WEBMD CORPORATION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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[X] |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended June 30, 2005 |
or
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[ ] |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from
to
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Commission file number 0-24975
WEBMD CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware |
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94-3236644 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification Number) |
669 River Drive, Center 2
Elmwood Park, New Jersey 07407-1361
(Address of principal executive offices)
(201) 703-3400
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 (the Exchange
Act) during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).
Yes þ No o
As of August 3, 2005, there were 345,333,683 shares of
the
registrants Common Stock outstanding.
WEBMD CORPORATION
QUARTERLY REPORT ON FORM 10-Q
For the period ended June 30, 2005
TABLE OF CONTENTS
WebMD®, WebMD Health®, dakota
imagingtm,
Digital Office Manager®, DIMDX®,
Emdeontm,
Emdeon Business
Servicestm,
Emdeon Practice
Servicestm,
Envoy®, ExpressBill®, Image
DirectorSM,
Intergy®, MedicineNet®, Medifax®,
Medifax-EDI®, Medpulse®, Medscape®, MEDPOR®,
Physician
FlowSM,
POREX®, Publishers Circle®, RxList®, The
Little Blue
Booktm,
The Medical Manager® and
ViPSSM
are trademarks of WebMD Corporation or its subsidiaries.
Note Regarding Name Change
As previously announced and as discussed in
Managements Discussion and Analysis of Financial
Condition and Results of Operations
Introduction Recent Developments, we plan to
seek stockholder approval, at our 2005 Annual Meeting of
Stockholders, for changing our corporate name from WebMD
Corporation to Emdeon Corporation and have begun to use Emdeon
in the names of two of our segments, Emdeon Business Services
(formerly WebMD Business Services) and Emdeon Practice Service
(formerly WebMD Practice Services), and as a brand for some of
their products and services.
2
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains both historical
and forward-looking statements. All statements other than
statements of historical fact are, or may be, forward-looking
statements. For example, statements concerning projections,
predictions, expectations, estimates or forecasts and statements
that describe our objectives, plans or goals are, or may be,
forward-looking statements. These forward-looking statements
reflect managements current expectations concerning future
results and events and can generally be identified by the use of
expressions such as may, will,
should, could, would,
likely, predict, potential,
continue, future, estimate,
believe, expect, anticipate,
intend, plan, foresee, and
other similar words or phrases, as well as statements in the
future tense.
Forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual
results, performance or achievements to be different from any
future results, performance and achievements expressed or
implied by these statements. The following important risks and
uncertainties could affect future results, causing those results
to differ materially from those expressed in our forward-looking
statements:
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the failure to achieve sufficient levels of customer utilization
and market acceptance of new or updated products and services; |
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the inability to successfully deploy new or updated applications
or services; |
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difficulties in forming and maintaining relationships with
customers and strategic partners; |
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the anticipated benefits from acquisitions not being fully
realized or not being realized within the expected time frames; |
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the inability to attract and retain qualified personnel; |
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general economic, business or regulatory conditions affecting
the healthcare, information technology, Internet and plastic
industries being less favorable than expected; and |
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the other risks and uncertainties described in this Quarterly
Report on Form 10-Q under the heading
Managements Discussion and Analysis of Financial
Condition and Results of Operations Factors That May
Affect Our Future Financial Condition or Results of
Operations. |
These factors are not necessarily all of the important factors
that could cause actual results to differ materially from those
expressed in any of our forward-looking statements. Other
unknown or unpredictable factors also could have material
adverse effects on our future results.
The forward-looking statements included in this Quarterly Report
on Form 10-Q are made only as of the date of this Quarterly
Report. We expressly disclaim any intent or obligation to update
any forward-looking statements to reflect subsequent events or
circumstances.
