of five years. The
results of operations of the acquired company have been included
in the financial statements of the Company from
September 25, 2003, the closing date of the acquisition,
and are included in the WebMD Business Services segment.
On July 17, 2003, the Company completed its acquisition of
Advanced Business Fulfillment, Inc. (“ABF”), a
privately held company based in St. Louis, Missouri. ABF
provides healthcare paid-claims communications services for
third-party administrators and health insurers. ABF’s
services allow its customers to outsource print-and-mail
activities for the distribution of checks, remittance advice and
explanations of benefits. The total purchase consideration for
ABF was approximately $112,651, comprised of $108,128 in cash,
net of the cash acquired, and $4,523 of acquisition costs for
all of the outstanding capital stock of ABF. Additionally, the
Company agreed to pay up to an additional $150,000 beginning in
April 2004 if certain financial milestones are achieved. The
additional payment may be made over a three-year period by
issuing shares of the Company’s common stock or, at the
Company’s option in certain circumstances, in cash. The
additional payment may exceed $150,000 if all or a portion of
the additional payment is made by issuing shares of the
Company’s stock and if the value of the Company’s stock
F-22
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
exceeds certain price levels at the time of payment. In April
2004, the Company paid $17,455 in cash as a result of the
achievement of certain financial milestones. In addition, the
Company accrued $43,500 as of December 31, 2004 for an
expected cash payment during 2005 related to ABF’s
achievement of certain financial milestones during 2004. The
payment and accrual resulted in increases in goodwill. The
acquisition was accounted for using the purchase method of
accounting and, accordingly, the purchase price was allocated to
the tangible and intangible assets acquired and the liabilities
assumed on the basis of their respective fair values. In
connection with the initial allocation of the purchase price,
goodwill of $61,128 and intangible assets subject to
amortization of $47,000 were recorded. The Company expects that
substantially all of the goodwill and intangible assets recorded
will be deductible for tax purposes. The intangible assets are
comprised of $41,000 relating to customer relationships with
estimated useful lives of ten years, $4,900 relating to acquired
unpatented technologies with estimated useful lives of nine
months to six years and $1,100 relating to a trade name with an
estimated useful life of three years. The results of operations
of ABF have been included in the financial statements of the
Company from July 17, 2003, the closing date of the
acquisition, and are included in the WebMD Business Services
segment.
On May 29, 2003, the Company acquired The Little Blue Book
(“LBB”), a company that maintains a database
containing practice information for over 380,000 physicians, and
publishes a pocket-sized reference book containing physician
information. The total purchase consideration for LBB was
approximately $10,061, comprised of $9,926 in cash, net of the
cash acquired, and acquisition costs of $135. Additionally, the
Company agreed to pay up to $2,500 if LBB meets certain
financial milestones during the years ending December 31,
2003 and 2004. In April 2004, the Company paid $1,500 in cash as
a result of the achievement of certain financial milestones. The
payment resulted in an increase in goodwill. The acquisition was
accounted for using the purchase method of accounting and,
accordingly, the purchase price was allocated to the tangible
and intangible assets acquired and the liabilities assumed on
the basis of their respective fair values. In connection with
the initial allocation of the purchase price, goodwill of $8,545
and intangible assets subject to amortization of $2,815 were
recorded. The Company expects that substantially all of the
goodwill and intangible assets recorded will be deductible for
tax purposes. The intangible assets are comprised of $1,787
relating to a trade name with an estimated useful life of seven
years, $761 relating to customer relationships with estimated
useful lives of five years and $267 relating to acquired
technology with an estimated useful life of three years. The
results of operations of LBB have been included in the financial
statements of the Company from May 29, 2003, the closing
date of the acquisition, and are included in the WebMD Health
segment.
On April 30, 2003, the Company acquired the assets and
assumed certain liabilities of a company which provides
healthcare benefit decision support tools and solutions to its
clients through online technology. The total purchase
consideration for this acquisition was approximately $4,052,
comprised of $4,000 in cash and acquisition costs of $52. The
acquisition was accounted for using the purchase method of
accounting and, accordingly, the purchase price was allocated to
the tangible and intangible assets acquired and the liabilities
assumed on the basis of their respective fair values. In
connection with the allocation of the purchase price, goodwill
of $4,070 and an intangible asset subject to amortization of
$710 were recorded. The Company expects that substantially all
of the goodwill and intangible asset recorded will be deductible
for tax purposes. The intangible asset represents customer
relationships with estimated useful lives of five years. The
results of operations of the acquired business have been
included in the financial statements of the Company from
April 30, 2003, the closing date of the acquisition, and
are included in the WebMD Health segment.
In 2003, the Company acquired seven practice services companies
for an aggregate cost of $2,175, which was paid in cash, net of
the cash acquired. Additionally, the Company will pay up to $675
beginning in 2004 if certain of the acquired companies meet
specified financial milestones. During 2004, the Company paid
$155 in cash as a result of the achievement of certain financial
milestones. These payments resulted in an increase in goodwill.
These acquisitions were accounted for using the purchase
F-23
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
method of accounting and, accordingly, the purchase prices were
allocated to assets acquired and liabilities assumed based on
their respective fair values. In connection with the initial
allocation of the purchase prices, goodwill of $1,469 and
intangible assets subject to amortization of $1,054 were
recorded. The Company expects that substantially all of the
goodwill recorded will be deductible for tax purposes. The
intangible assets are comprised of $351 related to non-compete
agreements with estimated useful lives of three to five years
and $703 related to customer relationships with estimated useful
lives of nine years. The results of operations of these
companies have been included in the financial statements of the
Company from the respective acquisition closing dates and are
included in the WebMD Practice Services segment.
2002 Acquisitions
On October 31, 2002, the Company acquired WellMed, Inc.
(“WellMed”), which develops and markets healthcare
information technology applications, including online healthcare
decision support and health management tools for use by
consumers. The total purchase consideration for WellMed was
approximately $19,031, comprised of $18,781 in cash and
acquisition costs of $250. The acquisition was accounted for
using the purchase method of accounting and, accordingly, the
purchase price was allocated to the tangible and intangible
assets acquired and the liabilities assumed on the basis of
their respective fair values. In connection with the allocation
of the purchase price, goodwill of $18,380 and an intangible
asset subject to amortization of $2,700 were recorded. The
Company expects that substantially all of the goodwill recorded
will be deductible for tax purposes. The intangible asset
represents the fair value of acquired unpatented technology and
has a useful life of three years. The results of operations of
WellMed have been included in the financial statements of the
Company from October 31, 2002, the closing date of the
acquisition, and are included in the WebMD Health segment.
In 2002, the Company acquired 21 practice services companies for
a total cost of $14,400, which was paid in cash. These
acquisitions were accounted for using the purchase method of
accounting with the purchase price being allocated to assets
acquired and liabilities assumed based on their respective fair
values. In connection with the allocation of the purchase price,
goodwill of $11,784 and intangible assets subject to
amortization of $4,049 were recorded. The Company expects that
substantially all of the goodwill recorded will be deductible
for tax purposes. The intangible assets are comprised of $1,281
related to non-compete agreements with estimated useful lives of
one to five years and $2,768 related to customer relationships
with estimated useful lives of nine years. The results of
operations of these companies have been included in the
financial statements of the Company from the respective
acquisition closing dates and are included in the WebMD Practice
Services segment.
F-24
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
Unaudited Pro Forma Information
The following unaudited pro forma financial information for the
years ended December 31, 2004 and 2003 gives effect to the
acquisitions of ABF, Medifax and ViPS, including the
amortization of intangible assets, as if they had occurred on
January 1, 2003. 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 on the date indicated, nor is
it necessarily indicative of future operating results of the
consolidated companies, and should not be construed as
representative of these results for any future period. The
remaining acquisitions in 2004 and 2003 have been excluded as
the pro forma impact of such acquisitions was not significant to
any of the periods presented.
| |
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Revenue
|
|
$ |
1,199,689 |
|
|
$ |
1,125,138 |
|
|
Income from continuing operations
|
|
$ |
40,964 |
|
|
$ |
30,457 |
|
|
Net income (loss)
|
|
$ |
40,964 |
|
|
$ |
(3,154 |
) |
|
Basic income (loss) per common share:
|
|
|
|
|
|
|
|
|
| |
Income from continuing operations
|
|
$ |
0.13 |
|
|
$ |
0.10 |
|
| |
Net income (loss)
|
|
$ |
0.13 |
|
|
$ |
(0.01 |
) |
|
Diluted income (loss) per common share:
|
|
|
|
|
|
|
|
|
| |
Income from continuing operations
|
|
$ |
0.12 |
|
|
$ |
0.09 |
|
| |
Net income (loss)
|
|
$ |
0.12 |
|
|
$ |
(0.01 |
) |
|
|
| 3. |
Significant Transactions |
America Online, Inc.
In May 2001, the Company entered into an agreement for a
strategic alliance with Time Warner, Inc. (“Time
Warner”). Under the agreement, the Company is the primary
provider of healthcare content, tools and services for use on
certain America Online properties. The Company and AOL share
certain revenue from advertising, commerce and programming on
the health channels of the AOL properties and on a co-branded
service created for AOL by the Company, with the Company
receiving 80% of revenues up to an agreed-upon annual threshold
and 60% thereafter. In connection with the strategic alliance,
the Company issued to Time Warner a warrant to
purchase 2,408,908 shares of the Company’s common
stock at an exercise price of $9.25 per share. The warrant
was valued at approximately $17,500 using the Black-Scholes
option pricing model and was amortized through May 2004, the
original term of the strategic alliance, as a non-cash
distribution expense included in sales, marketing, general and
administrative expense.
The original term of the agreement was three years expiring May
2004. The Company had the right to extend the original agreement
for an additional three-year term if the Company’s revenue
share did not exceed certain thresholds during the original
three-year term. These thresholds were not met and the Company
exercised its right to extend the contract term until May 2007.
Under the terms of the extension, the Company’s revenue
share will be subject to a minimum annual guarantee. Included in
the accompanying consolidated statement of operations for the
year ended December 31, 2004 is revenue of $3,679 related
to such guarantee.
News Corporation
In connection with the strategic relationship with News
Corporation entered into in 2000 and amended in 2001, the
Company receives $205,000 of domestic media services from News
Corporation over ten years expiring in 2010 and the Company
licensed its content to News Corporation for use across News
F-25
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
Corporation’s media properties for four years, ending in
January 2005, for cash payments totaling $12,000 per
contract year. The remaining portion of the domestic media
services is included in prepaid expenses and other current
assets and other assets in the accompanying consolidated balance
sheets.
Microsoft
In connection with a strategic relationship with Microsoft
entered into in 2000 and amended in 2001, the Company programmed
the majority of the MSN health channel, and the Company and MSN
shared 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 was
reached) and 60% thereafter. This agreement expired on
December 31, 2004.
|
|
| 4. |
Restructuring and Integration Charges |
After the mergers with Medical Manager Corporation, CareInsite,
Inc. and OnHealth Network Company in September 2000, the
Company’s Board of Directors approved a restructuring and
integration plan, with the objective of eliminating duplication
and redundancies that resulted from these and certain prior
acquisitions and consolidating the Company’s operational
infrastructure into a common platform. The Company’s
restructuring and integration efforts continued in 2001, which
included eliminating functions resulting from the Company’s
acquisition of Medscape and restructuring certain strategic
relationships the Company had with third parties. During 2002,
the Company recorded a benefit of $5,850 relating to its
restructuring and integration activity resulting from the
settlements of certain contractual obligations. During 2003 and
2002, the Company made cash payments of $7,620 and $4,968,
respectively, related to its 2000 and 2001 restructuring plans,
primarily related to lease payments of previously vacated
facilities.
In 2004, the Company recorded an incremental restructuring
charge, with respect to the 2000 restructuring plan, of $4,535
in connection with the settlement of a lawsuit against the
landlord of a property that the Company leased in 2000, but
never occupied, for its then Santa Clara, California
operations. The remainder of the settlement cost was previously
expensed as part of the 2000 restructuring plan. Under the
terms of the settlement, the original lease was terminated and
the Company made payments of approximately $24,409. In addition
during 2004, the Company made cash payments of $4,618 related to
its remaining 2000 and 2001 restructuring plans.
As of December 31, 2004, the Company’s remaining
obligations related to its 2000 and 2001 restructuring plans
were not material to the Company’s financial position and
have been included in accrued expenses in the accompanying
consolidated balance sheets.
|
|
| 5. |
Discontinued Operations |
On August 1, 2003, the Company completed the sale of two
operating units of Porex, Porex Bio Products, Inc. (“Porex
Bio”) and Porex Medical Products, Inc. (“Porex
Medical”) to enable Porex to focus on its porous materials
businesses. Accordingly, the historical financial information of
these operating units has been reclassified as discontinued
operations in the accompanying consolidated financial statements
for all periods presented. The operating units were sold in two
separate transactions for an aggregate sales price of $46,500.
An impairment charge of $33,113 was recorded in the results for
the quarter ended June 30, 2003 to reduce the long-lived
assets of Porex Bio and Porex Medical to fair value. The
write-down consisted of $27,564 of goodwill, $4,162 of trade
name and patent intangibles and $1,387 of other long-lived
assets consisting primarily of manufacturing equipment. The
impairment charge was based on the fair value of the divested
businesses as determined by the expected proceeds from
disposition. During the three months ended September 30,
2003, the Company recorded a loss on disposal of $3,491,
primarily representing certain costs related to the disposition,
which is included in income (loss) from
F-26
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
discontinued operations in the accompanying consolidated
statements of operations. Summarized operating results for the
discontinued units through August 1, 2003 were as follows:
| |
|
|
|
|
|
|
|
|
| |
|
For the Period | |
|
|
| |
|
January 1, 2003 | |
|
For the Year | |
| |
|
through | |
|
Ended | |
| |
|
August 1, 2003 | |
|
December 31, 2002 | |
| |
|
| |
|
| |
|
Revenue
|
|
$ |
31,004 |
|
|
$ |
54,181 |
|
| |
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$ |
(30,120 |
) |
|
$ |
3,411 |
|
|
Loss on disposal
|
|
|
(3,491 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of income taxes
|
|
$ |
(33,611 |
) |
|
$ |
3,411 |
|
| |
|
|
|
|
|
|
|
|
| 6. |
Convertible Redeemable Exchangeable Preferred Stock |
On March 19, 2004, the Company issued $100,000 of
Convertible Redeemable Exchangeable Preferred Stock (the
“Preferred Stock”) in a private transaction to
CalPERS/ PCG Corporate Partners, LLC (“CalPERS/ PCG
Corporate Partners”). CalPERS/ PCG Corporate Partners is a
private equity fund managed by the Pacific Corporate Group and
principally backed by California Public Employees’
Retirement System, or CalPERS.
