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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 333-70553
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HEALTHEON/WEBMD CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 94-3236644
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
400 THE LENOX BUILDING
3399 PEACHTREE ROAD, NE
ATLANTA, GEORGIA 30326
(Address of principal executive offices)
(404) 495-7600
(Registrant's telephone number, including area code)
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Check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
As of April 28, 2000, there were 182,104,643 shares of the
Registrant's Common Stock outstanding.
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HEALTHEON/WEBMD CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2000
INDEX
PAGE
PART I FINANCIAL INFORMATION NUMBER
ITEM 1. Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 2000 (Unaudited) and
December 31, 1999............................................................... 3
Unaudited Condensed Consolidated Statements of Operations for the three months
ended March 31, 2000 and 1999................................................... 4
Unaudited Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 and 1999................................................... 5
Notes to Condensed Consolidated Financial Statements............................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................... 10
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk......................... 26
PART II OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K................................................... 27
Signatures......................................................................... 28
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEALTHEON/WEBMD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents .................. $ 1,160,682 $ 291,286
Accounts receivable, net ................... 71,925 51,511
Other current assets ....................... 15,564 20,808
----------- -----------
Total current assets ................ 1,248,171 363,605
Property and equipment, net ....................... 65,103 48,384
Prepaid content and services ...................... 616,875 273,038
Intangible assets, net ............................ 3,763,748 3,547,559
Other assets ...................................... 54,370 9,876
----------- -----------
$ 5,748,267 $ 4,242,462
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................... $ 45,186 $ 77,288
Accrued liabilities ........................ 81,770 62,841
Deferred revenue ........................... 10,532 4,891
Current portion of capital lease obligations 2,204 2,281
----------- -----------
Total current liabilities ........... 139,692 147,301
Long-term liabilities ............................. 121,409 121,489
Stockholders' equity:
Convertible preferred stock ................ 629,000 --
Common stock ............................... 18 16
Additional paid-in capital ................. 5,684,964 4,370,165
Deferred stock compensation ................ (3,931) (5,089)
Accumulated deficit ........................ (822,885) (391,420)
----------- -----------
Total stockholders' equity .......... 5,487,166 3,973,672
----------- -----------
$ 5,748,267 $ 4,242,462
=========== ===========
See notes to condensed consolidated financial statements.
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HEALTHEON/WEBMD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data, unaudited)
THREE MONTHS ENDED
MARCH 31,
----------------------------
2000 1999
--------- --------
Revenue (1) ......................................... $ 65,881 $ 17,555
Operating costs and expenses:
Cost of operations ............................. 59,365 15,518
Development and engineering .................... 11,574 7,041
Sales and marketing ............................ 86,715 4,652
General and administrative ..................... 13,811 4,249
Depreciation and amortization .................. 338,710 5,225
--------- --------
Total operating costs and expenses ......... 510,175 36,685
--------- --------
Loss from operations ................................ (444,294) (19,130)
Interest income, net ................................ 12,829 561
--------- --------
Net loss ............................................ $(431,465) $(18,569)
========= ========
Basic and diluted net loss per common share ......... $ (2.47) $ (0.30)
========= ========
Weighted average shares outstanding used in computing
basic and diluted net loss per common share ........ 175,041 62,665
========= ========
(1) Includes revenue to related parties of $12,777 and $9,521 for the three
months ended March 31, 2000 and 1999, respectively. See note 2.
See notes to condensed consolidated financial statements.
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HEALTHEON/WEBMD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
THREE MONTHS ENDED
MARCH 31,
------------------------------
2000 1999
---------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................................................... $ (431,465) $(18,569)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of intangible assets ...................... 338,710 5,946
Amortization of deferred compensation related to options granted ........ 1,158 2,084
Amortization of non-cash prepaid content and services ................... 18,554 --
Changes in operating assets and liabilities:
Accounts receivable ................................................. (12,294) (2,470)
Other assets ........................................................ 16,061 (3,069)
Accounts payable .................................................... (28,163) (1,161)
Accrued liabilities ................................................. (22,575) 4,175
Deferred revenue .................................................... (294) 1,723
---------- --------
Net cash used in operating activities ........................ (120,308) (11,341)
---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments .......................................... -- (15,148)
Maturities of short-term investments ......................................... -- 7,790
Decrease in restricted cash .................................................. -- 867
Purchases of long-term investments ........................................... (42,500) --
Purchases of property and equipment .......................................... (5,666) (4,048)
Cash acquired in business combinations, net of cash paid ..................... 101,662 --
---------- --------
Net cash provided by (used in) investing activities .......... 53,496 (10,539)
---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of notes payable .................................................... -- (159)
Proceeds from issuance of common stock, net of repurchases ................... 936,951 41,755
Principal payments of capital lease obligations .............................. (743) (716)
---------- --------
Net cash provided by financing activities .................... 936,208 40,880
---------- --------
Net increase in cash and cash equivalents ........................................... 869,396 19,000
Cash and cash equivalents at beginning of period .................................... 291,286 19,389
---------- --------
Cash and cash equivalents at end of period .......................................... $1,160,682 $ 38,389
========== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ................................................................ $ 148 $ 139
========== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired under capital leases ...................................... $ 215 $ 983
========== ========
Issuance of common stock for asset purchases ................................. $ 372,737 $ 11,000
========== ========
Issuance of preferred stock for asset purchases .............................. $ 629,000 $ --
========== ========
Deferred compensation related to options granted ............................. $ -- $ 6,261
========== ========
Conversion of convertible preferred stock to common stock .................... $ -- $ 46,101
========== ========
See notes to condensed consolidated financial statements.
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HEALTHEON/WEBMD CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited condensed consolidated financial statements have been
prepared by Healtheon/WebMD's management and reflect all adjustments that, in
the opinion of management, are necessary for a fair presentation of the interim
periods presented. The results of operations for the three months ended March
31, 2000 are not necessarily indicative of the results to be expected for any
subsequent quarter or for the entire year ending December 31, 2000. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted under the Securities and Exchange Commission's rules and
regulations. A condensed consolidated statement of comprehensive loss has not
been presented because the components of comprehensive loss are not material.
Healtheon/WebMD operates within a single operating segment and to date has
derived nearly all of its revenue from within the United States.
These unaudited condensed consolidated financial statements and notes
included herein should be read in conjunction with Healtheon/WebMD's audited
consolidated financial statements and notes for the year ended December 31, 1999
which were included in our Annual Report on Form 10-K filed with the Securities
and Exchange Commission.
Revenue Recognition
Revenue recognized from arrangements deemed to be nonmonetary exchanges
of Healtheon/WebMD's products and services for customer products and services
totaled approximately $3,080 during the three months ended March 31, 2000, with
no revenue of this type recognized during the three months ended March 31, 1999.
Revenues from these exchanges are recorded at the fair value of the products and
services provided or received, whichever is more clearly evident.
Concentration of Revenue and Credit Risk
One customer represented 11% of consolidated revenue for the three
months ended March 31, 2000. Two customers, one of which is a related party,
comprised 32% of the total accounts receivable at March 31, 2000. We believe
that the concentration of credit risk in our trade receivables, with respect
to our limited customer base, is substantially mitigated by our credit
evaluation process. We do not require collateral. To date, our bad debt
write-offs have not been significant.
Net Loss Per Common Share
The following table presents the calculation of basic and diluted net
loss per common share:
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THREE MONTHS ENDED
MARCH 31,
------------------------------------
2000 1999
------------- ------------
Net loss ................................................................................. $ (431,465) $ (18,569)
============= ============
Basic and diluted:
Weighted-average shares of common stock outstanding ................................. 175,572 63,789
Less: Weighted-average common shares subject to repurchase .......................... (531) (1,124)
------------- ------------
Weighted-average shares used in computing basic and diluted net loss per
common share ........................................................................ 175,041 62,665
============= ============
Basic and diluted net loss per common share .............................................. $ (2.47) $ (0.30)
============= ============
We have excluded all convertible redeemable preferred stock,
convertible preferred stock, warrants, outstanding stock options and shares
subject to repurchase by Healtheon/WebMD from the calculation of diluted net
loss per common share because all such securities are anti-dilutive for the
periods presented. The total number of shares on an "as converted" basis
excluded from the calculation of diluted loss per shares was approximately 81.5
million shares at March 31, 2000 and 18.2 million shares at March 31, 1999.
Reclassifications
Certain reclassifications have been made to the financial statements to
conform with the current year presentation. These reclassifications had no
effect on previously reported financial position or results of operations.