3
PART I
FINANCIAL INFORMATION
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ITEM 1. |
Financial Statements |
WEBMD CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
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June 30, | |
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December 31, | |
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2005 | |
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2004 | |
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(Unaudited) | |
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ASSETS |
Current assets:
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Cash and cash equivalents
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$ |
35,930 |
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$ |
46,019 |
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Short-term investments
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152,005 |
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61,675 |
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Accounts receivable, net of allowance for doubtful accounts of
$13,885 at June 30, 2005 and $13,433 at December 31,
2004
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220,817 |
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204,447 |
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Inventory
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13,430 |
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13,978 |
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Prepaid expenses and other current assets
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39,724 |
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40,613 |
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Total current assets
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461,906 |
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366,732 |
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Marketable debt securities
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323,182 |
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511,864 |
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Marketable equity securities
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4,094 |
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4,017 |
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Property and equipment, net
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112,118 |
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89,677 |
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Goodwill
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1,028,592 |
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1,010,564 |
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Intangible assets, net
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253,249 |
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260,509 |
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Other assets
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44,822 |
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48,871 |
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$ |
2,227,963 |
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$ |
2,292,234 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
Current liabilities:
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Accounts payable
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$ |
11,167 |
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$ |
17,366 |
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Accrued expenses
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151,993 |
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201,528 |
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Deferred revenue
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114,227 |
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99,543 |
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Total current liabilities
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277,387 |
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318,437 |
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31/4% convertible
subordinated notes due 2007
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299,999 |
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1.75% convertible subordinated notes due 2023
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350,000 |
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350,000 |
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Other long-term liabilities
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5,334 |
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1,283 |
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Commitments and contingencies
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Convertible redeemable exchangeable preferred stock,
$0.0001 par value; 10,000 shares authorized, issued
and outstanding at June 30, 2005 and December 31, 2004
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98,416 |
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98,299 |
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Stockholders equity:
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Preferred stock, $0.0001 par value; 4,990,000 shares
authorized; no shares issued
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Common stock, $0.0001 par value; 900,000,000 shares
authorized; 425,134,952 shares issued at June 30,
2005; 394,041,320 shares issued at December 31, 2004
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43 |
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39 |
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Additional paid-in capital
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12,022,576 |
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11,776,911 |
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Deferred stock compensation
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(5,665 |
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(7,819 |
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Treasury stock, at cost; 80,849,495 shares at June 30,
2005 and December 31, 2004
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(379,968 |
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(379,968 |
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Accumulated deficit
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(10,147,006 |
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(10,172,904 |
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Accumulated other comprehensive income
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6,846 |
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7,957 |
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Total stockholders equity
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1,496,826 |
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1,224,216 |
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$ |
2,227,963 |
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$ |
2,292,234 |
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See accompanying notes.
4
WEBMD CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data, unaudited)
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Three Months Ended | |
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Six Months Ended | |
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June 30, | |
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June 30, | |
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2005 | |
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2004 | |
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2005 | |
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2004 | |
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Revenue
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$ |
322,556 |
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$ |
281,881 |
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$ |
626,490 |
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$ |
553,095 |
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Costs and expenses:
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Cost of operations
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181,950 |
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163,961 |
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354,113 |
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326,603 |
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Development and engineering
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14,457 |
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12,991 |
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29,097 |
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24,087 |
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Sales, marketing, general and administrative
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83,533 |
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83,298 |
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165,670 |
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160,292 |
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Depreciation and amortization
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17,541 |
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13,148 |
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34,045 |
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25,733 |
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Legal expense
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4,283 |
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2,215 |
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8,443 |
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4,252 |
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Interest income
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3,936 |
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4,511 |
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8,257 |
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9,994 |
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Interest expense
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3,895 |
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4,838 |
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8,676 |
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9,586 |
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Other expense (income), net
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1,712 |
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(447 |
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5,544 |
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(484 |
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Income before income tax provision
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19,121 |
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6,388 |
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29,159 |
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13,020 |
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Income tax provision
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2,955 |
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613 |
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3,144 |
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1,544 |
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Net income
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$ |
16,166 |
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$ |
5,775 |
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$ |
26,015 |
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$ |
11,476 |
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Net income per common share:
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Basic
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$ |
0.05 |
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$ |
0.02 |
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$ |
0.08 |
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$ |
0.04 |
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Diluted
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$ |
0.05 |
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$ |
0.02 |
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$ |
0.08 |
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$ |
0.03 |
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Weighted-average shares outstanding used in computing net income
per common share:
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Basic
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337,303 |
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322,919 |
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331,318 |
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316,965 |
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Diluted
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349,624 |
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337,763 |
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342,656 |
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332,582 |
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See accompanying notes.