The Preferred Stock has a liquidation preference of $100,000 in
the aggregate and is convertible into 10,638,297 shares of
the Company’s common stock in the aggregate, representing a
conversion price of $9.40 per share of common stock. The
Company may not redeem the Preferred Stock prior to March 2007.
Thereafter, the Company may redeem any portion of the Preferred
Stock at 105% of its liquidation preference; provided that any
redemption by the Company prior to March 2008 shall be subject
to the condition that the average closing sale prices of the
Company’s common stock is at least $13.16 per share,
subject to adjustment. The Company is required to redeem all
shares of the Preferred Stock then outstanding in March 2012, at
a redemption price equal to the liquidation preference of the
Preferred Stock, payable in cash or, at the Company’s
option, in shares of the Company’s common stock. If the
Company’s common stock is used to redeem the Preferred
Stock, the number of shares to be issued will be determined by
valuing the common stock at 90% of its closing price during the
15 trading days preceding redemption.
If the average closing sales price of the Company’s common
stock during the three-month period ended on the fourth
anniversary of the issuance date is less than $7.50 per
share, holders of the Preferred Stock will have a right to
exchange the Preferred Stock into the Company’s
10% Subordinated Notes (“10% Notes”) due
March 2010. The 10% Notes may be redeemed, in whole or in
part, at any time thereafter at the Company’s option at a
price equal to 105% of the principal amount of the
10% Notes being redeemed.
Holders of the Preferred Stock will not receive any dividends
unless the holders of common stock do, in which case holders of
the Preferred Stock will be entitled to receive ordinary
dividends in an amount equal to the ordinary dividends the
holders of the Preferred Stock would have received had they
converted such Preferred Stock into common stock immediately
prior to the record date for such dividend distribution. So long
as the Preferred Stock remains outstanding, the Company is
required to pay to CalPERS/ PCG Corporate Partners, on a
quarterly basis, an aggregate annual fee of 0.35% of the face
amount of the then outstanding Preferred Stock.
Holders of the Preferred Stock have the right to vote, together
with the holders of the Company’s common stock on an as
converted to common stock basis, on matters that are put to a
vote of the holders
F-27
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
common stock. The Certificate of Designations for the Preferred
Stock also provides that the Company will not, without the prior
approval of holders of 75% of the shares of Preferred Stock then
outstanding, voting as a separate class, issue any additional
shares of the Preferred Stock, or create any other class or
series of capital stock that ranks senior to or on a parity with
the Preferred Stock.
The Company incurred issuance costs related to the Preferred
Stock of approximately $1,885, which have been recorded against
the Preferred Stock in the accompanying consolidated balance
sheets. The issuance costs are amortized to accretion of
convertible redeemable exchangeable preferred stock in the
accompanying consolidated statements of stockholders’
equity, using the effective interest method over the period from
issuance through March 19, 2012. During 2004, $184 was
recorded to accretion of convertible redeemable exchangeable
preferred stock.
|
|
| 7. |
Convertible Subordinated Notes |
|
|
|
$350,000 1.75% Convertible Subordinated Notes due
2023 |
On June 25, 2003, the Company issued $300,000 aggregate
principal amount of 1.75% Convertible Subordinated Notes
due 2023 (the “1.75% Notes”) in a private
offering. On July 7, 2003, the Company issued an additional
$50,000 aggregate principal amount of the 1.75% Notes.
Unless previously redeemed or converted, the 1.75% Notes
will mature on June 15, 2023. Interest on the
1.75% Notes accrues at the rate of 1.75% per annum and
is payable semiannually on June 15 and December 15,
commencing December 15, 2003. The Company will also pay
contingent interest of 0.25% per annum of the average
trading price of the 1.75% Notes during specified six month
periods, commencing on June 20, 2010, if the average
trading price of the 1.75% Notes for specified periods
equals 120% or more of the principal amount of the
1.75% Notes.
The 1.75% Notes are convertible into an aggregate of
22,742,040 shares of the Company’s common stock
(representing a conversion price of $15.39 per share) if
the sale price of the Company’s common stock exceeds 120%
of the conversion price for specified periods and in certain
other circumstances. The 1.75% Notes are redeemable by the
Company after June 15, 2008 and prior to
June 20, 2010, subject to certain conditions,
including the sale price of the Company’s common stock
exceeding certain levels for specified periods. If the
1.75% Notes are redeemed by the Company during this period,
the Company will be required to make additional interest
payments. After June 20, 2010, the 1.75% Notes are
redeemable at any time for cash at 100% of their principal
amount. Holders of the 1.75% Notes may require the Company
to repurchase their 1.75% Notes on June 15, 2010,
June 15, 2013 and June 15, 2018, for cash at 100% of
the principal amount of the 1.75% Notes, plus accrued
interest. Upon a change in control, holders may require the
Company to repurchase their 1.75% Notes for, at the
Company’s option, cash or shares of the Company’s
common stock, or a combination thereof, at a price equal to 100%
of the principal amount of the 1.75% Notes being
repurchased.
|
|
|
$300,000
31/4% Convertible
Subordinated Notes due 2007 |
On April 1, 2002, the Company issued $300,000 aggregate
principal amount of
31/4% Convertible
Subordinated Notes due 2007 (the
“31/4% Notes”)
in a private offering. Interest on the
31/4% Notes
accrues at the rate of
31/4% per
annum and is payable semiannually on April 1 and October 1.
Unless previously redeemed or converted, the
31/4% Notes
will mature on April 1, 2007. At the time of issuance, the
31/4% Notes
were convertible into an aggregate of approximately
32,386,916 shares of the Company’s common stock
(representing a conversion price of $9.26 per share),
subject to adjustment in certain circumstances. During the three
months ended June 30, 2003, $1 principal amount of the
31/4% Notes
was converted into 107 shares of the Company’s common
stock in accordance with the provisions of the
31/4% Notes.
As of December 31, 2004, the
31/4% Notes
were convertible into an aggregate of approximately
32,386,808 shares of the Company’s common stock. The
31/4% Notes
are redeemable at the
F-28
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
Company’s option, at any time on or after April 5,
2005. The redemption price, as a percentage of the principal
amount, is 101.3% beginning April 5, 2005 and 100.65%
beginning April 1, 2006.
Segment information has been prepared in accordance with the
Statement of Financial Accounting Standards No. 131,
“Disclosures about Segments of an Enterprise and Related
Information” (“SFAS No. 131”). The
accounting policies of the segments are the same as the
accounting policies for the consolidated Company. Inter-segment
revenues represent sales of WebMD Business Services products
into the WebMD Practice Services customer base and are reflected
at rates comparable to those charged to third parties for
comparable products. The performance of the Company’s
business is monitored based on income or loss before
restructuring, taxes, non-cash and other items. Non-cash and
other items include depreciation, amortization, gain on
investments, other income, costs and expenses related to the
investigation by the United States Attorney for the District of
South Carolina and the SEC (“legal expense”), non-cash
expenses related to content, advertising and distribution
services acquired in exchange for the Company’s equity
securities in acquisitions and strategic alliances, and stock
compensation expense primarily related to stock options issued
and assumed in connection with acquisitions and restricted stock
issued to employees.
F-29
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
Summarized financial information for each of the Company’s
operating segments and a reconciliation to net income (loss) are
presented below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WebMD Business Services
|
|
$ |
686,585 |
|
|
$ |
505,729 |
|
|
$ |
466,810 |
|
|
WebMD Practice Services
|
|
|
296,115 |
|
|
|
302,640 |
|
|
|
275,306 |
|
|
WebMD Health
|
|
|
134,317 |
|
|
|
110,665 |
|
|
|
84,296 |
|
|
Porex
|
|
|
77,099 |
|
|
|
71,940 |
|
|
|
65,811 |
|
|
Inter-segment eliminations
|
|
|
(33,765 |
) |
|
|
(26,994 |
) |
|
|
(20,527 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
1,160,351 |
|
|
$ |
963,980 |
|
|
$ |
871,696 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) before restructuring, taxes, non-cash and other
items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WebMD Business Services
|
|
$ |
131,834 |
|
|
$ |
94,218 |
|
|
$ |
85,154 |
|
|
WebMD Practice Services
|
|
|
14,533 |
|
|
|
20,924 |
|
|
|
26,685 |
|
|
WebMD Health
|
|
|
32,898 |
|
|
|
24,898 |
|
|
|
5,574 |
|
|
Porex
|
|
|
22,650 |
|
|
|
20,532 |
|
|
|
19,891 |
|
|
Corporate
|
|
|
(58,382 |
) |
|
|
(50,251 |
) |
|
|
(51,272 |
) |
|
Interest income
|
|
|
18,717 |
|
|
|
22,901 |
|
|
|
19,590 |
|
|
Interest expense
|
|
|
(19,253 |
) |
|
|
(15,214 |
) |
|
|
(8,491 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
142,997 |
|
|
|
118,008 |
|
|
|
97,131 |
|
|
Restructuring, taxes, non-cash and other items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization and other
|
|
|
(57,765 |
) |
|
|
(62,434 |
) |
|
|
(125,593 |
) |
|
Non-cash content and distribution services and stock compensation
|
|
|
(27,801 |
) |
|
|
(36,747 |
) |
|
|
(50,971 |
) |
|
Restructuring and integration (charge) benefit
|
|
|
(4,535 |
) |
|
|
— |
|
|
|
5,850 |
|
|
Legal expense
|
|
|
(9,230 |
) |
|
|
(3,959 |
) |
|
|
— |
|
|
Gain on investments
|
|
|
457 |
|
|
|
1,659 |
|
|
|
6,547 |
|
|
Other income, net
|
|
|
121 |
|
|
|
4,218 |
|
|
|
3,844 |
|
|
Income tax (provision) benefit
|
|
|
(4,910 |
) |
|
|
(4,140 |
) |
|
|
10,079 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
39,334 |
|
|
|
16,605 |
|
|
|
(53,113 |
) |
|
Income (loss) from discontinued operations
|
|
|
— |
|
|
|
(33,611 |
) |
|
|
3,411 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Net income (loss)
|
|
$ |
39,334 |
|
|
$ |
(17,006 |
) |
|
$ |
(49,702 |
) |
| |
|
|
|
|
|
|
|
|
|
The Company does not disaggregate assets for internal management
reporting and, therefore, such information is not presented.
Revenues generated from foreign customers of the continuing
operations of the Company’s Porex segment were $33,315,
$31,320 and $26,674 in 2004, 2003 and 2002, respectively.
Long-lived assets based in foreign facilities were $19,020 and
$13,798 as of December 31, 2004 and 2003, respectively.
F-30
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
Property and equipment consist of the following:
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Computer equipment
|
|
$ |
62,106 |
|
|
$ |
52,968 |
|
|
Land and buildings
|
|
|
17,847 |
|
|
|
17,136 |
|
|
Office equipment, furniture and fixtures
|
|
|
45,695 |
|
|
|
38,612 |
|
|
Software
|
|
|
35,195 |
|
|
|
27,219 |
|
|
Leasehold improvements
|
|
|
9,727 |
|
|
|
9,050 |
|
|
Construction in process
|
|
|
11,848 |
|
|
|
3,819 |
|
| |
|
|
|
|
|
|
| |
|
|
182,418 |
|
|
|
148,804 |
|
|
Less: accumulated depreciation
|
|
|
(92,741 |
) |
|
|
(71,526 |
) |
| |
|
|
|
|
|
|
| |
Property and equipment, net
|
|
$ |
89,677 |
|
|
$ |
77,278 |
|
| |
|
|
|
|
|
|
Depreciation expense was $28,895, $25,926 and $23,255 in 2004,
2003 and 2002, respectively.
|
|
|
Goodwill and Intangible Assets |
Effective July 1, 2001 and January 1, 2002, the
Company adopted SFAS No. 141, “Business
Combinations” (“SFAS No. 141”) and
SFAS No. 142, respectively. SFAS No. 141
requires business combinations initiated after June 30,
2001 to be accounted for using the purchase method of
accounting. It also specifies the types of acquired intangible
assets that are required to be recognized and reported
separately from goodwill. SFAS No. 142 requires that
goodwill and certain intangibles no longer be amortized, but
instead tested for impairment at least annually.
SFAS No. 142 also requires that intangible assets with
definite useful lives be amortized over their respective
estimated useful lives and reviewed for impairment in accordance
with SFAS No. 144. Based on the Company’s
analysis, there was no impairment of goodwill upon adoption of
SFAS No. 142 on January 1, 2002, or in connection
with the annual impairment tests that were performed during the
quarters ended December 31, 2004, 2003 and 2002.