2. RELATED PARTY TRANSACTIONS
Revenue from related parties for the three months ended March 31, 2000
includes advertising revenue, content license and carriage fees, subscription
and e-commerce revenue pursuant to revenue-sharing and fixed-fee agreements with
related parties as discussed below. Two of the following arrangements were
originally entered into by and between WebMD and Microsoft Corporation in March
1999 and WebMD and At Home Corporation, or Excite@Home, in May 1999. As a result
of WebMD's merger in November 1999 with Healtheon, we assumed these agreements
and Microsoft Corporation and Excite@Home became related parties to
Healtheon/WebMD. In January 2000, we completed the transactions contemplated by
our strategic alliance with News Corporation at which time News Corporation
became a related party.
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Microsoft
For the three months ended March 31, 2000, we recognized $7,250 in
carriage fees as sales and marketing expense under the terms of our five-year
strategic alliance with Microsoft. For the three month period ended March 31,
2000, we recognized $964 of advertising revenue for advertising placed on
Microsoft's health channels and no revenue related to advertising placed by
Microsoft on our web site. For the three month period ended March 31, 2000, we
recorded revenue of $3,753 related to subscriptions to WebMD's physician web
site which were sponsored by Microsoft. This amount has been recorded net of
commissions. For the three month period ended March 31, 2000, we recognized
$9,000 as sales and marketing expense for amortization of the $180,000 value
assigned to the Microsoft strategic agreement. At March 31, 2000 and December
31, 1999, accounts receivable from Microsoft was $15,741 and $9,030,
respectively.
News Corporation
Pursuant to our strategic alliance entered into with News Corporation
in January 2000, Healtheon/WebMD will provide daily, health-related content to
News Corporation for an aggregate of $60,000 in licensing fees over a five-year
term. Revenue recognized from this agreement and from other services provided to
News Corporation totaled $4,500 for the three months ended March 31, 2000. There
was no accounts receivable from News Corporation at either March 31, 2000 or
December 31, 1999.
Excite@Home
Under a three-year services agreement with Excite@Home, Healtheon/WebMD
will create a co-branded health channel and online health-related communities
for Excite@Home. Excite@Home has guaranteed a minimum level of impressions
throughout the Excite@Home network, and we have agreed to pay carriage fees over
the term of the agreement. For the three month period ended March 31, 2000, we
recorded $2,500 as sales and marketing expense related to carriage fees based on
impressions delivered. Excite@Home and Healtheon/WebMD will share the
advertising revenue generated by the co-branded web site. At March 31, 2000 and
December 31, 1999, accounts receivable from Excite@Home was $1,837 and $1,158,
respectively.
Revenue from related parties includes revenue attributable to
UnitedHealth Group of $1,300 and $3,400 for the three months ended March 31,
2000 and 1999, respectively. In January 2000, the Chairman and Chief Executive
Officer of UnitedHealth Group resigned from our Board of Directors, and at this
date, UnitedHealth Group ceased to be a related party.
Revenue from related parties for the three months ended March 31, 1999
includes revenue attributable to SmithKline Labs of $6,100. In August 1999,
SmithKline Labs was sold to a company which is not a significant stockholder of
Healtheon/WebMD, and at this date, SmithKline Labs ceased to be a related party.
3. STOCKHOLDERS' EQUITY
From January 1, 1999 through February 10, 1999, the date of our initial
public offering, Healtheon/WebMD granted to employees options to purchase common
stock equal to a total of 4,107,625 shares with exercise prices ranging from
$3.55 to $5.85 per share. Deferred stock compensation of $6,261 was recorded for
the three month period March 31, 1999 and is being amortized over the vesting
period of these options.
On February 10, 1999, Healtheon completed its initial public offering.
We sold 5,750,000 shares of common stock to the public and realized net proceeds
of approximately $41,398.
On January 27, 2000, Janus Capital Corporation, through its managed
mutual funds, invested $930,000 in exchange for 15,000,000 shares of
Healtheon/WebMD common stock at $62.00 per share in a private transaction.
On January 26, 2000, as part of our strategic alliance with News
Corporation, we issued convertible preferred stock that is convertible into
21,282,645 shares of common stock and sold 2,000,000 shares of common stock to
affiliates of News Corporation. See Note 4.
4. BUSINESS COMBINATIONS
The 1999 Mergers
Effective November 12, 1999, Healtheon merged with WebMD, a provider of
web-based solutions for the administrative, communications and information needs
of healthcare professionals and the healthcare informational needs of consumers.
Healtheon exchanged 1.796 shares of its common stock for each share of WebMD
stock. The total purchase consideration was approximately $3,659,921. The
acquisition was accounted for using the purchase method and, accordingly, the
purchase price was allocated to the tangible and intangible assets acquired and
the liabilities assumed on the basis of their respective fair values on the
acquisition date. The total goodwill recorded in connection with the purchase
was $2,944,804 and is being amortized over three years. The values, totaling
approximately $196,307, assigned to WebMD's acquired technology, customer lists,
trademarks, and other intangibles, were determined through independent
appraisal.
Effective November 12, 1999, Healtheon acquired MedE America, a
provider of healthcare transaction services for hospitals, pharmacies,
physicians, dentists, payers and pharmacy benefit managers. Healtheon exchanged
0.7494 shares of its common stock for each share of MedE America stock. The
total purchase consideration was approximately $417,292. The acquisition was
accounted for using the purchase method and, accordingly, the purchase price was
allocated to the tangible and intangible assets acquired and
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the liabilities assumed on the basis of their respective fair values on the
acquisition date. The total goodwill recorded in connection with the purchase
was $324,983 and is being amortized over four years. The values, totaling
approximately $105,545, assigned to MedE America's customer lists, trademarks
and acquired technology, were determined through independent appraisal.
Effective November 12, 1999, Healtheon acquired Medcast, an
Internet-based medical news and information service. Healtheon exchanged
2,692,501 shares or options to purchase shares of its common stock and
approximately $2,336 in cash for all Medcast outstanding stock. The total
purchase consideration was approximately $112,953. The acquisition was accounted
for using the purchase method and, accordingly, the purchase price was allocated
to the tangible and intangible assets acquired and the liabilities assumed on
the basis of their respective fair values on the acquisition date. The total
goodwill recorded in connection with the purchase was approximately $109,755 and
is being amortized over three years. The values, totaling $17,700, assigned to
Medcast's customer lists, trademarks and acquired technology, were determined
through independent appraisal.
The fair value per share of Healtheon's common stock was based on the
closing price of Healtheon's common stock on the five days prior and subsequent
to the days the mergers were announced, or, if applicable, the days the merger
agreements were amended, which were September 7, 1999 for WebMD, October 6, 1999
for Medcast and November 9, 1999 for MedE America.
2000 Acquisitions and Strategic Partnerships
On January 26, 2000, Healtheon/WebMD completed the transactions
contemplated by its strategic alliance agreement with The News Corporation
Limited, Fox Entertainment Group and certain of their affiliates (collectively,
"News Corporation"). Under this strategic partnership, News Corporation became a
minority stockholder in Healtheon/WebMD. The financial terms of the strategic
partnership include $400.0 million in media branding services to be provided by
News Corporation and its affiliates to Healtheon/WebMD domestically over 10
years; a $100.0 million cash investment commitment by News Corporation in an
international joint venture; a $60.0 million five-year licensing agreement for
syndication of WebMD daily broadcast content; the transfer to Healtheon/WebMD of
a 50% interest in The Health Network, a health-focused cable network, and 50%
ownership of thehealthnetwork.com. Healtheon/WebMD issued an aggregate of
155,951 shares of Series A Preferred Stock, which shares vote on an
as-if-converted basis with Healtheon/WebMD's common stock, in consideration for
its 50% interest in thehealthnetwork.com. Assuming conversion of all of the
shares of Series A Preferred Stock, the holders of these shares will receive
21,282,645 shares of the Healtheon/WebMD's common stock. These shares are
subject to restrictions on their sale for three years. In addition, affiliates
of Fox Entertainment purchased 2,000,000 shares of the Healtheon/WebMD's common
stock at $50.00 per share for an aggregate purchase price of $100.0 million in
cash.
On January 31, 2000, Healtheon/WebMD completed its acquisition of
Kinetra LLC, a joint venture between Electronic Data Systems Corporation and Eli
Lilly and Company, which was accounted for under the purchase method of
accounting. Kinetra is a provider of health information networks and healthcare
e-commerce services that enhance decision-critical information flow within the
healthcare field. The total purchase consideration was approximately $291,538,
comprising the issuance of 7,437,248 shares of Healtheon/WebMD's common stock
with an aggregate fair value of $286,288, $5,250 of acquisition costs and a
nominal amount of cash in exchange for all of the membership interests of
Kinetra.