5
WEBMD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
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Six Months Ended | |
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June 30, | |
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2005 | |
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2004 | |
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Cash flows from operating activities:
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Net income
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$ |
26,015 |
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$ |
11,476 |
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Adjustments to reconcile net income to net cash provided by
operating activities:
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Depreciation and amortization
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34,045 |
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25,733 |
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Amortization of debt issuance costs
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1,333 |
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1,498 |
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Non-cash advertising and distribution services
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5,013 |
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11,284 |
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Non-cash stock-based compensation
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2,367 |
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4,441 |
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Bad debt expense
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3,722 |
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2,914 |
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Loss on redemption of convertible debt
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1,902 |
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Loss (gain) on investments
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3,642 |
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(363 |
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Gain on sale of property and equipment
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(121 |
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Changes in operating assets and liabilities:
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Accounts receivable
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(18,350 |
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(1,724 |
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Inventory
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547 |
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206 |
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Prepaid expenses and other, net
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1,294 |
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(937 |
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Accounts payable
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(5,881 |
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(900 |
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Accrued expenses
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(2,450 |
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(19,179 |
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Deferred revenue
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9,501 |
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6,320 |
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Net cash provided by operating activities
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62,700 |
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40,648 |
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Cash flows from investing activities:
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Proceeds from maturities and sales of available-for-sale
securities
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190,673 |
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1,011,914 |
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Purchases of available-for-sale securities
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(94,350 |
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(1,103,876 |
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Purchases of property and equipment
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(38,717 |
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(12,047 |
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Proceeds received from sale of property and equipment
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400 |
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|
417 |
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Cash paid in business combinations, net of cash acquired
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(74,110 |
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(58,060 |
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Net cash used in investing activities
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(16,104 |
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(161,652 |
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Cash flows from financing activities:
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Redemption of convertible debt
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(86,694 |
) |
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Proceeds from issuance of common stock
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31,437 |
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25,011 |
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Payments of notes payable and other
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(304 |
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(257 |
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Net proceeds from issuance of preferred shares
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98,115 |
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Purchases of treasury stock
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(4,877 |
) |
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Net cash (used in) provided by financing activities
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(55,561 |
) |
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117,992 |
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Effect of exchange rates on cash
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(1,124 |
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(200 |
) |
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Net decrease in cash and cash equivalents
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(10,089 |
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(3,212 |
) |
Cash and cash equivalents at beginning of period
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|
46,019 |
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|
39,648 |
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Cash and cash equivalents at end of period
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$ |
35,930 |
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$ |
36,436 |
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See accompanying notes.
6
WEBMD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data, unaudited)
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1. |
Summary of Significant Accounting Policies |
Basis of Presentation
The unaudited consolidated financial statements of WebMD
Corporation (the Company) have been prepared by
management and reflect all adjustments (consisting of only
normal recurring adjustments) that, in the opinion of
management, are necessary for a fair presentation of the interim
periods presented. The results of operations for the three and
six months ended June 30, 2005 are not necessarily
indicative of the results to be expected for any subsequent
period or for the entire year ending December 31, 2005.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with
U.S. generally accepted accounting principles have been
condensed or omitted under the Securities and Exchange
Commissions rules and regulations.
The unaudited consolidated financial statements and notes
included herein should be read in conjunction with the
Companys audited consolidated financial statements and
notes for the year ended December 31, 2004, which were
included in the Companys Annual Report on Form 10-K
filed with the Securities and Exchange Commission.
Accounting Estimates
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and
accompanying notes. The Company is subject to uncertainties such
as the impact of future events, economic, environmental and
political factors and changes in the Companys business
environment; therefore, actual results could differ from these
estimates. Accordingly, the accounting estimates used in the
preparation of the Companys financial statements will
change as new events occur, as more experience is acquired, as
additional information is obtained and as the Companys
operating environment changes. Changes in estimates are made
when circumstances warrant. Such changes in estimates and
refinements in estimation methodologies are reflected in
reported results of operations; if material, the effects of
changes in estimates are disclosed in the notes to the
consolidated financial statements. Significant estimates and
assumptions by management affect: the allowance for doubtful
accounts, the carrying value of inventory, the carrying value of
prepaid advertising and distribution services, the carrying
value of long-lived assets (including goodwill and intangible
assets), the amortization period of long-lived assets (excluding
goodwill), the carrying value, capitalization and amortization
of software development costs, the carrying value of short-term
and long-term investments, the provision for income taxes and
related deferred tax accounts, certain accrued expenses, revenue
recognition, contingencies, litigation and the value attributed
to warrants issued for services.
Inventory
Inventory is stated at the lower of cost or market value using
the first-in, first-out basis. Cost includes raw materials,
direct labor and manufacturing overhead. Market value is based
on current replacement cost for raw materials and supplies and
on net realizable value for work-in-process and finished goods.