F-31
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
The changes in the carrying amount of goodwill during the years
ended December 31, 2004 and 2003 were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
WebMD | |
|
WebMD | |
|
|
|
|
|
|
| |
|
Business | |
|
Practice | |
|
WebMD | |
|
|
|
|
| |
|
Services | |
|
Services | |
|
Health | |
|
Porex | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Balance as of January 1, 2003
|
|
$ |
341,967 |
|
|
$ |
182,085 |
|
|
$ |
23,705 |
|
|
$ |
38,286 |
|
|
$ |
586,043 |
|
| |
Goodwill recorded during the period
|
|
|
244,021 |
|
|
|
1,469 |
|
|
|
12,731 |
|
|
|
— |
|
|
|
258,221 |
|
| |
Adjustments to finalize purchase price allocations
|
|
|
— |
|
|
|
(745 |
) |
|
|
407 |
|
|
|
— |
|
|
|
(338 |
) |
| |
Effects of exchange rates
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
522 |
|
|
|
522 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2004
|
|
|
585,988 |
|
|
|
182,809 |
|
|
|
36,843 |
|
|
|
38,808 |
|
|
|
844,448 |
|
| |
Acquisitions during the period
|
|
|
99,829 |
|
|
|
— |
|
|
|
14,942 |
|
|
|
4,122 |
|
|
|
118,893 |
|
| |
Contingent consideration payments for prior period acquisitions
|
|
|
60,955 |
|
|
|
155 |
|
|
|
1,500 |
|
|
|
— |
|
|
|
62,610 |
|
| |
Tax reversals(a)
|
|
|
(7,141 |
) |
|
|
(7,321 |
) |
|
|
— |
|
|
|
— |
|
|
|
(14,462 |
) |
| |
Adjustments to finalize purchase price allocations
|
|
|
(1,263 |
) |
|
|
— |
|
|
|
(116 |
) |
|
|
— |
|
|
|
(1,379 |
) |
| |
Effects of exchange rates
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
454 |
|
|
|
454 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2004
|
|
$ |
738,368 |
|
|
$ |
175,643 |
|
|
$ |
53,169 |
|
|
$ |
43,384 |
|
|
$ |
1,010,564 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
During the fourth quarter of 2004, in accordance with
EITF 93-7, “Uncertainties Related to Income Taxes in a
Purchase Business Combination,” the Company reduced
goodwill and accrued liabilities by $7,141 and $7,321 for the
WebMD Business Services and WebMD Practice Services segments,
respectively. The reduction related to the favorable resolution
of estimated tax liabilities established in connection with the
2000 acquisitions of Envoy and Medical Manager. |
Intangible assets subject to amortization consist of the
following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2004 | |
|
December 31, 2003 | |
| |
|
| |
|
| |
| |
|
Gross | |
|
|
|
Gross | |
|
|
| |
|
Carrying | |
|
Accumulated | |
|
|
|
Carrying | |
|
Accumulated | |
|
|
| |
|
Amount | |
|
Amortization | |
|
Net | |
|
Amount | |
|
Amortization | |
|
Net | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Customer lists
|
|
$ |
369,704 |
|
|
$ |
(217,874 |
) |
|
$ |
151,830 |
|
|
$ |
325,160 |
|
|
$ |
(206,163 |
) |
|
$ |
118,997 |
|
|
Technology and patents
|
|
|
234,722 |
|
|
|
(155,687 |
) |
|
|
79,035 |
|
|
|
191,318 |
|
|
|
(146,905 |
) |
|
|
44,413 |
|
|
Trade names
|
|
|
40,716 |
|
|
|
(26,923 |
) |
|
|
13,793 |
|
|
|
30,316 |
|
|
|
(19,756 |
) |
|
|
10,560 |
|
|
Non-compete agreements and other
|
|
|
17,920 |
|
|
|
(2,069 |
) |
|
|
15,851 |
|
|
|
11,019 |
|
|
|
(859 |
) |
|
|
10,160 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
663,062 |
|
|
$ |
(402,553 |
) |
|
$ |
260,509 |
|
|
$ |
557,813 |
|
|
$ |
(373,683 |
) |
|
$ |
184,130 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense was $28,870, $35,763 and $102,338 in 2004,
2003 and 2002, respectively. Aggregate amortization expense for
intangible assets is estimated to be:
| |
|
|
|
|
| Year Ending December 31, |
|
|
|
2005
|
|
$ |
33,617 |
|
|
2006
|
|
|
30,668 |
|
|
2007
|
|
|
29,856 |
|
|
2008
|
|
|
27,489 |
|
|
2009
|
|
|
20,769 |
|
|
Thereafter
|
|
|
118,110 |
|
F-32
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
Accrued expenses consist of the following:
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Accrued outside services
|
|
$ |
13,142 |
|
|
$ |
17,855 |
|
|
Accrued restructuring costs
|
|
|
1,423 |
|
|
|
25,915 |
|
|
Accrued acquisition contingent consideration
|
|
|
43,500 |
|
|
|
— |
|
|
Accrued compensation
|
|
|
40,001 |
|
|
|
37,344 |
|
|
Accrued customer deposits
|
|
|
19,804 |
|
|
|
16,539 |
|
|
Accrued income, sales and other taxes
|
|
|
27,770 |
|
|
|
51,781 |
|
|
Other accrued liabilities
|
|
|
55,888 |
|
|
|
58,996 |
|
| |
|
|
|
|
|
|
| |
Total accrued expenses
|
|
$ |
201,528 |
|
|
$ |
208,430 |
|
| |
|
|
|
|
|
|
|
|
| 11. |
Commitments and Contingencies |
Legal Proceedings
|
|
|
Investigations by United States Attorney for the District
of South Carolina and the SEC |
As previously disclosed, the United States Attorney for the
District of South Carolina is conducting an investigation of the
Company, which the Company first learned about on
September 3, 2003. On that date, Federal Bureau of
Investigation and Internal Revenue Service agents executed
search warrants at the Company’s corporate headquarters in
Elmwood Park, New Jersey and the offices of Medical Manager
Health Systems, currently known as WebMD Practice Services, Inc.
(a subsidiary of WebMD Corporation), in Tampa, Florida and
Alachua, Florida and delivered subpoenas for documents and
financial records. Based on the information available to the
Company, the Company believes that the investigation relates
principally to issues of financial accounting improprieties for
Medical Manager Corporation, a predecessor of WebMD Corporation
(by its merger into WebMD Corporation in September 2000), and
our WebMD Practice Services subsidiary; however, the Company
cannot be sure of the investigation’s exact scope or how
long it will continue. Included among the materials removed or
subject to subpoena are records relating to a $5.5 million
restatement of revenue by Medical Manager Corporation in August
1999 and to acquisitions by the Company’s WebMD Practice
Services subsidiary of other companies, most of which were
dealers of Medical Manager products and services.
In connection with this matter, the Company has uncovered
evidence that, prior to Medical Manager’s acquisition by
WebMD Corporation in September 2000, Medical Manager’s
dealer acquisition program was improperly used to artificially
inflate the revenue, earnings and goodwill of Medical Manager.
Also, as the Company has stated in the past, the Company has
evidence of kickback payments by former dealers to certain
former employees of Medical Manager who were responsible for the
acquisition program. The Company has commenced lawsuits against
two of those former employees. These kickback payments appear to
have continued until sometime in 2002.
It is our understanding that the investigation by the
U.S. Attorney’s Office also relates to allegations of
improper revenue recognition practices in connection with system
sales in the Medical Manager business. The Company has
identified evidence that some employees had in the past engaged
in practices to improperly recognize revenue in connection with
system sales.
The United States Attorney for the District of South Carolina
announced on January 10, 2005, that three former employees
of WebMD Practice Services, Inc. have each agreed to plead
guilty to one count
F-33
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
of mail fraud and that one such employee has also agreed to
plead guilty to one count of tax evasion for acts committed
while they were employed by WebMD Practice Services, Inc. and
its predecessor. The three former employees include a Vice
President of WebMD Practice Services responsible for
acquisitions who was terminated for cause in January 2003; an
executive who served in various accounting roles at WebMD
Practice Services until his resignation in March 2002; and a
former independent Medical Manager dealer who was a paid
consultant to Medical Manager until the termination of his
services in 2002.
According to the Informations, Plea Agreements and Factual
Summaries filed by the United States Attorney in, and available
from, the District Court of the United States for the District
of South Carolina — Beaufort Division, on
January 7, 2005, the three former employees and other as
yet unnamed co-schemers were engaged in schemes between 1997 and
2002 that included causing companies acquired by Medical Manager
to pay the former vice president in charge of acquisitions and
co-schemers kickbacks which were funded through increases in the
purchase price paid by Medical Manager to the acquired company
and that included fraudulent accounting practices to inflate
artificially the quarterly revenues and earnings of WebMD
Practice Services, Inc., when it was an independent public
company called Medical Manager Corporation from 1997 through
1999, when and after it became acquired by Synetic, Inc. in July
1999 and when and after it became a subsidiary of WebMD
Corporation in September 2000. Medical Manager Corporation
ceased being a separate public company on September 12,
2000 and filed its last quarterly report with the Securities and
Exchange Commission for the quarter ended March 31, 2000.
To date, in light of the information obtained by the Company,
including that contained in the court documents filed by the
United States Attorney in South Carolina, the Company has not
uncovered information that it believes would require a
restatement for any of the years covered by its financial
statements. In addition, the Company believes that the amounts
of the kickback payments referred to in the court documents have
already been reflected in the financial statements of the
Company to the extent required.
The fraudulent accounting practices cited by the government in
the January 7, 2005 District Court filings included: causing
companies acquired by Medical Manager to reclassify previously
recognized sales revenue as deferred income so that such
deferred income could subsequently be reported as revenue by
Medical Manager and its parents in later periods; fabricating
deferred revenue entries which could be used to inflate earnings
when Medical Manager acquired companies; causing companies
acquired by Medical Manager to inflate reserve accounts so that
these reserves could be reversed in later reporting periods in
order to artificially inflate earnings for Medical Manager and
its parents; accounting for numerous acquisitions through the
pooling of interests method in order to fraudulently inflate
Medical Manager’s quarterly earnings, when the individuals
involved knew the transactions failed to qualify for such
treatment; causing companies acquired by Medical Manager to
enter into sham purchases of software from Medical Manager in
connection with the acquisition which purchases were funded by
increasing the purchase price paid by Medical Manager to the
acquired company and using these “round trip” sales to
create fraudulent revenue for Medical Manager and its parents;
and causing Medical Manager to book and record sales and
training revenue before the revenue process was complete in
accordance with Generally Accepted Accounting Principles and
thereby fraudulently inflating Medical Manager’s reported
revenues and earnings. According to the Informations to which
the former employees have plead guilty, the fraudulent
accounting practices resulted in the reported revenues of
Medical Manager being overstated materially between June 1997
and at least December 31, 2001, and reported quarterly
earnings per share for Medical Manager being overstated by at
least one cent per share in every quarter during that period.
The documents filed by the United States Attorney state that the
former employees engaged in their fraudulent conduct “in
concert with senior management,” and “at the direction
of senior Medical Manager officers.” In its statement the
United States Attorney for the District of South Carolina stated
that “the
F-34
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
senior management and officers referred to in the Court
documents were members of senior management of the Medical
Manager subsidiary during the relevant time period.” Based
on the information it has obtained to date, the Company does not
believe that any member of its senior management whose duties
were not primarily related to the operations of WebMD Practice
Services during the relevant time periods engaged in the alleged
improprieties. The Company understands, however, that in light
of the nature of the allegations involved, the
U.S. Attorney’s office has been investigating all
levels of the Company’s management. As part of its
responsibilities, the Special Committee of the Board of
Directors that is overseeing this matter is evaluating whether
members of senior management whose duties were primarily related
to the operations of WebMD Practice Services during the relevant
time periods engaged in the alleged improprieties, and will
continue to evaluate as information becomes available to it
whether any other member of the Company’s senior management
engaged in improprieties in connection with any matter being
investigated by the United States Attorney.
The Company has been cooperating and intends to continue to
cooperate fully with the U.S. Attorney’s Office. As
previously reported, our Board of Directors has formed a special
committee consisting solely of independent directors to oversee
this matter with the sole authority to direct the Company’s
response to the allegations that have been raised. The Special
Committee has retained independent legal counsel to advise it.
The Company has retained counsel to advise it in connection with
the investigation and such counsel reports directly to the
Special Committee.
As previously disclosed, the Company understands that the SEC is
also conducting a formal investigation into this matter.
While the Company is not able to estimate, at this time, the
amount of the expenses that it will incur in connection with the
investigations, it expects that they may continue to be
significant. For the years ended December 31, 2004 and
2003, those expenses are reflected as “Legal Expense”
in the Consolidated Statements of Operations.
|
|
|
Litigation Regarding Distribution of Shares in Healtheon
Initial Public Offering |
In the summer and fall of 2001, seven purported class action
lawsuits were filed against Morgan Stanley & Co.
Incorporated and Goldman Sachs & Co., underwriters of
the initial public offering of the Company (then known as
Healtheon) in the United States District Court for the Southern
District of New York. Three of these suits also named the
Company and certain former officers and directors of the Company
as defendants. These suits were filed in the wake of reports of
governmental investigations of the underwriters’ practices
in the distribution of shares in certain initial public
offerings. Similar suits were filed in connection with over 300
other initial public offerings that occurred in 1999, 2000 and
2001.
The complaints against the Company and its former officers and
directors alleged violations of Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 under that
Act and Section 11 of the Securities Act of 1933 because of
failure to disclose certain practices alleged to have occurred
in connection with the distribution of shares in the Healtheon
IPO. Claims under Section 12(a)(2) of the Securities Act of
1933 were also brought against the underwriters. These claims
were consolidated, along with claims relating to over 300 other
initial public offerings, in the Southern District of New York.
The plaintiffs have dismissed the claims against the four former
officers and directors of the Company without prejudice,
pursuant to Reservation of Rights and Tolling Agreements with
those individuals.
On July 15, 2002, the issuer defendants in the consolidated
action, including the Company, filed a joint motion to dismiss
the consolidated complaints. On February 18, 2003, the
District Court denied, with certain exceptions not relevant to
the Company, the issuer defendants’ motion to dismiss.
After a lengthy mediation under the auspices of former United
States District Judge Nicholas Politan, the issuer defendants in
the consolidated action (including the Company), the affected
insurance
F-35
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
companies and the plaintiffs reached an agreement on a
settlement to resolve the matter among the participating issuer
defendants, their insurers and the plaintiffs. The settlement
calls for the participating issuers’ insurers jointly to
guarantee that plaintiffs recover a certain amount in the IPO
litigation and certain related litigation from the underwriters
and other non-settling defendants. Accordingly, in the event
that the guarantee becomes payable, the agreement calls for the
Company’s insurance carriers, not the Company, to pay the
Company’s pro rata share.