Proposed Mergers
On January 22, 2000, Healtheon/WebMD entered into a definitive
agreement with Quintiles Transnational Corp. and its subsidiary, QFinance, Inc.
(collectively, "Quintiles"), to acquire Quintiles' electronic data interchange
subsidiary ("EDI"), Envoy Corporation, a provider of healthcare EDI transactions
in the United States. Under the terms of the agreement, Quintiles will receive
35,000,000 shares of Healtheon/WebMD stock and $400,000 in cash, for a total
consideration of approximately $2,500,000. Quintiles will issue Healtheon/WebMD
a warrant to purchase up to 10,000,000 shares of Quintiles common stock at
$40.00 per share, exercisable for four years. Stock received by Quintiles in the
transaction will be subject to restrictions on sale for one to two years.
Completion of the agreement, which will be accounted for as a purchase
transaction, is expected in the second quarter of 2000, subject to regulatory
approval and certain other customary closing conditions. We have received and
responded to a request from the Department of Justice for additional information
in connection with our pre-merger notification filing under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, with respect
to our announced acquisition of Envoy. This acquisition may not be completed
until 20 days after the DOJ determines that we have substantially complied with
the request for additional information, unless this waiting period is terminated
earlier by the DOJ.
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On February 13, 2000, Healtheon/WebMD entered into definitive
agreements to acquire Medical Manager Corporation, a provider of physician
practice management systems in the United States, and its publicly traded
subsidiary, CareInsite, Inc., a developer of an Internet-based healthcare
e-commerce network that links physicians, suppliers and patients. Under the
terms of the agreements, Healtheon/WebMD will exchange 1.65 shares of its common
stock for each share of Medical Manager and 1.3 shares for each share of
CareInsite not owned directly or indirectly by Medical Manager. Completion of
the acquisitions, which will be accounted for under the purchase method of
accounting, is expected in mid-year 2000, subject to regulatory and stockholder
approvals and certain other customary closing conditions. The completion of the
Medical Manager and CareInsite acquisitions are conditioned on each other.
On February 15, 2000, Healtheon/WebMD entered into a definitive
agreement to acquire OnHealth Network Company, a leading source of
consumer-oriented health and wellness information, products and services on the
web. Under the terms of the agreement, stockholders of OnHealth stock are to
receive 0.189435 shares of Healtheon/WebMD common stock for each share of
OnHealth stock. Closing of the transaction, which will be accounted for under
the purchase method of accounting, is expected in mid-year 2000, subject to
regulatory and OnHealth stockholder approval and other customary closing
conditions. In connection with the agreement, Healtheon/WebMD advanced $15,000
to OnHealth for working capital needs and has agreed to provide an additional
$15,000 as needed prior to the date of closing.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
Except for historical information, this quarterly report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements involve risks and uncertainties,
including, among other things, statements regarding our pending acquisitions,
anticipated costs and expenses, revenue mix, product and service development and
relationships with strategic partners. These forward-looking statements include
declarations regarding our belief or current expectations of management, such as
statements indicating that "we expect," "we anticipate," "we intend," "we
believe" and similar language. Our actual results may differ significantly from
those projected in the forward-looking statements. Factors that might cause or
contribute to such differences include, but are not limited to, those discussed
in the section "Management's discussion and analysis of financial condition and,
results of operations -- Factors that may affect future results of operations."
You should carefully review the risks described in our reports and registration
statements that we file from time to time with the Securities and Exchange
Commission. You are cautioned not to place undue reliance on the forward-looking
statements, which speak only as of the date of this quarterly report. We
undertake no obligation to publicly release any revisions to the forward-looking
statements or reflect events or circumstances after the date of this document.
The following discussion also should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended December
31, 1999 included in our Annual Report on Form 10-K as filed with the Securities
and Exchange Commission.
OVERVIEW
We provide web-based healthcare information and services to facilitate
connectivity and transactions among physicians, patients, payers and other
healthcare industry participants. Our Internet-based information and transaction
platform allows for the secure exchange of information among the disparate
information systems used by healthcare industry participants and supports our
administrative transaction services, including patient enrollment, eligibility
determination, referrals and authorizations, laboratory and diagnostic test
orders and results, clinical data retrieval and claims processing.
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Our web site, WebMD.com, offers a single destination for the exchange
of healthcare information and supports a broad range of healthcare transactions
delivered over our secure, Internet-based platform. We design our service
offerings to help integrate and manage administrative, clinical, research and
information needs of healthcare industry participants. We believe that our
web-based solution has the potential to create significant improvements in the
way that information is used by the healthcare system, enabling improved
workflows, better decision making and, ultimately, higher quality patient care
at a lower cost.
Through WebMD.com, physician subscribers can access WebMD Practice, our
provider destination, and consumers can access WebMD Health, our free consumer
destination. WebMD Practice provides physicians with administrative transaction
services, medical news and research, continuing medical education credits,
customized web sites and e-mail accounts, among other services. WebMD Health
provides consumers with health and wellness news and information, support
communities, interactive tools and opportunities to purchase health-related
products and services. Our communities allow consumers to participate in
real-time discussion and support networks over the Internet.
We currently provide services to over 250,000 physicians and
approximately 11,000 dentists, 4,500 hospitals, 46,000 pharmacies, 650 payers
and 8 laboratory companies. In addition, nearly 100,000 physicians have
subscriptions to WebMD Practice, and over 1,100,000 consumers are enrolled in
our support communities on WebMD Health. In March 2000, WebMD.com attracted
approximately 2.9 million unique users, according to Media Metrix, and page
views exceeded approximately 44.8 million, according to commercial software that
we utilize.
We were incorporated in December 1995 and commenced operations in
January 1996. In November 1999, we merged with WebMD, Inc., MedE America
Corporation and Greenberg News Networks, Inc., which is referred to as Medcast,
and changed our name to Healtheon/WebMD Corporation. We launched our integrated
web site in November 1999 following the closing of these mergers.
In January 2000, we completed the acquisition of Kinetra LLC and the
transactions contemplated by our strategic alliance with News Corporation. Also
in the first quarter of 2000, we entered into definitive agreements to acquire
Envoy Corporation, Medical Manager Corporation, CareInsite, Inc. and OnHealth
Network Company. These acquisitions are subject to regulatory approvals and
customary closing conditions. These acquisitions will be acccounted for as
purchase transactions and are expected to be completed in mid-year 2000. For a
more complete description of these transactions, see Note 4 to the Condensed
Consolidated Financial Statements in this quarterly report and "Business -
Recent events" in our 1999 annual report.
RESULTS OF OPERATIONS
Revenue
We recognize revenue as our services are performed or our products are
delivered. We earn revenue on our network-based fees from fixed fee subscription
arrangements, which are recognized ratably over the term of the applicable
agreement, and from our administrative services, which are priced on a
per-transaction or per-user basis and recognized as the services are performed.
Revenue from our development, consulting and information technology management
services is recognized as these services are performed. We recognize revenue
related to software license fees when a customer enters into a non-cancelable
license agreement, the software product covered by the license agreement has
been delivered, there are no uncertainties surrounding product acceptance, there
are no significant future performance obligations, the license fees are fixed or
determinable and collection of the license fees is considered probable.
Revenue from advertising is recognized as advertisements are run on our
web site or on co-branded web sites. Our subscription revenue, including
subscription revenue from sponsorship arrangements, is recognized ratably over
the subscription term as subscriptions are placed with physicians. We do not
allocate subscription revenue among our various service offerings included as
part of the base subscription fee. Revenue from fixed fee content license or
carriage fees is recognized ratably over the term of the applicable agreement.
We recognize e-commerce revenue when a subscriber or consumer utilizes our
Internet-based services or purchases goods or services through our web site or a
co-branded web site with one of our strategic partners. We recognize revenue
from our optional services when we provide one or more of these services for
fees in addition to the base subscription fees for WebMD Practice.
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For the three months ended March 31, 2000, total revenue increased to
$65.9 million from $17.6 million for the three months ended March 31, 1999. This
increase is due primarily to the growth of our transaction- and network-based
services and to the additional revenue sources that were acquired upon the
closing of our mergers with WebMD and MedE America. Transaction revenue,
advertising revenue and subscription revenue comprise 43.8%, 29.4% and 10.3% of
total revenue for the three months ended March 31, 2000 and 54.5%, 0% and 0% of
total revenue for the three months ended March 31, 1999, respectively.