The Company and virtually all of the approximately
260 other issuer defendants who are eligible have also
elected to participate in the settlement. Although the Company
believes that the claims alleged in the lawsuits were primarily
directed at the underwriters and, as they relate to the Company,
were without merit, we believe that the settlement is beneficial
to the Company because it reduces the time, expense and risks of
further litigation, particularly since virtually all of the
other issuer defendants will participate and our insurance
carriers strongly support the settlement.
On June 10, 2004, plaintiffs submitted to the court a
Stipulation and Agreement of Settlement with Defendant Issuers
and Individuals. On February 15, 2005, the court certified
the proposed settlement class and preliminarily approved the
settlement, subject to certain modifications by the parties.
Assuming these modifications are made, notice of the settlement
will be provided to the class members and the Court will
schedule a hearing for final approval of the settlement.
|
|
|
Merrill Lynch Fundamental Growth Fund, Inc.
et al. v. McKesson HBOC, Inc., et al. |
WebMD Corporation was named as a defendant in the action
Merrill Lynch Fundamental Growth Fund, Inc.,
et al. v. McKesson HBOC, Inc., et al., Case
No. 405792, in the San Francisco Superior Court. The
original complaint in this matter alleged that McKesson HBOC
(now known as McKesson Corp.), HBO and Company (which we refer
to as HBOC), certain officers and directors of those firms,
Arthur Andersen LLP, and Bear Stearns & Co. engaged in
a number of practices whereby HBOC and later McKesson HBOC
improperly recognized revenues. When these practices were
discovered, McKesson HBOC eliminated more than $327 million
in revenues that HBOC had recognized over the prior three years.
Plaintiffs claim to have lost more than $150 million as a
result of the decline in McKesson HBOC’s share value after
the accounting practices came to light in April 1999.
On September 4, 2003, the plaintiffs filed a fourth amended
complaint, naming WebMD Corporation and two other defendants,
General Electric Capital Corporation, Inc. and Computer
Associates International, Inc., for the first time. The
complaint alleged that WebMD Corporation aided and abetted
alleged fraud by certain defendants and conspired with those
defendants in relation to HBOC’s and McKesson HBOC’s
alleged improper recognition of approximately $14 million
in revenue on two software transactions. Plaintiffs also alleged
that WebMD Corporation made certain negligent misrepresentations
with respect to these transactions.
Plaintiffs alleged that WebMD Corporation, through its
participation in certain transactions with HBOC and McKesson
HBOC, learned that officers of HBOC and/or McKesson HBOC, HBOC
and McKesson HBOC were breaching duties owed to McKesson HBOC
shareholders by making material misstatements and suppressing or
omitting facts with respect to HBOC’s and McKesson
HBOC’s financial results for the periods ending
December 31, 1998 and March 31, 1999 and that WebMD,
Inc. aided and abetted and conspired with these defendants. The
complaint was based on alleged conduct by WebMD, Inc., then a
separate private company and now a subsidiary of WebMD
Corporation. One of the HBOC officers became an officer of
WebMD, Inc. on December 1, 1998, after having served as
HBOC’s representative on the board of WebMD, Inc. and was
dismissed by WebMD, Inc. after the accounting fraud at HBOC was
disclosed. The other officer served as HBOC’s
representative on the Board of WebMD, Inc. and ceased to be a
director of WebMD, Inc. upon dismissal by McKesson HBOC.
Plaintiffs seek unspecified damages against WebMD Corporation.
The complaint alleges numerous instances of
F-36
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
improper accounting by HBOC unrelated to the transactions
between WebMD, Inc. and HBOC and/or McKesson HBOC.
On December 16, 2003, WebMD Corporation filed a demurrer,
seeking dismissal of the plaintiffs’ two claims against it.
On July 22, 2004, the Court sustained that demurrer,
finding that the plaintiffs’ claims were time barred. On
October 8, 2004, the Court dismissed plaintiffs’
Fourth Amended Compliant with prejudice as to California, but
without prejudice with respect to filing in another
jurisdiction. On November 17, 2004, plaintiffs filed a
notice of appeal of the Court’s order in favor of WebMD
Corporation. On November 30, 2004, WebMD Corporation filed
a cross-appeal for the purpose of challenging the form of the
order. Those appeals have not yet been briefed.
In March 2004, McKesson Corp. filed cross-complaints against
General Electric Capital Corporation, Inc., Computer Associates
International, Inc., and WebMD Corporation for declaratory
relief and indemnification, alleging that each of these
cross-defendants is obligated to indemnify McKesson if McKesson
is compelled to pay any sum as the result of any damages,
judgment or other awards recovered by the plaintiffs against
McKesson. McKesson sought judicial determinations of the
comparative fault of McKesson and each cross-defendant for
damages claimed by the plaintiffs, if any such damages are found
to exist, and declarations of the amount that each
cross-defendant is obligated to indemnify McKesson if McKesson
is compelled to pay any sum as the result of any damages,
judgment or other awards recovered by the plaintiffs against
McKesson.
On June 8, 2004, WebMD Corporation filed a demurrer,
seeking dismissal of McKesson’s claims. On
September 10, 2004, the Court sustained the demurrer to
McKesson’s claims against WebMD Corporation. On
December 7, 2004, the Court dismissed McKesson’s
cross-complaint with prejudice and ordered entry of judgment in
favor of WebMD Corporation. On January 27, 2005, McKesson
filed a notice of appeal of the Court’s order in favor of
WebMD Corporation. That appeal has not yet been briefed.
On August 12, 2004, the original plaintiffs in the
California lawsuit, Merrill Lynch Fundamental Growth Fund, Inc.
and Merrill Lynch Global Value Fund, Inc., filed a separate
lawsuit in Superior Court in New Jersey, Middlesex County,
alleging substantially the same issues and claims as they did in
the California lawsuit. In response to WebMD Corporation’s
motion to dismiss, plaintiffs filed a First Amended Complaint on
January 4, 2005, dropping claims against WebMD Corporation,
but asserting the same claims against its subsidiary WebMD,
Inc., the company that engaged in the two software transactions.
On February 4, 2005, the New Jersey court dismissed WebMD
Corporation from the action without prejudice, and stayed the
New Jersey action until the California action is resolved,
subject to WebMD Corporation’s entering into a tolling
agreement with plaintiffs, which WebMD Corporation has done.
The Company intends to vigorously defend against the
plaintiffs’ and McKesson’s claims against WebMD
Corporation and WebMD, Inc.
|
|
|
Porex Mammary Implant Litigation |
From 1988 through 1990, Porex distributed silicone mammary
implants in the United States pursuant to a distribution
arrangement with a Japanese manufacturer. Porex believes that,
after accounting for implants returned to Porex, the aggregate
number of persons who received implants distributed by Porex
totals approximately 2,500. Since March 1991, Porex has been
named as one of many co-defendants in a number of actions
brought by recipients of mammary implants. The typical case or
claim alleges that the individual’s mammary implants caused
one or more of a wide range of ailments. These implant cases and
claims generally raise difficult and complex factual and legal
issues and are subject to many uncertainties and complexities,
including, but not limited to, the facts and circumstances of
each particular case or
F-37
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
claim, the jurisdiction in which each suit is brought, and
differences in applicable law. Porex does not have sufficient
information to evaluate each case and claim.
Certain of the actions against Porex have been dismissed, where
it was determined that the implant in question was not
distributed by Porex. In addition, as of March 1 2005,
approximately 300 actions have been settled by the
manufacturer, or by Porex’s insurance carriers, without
material cost to Porex. As of March 1, 2005, no
implant-related claims were pending against Porex. During
calendar years 2004 and 2003, there were no implant-related
claims made against Porex by individuals, as compared to two
claims during each of 2002, 2001 and 2000, 39 claims during
1999 and nine claims during 1998. The majority of claims made
during 1999 were claims that were filed by individuals following
a court ruling in 1999 that cases filed in earlier years would
not proceed as class actions, as a result of which such
individuals would not be members of a class in such cases.
In 1994, Porex was notified that its insurance carrier would not
renew its then-existing insurance coverage after
December 31, 1994 with respect to actions and claims
arising out of its distribution of implants. However, Porex
exercised its right, under such policy, to purchase extended
reporting period coverage with respect to such actions and
claims. Such coverage provides insurance subject to existing
policy limits, but for an unlimited time period with respect to
actions and claims made after December 31, 1994 based on
events that occurred during the policy period. In addition,
Porex has purchased extended reporting period coverage with
respect to other excess insurance. This coverage also extends
indefinitely, replacing coverage that would, by its terms, have
otherwise expired by December 31, 1997. Porex will continue
to evaluate the need to purchase further extended reporting
period coverage from excess insurers to the extent such coverage
is reasonably available.
The Company believes that Porex’s present coverage,
together with its insurance policies in effect on or before
December 31, 1994, should provide adequate coverage against
liabilities that could result from actions or claims arising out
of Porex’s distribution of silicone mammary implants.
However, the Company cannot be certain that particular cases and
claims will not result in liability that is greater than
expected based on Porex’s prior experience. If so,
Porex’s liability could exceed the amount of its insurance
coverage. Furthermore, certain actions and claims may seek
punitive and compensatory damages arising out of alleged
intentional torts. If these claims are successful, such damages
may or may not be covered, in whole or in part, by Porex’s
insurance policies.
In the normal course of business, the Company is involved in
various other claims and legal proceedings. While the ultimate
resolution of these matters, and those discussed above, has yet
to be determined, the Company does not believe that their
outcome will have a material adverse effect on the
Company’s consolidated financial position, results of
operations or liquidity.
Leases
The Company leases its offices and other facilities under
operating lease agreements that expire at various dates through
2015. Total rent expense for all operating leases was
approximately $20,415, $19,486
F-38
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
and $18,700 in 2004, 2003 and 2002, respectively. Future minimum
lease commitments under non-cancelable lease agreements at
December 31, 2004 were as follows:
| |
|
|
|
|
|
| Year Ending December 31, |
|
|
|
2005
|
|
$ |
24,252 |
|
|
2006
|
|
|
22,205 |
|
|
2007
|
|
|
19,916 |
|
|
2008
|
|
|
18,092 |
|
|
2009
|
|
|
9,520 |
|
|
Thereafter
|
|
|
26,002 |
|
| |
|
|
|
| |
Total minimum lease payments
|
|
$ |
119,987 |
|
| |
|
|
|
The Company maintains various defined contribution retirement
plans covering substantially all of its employees. Certain of
these plans provide for Company matching and discretionary
contributions. The Company has recorded expenses related to
these plans of $1,621, $1,531 and $3,485 for 2004, 2003 and
2002, respectively.
Common Stock
On March 29, 2001, the Company announced a stock repurchase
program (the “Program”). Under the Program, the
Company was originally authorized to 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. The maximum
aggregate amount of purchases under the Program was subsequently
increased to $100,000, $150,000 and $200,000 on November 2,
2001, November 7, 2002 and August 19, 2004,
respectively. As of December 31, 2004, the Company had
repurchased 26,585,986 shares at a cost of approximately
$138,468 under the Program, of which 4,272,630 shares were
repurchased during 2004 for an aggregate purchase price of
$32,110, 2,322,196 shares were repurchased during 2003 for
an aggregate purchase price of $20,316 and 4,062,734 shares
were repurchased during 2002 for an aggregate purchase price of
$20,219. Repurchased shares are recorded under the cost method
and are reflected as treasury stock in the accompanying
consolidated balance sheets. As of December 31, 2004, the
Company had $61,532 available to repurchase shares of its common
stock under the Program.
In addition, during 2002, the Company repurchased
14,100,000 shares of its common stock from Cerner
Corporation at a purchase price of $6.01 per share, or an
aggregate purchase price of $84,741. The repurchase of the
shares from Cerner Corporation was separately approved by the
Executive Committee of the Company’s Board of Directors
and, accordingly, was not part of the Stock Repurchase Program.
Preferred Stock
In September 2000, the Board of Directors authorized
200 shares of Series B Convertible Redeemable
Preferred Stock (“Series B Preferred”). In
connection with the acquisition of CareInsite, the Company
issued 100 shares of Series B Preferred in exchange
for all the outstanding shares of CareInsite’s preferred
stock. In March 2002, the Company redeemed the outstanding
Series B Preferred for $10,000 in accordance with its terms.
In November 2003, the Board of Directors eliminated the
designation of the Series B Preferred and restored all the
shares to the status of authorized and unissued shares of
preferred stock.
F-39
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
On September 23, 2004, two related proposals were approved
at the Company’s annual meeting of stockholders. The first
proposal reduced the number of authorized shares of the
Company’s Convertible Redeemable Exchangeable Preferred
Stock from 5,000,000 to 10,000 (the amount issued and
outstanding). The other proposal authorized the Company’s
Board of Directors to approve the issuance of up to
4,990,000 shares of preferred stock from time to time in
one or more series, to establish from time to time the number of
shares to be included in any such series, and to fix the
designation, powers, preferences and rights of the shares of
each such series and the qualifications, limitations and
restrictions thereof. No shares have been issued pursuant to
that authority and the 10,000 shares of Convertible
Redeemable Exchangeable Preferred Stock are the only shares of
preferred stock of the Company that are issued and outstanding.
Warrants
The Company has warrants outstanding to
purchase 7,575,903 shares of common stock at prices
ranging from $0.67 to $38.13 per share, with a weighted
average exercise price of $10.48 per share as of
December 31, 2004. Substantially all of the outstanding
warrants are vested and exercisable, except for a warrant to
purchase 666,668 shares of the Company’s common
stock at an exercise price of $1.00 per share which was
vested but did not become exercisable until January 25,
2005. The warrants expire at various dates through
January 1, 2010.
During 2004, 2003 and 2002, warrants to purchase a total of
2,302,706 shares, 1,729,713 shares and
1,090,121 shares, respectively, of the Company’s
common stock at a weighted average exercise price of
$5.14 per share, $5.33 per share and $3.04 per
share, respectively, were exercised. Also during 2004, 2003 and
2002, warrants to purchase a total of 15,691,782 shares,
241,018 shares and 9,274,216 shares, respectively, of
the Company’s common stock at a weighted average price of
$27.35 per share, $11.43 per share and $36.91 per
share, respectively, were cancelled.
|
|
| 14. |
Stock Compensation Plans |
The Company has various stock compensation plans (collectively,
the “Plans”) for directors, officers and key employees
that provide for non-qualified and incentive stock options and
restricted stock grants. An aggregate of 9,153,460 shares
of common stock remain available for grant under the Plans at
December 31, 2004.
In addition to the Plans, the Company has granted options to
certain directors, officers and key employees. At
December 31, 2004, there were options to
purchase 6,030,500 shares of common stock outstanding
to these individuals. The terms of these grants are similar to
the terms of the options granted under the Plans.
Stock Options
Generally, options under the Plans vest and become exercisable
ratably over a three to five year period based on their
individual grant dates. The majority of options granted under
the Plans expire within ten years from the date of grant.
Options are generally granted at prices not less than the fair
market value of common stock on the date of grant.
The Company records deferred stock compensation related to stock
options as a component of stockholders’ equity when the
exercise price is lower than the deemed fair value of common
stock on the date stock options are granted. No deferred stock
compensation related to stock options was recorded in 2004, 2003
or 2002. Deferred stock compensation was recorded in 2000 as a
result of the unvested portion of options assumed in connection
with certain 2000 acquisitions and options granted during 2000
with exercise prices less than fair market value of the common
stock on the date of grant. At December 31,
F-40
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
2004, deferred compensation related to stock options was $132,
and will be amortized on a graded vesting method over the period
from January 2005 through September 2005.
The Company recorded stock compensation expense for stock
options, primarily related to deferred stock compensation
recorded in 2000, of $3,821, $11,319 and $25,048 in 2004, 2003
and 2002, respectively.
A summary of the status of the Company’s stock option plans
for the three year period ended December 31, 2004 is
presented below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
Weighted | |
|
|
|
Weighted | |
|
|
|
Weighted | |
| |
|
|
|
Average | |
|
|
|
Average | |
|
|
|
Average | |
| |
|
Number of | |
|
Exercise Price | |
|
Number of | |
|
Exercise Price | |
|
Number of | |
|
Exercise Price | |
| |
|
Shares | |
|
Per Share | |
|
Shares | |
|
Per Share | |
|
Shares | |
|
Per Share | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Outstanding at the beginning of the year
|
|
|
104,760,726 |
|
|
$ |
12.86 |
|
|
|
108,232,050 |
|
|
$ |
12.73 |
|
|
|
121,184,501 |
|
|
$ |
12.99 |
|
| |
Granted
|
|
|
19,230,750 |
|
|
|
8.31 |
|
|
|
12,326,350 |
|
|
|
9.88 |
|
|
|
4,946,459 |
|
|
|
6.58 |
|
| |
Exercised
|
|
|
(7,796,440 |
) |
|
|
4.42 |
|
|
|
(8,773,510 |
) |
|
|
4.73 |
|
|
|
(5,316,668 |
) |
|
|
3.26 |
|
| |
Cancelled
|
|
|
(9,937,784 |
) |
|
|
15.18 |
|
|
|
(7,024,164 |
) |
|
|
15.82 |
|
|
|
(12,582,242 |
) |
|
|
16.49 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the end of the year
|
|
|
106,257,252 |
|
|
|
12.44 |
|
|
|
104,760,726 |
|
|
|
12.86 |
|
|
|
108,232,050 |
|
|
|
12.73 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at the end of the year
|
|
|
77,325,908 |
|
|
$ |
13.72 |
|
|
|
73,927,473 |
|
|
$ |
14.03 |
|
|
|
70,764,983 |
|
|
$ |
13.86 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information with respect to
options outstanding and options exercisable at December 31,
2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Outstanding | |
|
Exercisable | |
| |
|
| |
|
| |
| |
|
|
|
Weighted | |
|
|
| |
|
|
|
Weighted | |
|
Average | |
|
|
|
Weighted | |
| |
|
|
|
Average | |
|
Remaining | |
|
|
|
Average | |
| |
|
|
|
Exercise | |
|
Contractual | |
|
|
|
Exercise | |
| Exercise Prices |
|
Shares | |
|
Price | |
|
Life (In Years) | |
|
Shares | |
|
Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
$0.25-$5.34
|
|
|
11,912,774 |
|
|
$ |
3.57 |
|
|
|
6.24 |
|
|
|
11,203,642 |
|
|
$ |
3.53 |
|
|
$5.40-$7.27
|
|
|
13,244,058 |
|
|
|
6.37 |
|
|
|
6.61 |
|
|
|
7,908,445 |
|
|
|
6.05 |
|
|
$7.28-$8.59
|
|
|
12,819,819 |
|
|
|
8.44 |
|
|
|
8.95 |
|
|
|
1,306,234 |
|
|
|
8.11 |
|
|
$8.60-$11.44
|
|
|
11,091,681 |
|
|
|
9.24 |
|
|
|
8.34 |
|
|
|
3,203,901 |
|
|
|
9.63 |
|
|
$11.55-$11.69
|
|
|
11,879,927 |
|
|
|
11.55 |
|
|
|
5.42 |
|
|
|
11,877,677 |
|
|
|
11.55 |
|
|
$11.73-$13.38
|
|
|
11,373,783 |
|
|
|
12.45 |
|
|
|
6.16 |
|
|
|
8,713,346 |
|
|
|
12.65 |
|
|
$13.50-$15.88
|
|
|
10,281,637 |
|
|
|
14.10 |
|
|
|
5.08 |
|
|
|
10,169,637 |
|
|
|
14.09 |
|
|
$16.06-$21.69
|
|
|
13,287,044 |
|
|
|
17.80 |
|
|
|
5.50 |
|
|
|
12,936,044 |
|
|
|
17.75 |
|
|
$22.12-$105.00
|
|
|
10,366,529 |
|
|
|
31.28 |
|
|
|
4.78 |
|
|
|
10,006,982 |
|
|
|
31.18 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
106,257,252 |
|
|
$ |
12.44 |
|
|
|
6.39 |
|
|
|
77,325,908 |
|
|
$ |
13.72 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The pro forma information presented in Note 1 has been
determined as if employee stock options granted subsequent to
December 31, 1994 were accounted for under the fair value
method of
F-41
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
SFAS No. 123. The fair value for these options was
estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Expected dividend yield
|
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
Expected volatility
|
|
|
0.58 |
|
|
|
0.85 |
|
|
|
0.9 |
|
|
Risk free interest rate
|
|
|
1.70 |
% |
|
|
1.33 |
% |
|
|
1.85 |
% |
|
Expected post-vesting option lives (years)
|
|
|
0.75-3.0 |
|
|
|
0.75-3.0 |
|
|
|
0.75-3.0 |
|
|
Weighted fair value of options granted during the year
|
|
$ |
3.68 |
|
|
$ |
5.64 |
|
|
$ |
4.06 |
|
Restricted Stock Awards
Restricted stock consists of shares of common stock which have
been awarded to employees. The grants are restricted such that
they are subject to substantial risk of forfeiture and to
restrictions on their sale or other transfer by the employee
until they vest. Generally, restricted stock awards vest ratably
over a three to five year period based on their individual award
dates.
The Company records deferred stock compensation related to
restricted stock awards as a component of stockholders’
equity based on the fair market value of common stock on the
date of the award. Deferred stock compensation related to
restricted stock awards of $13,001, $25 and $2,500 was recorded
in 2004, 2003 and 2002, respectively.
The Company recorded stock compensation expense related to
restricted stock awards of $5,154, $1,130 and $217 in 2004, 2003
and 2002, respectively, based on the graded vesting method over
the respective vesting periods of the awards.
During 2004, the Company granted 1,584,800 restricted stock
awards with a weighted average fair value of $8.20 per
share. During 2002, the Company granted 400,159 restricted stock
awards with a weighted average fair value of $6.31 per
share. There were no restricted stock awards during 2003.
Approximately 71,000 and 96,000 restricted stock awards vested
during 2004 and 2003, respectively. Approximately 92,000, 87,000
and 2,000 restricted stock awards were cancelled during 2004,
2003 and 2002, respectively. There were 1,637,609 restricted
stock awards that were unvested as of December 31, 2004.
Employee Stock Purchase Plan
The Company’s 1998 Employee Stock Purchase Plan, as amended
from time to time (the “1998 Purchase Plan”), became
effective upon the completion of the initial public offering on
February 10, 1999. The 1998 Purchase Plan allows eligible
employees the opportunity to purchase shares of the
Company’s common stock through payroll deductions, up to
15% of a participant’s annual compensation with a maximum
of 5,000 shares available per participant during each
purchase period. Prior to an amendment to the 1998 Purchase Plan
on November 1, 2002, the purchase price of the stock was
85% of the lesser of the fair market value on the first and last
day of each purchase period. Effective with the November 1,
2002 amendment, the purchase price of the stock is 85% of the
fair market value on the last day of each purchase period. A
total of 5,102,219 shares of common stock remain reserved
for issuance under the 1998 Purchase Plan. The 1998 Purchase
Plan, as amended in connection with the 2000 mergers, provides
for annual increases equal to the lesser of
1,500,000 shares, 0.5% of the outstanding common shares, or
a lesser amount determined by the Board of Directors. A total of
393,228, 345,575 and 640,172 shares were issued under this
plan during 2004, 2003 and 2002, respectively.
F-42
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Company’s deferred tax assets (liabilities) were as
follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
| |
Net operating loss carryforwards
|
|
$ |
770,471 |
|
|
$ |
729,963 |
|
| |
Capital loss carryforwards
|
|
|
4,623 |
|
|
|
1,967 |
|
| |
Restructuring costs
|
|
|
541 |
|
|
|
9,943 |
|
| |
Research and development tax credits
|
|
|
17,591 |
|
|
|
15,274 |
|
| |
Other accrued expenses
|
|
|
53,478 |
|
|
|
33,589 |
|
| |
Allowance for doubtful accounts
|
|
|
5,067 |
|
|
|
7,692 |
|
| |
Depreciation
|
|
|
4,674 |
|
|
|
4,846 |
|
| |
Intangible assets
|
|
|
64,608 |
|
|
|
131,979 |
|
| |
Prepaid assets
|
|
|
7,043 |
|
|
|
— |
|
| |
Other
|
|
|
4,465 |
|
|
|
515 |
|
| |
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
932,561 |
|
|
|
935,768 |
|
|
Valuation allowance
|
|
|
(915,452 |
) |
|
|
(926,767 |
) |
| |
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
17,109 |
|
|
|
9,001 |
|
| |
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
| |
Tax basis
|
|
|
(2,541 |
) |
|
|
(2,582 |
) |
| |
Convertible subordinated notes
|
|
|
(12,212 |
) |
|
|
— |
|
| |
Other
|
|
|
(2,356 |
) |
|
|
(6,419 |
) |
| |
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(17,109 |
) |
|
|
(9,001 |
) |
| |
|
|
|
|
|
|
|
Net deferred tax assets and liabilities
|
|
$ |
— |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
The reconciliation between the federal statutory rate and the
effective income tax rate is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
United States federal statutory rate
|
|
|
34.0 |
% |
|
|
34.0 |
% |
|
|
(34.0 |
)% |
|
State income taxes (net of federal benefit)
|
|
|
4.0 |
|
|
|
3.3 |
|
|
|
(3.6 |
) |
|
Restructuring costs
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
(3.1 |
) |
|
Goodwill amortization
|
|
|
(9.1 |
) |
|
|
(12.3 |
) |
|
|
5.6 |
|
|
Valuation allowance
|
|
|
(15.4 |
) |
|
|
(2.0 |
) |
|
|
21.0 |
|
|
Other
|
|
|
(2.4 |
) |
|
|
(3.0 |
) |
|
|
(1.9 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
11.1 |
% |
|
|
20.0 |
% |
|
|
(16.0 |
)% |
| |
|
|
|
|
|
|
|
|
|
A valuation allowance equal to 100% of the net deferred tax
assets has been established because of the uncertainty of
realization of the deferred tax assets due to the lack of
earnings history. The valuation allowance for deferred tax
assets decreased by $11,315 and $14,740 in 2004 and 2003,
respectively.
F-43
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
At December 31, 2004, the Company had net operating loss
carryforwards for federal income tax purposes of approximately
$2.0 billion, which expire in 2005 through 2024, capital
loss carryforwards of approximately $12,167, which expire in
2008, and federal tax credits of approximately $17,591, which
expire in 2006 through 2024.
Approximately $378,418 and $172,661 of these net operating loss
carryforwards were recorded through additional paid in capital
and goodwill, respectively. Therefore, if in the future the
Company believes that it is more likely than not that these tax
benefits will be realized, this portion of the valuation
allowance will be reversed against additional paid in capital
and goodwill, respectively.
A portion of net operating loss carryforwards and tax credit
carryforwards may be subject to an annual limitation regarding
their utilization against taxable income in future periods due
to the “change of ownership” provisions of the
Internal Revenue Code and similar state provisions. A portion of
these carryforwards may expire before becoming available to
reduce future income tax liabilities.
The income tax provision (benefit) for 2002 included a $12,887
benefit reflecting the carryback of net operating losses to the
prior periods of certain acquired subsidiaries, in which those
subsidiaries generated taxable income. The carryback was allowed
as a result of the “Job Creation and Worker Assistance Act
of 2002” that was enacted on March 9, 2002. In
addition, some of the Company’s operating companies are
profitable in certain states and foreign countries in which the
Company does not have net operating losses to offset that
income. Accordingly, the Company provided for taxes of $4,910,
$4,140, and $2,808 related to foreign, state and other
jurisdictions during 2004, 2003, and 2002, respectively.
The income tax provision (benefit) for 2004, 2003 and 2002
includes $2,037, $2,228 and $1,756, respectively, related to
non-U.S. income taxes. The non-U.S. income included in
income (loss) from continuing operations before income tax
provision (benefit) was $4,270, $5,879 and $4,310 for 2004, 2003
and 2002, respectively. At December 31, 2004 and 2003,
cumulative undistributed earnings of the Company’s foreign
subsidiaries were $23,248 and $20,220, respectively. No U.S.
income taxes have been provided for since the Company considers
the undistributed earnings to be permanently reinvested for
continued use in the Company’s foreign subsidiaries’
operations.
|
|
| 16. |
Fair Value of Financial Instruments |
The following disclosure of the estimated fair value of
financial instruments is made in accordance with the
requirements of SFAS No. 107, “Disclosures about
Fair Value of Financial Instruments.” The estimated fair
values have been determined using available market information.