For the three months ended March 31, 2000, revenue from related
parties, which consists principally of services provided to UnitedHealth Group,
Microsoft and News Corporation, increased to $12.8 million from $9.5 million for
the three months ended March 31, 1999. The increase was primarily due to
increases in transaction-based services to UnitedHealth Group, from
subscriptions and third party advertising through our Microsoft strategic
alliance and from health-related content licensed to News Corporation. Revenue
from SmithKline Labs ceased being related party revenue in August 1999 when
SmithKline Labs was sold to Quest Diagnostics, and revenue from UnitedHealth
Group ceased being related party revenue in January 2000 when the Chairman and
Chief Executive Officer of UnitedHealth Group resigned from our board of
directors.
Cost of Operations
Cost of operations, which consists principally of costs to operate and
maintain our networks and costs related to providing services, increased from
$15.5 million for the three months ended March 31, 1999 to $59.4 million for the
three months ended March 31, 2000. The increase resulted primarily from
increased personnel and network operations costs, costs to acquire exclusive
arrangements to provide consumer healthcare-related content to other web sites
and other costs required to support the increased service revenues. Of the
increase in cost of operations, $33.1 million relates to expenses incurred by
the companies acquired in the 1999 Mergers and the 2000 Acquisitions and
Strategic Partnerships.
Development and Engineering
Development and engineering expense consists primarily of expenses
associated with development of services and applications and excludes
development expenses that are included in cost of operations. These expenses,
which are comprised of salaries paid to engineering personnel, fees paid to
outside contractors and consultants, a portion of facilities expenses and
maintenance of capital equipment used in the development process, increased from
$7.0 million for the three months ended March 31, 1999 to $11.6 for the three
months ended March 31, 2000. The increase was the result of a significant
increase in the number of engineers engaged in the development of our
applications and services. Of the increase, $2.7 million relates to expenses
incurred by the companies acquired in the 1999 Mergers and the 2000 Acquisitions
and Strategic Partnerships.
Sales and Marketing
Sales and marketing expense, which consists principally of salaries and
related expenses for sales, account management and marketing personnel,
commissions, and expenses for marketing programs and trade shows, increased from
$4.6 million for the three months ended March 31, 1999 to $86.7 million for the
three months ended March 31, 2000. The increase primarily related to the
salaries and related costs of added sales and marketing personnel and to
advertising and promotion costs incurred to increase awareness of our WebMD
brand. Of the increase, $79.0 million relates to expenses incurred by the
companies acquired in the 1999 Mergers and the 2000 Acquisitions and Strategic
Partnerships.
General and Administrative
General and administrative expense which consists primarily of salaries
and related expenses for administrative, finance, legal, human resources and
executive personnel, fees for professional services, costs of general insurance
and other internal control systems costs, increased to $13.8 million for the
three months ended March 31, 2000 from $4.2 million for the three months ended
March 31, 1999. The increase primarily related to increased personnel costs and
facilities expenses incurred as we added administrative personnel and executive
management. General and administrative expenses include the amortization of
deferred stock compensation which increased to $1.2 million for the three months
ended March 31, 2000 from $2.1 million for the three months ended March 31,
1999. The remainder of the increase resulted from salaries and related costs of
office space and facilities as we added administrative personnel and executive
management. Of the increase, $12.2 million is a result of expenses incurred by
the companies acquired in the 1999 Mergers and the 2000 Acquisitions and
Strategic Partnerships.
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Depreciation and Amortization
Depreciation and amortization was $338.7 million for the three months
ended March 31, 2000 and $5.2 million for the three months ended March 31, 1999.
The increase was due primarily to the amortization of intangible assets acquired
in the 1999 Mergers and the 2000 Acquisitions and Strategic Partnerships, the
amounts of which are being amortized over expected lives of one to five years.
The consummation of the pending proposed purchase transactions announced in the
first quarter of 2000 will add significant additional charges in future periods.
Interest Income and Expense
Interest income has been derived primarily from cash investments.
Interest expense results primarily from our borrowings and from capitalized
lease obligations for equipment purchases. Net interest income was $12.8 million
for the three months ended March 31, 2000 and $0.6 million for the three months
ended March 31, 1999. The increase was primarily due to higher average cash
balances resulting from the $41.4 million in net proceeds from our initial
public offering in February 1999, the $930.0 million in net proceeds received
from the sale of our common stock to Janus Capital in February 2000 and from
cash balances that were acquired in the 1999 Mergers and the 2000 Acquisitions
and Strategic Partnerships.
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LIQUIDITY AND CAPITAL RESOURCES
In February 1999, we completed the initial public offering of our
common stock and realized net proceeds from the offering of approximately $41.4
million. Prior to this offering, we had funded our operations since inception
primarily through the private placement of equity securities. We had also
financed our operations through equipment lease financing and bank borrowings.
In January 2000, we raised an additional $1.03 billion from our sale of
15.0 million shares of our common stock to Janus Capital Corporation, through
its managed mutual funds, for $930.0 million, as well as our sale of 2.0 million
shares of our common stock to affiliates of News Corporation for $100.0 million
in connection with our News Corporation strategic alliance. As of March 31,
2000, we had outstanding equipment lease liabilities of $4.4 million. As of
March 31, 2000, we had approximately $1.16 billion in cash and cash equivalents
and working capital of $1.11 billion.
Cash used in operating activities was $120.3 million for the three
months ended March 31, 2000 compared to $11.3 million for the first quarter of
1999. The cash used during these periods was primarily attributable to net
operating losses, offset in part by depreciation and amortization. Our losses
were principally related to increased sales and marketing expenses to promote
the WebMD brand and development and engineering expenses to improve our product
offerings and develop new applications and content.
Cash provided by investing activities was $53.5 million for the three
months ended March 31, 2000 compared to cash used in investing activities of
$10.5 million for the first quarter of 1999. Purchases of long-term investments,
consisting primarily of investments in technology or service partners, were
$42.5 million for the first quarter of 2000 compared with no long-term
investment purchases during the same period of 1999. Investments in property and
equipment, excluding equipment acquired under capital leases, were $5.7 million
for the first quarter of 2000 compared to $4.0 million for the same period in
1999. In the first quarter of 1999, we purchased $15.1 million of short-term
investments and realized $7.8 million in cash from maturities of our short-term
investments. We invest our excess cash in short-term, interest-bearing
securities and will continue to do so in the future. We are not assured of
having excess cash balances in the future, so purchases of short-term
investments cannot be assured.
Cash provided by financing activities was $936.2 million for the three
months ended March 31, 2000, primarily related to the net proceeds received from
our sale of common stock to Janus. We intend to use proceeds from these
financing activities to pay the $400.0 million cash portion of our acquisition
of Envoy, to fund additional advances, if any, to OnHealth of up to $15.0
million pursuant to their line of credit, to provide working capital and for
general corporate purposes. For the first quarter of 1999, cash provided by
financing activities of $40.9 million related primarily to the net proceeds of
our initial public offering of $41.4 million.
As of March 31, 2000, we did not have any material commitments for
capital expenditures. Our principal commitments at March 31, 2000 consisted of
obligations under operating and capital leases and guaranteed payments under our
strategic agreements.
We estimate that we will make the following aggregate guaranteed
payments under our current relationships with our strategic partners in each
calendar year noted:
Year Ended December 31, Amount
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2000................................................... $78.3 million
2001................................................... 82.6 million
2002................................................... 51.4 million
2003................................................... 34.4 million
2004................................................... 8.8 million
Most of our current strategic relationships contain revenue sharing
arrangements which generally provide for us to share advertising, sponsorship or
transaction net revenues, ranging from 15% to as much as 100%, with strategic
partners. In addition, some strategic partner agreements and promotional
arrangements require payments on a per-subscriber basis. We may enter into
additional promotional arrangements with current and future strategic partners
that may require us to pay consideration in amounts that significantly exceed
the
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amounts we are required to pay under our current arrangements. These guaranteed
payments and promotional and other arrangements may require us to incur
significant expenses. We cannot guarantee that we will generate sufficient
revenues to offset these expenses.
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. However, with the investments by Janus and affiliates of News
Corporation, we believe that we will have sufficient cash resources to meet our
presently anticipated working capital and capital expenditure requirements for
at least the next 12 months. In addition, we expect to incur operating losses
for at least the next 12 months. We believe that our future liquidity and
capital requirements will depend upon numerous factors, including the success of
our existing and new application and service offerings and competing
technological and market developments. We may be required to raise additional
funds through public or private financing, strategic relationships or other
arrangements.