However, considerable judgment is required in interpreting
market data to develop estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the
amounts that the Company could realize in a current market
exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the
estimated fair value amounts.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2004 | |
|
December 31, 2003 | |
| |
|
| |
|
| |
| |
|
Cost Basis | |
|
Fair Value | |
|
Cost Basis | |
|
Fair Value | |
| |
|
| |
|
| |
|
| |
|
| |
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
46,019 |
|
|
$ |
46,019 |
|
|
$ |
39,648 |
|
|
$ |
39,648 |
|
| |
Short-term investments
|
|
|
62,077 |
|
|
|
61,675 |
|
|
|
229,612 |
|
|
|
231,033 |
|
| |
Marketable securities — long term
|
|
|
516,188 |
|
|
|
515,881 |
|
|
|
447,583 |
|
|
|
456,034 |
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Convertible subordinated notes
|
|
$ |
649,999 |
|
|
$ |
615,124 |
|
|
$ |
649,999 |
|
|
$ |
657,812 |
|
| |
Convertible exchangeable redeemable preferred stock
|
|
|
98,299 |
|
|
|
94,750 |
|
|
|
— |
|
|
|
— |
|
F-44
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
As of December 31, 2004 and 2003, the Company’s
short-term investments and marketable debt securities consisted
of certificates of deposit, auction rate securities, municipal
bonds, asset backed securities, Federal Agency Notes and
U.S. Treasury Notes and marketable equity securities
consisted of equity investments in publicly traded companies.
All marketable securities are classified as available-for-sale.
In accordance with the requirements of SFAS No. 115,
“Accounting for Certain Investments in Debt and Equity
Securities,” below is a summary of the fair value, gains
and losses relating to the Company’s investments in debt
and equity securities:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2004 | |
|
December 31, 2003 | |
| |
|
| |
|
| |
| |
|
Cost or | |
|
Gross | |
|
Gross | |
|
|
|
Cost or | |
|
Gross | |
|
Gross | |
|
|
| |
|
Amortized | |
|
Unrealized | |
|
Unrealized | |
|
Fair | |
|
Amortized | |
|
Unrealized | |
|
Unrealized | |
|
Fair | |
| |
|
Cost | |
|
Gains | |
|
Losses | |
|
Value | |
|
Cost | |
|
Gains | |
|
Losses | |
|
Value | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Short-Term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Certificate of deposits and marketable debt
securities
|
|
$ |
62,077 |
|
|
$ |
— |
|
|
$ |
402 |
|
|
$ |
61,675 |
|
|
$ |
229,612 |
|
|
$ |
1,421 |
|
|
$ |
— |
|
|
$ |
231,033 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Marketable debt
securities
|
|
$ |
514,696 |
|
|
$ |
1,633 |
|
|
$ |
4,465 |
|
|
$ |
511,864 |
|
|
$ |
445,810 |
|
|
$ |
6,043 |
|
|
$ |
563 |
|
|
$ |
451,290 |
|
| |
Equity securities
|
|
|
1,492 |
|
|
|
2,527 |
|
|
|
2 |
|
|
|
4,017 |
|
|
|
1,773 |
|
|
|
2,971 |
|
|
|
— |
|
|
|
4,744 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total
|
|
$ |
516,188 |
|
|
$ |
4,160 |
|
|
$ |
4,467 |
|
|
$ |
515,881 |
|
|
$ |
447,583 |
|
|
$ |
9,014 |
|
|
$ |
563 |
|
|
$ |
456,034 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the gross unrealized losses and fair
value of the Company’s investments with unrealized losses
that are deemed to be temporarily impaired, aggregated by
investment category and length of time that individual
securities have been in a continuous unrealized loss position as
of December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
In Loss Position | |
|
In Loss Position | |
|
|
|
|
| |
|
Less Than | |
|
More Than | |
|
|
| |
|
12 Months | |
|
12 Months | |
|
Total | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
Gross | |
|
|
|
Gross | |
|
|
|
Gross | |
| |
|
Fair | |
|
Unrealized | |
|
Fair | |
|
Unrealized | |
|
Fair | |
|
Unrealized | |
| |
|
Value | |
|
Losses | |
|
Value | |
|
Losses | |
|
Value | |
|
Losses | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Short-Term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Certificate of deposits and marketable debt securities
|
|
$ |
54,598 |
|
|
$ |
402 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
54,598 |
|
|
$ |
402 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Marketable debt securities
|
|
$ |
297,050 |
|
|
$ |
2,505 |
|
|
$ |
126,040 |
|
|
$ |
1,960 |
|
|
$ |
423,090 |
|
|
$ |
4,465 |
|
| |
Equity securities
|
|
|
6 |
|
|
|
2 |
|
|
|
— |
|
|
|
— |
|
|
|
6 |
|
|
|
2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total
|
|
$ |
297,056 |
|
|
$ |
2,507 |
|
|
$ |
126,040 |
|
|
$ |
1,960 |
|
|
$ |
423,096 |
|
|
$ |
4,467 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gross unrealized losses related to short-term and long-term
marketable debt securities are primarily due to a decrease in
the fair value of debt securities as a result of an increase in
interest rates during fiscal 2004. The Company has
determined that the gross unrealized losses on its short-term
and long-term marketable debt and equity securities at
December 31, 2004 are temporary in nature. The Company
reviews its investment portfolio to identify and evaluate
investments that have indications of possible impairment.
Factors considered in determining whether a loss is temporary
include the length of time and extent to which fair value has
been less than the cost basis, the financial condition and
near-term
F-45
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
prospects of the investee, credit quality and the Company’s
ability to hold the investment for a period of time sufficient
to allow for any anticipated recovery in market value.
The amortized cost and estimated fair value by maturity of
securities are shown in the following table. Securities are
classified according to their contractual maturities without
consideration of principal amortization, potential prepayments
or call options. Accordingly, actual maturities may differ from
contractual maturities. During the quarter ended
December 31, 2003, the Company reviewed the classification
of its held-to-maturity and available-for-sale securities. The
Company considered its acquisition activity in 2003, and
its plan to continue to invest in acquisitions, strategic
relationships, infrastructure and product development in the
future. As a result of its review, the Company determined it no
longer had the positive intent to hold certain of its securities
to maturity, and accordingly, all remaining held-to-maturity
securities were reclassified to available-for-sale.
| |
|
|
|
|
|
|
|
|
|
|
| |
|
Cost or | |
|
|
| |
|
Amortized Cost | |
|
Fair Value | |
| |
|
| |
|
| |
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
| |
Due in one year or less
|
|
$ |
62,077 |
|
|
$ |
61,675 |
|
| |
Due after one year through five years
|
|
|
514,696 |
|
|
|
511,864 |
|
| |
|
|
|
|
|
|
| |
|
Total
|
|
$ |
576,773 |
|
|
$ |
573,539 |
|
| |
|
|
|
|
|
|
During 2004, the Company sold its investments in
available-for-sale marketable debt securities for proceeds of
$1,252,851. The Company realized a gain of $198 and
realized a loss of $84 in connection with these sales.
Additionally, the Company sold a portion of its investments in
marketable equity securities for proceeds of $640, which
resulted in a gain of $343. The proceeds from these sales
have been included in “proceeds from maturities and sales
of available-for-sale securities” in the accompanying
consolidated statements of cash flows and the gains and losses
have been included in “gain on investments” in the
accompanying consolidated statements of operations.
During 2003, three of the Company’s investments in
held-to-maturity debt securities were called for early
redemption by the issuer for net proceeds of $155,000. As a
result of the redemption, the Company realized a gain
of $285 reflecting the difference between the proceeds
received and the related carrying amount of the investment. In
addition, the Company sold its investments in available-for-sale
marketable debt securities for proceeds of $1,075,510. A
portion of these proceeds were used to finance the Medifax
acquisition on December 22, 2003. The Company realized a
loss of $1,599 in connection with the sales. Additionally,
during 2003, the Company sold a portion of its investments in
marketable equity securities for proceeds of $4,387, which
resulted in a gain of $2,973. The proceeds from these sales
have been included in “proceeds from maturities and sales
of available-for-sale securities” and “proceeds from
maturities and redemptions of held-to-maturity securities”
in the accompanying consolidated statements of cash flows and
the gain and losses have been included in “gain on
investments” in the accompanying consolidated statements of
operations.
During 2002, one of the Company’s investments in Federal
Agency Notes was called for early redemption by the issuer for
net proceeds of $56,000. As a result of the redemption, the
Company realized a gain of $681 reflecting the difference
between the proceeds received and the related carrying amount of
the investment. The proceeds from this redemption have been
included in “proceeds from maturities and redemptions of
held-to-maturity securities” in the accompanying
consolidated statements of cash flows and the gain has been
included in “gain on investments” in the accompanying
consolidated statements of operations. Additionally, during
2002, the Company sold one of its investments in marketable
equity securities for proceeds of $7,026, which resulted in
a gain of $5,866. The proceeds from this sale have been
included in “proceeds from maturities and sales of
available-for-sale securities” in the accompanying
F-46
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
consolidated statements of cash flows and the gain has been
included in “gain on investments” in the accompanying
consolidated statements of operations.
|
|
| 17. |
Related Party Transactions |
In 2004, the Company’s WebMD Health segment entered into an
agreement with Fidelity Employer Services Company
LLC (“FESCo”) to integrate WebMD Health’s
employer product into the services FESCo provides to its
clients. FESCo provides human resources administration and
benefit administration services to employers. The Company
recorded $817 in revenue in 2004 related to the FESCo
agreement. FESCO is an affiliate of FMR Corp, which
reported beneficial ownership of approximately 10.8% of the
Company’s common stock at December 31, 2004.
The Company leases property in Alachua, Florida for its WebMD
Practice Services segment that is owned by a former executive
officer of the Company. The term of the lease is through
March 31, 2009. The Company is responsible for all real
estate taxes, insurance and maintenance related to this
property. During 2004, 2003 and 2002, the Company paid rent
under this lease of approximately $1,203, $1,087 and $967,
respectively.
|
|
| 18. |
Comprehensive Income (Loss) |
Comprehensive income (loss) is comprised of net income (loss)
and other comprehensive income (loss). Other comprehensive
income (loss) includes certain changes in equity that are
excluded from net income (loss), such as changes in unrealized
holding gains (losses) on available-for-sale marketable
securities and foreign currency translation adjustments. The
following table presents the components of other comprehensive
income (loss) for the years ended December 31, 2004, 2003
and 2002:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Foreign currency translation gains
|
|
$ |
2,118 |
|
|
$ |
3,285 |
|
|
$ |
2,523 |
|
|
Unrealized gains (losses) on securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Unrealized holding gains (losses)
|
|
|
(10,124 |
) |
|
|
3,078 |
|
|
|
2,907 |
|
| |
Less: reclassification adjustment for net gains realized in net
income (loss)
|
|
|
(457 |
) |
|
|
(1,659 |
) |
|
|
(6,547 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net unrealized (losses) gains on securities
|
|
|
(10,581 |
) |
|
|
1,419 |
|
|
|
(3,640 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income
|
|
|
(8,463 |
) |
|
|
4,704 |
|
|
|
(1,117 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
39,334 |
|
|
|
(17,006 |
) |
|
|
(49,702 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$ |
30,871 |
|
|
$ |
(12,302 |
) |
|
$ |
(50,819 |
) |
| |
|
|
|
|
|
|
|
|
|
The foreign currency translation gains are not currently
adjusted for income taxes as they relate to permanent
investments in non-U.S. subsidiaries.
Accumulated other comprehensive income includes:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Unrealized (losses) gains on securities
|
|
$ |
(709 |
) |
|
$ |
9,872 |
|
|
$ |
8,453 |
|
|
Foreign currency translation gains
|
|
|
8,666 |
|
|
|
6,548 |
|
|
|
3,263 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income
|
|
$ |
7,957 |
|
|
$ |
16,420 |
|
|
$ |
11,716 |
|
| |
|
|
|
|
|
|
|
|
|
F-47
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
|
|
| 19. |
Supplemental Disclosures of Cash Flow Information |
Supplemental information related to the consolidated statements
of cash flows is summarized below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$ |
16,190 |
|
|
$ |
12,714 |
|
|
$ |
5,021 |
|
| |
|
|
|
|
|
|
|
|
|
|
Taxes paid
|
|
$ |
5,635 |
|
|
$ |
7,215 |
|
|
$ |
1,090 |
|
| |
|
|
|
|
|
|
|
|
|
|
Supplemental Schedule of Non-Cash Investing and Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of convertible redeemable exchangeable preferred stock
|
|
$ |
184 |
|
|
$ |
— |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Issuance of equity securities in connection with strategic
alliances and services
|
|
$ |
15 |
|
|
$ |
67 |
|
|
$ |
39 |
|
| |
|
|
|
|
|
|
|
|
|
|
Deferred stock compensation related to restricted stock awards
|
|
$ |
13,001 |
|
|
$ |
25 |
|
|
$ |
2,500 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| 20. |
Quarterly Financial Data (Unaudited) |
The following table summarizes the quarterly financial data for
2004 and 2003. The per share calculations for each of the
quarters are based on the weighted average number of shares for
each period; therefore, the sum of the quarters may not
necessarily be equal to the full year per share amount.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
| |
|
| |
| |
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
| |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Quarter | |
| |
|
| |
|
| |
|
| |
|
| |
|
Revenue
|
|
$ |
271,214 |
|
|
$ |
281,881 |
|
|
$ |
299,615 |
|
|
$ |
307,641 |
|
| |
Cost of operations
|
|
|
162,642 |
|
|
|
163,961 |
|
|
|
168,571 |
|
|
|
171,257 |
|
| |
Development and engineering
|
|
|
11,096 |
|
|
|
12,991 |
|
|
|
14,392 |
|
|
|
15,682 |
|
| |
Sales, marketing, general and administrative
|
|
|
76,994 |
|
|
|
83,298 |
|
|
|
84,762 |
|
|
|
78,973 |
|
| |
Depreciation, amortization and other
|
|
|
12,585 |
|
|
|
13,148 |
|
|
|
15,189 |
|
|
|
16,843 |
|
| |
Legal expense
|
|
|
2,037 |
|
|
|
2,215 |
|
|
|
2,325 |
|
|
|
2,653 |
|
| |
Interest income (expense), net
|
|
|
735 |
|
|
|
(327 |
) |
|
|
(331 |
) |
|
|
(613 |
) |
| |
Restructuring and other income (expense), net
|
|
|
37 |
|
|
|
447 |
|
|
|
(4,441 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income tax provision
|
|
|
6,632 |
|
|
|
6,388 |
|
|
|
9,604 |
|
|
|
21,620 |
|
| |
Income tax provision
|
|
|
931 |
|
|
|
613 |
|
|
|
1,435 |
|
|
|
1,931 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
5,701 |
|
|
$ |
5,775 |
|
|
$ |
8,169 |
|
|
$ |
19,689 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per common share
|
|
$ |
0.02 |
|
|
$ |
0.02 |
|
|
$ |
0.03 |
|
|
$ |
0.06 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per common share
|
|
$ |
0.02 |
|
|
$ |
0.02 |
|
|
$ |
0.02 |
|
|
$ |
0.06 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
F-48
WebMD Corporation
Notes to Consolidated Financial
Statements — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2003 | |
| |
|
| |
| |
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
| |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Quarter | |
| |
|
| |
|
| |
|
| |
|
| |
|
Revenue
|
|
$ |
221,531 |
|
|
$ |
233,418 |
|
|
$ |
250,635 |
|
|
$ |
258,396 |
|
| |
|
Cost of operations
|
|
|
125,845 |
|
|
|
135,441 |
|
|
|
149,270 |
|
|
|
154,383 |
|
| |
|
Development and engineering
|
|
|
10,917 |
|
|
|
10,403 |
|
|
|
11,334 |
|
|
|
10,331 |
|
| |
|
Sales, marketing, general and administrative
|
|
|
68,108 |
|
|
|
69,359 |
|
|
|
72,450 |
|
|
|
72,565 |
|
| |
|
Depreciation, amortization and other
|
|
|
26,920 |
|
|
|
14,944 |
|
|
|
11,097 |
|
|
|
9,473 |
|
| |
|
Legal expense
|
|
|
— |
|
|
|
— |
|
|
|
493 |
|
|
|
3,466 |
|
| |
|
Interest income, net
|
|
|
2,233 |
|
|
|
2,059 |
|
|
|
1,698 |
|
|
|
1,697 |
|
| |
|
Other income, net
|
|
|
183 |
|
|
|
1,118 |
|
|
|
3,039 |
|
|
|
1,537 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income tax
provision
|
|
|
(7,843 |
) |
|
|
6,448 |
|
|
|
10,728 |
|
|
|
11,412 |
|
| |
Income tax provision
|
|
|
987 |
|
|
|
1,001 |
|
|
|
1,273 |
|
|
|
879 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income (loss) from continuing operations
|
|
|
(8,830 |
) |
|
|
5,447 |
|
|
|
9,455 |
|
|
|
10,533 |
|
| |
Income (loss) from discontinued operations, net of income taxes
|
|
|
1,472 |
|
|
|
(31,717 |
) |
|
|
(3,366 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(7,358 |
) |
|
$ |
(26,270 |
) |
|
$ |
6,089 |
|
|
$ |
10,533 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Income (loss) from continuing operations
|
|
$ |
(0.03 |
) |
|
$ |
0.02 |
|
|
$ |
0.03 |
|
|
$ |
0.03 |
|
| |
|
Income (loss) from discontinued operations, net of income taxes
|
|
|
0.01 |
|
|
|
(0.11 |
) |
|
|
(0.01 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(0.02 |
) |
|
$ |
(0.09 |
) |
|
$ |
0.02 |
|
|
$ |
0.03 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Income (loss) from continuing operations
|
|
$ |
(0.03 |
) |
|
$ |
0.02 |
|
|
$ |
0.03 |
|
|
$ |
0.03 |
|
| |
|
Income (loss) from discontinued operations, net of income taxes
|
|
|
0.01 |
|
|
|
(0.10 |
) |
|
|
(0.01 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(0.02 |
) |
|
$ |
(0.08 |
) |
|
$ |
0.02 |
|
|
$ |
0.03 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of HealthShare Technologies. On
March 14, 2005, the Company acquired HealthShare
Technologies. The purchase price paid at closing was $31,000 in
cash. In addition, the Company has agreed to pay up to an
additional $5,000 if certain financial milestones are achieved
for calendar year 2005. HealthShare provides health plans and
employers, and their members and employees, with online decision
support tools that evaluate both hospital care cost and quality
to enable users to make more informed decisions. HealthShare
also provides professional decision support tools used by health
plan executives to develop provider networks, identify centers
of excellence, and evaluate comparative hospital quality.
HealthShare tools are also used by hospitals to provide online
decision support to help enhance quality of care, manage costs
and profitability, and better understand market position. The
results of operations of HealthShare will be included in our
WebMD Health segment.
F-49
|
|
|
Schedule II. Valuation and Qualifying Accounts |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, 2004, 2003 and 2002 | |
| |
|
| |
| |
|
Balance at | |
|
Charged to | |
|
|
| |
|
Beginning | |
|
Costs and | |
|
|
|
Balance at | |
| |
|
of Year | |
|
Expenses | |
|
Acquired | |
|
Write-offs | |
|
Other(a) | |
|
End of Year | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Allowance for Doubtful Accounts
|
|
$ |
20,500 |
|
|
$ |
3,606 |
|
|
$ |
157 |
|
|
$ |
(10,830 |
) |
|
$ |
— |
|
|
$ |
13,433 |
|
| |
Valuation Allowance for Deferred Tax Assets
|
|
|
926,767 |
|
|
|
(7,991 |
) |
|
|
(18,145 |
) |
|
|
— |
|
|
|
14,821 |
|
|
|
915,452 |
|
|
December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Allowance for Doubtful Accounts
|
|
|
22,417 |
|
|
|
6,328 |
|
|
|
768 |
|
|
|
(9,013 |
) |
|
|
— |
|
|
|
20,500 |
|
| |
Valuation Allowance for Deferred Tax Assets
|
|
|
941,507 |
|
|
|
(1,423 |
) |
|
|
(33,277 |
) |
|
|
— |
|
|
|
19,960 |
|
|
|
926,767 |
|
|
December 31, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Allowance for Doubtful Accounts
|
|
|
26,972 |
|
|
|
11,305 |
|
|
|
34 |
|
|
|
(15,894 |
) |
|
|
— |
|
|
|
22,417 |
|
| |
Valuation Allowance for Deferred Tax Assets
|
|
|
939,764 |
|
|
|
10,471 |
|
|
|
(17,355 |
) |
|
|
— |
|
|
|
8,627 |
|
|
|
941,507 |
|
|
|
|
|
(a) |
|
Represents valuation allowance created through equity as a
result of stock option and warrant exercises. |
S-1
INDEX TO EXHIBITS
| |
|
|
|
|
| Exhibit No. | |
|
Description |
| | |
|
|
| |
2 |
.1 |
|
Stock Purchase Agreement dated as of June 15, 2003 between WebMD
Corporation and Joseph Q. DiMartini, individually and as Trustee
U/A dated February 6, 1998 f/b/o Joseph Q. DiMartini, and as
Trustee of the Joseph Q. DiMartini 2002 Irrevocable Trust dated
October 14, 2002, Eric J. Schaefer, an individual, Daniel A.
Schmitt, individually and as Trustee of the Daniel A. Schmitt
Revocable Trust dated March 26, 1999, and as Trustee of the
Daniel Schmitt 2002 Irrevocable Trust dated September 24, 2002,
and Dru A. Schmitt, individually and as Trustee U/A dated
October 20, 1997 f/b/o Dru A. Schmitt (incorporated by reference
to Exhibit 2.1 to Registrant’s Quarterly Report on Form
10-Q for the quarter ended June 30, 2003) |
| |
2 |
.2 |
|
Stock Purchase Agreement dated as of October 21, 2003 between
TPG Holding Company Limited and Envoy Corporation (incorporated
by reference to Exhibit 2.1 to Registrant’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2003) |
| |
2 |
.3 |
|
Amendment No. 1, dated as of November 28, 2003, to the Stock
Purchase Agreement dated as of October 21, 2003 between TPG
Holding Company Limited and Envoy Corporation (incorporated by
reference to Exhibit 2.1 to Registrant’s Current Report on
Form 8-K filed December 1, 2003) |
| |
2 |
.4 |
|
Amendment No. 2, dated as of December 22, 2003, to the Stock
Purchase Agreement dated as of October 21, 2003 between TPG
Holding Company Limited and Envoy Corporation (incorporated by
reference to Exhibit 2.1 to Registrant’s Current Report on
Form 8-K filed December 24, 2003) |
| |
2 |
.5 |
|
Agreement and Plan of Merger, dated as of July 9, 2004, by and
among VIPS, Inc., WebMD Corporation, Envoy Corporation and
Valor, Inc. (incorporated by reference to Exhibit 2.1 to
Registrant’s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2004) |
| |
3 |
.1 |
|
Eleventh Amended and Restated Certificate of Incorporation of
Registrant, as amended (incorporated by reference to Exhibit 3.1
to Registrant’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2004) |
| |
3 |
.2 |
|
Certificate of Designations for Convertible Redeemable
Exchangeable Preferred Stock, as amended (incorporated by
reference to Exhibit 3.2 to Registrant’s Quarterly Report
on Form 10-Q for the quarter ended September 30, 2004) |
| |
3 |
.3 |
|
Amended and Restated Bylaws of Registrant, as currently in
effect (incorporated by reference to Exhibit 3.2 to
Registrant’s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2004) |
| |
4 |
.1 |
|
Specimen Common Stock certificate (incorporated by reference to
Exhibit 4.1 to Registrant’s Annual Report on Form 10-K for
the year ended December 31, 2000) |
| |
4 |
.2 |
|
Indenture between WebMD Corporation and The Bank of New York,
dated as of April 1, 2002 (incorporated by reference to Exhibit
4.1 to the Registrant’s Quarterly Report on Form 10-Q for
the quarter ended March 31, 2002) |
| |
4 |
.3 |
|
Registration Rights Agreement dated as of April 1, 2002 between
WebMD Corporation and UBS Warburg LLC (incorporated by reference
to Exhibit 4.2 to the Registrant’s Quarterly Report on Form
10-Q for the quarter ended March 31, 2002) |
| |
4 |
.4 |
|
Form of
31/4%
Convertible Subordinated Note Due 2007 (included in Exhibit 4.2) |
| |
4 |
.5 |
|
Indenture, dated as of June 25, 2003, between WebMD Corporation
and The Bank of New York (incorporated by reference to Exhibit
4.1 to Registrant’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2003) |
| |
4 |
.6 |
|
Form of 1.75% Convertible Subordinated Note Due 2023 (included
in Exhibit 4.5) |
| |
4 |
.7 |
|
Registration Rights Agreement dated as of June 25, 2003 between
WebMD Corporation and Banc of America Securities LLC
(incorporated by reference to Exhibit 4.2 to Registrant’s
Quarterly Report on Form 10-Q for the quarter ended June 30,
2003) |
E-1
| |
|
|
|
|
| Exhibit No. | |
|
Description |
| | |
|
|
| |
4 |
.8 |
|
Registration Rights Agreement dated as of July 17, 2003 between
WebMD Corporation and Joseph Q. DiMartini, individually and as
Trustee U/A dated February 6, 1998 f/b/o Joseph Q. DiMartini,
and as Trustee of the Joseph Q. DiMartini 2002 Irrevocable Trust
dated October 14, 2002, Eric J. Schaefer, an individual, Daniel
A. Schmitt, individually and as Trustee of the Daniel A. Schmitt
Revocable Trust dated March 26, 1999, and as Trustee of the
Daniel Schmitt 2002 Irrevocable Trust dated September 24, 2002,
and Dru A. Schmitt, individually and as Trustee U/A dated
October 20, 1997 f/b/o Dru A. Schmitt (incorporated by reference
to Exhibit 4.3 to Registrant’s Quarterly Report on Form
10-Q for the quarter ended June 30, 2003) |
| |
4 |
.9 |
|
Convertible Redeemable Exchangeable Preferred Stock Purchase
Agreement, dated as of March 4, 2004, between CalPERs/PCG
Corporate Partners, LLC and WebMD Corporation (incorporated by
reference to Exhibit 4.9 to Registrant’s Annual Report on
Form 10-K for the year ended December 31, 2003) |
| |
4 |
.10 |
|
Form of Stock Certificate for Convertible Redeemable
Exchangeable Preferred Stock (included in Exhibit 3.2) |
| |
4 |
.11 |
|
Form of Indenture for 10% Subordinated Notes due 2010 (included
in Exhibit 3.2) |
| |
4 |
.12 |
|
Form of 10% Subordinated Note due 2010 (included in Exhibit 3.2) |
| |
10 |
.1 |
|
Form of Indemnification Agreement to be entered into by
Registrant with each of its directors and officers (incorporated
by reference to Exhibit 10.1 to Registrant’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002) |
| |
10 |
.2 |
|
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 (incorporated by
reference to Exhibit 10.4 to Registrant’s Quarterly Report
on Form 10-Q for the quarter ended March 31, 2000), as amended
by Amendment dated February 15, 2001 (incorporated by reference
to Exhibit 10.1 to Registrant’s Quarterly Report on Form
10-Q for the quarter ended March 31, 2001) |
| |
10 |
.3 |
|
Healtheon/WebMD Media Services Agreement dated January 26, 2000
among Registrant, Eastrise Profits Limited and Fox Entertainment
Group, Inc. (incorporated by reference to Exhibit 10.5 to
Registrant’s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2000) , as amended by Amendment dated February
15, 2001 (incorporated by reference to Exhibit 10.2 to
Registrant’s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2001) |
| |
10 |
.4 |
|
Warrant to Purchase Shares of Common Stock of WebMD, Inc. dated
May 12, 1999 issued to Microsoft Corporation (incorporated by
reference to Exhibit 10.9 to Registrant’s Annual Report on
Form 10-K for the year ended December 31, 2000) |
| |
10 |
.5* |
|
Employment Agreement dated as of February 1, 1998 between
Registrant and K. Robert Draughon (incorporated by reference to
Exhibit 10.51 to Registrant’s Form 10-K to Annual Report on
Form 10-K for the year ended December 31, 2000, as amended by
Amendment No. 1 on Form 10-K/A) |
| |
10 |
.6* |
|
Letter Agreement dated as of September 12, 2000 between
Registrant and K. Robert Draughon (incorporated by reference to
Exhibit 10.52 to Registrant’s Form 10-K to Annual Report on
Form 10-K for the year ended December 31, 2000, as amended by
Amendment No. 1 on Form 10-K/A) |
| |
10 |
.7* |
|
Agreement dated as of October 8, 2001 between Registrant and
Martin J. Wygod (incorporated by reference to Exhibit 10.55 to
Registrant’s Form 10-K to Annual Report on Form 10-K for
the year ended December 31, 2001) |
| |
10 |
.8* |
|
Amended and Restated Stock Option Agreement dated August 21,
2000 between the Registrant (as successor to Medical Manager
Corporation) and Martin J. Wygod (incorporated by reference to
Exhibit 10.21 to Registrant’s Annual Report on Form 10-K
for the year ended December 31, 2000, as amended by Amendment
No. 1 on Form 10-K/A) |
E-2
| |
|
|
|
|
| Exhibit No. | |
|
Description |
| | |
|
|
| |
10 |
.9* |
|
Employment Agreement dated as of October 23, 2002 between the
Registrant and Roger C. Holstein (incorporated by reference to
Exhibit 10.14 to Registrant’s Annual Report on Form 10-K
for the year ended December 31, 2002) |
| |
10 |
.10* |
|
Employment Agreement dated as of May 16, 1999 between the
Registrant (as successor to Synetic, Inc.) and Michael A. Singer
(incorporated by reference to Exhibit 10.26 to Medical Manager
Corporation’s Annual Report on Form 10-K for the fiscal
year ended June 30, 1999) |
| |
10 |
.11* |
|
Letter Agreement dated as of September 5, 2000 between
Registrant (as successor to Medical Manager Corporation) and
Michael A. Singer (incorporated by reference to Exhibit 10.50 to
Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2001, as amended by Amendment No. 1 on Form 10-K/A) |
| |
10 |
.12* |
|
Employment Agreement dated as of July 1, 2000 between Registrant
(as successor to Medical Manager Corporation) and Charles A.