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FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
We have incurred and will continue to incur substantial losses
We began operations in January 1996 and have incurred net losses from
operations in each fiscal period since our inception. As of March 31, 2000, we
had accumulated losses of approximately $822.9 million. In addition, we
currently intend to invest heavily in pending acquisitions, infrastructure
development, applications development and sales and marketing in order to deploy
our services to a growing number of potential customers and strategic partners.
The purchase price of acquisitions we have recently completed will be, and the
purchase price of acquisitions which we may undertake in the future may be,
amortized over the useful life of the tangible and intangible assets. As of
March 31, 2000, we had approximately $3.8 billion of unamortized goodwill and
other intangible assets reflected on our financial statements as a result of
acquisitions. We currently anticipate that this amortization will cause us to
incur significant net losses for the next several years. We expect that we will
incur increasing net operating losses and negative cash flows for the
foreseeable future and may never be profitable.
The business of providing services over the Internet is difficult to
evaluate and our business model is unproven
Because we recently began operations, it is difficult to evaluate our
businesses and prospects. Our revenue and income potential is unproven and our
business model is evolving. We derive a substantial portion of our revenue from
non-Internet network services, from development and consulting services and from
managing and operating our customers' information technology infrastructures. We
may never achieve favorable operating results or profitability.
Our quarterly operating results may vary, which could affect the market
price of our common stock
Our operating results have varied on a quarterly basis during our
limited operating history, and we expect to experience significant fluctuations
in future quarterly operating results. These fluctuations have been and may in
the future be caused by numerous factors, many of which are outside of our
control, including, but not limited to:
- market acceptance of and demand for our products and services
- our ability to attract and retain customers and subscribers
- expenses relating to acquisitions and strategic partnerships
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- usage of the Internet and our ability to maintain and increase traffic
on our web site
- our ability to continue to develop and extend our brand
- our ability to effectively integrate the operations and technologies
of acquired businesses with our operations
- introduction and timing of new products and services or enhancements by
us or our competitors
- capacity constraints and dependencies on computer infrastructure
- economic conditions affecting the Internet or healthcare industries
- general economic conditions
Fluctuations in our quarterly results could adversely affect the market
price of our common stock in a manner unrelated to our long-term operating
performance. We expect to increase activities and spending in substantially all
operational areas and will base our expense levels in part upon our expectations
concerning future revenue, and these expense levels will be relatively fixed in
the short term. If we have lower revenue, we may not be able to reduce spending
in the short term in response. Any shortfall in revenue would have a direct
impact on our results of operations. As a result, we believe that
period-to-period comparisons of our results of operations will not necessarily
be meaningful and should not be relied upon as an indicator of future
performance. For these and other reasons, it is likely that in some future
quarter or quarters we may not meet the earnings estimates of securities
analysts or investors, which would materially and adversely affect our stock
price.
Our business will suffer if we fail to successfully integrate any acquired
businesses and technologies in the future
We have in the past acquired, and may in the future acquire,
businesses, technologies, services, product lines or content databases. We are
in the process of completing the integration and consolidation of the
operations, products and services, technologies and personnel of our November
1999 acquisitions of WebMD, MedE America and Medcast, as well as our January
2000 acquisition of Kinetra and strategic partnership with News Corporation, and
we will need to integrate and consolidate the operations, products and services,
technologies and personnel of Envoy, Medical Manager, CareInsite and OnHealth
upon our completion of these pending mergers. We cannot guarantee that any
acquired businesses will be successfully integrated with our operations in a
timely manner, or at all. The successful integration of the acquired businesses
into our operations is critical to our future performance. Failure to
successfully integrate acquired businesses or to achieve operating synergies
would have a material adverse effect on our business, financial condition and
results of operation. Integrating any newly acquired organizations and
technologies in the future could be expensive, time consuming and may strain our
resources. Our pending and any future acquisitions could divert management's
attention from other business concerns and expose us to unforeseen liabilities
or risks associated with entering new markets. In addition, we may lose key
employees while integrating these new companies. We may also lose our current
strategic partners and customers if any acquired companies have relationships
with competitors of our strategic partners or customers.
Challenges to the successful integration of acquired businesses include,
but are not limited to:
- centralization and consolidation of financial, operational and
administrative functions
- integration of platforms, networks and service centers
- ability to cross-sell products and services to our existing customer base
and customer bases of acquired companies
- integration and retention of personnel
- potential conflicts in customer, strategic, sponsor or advertising
relationships
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- need to coordinate geographically diverse organizations
- compliance with regulatory requirements
Consequently, we may not be successful in integrating acquired businesses or
technologies and may not achieve anticipated revenue and cost benefits. We also
cannot guarantee that these acquisitions will result in sufficient revenues or
earnings to justify our investment in, or expenses related to, these
acquisitions or that any synergies will develop. If we fail to execute our
acquisition strategy successfully for any reason, our business will suffer
significantly.
Managing our growth through acquisitions may strain our administrative,
technical and financial resources
We have rapidly and significantly expanded our operations recently and
expect to continue to do so. Our growth has been accomplished primarily through
acquisitions, including our mergers with WebMD, MedE America, Medcast and
Kinetra. This growth has placed a significant strain on our managerial,
operational, financial and other resources and is expected to continue to strain
our resources. If we are unable to respond to and manage this expected growth,
then the quality of our services and our results of operations could be
materially adversely affected.
Our current platforms, information systems, procedures and controls may
not continue to support our operations, and may hinder our ability to exploit
the market for healthcare applications and services. We are in the process of
completing the integration of our accounting and management information systems
following the mergers of WebMD, MedE America an Medcast in November 1999 and
Kinetra in January 2000. We could experience interruptions to our business while
we transition to new systems. We cannot guarantee that our systems, procedures
and controls will be adequate to support expansion of our operations.
Our business and stock price could suffer if we fail to complete our
pending acquisitions
In the first quarter of 2000, we entered into merger agreements
providing for our acquisition of Envoy, Medical Manager, CareInsite and
OnHealth. The completion of each is subject to regulatory approval, including
approval from state and federal antitrust agencies, and other customary closing
conditions. The Medical Manager and CareInsite mergers are subject to the
approval of our stockholders, Medical Manager's stockholders and CareInsite's
stockholders and the OnHealth merger is subject to approval by OnHealth's
stockholders. In addition, the closing of the Medical Manager and CareInsite
mergers are conditioned on each other. We cannot guarantee that regulatory
approvals will be received, or that we will not be required to make changes in
our business in order to receive regulatory approvals, or that other closing
conditions of any of our pending mergers will be satisfied in a timely manner,
or at all. Failure to complete these mergers in a timely manner would have a
material effect on our business, results of operations and stock price.
Future stock issuances will dilute our stockholders and could result in
adverse accounting consequences
We intend to pay for some of our acquisitions and branding and
advertising services by issuing additional common stock which would dilute our
stockholders. We may also use cash to acquire companies or technologies and may
need to incur debt to pay for these acquisitions. Acquisition financing may not
be available on favorable terms, or at all. In addition, we may be required to
amortize significant amounts of goodwill and other intangible assets in
connection with future acquisitions, which could materially increase our
operating expenses.
Our ability to generate revenues will suffer if we do not quickly expand
our suite of applications and service offerings
We currently offer a limited number of applications on our
Internet-based platform and some of our service offerings are not fully
developed or launched. We must quickly introduce new applications and services,
improve the functionality of our existing services and successfully launch these
services in a timely manner in order to attract and retain subscribers. We
expect that our advertising and sponsorship revenues will be dependent on the
level of usage of our services by subscribers and consumers, and believe that
levels of usage will not increase unless we improve functionality. We rely on a
combination of internal development,
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strategic relationships, licensing and acquisitions to develop these
applications and services. Each of our applications, regardless of how it was
developed, must be integrated and customized to operate with existing customer
legacy computer systems and our platform. We are currently in the process of
migrating many of our acquired applications and products and services to our
Internet-based platform. Developing, integrating and customizing these
applications and services will be time consuming, and these applications and
services may never achieve market acceptance, which could also cause our
business to suffer.