Mele, as amended (incorporated by reference to Exhibit 10.51 to
Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2001, as amended by Amendment No. 1 on
Form 10-K/A) |
| |
10 |
.13* |
|
Employment Agreement dated as of July 1, 2000 between Registrant
(as successor to Medical Manager Corporation) and Anthony Vuolo,
as amended (incorporated by reference to Exhibit 10.52 to
Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2001, as amended by Amendment No. 1 on Form 10-K/A) |
| |
10 |
.14* |
|
Form of Amended and Restated Stock Option Agreement dated August
21, 2000, between Registrant (as successor to Medical Manager
Corporation) and each of Charles A. Mele and Anthony Vuolo
(incorporated by reference to Exhibit 10.54 to Registrant’s
Annual Report on Form 10-K for the year ended December 31, 2001,
as amended by Amendment No. 1 on Form 10-K/A) |
| |
10 |
.15* |
|
WebMD Corporation 2001 Employee Non-Qualified Stock Option Plan,
as amended (incorporated by reference to Exhibit 10.46 to
Registrant’s Form 10-K for the year ended December 31,
2001, as amended by Amendment No. 1 on Form 10-K/A) |
| |
10 |
.16* |
|
WebMD Corporation 2002 Restricted Stock Plan and Form of Award
Agreement (incorporated by reference to Exhibit 10.21 to
Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2002) |
| |
10 |
.17* |
|
Healtheon Corporation 1996 Stock Plan and Form of Stock Option
Agreement (incorporated by reference to Exhibit 10.2 to
Amendment No. 2 to Registrant’s Registration Statement on
Form S-1 (No. 333-70553) filed February 10, 1999) |
| |
10 |
.18* |
|
WebMD Corporation Amended and Restated 1998 Employee Stock
Purchase Plan (incorporated by reference to Exhibit 99.27 to
Registrant’s Registration Statement on Form S-8
(No. 333-47250) filed October 4, 2000) |
| |
10 |
.19* |
|
WebMD Corporation 2000 Long-Term Incentive Plan (incorporated by
reference to Annex G to the Proxy Statement/Prospectus, filed on
August 7, 2000, and included in Registrant’s Registration
Statement on Form S-4 (No. 333-39592) |
| |
10 |
.20* |
|
WebMD, Inc. Amended and Restated 1997 Stock Incentive Plan, as
amended (incorporated by reference to Exhibit 10.2 to
Registrant’s Registration Statement on Form S-8
(No. 33-90795) filed November 12, 1999) |
| |
10 |
.21* |
|
Envoy Stock Plan (incorporated by reference to Exhibit 99.1 to
Registrant’s Registration Statement on Form S-8
(No. 333-42616) filed July 31, 2000) |
| |
10 |
.22* |
|
Amended and Restated 1989 Class A Non-Qualified Stock Option
Plan of Synetic, Inc. (incorporated by reference to Exhibit 10.1
to Synetic, Inc.’s Registration Statement on Form S-1
(No. 333-28654) filed May 18, 1989) |
| |
10 |
.23* |
|
Amended and Restated 1989 Class B Non-Qualified Stock Option
Plan of Synetic, Inc. (incorporated by reference to Exhibit 10.2
to Synetic, Inc.’s Registration Statement on Form S-1
(No. 333-28654) filed May 18, 1989) |
| |
10 |
.24* |
|
1991 Director Stock Option Plan of Synetic, Inc. (incorporated
by reference to Exhibit 4.2 to Synetic, Inc.’s Registration
Statement on Form S-8 (No. 333-46640) filed March 24, 1992) |
E-3
| |
|
|
|
|
| Exhibit No. | |
|
Description |
| | |
|
|
| |
10 |
.25* |
|
Amended and Restated 1991 Special Non-Qualified Stock Option
Plan of Synetic, Inc. (incorporated by reference to Exhibit 4.3
to Synetic, Inc.’s Registration Statement on Form S-8
(No. 333-36041) filed September 19, 1997) |
| |
10 |
.26* |
|
Medical Manager Corporation’s 1996 Amended and Restated
Long-Term Incentive Plan (incorporated by reference to Exhibit
10.1 to Medical Manager Corporation’s (Commission File No.
0-29090) Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998) |
| |
10 |
.27* |
|
Medical Manager Corporation’s 1996 Amended and Restated
Non-Employee Director’s Stock Plan (incorporated by
reference to Exhibit 10.2 to Medical Manager Corporation’s
(Commission File No. 0-29090) Annual Report on Form 10-K for the
fiscal year ended December 31, 1997) |
| |
10 |
.28* |
|
1996 Class C Stock Option Plan of Synetic, Inc. (incorporated by
reference to Exhibit 4.1 to Synetic, Inc.’s Registration
Statement on Form S-8 (No. 333-36041) filed September
19, 1997) |
| |
10 |
.29* |
|
1997 Class D Stock Option Plan of Synetic, Inc. (incorporated by
reference to Exhibit 4.2 to Synetic, Inc.’s Registration
Statement on Form S-8 (No. 333-36041) filed September
19, 1997) |
| |
10 |
.30* |
|
1998 Class E Stock Option Plan of Synetic, Inc. (incorporated by
reference to Exhibit 4.1 to Synetic, Inc.’s Registration
Statement on Form S-8 (No. 333-72517) filed February
17, 1999) |
| |
10 |
.31* |
|
The 1999 Medical Manager Corporation Stock Option Plan for
Employees of Medical Manager Systems, Inc. (incorporated by
reference to Exhibit 10.28 to Medical Manager Corporation’s
Annual Report on Form 10-K for the year ended June 30, 1999) |
| |
10 |
.32* |
|
Form of Stock Option Agreement between the Corporation and each
of John H. Kang and Michael A. Singer (incorporated by reference
to Exhibit 99.5 to Amendment No. 1 to Medical Manager
Corporation’s Registration Statement on Form S-4
(No. 333-81123) filed June 24, 1999) |
| |
10 |
.33* |
|
1998 Porex Technologies Corp. Stock Option Plan of Synetic, Inc.
(incorporated by reference to Exhibit 4.2 to Synetic,
Inc.’s Registration Statement on Form S-8
(No. 333-72517) filed February 17, 1999) |
| |
10 |
.34* |
|
CareInsite, Inc. 1999 Officer Stock Option Plan (incorporated by
reference to Exhibit 10.18 to Amendment No. 6 to CareInsite,
Inc.’s Registration Statement on Form S-1
(No. 333-75071) filed June 11, 1999) |
| |
10 |
.35* |
|
CareInsite, Inc. 1999 Employee Stock Option Plan (incorporated
by reference to Exhibit 10.17 to Amendment No. 6 to CareInsite,
Inc.’s Registration Statement on Form S-1
(No. 333-75071) filed June 11, 1999) |
| |
10 |
.36* |
|
CareInsite, Inc. 1999 Director Stock Option Plan (incorporated
by reference to Annex H to the Proxy Statement/Prospectus, filed
on August 7, 2000, and included in Registrant’s
Registration Statement on Form S-4 (No. 333-39592) |
| |
10 |
.37* |
|
Amendment to the Company Stock Option Plans of Medical Manager
Corporation and CareInsite, Inc. (incorporated by reference to
Exhibit 99.28 to Registrant’s Registration Statement on
Form S-8 (No. 333-47250) filed October 4, 2000) |
| |
10 |
.38* |
|
Employment Agreement, dated as of September 11, 2000, between
the Registrant and Kirk Layman (incorporated by reference to
Exhibit 10.44 to Registrant’s Annual Report on
Form 10-K for the year ended December 31, 2003) |
| |
10 |
.39* |
|
2003 Non-Qualified Stock Option Plan for Employees of Advanced
Business Fulfillment, Inc. (incorporated by reference to Exhibit
10.2 to Registrant’s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2003) |
| |
10 |
.40* |
|
2004 Non-Qualified Stock Option Plan for Employees of Dakota
Imaging, Inc. (incorporated by reference to Exhibit 10.1 to the
Registrant’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2004) |
| |
10 |
.41* |
|
2004 Non-Qualified Stock Option Plan for Employees of VIPS, Inc.
(incorporated by reference to Exhibit 10.2 of the
Registrant’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2004) |
E-4
| |
|
|
|
|
| Exhibit No. | |
|
Description |
| | |
|
|
| |
10 |
.42* |
|
Employment Agreement, dated as of August 20, 2001, between the
Registrant and Wayne Gattinella (incorporated by reference to
Exhibit 10.46 to Registrant’s Annual Report on
Form 10-K for the year ended December 31, 2003) |
| |
10 |
.43* |
|
Stock Option Agreement between the Registrant and Wayne
Gattinella dated August 20, 2001 (incorporated by reference to
Exhibit 4.8 to Registrant’s Registration Statement on
Form S-8 (No. 333-888420) filed May 16, 2002) |
| |
10 |
.44* |
|
Employment Agreement, dated as of September 23, 2003, between
the Registrant and Andrew Corbin (incorporated by reference to
Exhibit 10.1 to Registrant’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2003) |
| |
10 |
.45* |
|
Employment Agreement, dated as of December 4, 2003, between
Envoy Corporation and Tony Holcombe (incorporated by reference
to Exhibit 10.49 to Registrant’s Annual Report on Form 10-K
for the year ended December 31, 2003) |
| |
10 |
.46* |
|
Letter Amendment, dated September 23, 2004, between the
Registrant and Tony Holcombe (incorporated by reference to
Exhibit 10.1 to Registrant’s Current Report on
Form 8-K filed September 28, 2004) |
| |
10 |
.47* |
|
Employment Agreement, dated September 23, 2004, between the
Registrant and Kevin Cameron (incorporated by reference to
Exhibit 10.1 to Registrant’s Current Report on
Form 8-K filed September 28, 2004) |
| |
10 |
.48* |
|
Letter Agreement, dated February 9, 2005, between Michael A.
Singer and WebMD Corporation (incorporated by reference to
Exhibit 99.1 to Registrant’s Current Report on
Form 8-K filed February 9, 2005) |
| |
12 |
.1 |
|
Computation of Ratio of Earnings to Fixed Charges |
| |
14 |
.1 |
|
Code of Business Conduct (incorporated by reference to Exhibit
14.1 to Registrant’s Annual Report on Form 10-K for the
year ended December 31, 2003, as amended by Amendment No. 1
on Form 10-K/A) |
| |
21 |
.1 |
|
Subsidiaries of Registrant |
| |
23 |
.1 |
|
Consent of Ernst & Young LLP, Independent Registered Public
Accounting Firm |
| |
24 |
.1 |
|
Power of Attorney (see page 99) |
| |
31 |
.1 |
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer of Registrant |
| |
31 |
.2 |
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer of Registrant |
| |
32 |
.1 |
|
Section 1350 Certification of Chief Executive Officer of
Registrant |
| |
32 |
.2 |
|
Section 1350 Certification of Chief Financial Officer of
Registrant |
| |
99 |
.1 |
|
Amended and Restated Audit Committee Charter |
| |
99 |
.2 |
|
Amended and Restated Compensation Committee Charter |
| |
99 |
.3 |
|
Amended and Restated Nominating Committee Charter |
| |
99 |
.4 |
|
Governance & Compliance Committee Charter (incorporated by
reference to Exhibit 99.4 to Registrant’s Current Report on
Form 8-K filed November 4, 2004) |
|
|
| * |
Agreement relates to executive compensation. |
E-5