We are dependent on strategic relationships to generate some of our revenue
Our ability to generate revenue will suffer if we cannot establish and
maintain strategic relationships. We must establish and maintain strategic
relationships with leaders in a number of healthcare and Internet industry
segments. For a more complete description of our strategic relationships, see
the section entitled "Business -- Strategic relationships," in our 1999 annual
report and for a description of our revenue resulting from these relationships,
see "--Our revenue will be concentrated in a few customers and our ability to
generate revenue would suffer if we lost any of these customers." Our strategic
relationships are critical to our success because we believe that these
relationships will provide additional subscribers and consumers to our web site
and will generate acceptance of our platform, applications and services. We may
not be able to establish commercial acceptance of our platform, applications and
services unless we maintain our existing strategic relationships and establish
and maintain additional strategic relationships in the future.
We may compete with potential strategic partners. Some of our current
and future strategic partners may compete with us and some strategic
relationships or acquisitions may put us in competition with existing strategic
partners or customers. For example, Medical Manager, which we have agreed to
acquire, competes with some of our strategic partners in the physician practice
management software business. In addition, we may not be able to maintain or
establish relationships with key participants in the healthcare and Internet
industries if we have already established relationships with competitors of
these key participants.
We have granted exclusive rights to strategic partners. We have agreed
that some of our strategic partners will be our exclusive providers of some of
our applications and content. For example, we have entered into strategic
agreements with exclusive online pharmacy and medical supplies and equipment
e-commerce partners and providers of various categories of content and services.
These agreements may limit our access to other applications and content we might
otherwise be able to make available to our customers. Our inability to offer
such applications and content could cause our business to suffer.
Our revenue will be concentrated in a few customers, and our ability to
generate revenue would suffer if we lost any of these customers
We received a significant amount of our 1999 revenue from three
customers. Quest Diagnostics, which recently acquired SmithKline Labs, Beech
Street and UnitedHealth Group, each accounted for more than 10% of our revenue
for the year ended December 31, 1999, and together accounted for approximately
57.9% of our revenue for the same period. In addition, Quest Diagnostics
accounted for 11% of our revenue for the three months ended March 31, 2000. We
expect that these three customers, together with Microsoft, may account for a
significant amount of our revenue for 2000. Microsoft will have the right to
terminate its strategic alliance with us if we acquire Medical Manager and
CareInsite and within 60 days thereafter we cannot resolve with Microsoft any
conflicts that may be created by our ownership of those companies. For details
regarding our relationship with Microsoft, see the section entitled "Business -
Strategic relationships -- Microsoft" in our 1999 annual report. If we do not
generate as much revenue from these customers as we expect, or if we lose any of
these customers, our revenue will be significantly reduced which would harm our
business and results of operations.
Our ability to generate revenue will suffer if we cannot attract and
retain subscribers
We must attract and retain subscribers to WebMD Practice in order to
generate subscription revenue. In addition, our ability to generate advertising
and sponsorship revenue and transaction revenue will be dependent on the
number of subscribers and level of usage by those subscribers. We cannot
guarantee that we will be able to attract new or retain existing subscribers. In
particular, we cannot guarantee that we will retain
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subscribers whose subscriptions are initially paid for by our strategic partners
once those subscribers are required to pay for their subscriptions themselves or
that these subscribers will actually use our services.
Our business will suffer if healthcare participants do not accept Internet
solutions
Our business model depends on the adoption of Internet solutions by
healthcare participants. Our ability to generate revenue could suffer
dramatically if Internet solutions are not accepted or not perceived to be
effective.
The Internet infrastructure may be unable to support the demands placed
on it by continued growth and use of the Internet. The adoption of Internet
solutions by healthcare participants will require the acceptance of a new way of
conducting business and exchanging information. To maximize the benefits of our
platform, healthcare participants must be willing to allow sensitive information
to be stored in our databases and to conduct healthcare transactions over the
Internet.
Performance problems with our systems could damage our business
Our customer satisfaction and our business could be harmed if we or our
customers experience system delays, failures or loss of data. We currently
process substantially all our customer transactions and data at our facilities.
Although we have a contingency plan for emergencies, 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 could interrupt data processing or result in the loss of stored data.
While we have general liability insurance that we believe is adequate, including
coverage for errors and omissions, we may not be able to maintain this insurance
on reasonable terms in the future. In addition, our insurance may not be
sufficient to cover large claims and our insurer could deny coverage on claims.
If we are liable for an uninsured or underinsured claim or if our premiums
increase significantly, our financial condition could be materially harmed.
Performance problems with the systems of our service and content providers
could harm our business
We depend on service and content providers to provide information and
data feeds on a timely basis. Our web site could experience disruptions or
interruptions in service due to the failure or delay in the transmission or
receipt of this information. In addition, our customers depend on Internet
service providers, online service providers and other web site operators for
access to our web site. All of these providers have experienced significant
outages in the past and could experience outages, delays and other difficulties
in the future due to system failures unrelated to our systems. Any significant
interruptions in our services or increases in response time could result in a
loss of potential or existing customers, strategic partners, advertisers or
sponsors and, if sustained or repeated, could reduce the attractiveness of our
services.
If our systems experience security breaches or are otherwise perceived to
be insecure, our reputation will suffer
A material security breach could damage our reputation or result in
liability. We retain confidential customer and patient information in our
processing centers. We may be required to spend significant capital and other
resources to protect against security breaches or to alleviate problems caused
by breaches. Any well-publicized compromise of Internet security could deter
people from using the Internet or from conducting transactions that involve
transmitting confidential information, including confidential healthcare
information. Therefore, it is critical that these facilities and infrastructure
remain secure and are perceived by the marketplace to be secure. Despite the
implementation of security measures, this infrastructure may be vulnerable to
physical break-ins, computer viruses, programming errors, attacks by third
parties or similar disruptive problems.
Our business will be harmed if we are unsuccessful in responding to rapid
technology changes in our markets
Healthcare information exchange and transaction processing is a
relatively new and evolving market. The pace of change in our markets is rapid
and there are frequent new product introductions and evolving industry
standards. We may be unsuccessful in responding to technological developments
and changing customer
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needs. In addition, our applications and services offerings may become obsolete
due to the adoption of new technologies or standards.
Our platform infrastructure and scalability are not proven and we may fail
to respond to new growth
To date, we have processed a limited number and variety of transactions
over our platforms. Similarly, a limited number of healthcare participants use
these platforms. Our systems may not accommodate increased use while maintaining
acceptable overall performance. We must continue to expand and adapt our network
infrastructure to accommodate additional users, increased transaction volumes
and changing customer requirements. This expansion and adaptation will be
expensive and could divert our attention from other activities.
If we are unable to generate significant advertising revenues, our future
results of operations could be materially adversely affected
We derive a portion of our revenues from advertising on our web site.
We may not be able to continue to generate significant advertising revenues. No
standards have been widely accepted to measure the effectiveness of web
advertising. If no standards develop, existing advertisers may not continue
their current level of web advertising, and advertisers that have traditionally
relied on other advertising media may be reluctant to advertise on the web.
Advertisers that already have invested substantial resources in other
advertising methods may be reluctant to adopt a new strategy. Our business would
be adversely affected if the market for web advertising fails to develop or
develops more slowly than expected. Different pricing models are used to sell
advertising on the web. It is difficult to predict which, if any, will emerge as
the industry standard. This makes it difficult to project future advertising
revenues. The level of subscriber and consumer usage for our services is likely
to be a factor in determining advertising rates, and we cannot predict whether
those subscribers whose subscriptions are paid for by our strategic partners
will actually use our services. Moreover, filter software programs that limit or
prevent advertising from being delivered to a web user's computer are available.
Widespread adoption of this software could adversely affect the commercial
viability of web advertising.
If we are unable to generate significant revenue from e-commerce
transactions, our future results of operations could be materially
adversely affected
We cannot guarantee that we will be able to generate significant
transaction revenues in the future. We have developed relationships with service
providers to offer healthcare products and services through direct links from
our web site to their web sites. However, there is no established business model
for the sale of healthcare products or services over the Internet. Accordingly,
we have no significant experience in the sale of products or services online and
the development of relationships with providers of these products and services,
nor can we predict the rate at which our customers will elect to engage in this
form of commerce or the compensation that we will receive for enabling these
transactions.
Lengthy sales and implementation cycles for our solutions could adversely
affect our revenue growth
A key element of our strategy is to market our solutions directly to
large healthcare organizations. We will be unable to control many of the factors
that will influence our customers' buying decisions. We expect that the sales
and implementation process will be lengthy and will involve a significant
technical evaluation and commitment of capital and other resources by our
customers. The sale and implementation of our solutions are subject to delays
due to our customers' internal budgets and procedures for approving large
capital expenditures and deploying new technologies within their networks.
We will need to expend substantial resources to integrate our
applications with the existing legacy and client-server architectures of large
healthcare organizations. We have limited experience in integrating our
applications with large, complex architectures, and we may experience delays in
the integration process. These delays would, in turn, delay our ability to
generate revenue from these applications and could adversely affect our results
of operations.
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We will face significant competition
The market for healthcare information services is intensely
competitive, rapidly evolving and subject to rapid technological change. Many of
our competitors have greater financial, technical, product development,
marketing and other resources than we have. These organizations may be better
known and have more customers than we have. Many of our competitors have also
announced or introduced Internet strategies that will compete with our
applications and services. We may be unable to compete successfully against
these organizations.
We have many competitors, including:
- healthcare information software vendors
- healthcare electronic data interchange companies
- large information technology consulting service providers
- online services or web sites targeted to the healthcare industry,
physicians and healthcare consumers generally
- publishers and distributors of traditional offline media, including those
targeted to healthcare professionals, many of which have established or may
establish web sites
- general purpose consumer online services and portals and other
high-traffic web sites which provide access to healthcare-related content and
services
- public sector and non-profit web sites that provide healthcare
information without advertising or commercial sponsorships
- vendors of healthcare information, products and services distributed
through other means, including direct sales, mail and fax messaging
We expect that major software information systems companies and others
specializing in the healthcare industry will offer competitive applications or
services. In addition, some of our existing and potential customers and
strategic partners may also compete with us. For example, in April 2000, it was
reported that a consortium of six health insurance companies may join together
to develop an online project which links insurers, doctors and patients. If this
consortium decides to proceed with its plans to allow patients to enroll in
health plans and choose doctors online, while also taking care of administrative
tasks such as processing payment claims, it could compete with our services.
Our business could be adversely affected as a result of political,
regulatory, economic or other changes in the healthcare industry
The healthcare industry is highly regulated and is subject to changing
political, economic and regulatory influences. These factors affect the
purchasing practices and operation of healthcare organizations. Changes in
current healthcare financing and reimbursement systems could cause us to make
unplanned modifications of applications or services, or result in delays or
cancellations of orders or in the revocation of endorsement of our applications
and services by healthcare participants. Federal and state legislatures have
periodically considered programs to reform or amend the U.S. healthcare system
at both the federal and state level. These programs may contain proposals to
increase governmental involvement in healthcare, lower reimbursement rates or
otherwise change the environment in which healthcare industry participants
operate. Healthcare industry participants may respond by reducing their
investments or postponing investment decisions, including investments in our
applications and services. We do not know what effect any proposals would have
on our business.
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Government regulation could adversely affect our business
Our business is and will continue to be subject to government
regulation. Existing and new laws and regulations could adversely affect our
business. Laws and regulations may be adopted with respect to the Internet or
other online services covering issues such as:
- user privacy and patient confidentiality
- pricing
- content
- copyrights and patents
- distribution
- characteristic and quality of products and services
We cannot predict whether these laws will be adopted and how they will
affect our business.
Regulation regarding privacy and patient confidentiality. Internet user
privacy has become an issue both in the U.S. and abroad. Whether and how
existing privacy or consumer protection laws in various jurisdictions apply to
the Internet is uncertain and may take years to resolve. Any legislation or
regulations of this nature could affect the way we conduct our business,
particularly in our collection or use of personal information, and could harm
our business. Further, activities on or using the Internet have come under
increased scrutiny, including increased investigation in the healthcare arena by
the Federal Trade Commission and heightened media attention.
Similar to many other Internet healthcare companies, we have recently
received a request for information from the FTC concerning our web site privacy
policies and practices. While we believe we are in compliance with all
applicable laws, all third party contractual commitments and our published
privacy commitments, government inquiries such as this inquiry can divert
management's attention from other matters and create unfavorable publicity.
Numerous state and federal laws govern the collection, dissemination, use,
access to and confidentiality of patient health information. Many states have
laws and regulations that protect the confidentiality of medical records or
medical information. In addition, the federal Department of Health and Human
Services has proposed regulations implementing the Health Insurance Portability
and Accountability Act of 1996, or HIPAA, concerning standards for electronic
transactions, security and electronic signatures and privacy of individually
identifiable health information. The proposed regulations, among other things,
would require companies to develop security standards for all health information
that is used electronically. The proposed regulations would impose significant
obligations on companies that send or receive electronic health information. The
application of these laws to the personal information we collect could create
potential liability under these laws. We have designed our services to comply
with these proposed regulations. However, we cannot predict when these proposed
regulations will be finalized and whether they will be changed before they are
finalized. Any changes could cause us to use additional resources to revise our
platform and services.
Additional legislation governing the distribution of medical records exists
and has been proposed at both the state and federal levels. We will be subject
to extensive regulation relating to the confidentiality and release of patient
records, and it may be expensive to implement security or other measures to
comply with new legislation and final regulations. Further, we may be restricted
or prevented from maintaining or delivering patient records electronically. Such
a restriction may have an adverse effect on our business.
Federal and state regulation of healthcare relationships. There are federal
and state laws that govern patient referrals, physician financial relationships
and inducements to beneficiaries of federal healthcare programs. The federal
Anti-Kickback Law prohibits any person or entity from offering, paying,
soliciting or receiving anything of value, directly or indirectly, for the
referral of patients covered by Medicare, Medicaid and other federal healthcare
programs or the leasing, purchasing, ordering or arranging for or recommending
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the lease, purchase or order of any item, good, facility or service covered by
these programs. The Anti-Kickback Law is broad and may apply to some of our
activities. Penalties for violating the Anti-Kickback Law include imprisonment,
fines and exclusion from participating, directly or indirectly, in Medicare,
Medicaid and other federal healthcare programs. Many states also have similar
anti-kickback laws that are not necessarily limited to items or services for
which payment is made by a federal healthcare program. We carefully review our
practices with regulatory experts to ensure that we comply with all applicable
laws. However, the laws in this area are both broad and vague and it is often
difficult or impossible to determine precisely how the laws will be applied,
particularly to new services such as ours. Any determination by a state or
federal regulatory agency that any of our practices violate any of these laws
could subject us to civil or criminal penalties and require us to change or
terminate certain portions of our business.
We currently provide billing services and intend to provide repricing
services to providers and, therefore, may be subject to state and federal laws
that govern the submission of claims for medical expense reimbursement. These
laws generally prohibit an individual or entity from knowingly presenting or
causing to be presented a claim for payment from Medicare, Medicaid or other
third party payers that is false or fraudulent, or is for an item or service
that was not provided as claimed. These laws also provide civil and criminal
penalties for noncompliance. We have designed our current transaction services
and will design any future services to place the responsibility for compliance
with these laws on our customers. However, we cannot guarantee that state and
federal agencies will regard billing errors processed by us as inadvertent and
not in violation of these laws.
Regulation by the Food and Drug Administration. Some computer
applications and software are considered medical devices and are subject to
regulation by the United States Food and Drug Administration, or the FDA. FDA
regulations are broadly worded and its guidance in these areas is outdated,
leaving uncertainty in how these regulations apply. We have attempted to design
our services so that our computer applications and software are not considered
to be medical devices. However, the FDA may take the position that our services
are subject to FDA regulation. In addition, we may expand our services in the
future to areas that subject us to FDA regulation. We have no experience in
complying with FDA regulations. We believe that complying with FDA regulations
may be time-consuming, burdensome and expensive and could delay our introduction
of new applications or services.
Regulation of transaction services. State and federal statutes
and regulations governing transmission of claims may affect our operations. For
example, Medicaid rules require certain processing services and eligibility
verification to be maintained as separate and distinct operations. We believe
that our practices are in compliance with applicable state and federal laws.
These laws, though, are complex and changing, and the government may take
positions that are inconsistent with our practices.
Professional regulation. The practice of most healthcare
professions requires licensing under applicable state law. In addition, the laws
in some states prohibit business entities from practicing medicine, which is
referred to as the prohibition against the corporate practice of medicine. We
have attempted to structure our web site, strategic relationships and other
operations to avoid violating these state licensing and professional practice
laws. A state, however, may determine that some portion of our business violates
these laws and may seek to have us discontinue those portions or subject us to
penalties or licensure requirements. We employ and contract with physicians who
provide only medical information to consumers, and we have no intent to provide
medical care or advice. We do not maintain professional liability insurance
because we believe we are not a healthcare provider. Any determination that we
are a healthcare provider and acted improperly as a healthcare provider may
result in liability for which we are not insured.
Complying with antitrust regulations may delay completion of our pending
acquisitions
The FTC, Department of Justice or other federal or state regulatory
agencies charged with enforcement of the antitrust laws may review our future
acquisitions or business activities. We believe that our business activities,
contractual relationships and pending acquisitions comply with all applicable
antitrust laws.
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In the course of reviewing our pending acquisitions and strategic
relationships, it is possible that governmental agencies may seek to require us
to modify our pending acquisitions or business activities. If governmental
agencies seek modifications, it could delay our completion of these
transactions. If the governmental agencies were successful in requiring
modifications, it could have an adverse effect on our operations. We have
received and responded to a request from the DOJ for additional information in
connection with our pre-merger notification filing under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, with respect to our announced
acquisition of Envoy. This acquisition may not be completed until 20 days after
the DOJ determines that we have substantially complied with the request for
additional information, unless this waiting period is terminated earlier by the
DOJ.
Third parties may bring claims against us as a result of content provided
on our web site, which may be expensive and time consuming to defend
We could be subject to third party claims based on the nature and
content of information supplied on our web site by us or third parties,
including content providers, medical advisors or users. We could also be subject
to liability for content that may be accessible through our web site or third
party web sites linked from our web sites or through content and information
that may be posted by users in chat rooms or bulletin boards. Even if these
claims do not result in liability to us, investigating and defending against
these claims could be expensive and time consuming and could divert management's
attention away from operating the business.
Our intellectual property may be subjected to infringement claims or may be
infringed upon
Our intellectual property is important to our business. We could be
subject to intellectual property infringement claims as the number of our
competitors grows and the functionality of our applications overlaps with
competitive offerings. These claims, even if not meritorious, could be expensive
and divert management's attention from our operations. If we become liable to
third parties for infringing their intellectual property rights, we could be
required to pay a substantial damage award and to develop non-infringing
technology, obtain a license or cease selling the applications that contain the
infringing intellectual property. We may be unable to develop non-infringing
technology or obtain a license on commercially reasonable terms, or at all. In
addition, we may not be able to protect against misappropriation of our
intellectual property. Third parties may infringe upon our intellectual property
rights. If we do not detect any unauthorized use, we may be unable to enforce
our rights.
Our business will be adversely affected if we cannot attract and retain key
personnel
Our future operating results will substantially depend on the ability
of our officers and key employees to manage changing business conditions and to
implement and improve our technical, administrative, financial control and
reporting systems. We need to attract, integrate, motivate and retain highly
skilled technical people. In particular, we need to attract experienced
professionals capable of developing, selling and installing complex healthcare
information systems. We face intense competition for these people. Our executive
management team, including Jeffrey T. Arnold, our Chief Executive Officer, and
W. Michael Long, our Chairman, are critical to our success.
Our business could be adversely affected as a result of our international
expansion
One element of our strategic alliance with News Corporation is the
formation of WebMD International as a joint venture with News Corporation to
launch our services worldwide, other than in the U.S. and Japan. In addition, we
have entered into an agreement with one of our strategic partners to form an
international joint venture in Japan. We have extremely limited experience in
developing localized versions of our products and services. WebMD International
and any future international ventures may not be successful in launching our
services into foreign markets.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
The primary objective of our investment activities is to preserve
principal while at the same time maximizing the income we receive from our
investments without significantly increasing risk. Some of the securities that
we have invested in may be subject to market risk. This means that a change in
prevailing interest rates may cause the principal amount of the investment to
fluctuate. For example, if we hold a security that was issued with a fixed
interest rate at the then-prevailing rate and the prevailing interest rate later
rises, the principal amount of our investment will probably decline. To minimize
this risk, we maintain our portfolio of cash equivalents and short-term
investments in a variety of securities, including commercial paper, other
non-government debt securities and money market funds. In general, money market
funds are not subject to market risk because the interest paid on such funds
fluctuates with the prevailing interest rate. In addition, we invest in
relatively short-term securities. As of March 31, 2000, all of our investments
mature in less than three months.
The following table presents the amounts of our cash equivalents that
are subject to market risk and weighted-average interest rates as of March 31,
2000. This table does not include money market funds because those funds are not
subject to market risk.
MATURING IN
--------------------------------------
THREE MONTHS FAIR
OR LESS VALUE
------------ ----------
(DOLLARS IN THOUSANDS)
Included in cash and cash equivalents....................... $1,097,969 $1,097,969
Weighted-average interest rate......................... 6.11%
EXCHANGE RATE SENSITIVITY
Currently the majority of Healtheon/WebMD's sales and expenses are
denominated in U.S. dollars and as a result we have experienced no significant
foreign exchange gains and losses to date. We conduct only limited transactions
in foreign currencies, and we do not anticipate that foreign exchange gains or
losses will be significant in the foreseeable future. We have not engaged in
foreign currency hedging activities to date.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The exhibits listed in the accompanying Exhibit Index on page 29 are filed
as part of this quarterly report.
(b) The following reports on Form 8-K were filed during the quarter ended
March 31, 2000:
- Report on Form 8-K filed on January 27, 2000 pursuant to which the
Registrant announced entering into a definitive merger agreement to
acquire Envoy from Quintiles.
- Report on Form 8-K filed on January 28, 2000 pursuant to which the
Registrant announced the completion of the investment by Janus.
- Report on Form 8-K filed on February 8, 2000 pursuant to which the
Registrant announced the completion of the transactions contemplated by
its strategic alliance with News Corporation.
- Report on Form 8-K filed on February 10, 2000 pursuant to which the
Registrant announced the completion of the acquisition of Kinetra.
- Report on Form 8-K filed on February 14, 2000 pursuant to which the
Registrant announced entering into definitive merger agreements to acquire
Medical Manager and CareInsite.
- Report on Form 8-K filed on February 16, 2000 pursuant to which the
Registrant announced entering into a definitive merger agreement to
acquire OnHealth.
- Report on Form 8-K/A filed on February 22, 2000 pursuant to which the
Registrant filed the merger agreement and voting agreement as exhibits
in connection with its previously announced acquisition of OnHealth.
- Report on Form 8-K/A filed on February 24, 2000 pursuant to which the
Registrant filed the merger agreements and voting agreements as exhibits
in connection with its previously announced acquisitions of Medical
Manager and CareInsite.
- Report on Form 8-K/A filed on March 23, 2000 pursuant to which the
Registrant filed a voting agreement as an exhibit in connection with its
previously announced acquisitions of Medical Manager and CareInsite.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
HEALTHEON/WEBMD CORPORATION
Date: May 15, 2000 By: /s/ John L. Westermann III
-----------------------------------------------------
John L. Westermann III
Executive Vice President, Chief Financial Officer,
Secretary and Treasurer
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
10.1 Amended and Restated Operating Agreement of The Health Network LLC
dated January 26, 2000, between Registrant and AHN/FIT Cable, LLC
10.2 Amended and Restated Operating Agreement of The H/W Health & Fitness
LLC dated January 26, 2000, between Healtheon/WebMD Cable Corporation
and AHN/FIT Internet, LLC
10.3 Content License Agreement dated January 26, 2000, between Fox
Entertainment Group, Inc. and Registrant
10.4 Healtheon/WebMD Corporation Registration Rights Agreement dated January
26, 2000, between Registrant, Eastrise Profits Limited, AHN/FIT Cable,
LLC, AHN/FIT Internet, LLC, News America Incorporated, and Fox
Broadcasting Company
10.5 Healtheon/WebMD Media Services Agreement dated January 26, 2000,
between Registrant, Eastrise Profits Limited and Fox Entertainment
Group, Inc.
10.6 Content License Agreement dated January 26, 2000, between The News
Corporation Limited and Registrant
10.7 Operating Agreement of WebMD International LLC dated January 26, 2000,
between HW International Holdings, Inc. and IJV Holdings Inc.
10.8 WebMD International Media Services Agreement dated January 26, 2000,
between WebMD International LLC and Eastrise Profits Limited
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10.9 Assignment and Assumption Agreement dated January 26, 2000,
between AHN/FIT Internet, and H/W Health & Fitness, LLC
10.10 Stock Purchase Agreement dated January 26, 2000 between Registrant
and Janus Capital Corporation.
10.11 Healtheon/WebMD Corporation Registration Rights Agreement dated
January 26, 2000 between Registrant and Janus Capital Corporation
27.1 Financial data schedule (EDGAR only)
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