Inventory consisted of the following:
7
WEBMD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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June 30, | |
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December 31, | |
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|
2005 | |
|
2004 | |
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|
| |
|
| |
Raw materials and supplies
|
|
$ |
3,331 |
|
|
$ |
3,925 |
|
Work-in-process
|
|
|
1,470 |
|
|
|
1,335 |
|
Finished goods and other
|
|
|
8,629 |
|
|
|
8,718 |
|
|
|
|
|
|
|
|
|
|
$ |
13,430 |
|
|
$ |
13,978 |
|
|
|
|
|
|
|
|
Accounting for Stock-Based Compensation
The Company accounts for its stock-based employee compensation
plans using the intrinsic value method under the recognition and
measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees (APB
No. 25), and related interpretations. No stock-based
employee compensation cost is reflected in net income with
respect to options granted with an exercise price equal to the
market value of the underlying common stock on the date of
grant. Stock-based awards to non-employees are accounted for
based on provisions of SFAS No. 123, Accounting
for Stock-Based Compensation
(SFAS No. 123), and EITF 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services. The following table illustrates the
effect on net income and net income per common share if the
Company had applied the fair value recognition provisions of
SFAS No. 123 to stock-based employee compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Net income as reported
|
|
$ |
16,166 |
|
|
$ |
5,775 |
|
|
$ |
26,015 |
|
|
$ |
11,476 |
|
Add: Stock-based employee compensation expense included in
reported net income
|
|
|
716 |
|
|
|
2,736 |
|
|
|
2,367 |
|
|
|
4,441 |
|
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards
|
|
|
(8,828 |
) |
|
|
(19,889 |
) |
|
|
(19,368 |
) |
|
|
(36,941 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss)
|
|
$ |
8,054 |
|
|
$ |
(11,378 |
) |
|
$ |
9,014 |
|
|
$ |
(21,024 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$ |
0.05 |
|
|
$ |
0.02 |
|
|
$ |
0.08 |
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported
|
|
$ |
0.05 |
|
|
$ |
0.02 |
|
|
$ |
0.08 |
|
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted pro forma
|
|
$ |
0.02 |
|
|
$ |
(0.04 |
) |
|
$ |
0.03 |
|
|
$ |
(0.07 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The pro forma results above are not intended to be indicative of
or a projection of future results. Pro forma information
regarding net income has been determined as if employee stock
options granted subsequent to December 31, 1994 were
accounted for under the fair value method of
SFAS No. 123. The fair value for 2005 options was
estimated at the date of grant using the Black-Scholes option
pricing model employing weighted average assumptions that were
substantially consistent with the 2004 assumptions except with
respect to the volatility assumption which was 0.5 for options
granted during the six months ended June 30, 2005. The 2004
assumptions were included in Note 14 to the consolidated
financial statements contained in the Companys 2004 Annual
Report on Form 10-K filed with the Securities and Exchange
Commission.
Net Income Per Common Share
Basic income per common share and diluted income per common
share are presented in conformity with SFAS No. 128,
Earnings Per Share
(SFAS No. 128). In accordance with
SFAS No. 128, basic
8
WEBMD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
income per common share has been computed using the
weighted-average number of shares of common stock outstanding
during the period, increased to give effect to the assumed
conversion of the Convertible Redeemable Exchangeable Preferred
Stock. Diluted income per common share has been computed using
the weighted-average number of shares of common stock
outstanding during the period, increased to give effect to
potentially dilutive securities. The following table presents
the calculation of basic and diluted income per common share
(shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
16,166 |
|
|
$ |
5,775 |
|
|
$ |
26,015 |
|
|
$ |
11,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
326,665 |
|
|
|
312,281 |
|
|
|
320,680 |
|
|
|
310,886 |
|
|
Convertible redeemable exchangeable preferred stock
|
|
|
10,638 |
|
|
|
10,638 |
|
|
|
10,638 |
|
|
|
6,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares Basic
|
|
|
337,303 |
|
|
|
322,919 |
|
|
|
331,318 |
|
|
|
316,965 |
|
Employee stock options, restricted stock and warrants
|
|
|
12,321 |
|
|
|
14,844 |
|
|
|
11,338 |
|
|
|
15,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted-average shares after assumed
conversions Diluted
|
|
|
349,624 |
|
|
|
337,763 |
|
|
|
342,656 |
|
|
|
332,582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.05 |
|
|
$ |
0.02 |
|
|
$ |
0.08 |
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.05 |
|
|
$ |
0.02 |
|
|
$ |
0.08 |
|
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has excluded convertible subordinated notes, as well
as certain outstanding warrants and stock options, from the
calculation of diluted income per common share because such
securities were anti-dilutive during the periods presented. The
following table presents the total number of shares that could
potentially dilute basic income per common share in the future
that were not included in the computation of diluted income per
common share during the periods presented (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Options and warrants
|
|
|
59,832 |
|
|
|
72,403 |
|
|
|
68,888 |
|
|
|
72,398 |
|
Convertible notes
|
|
|
22,742 |
|
|
|
55,129 |
|
|
|
22,742 |
|
|
|
55,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,574 |
|
|
|
127,532 |
|
|
|
91,630 |
|
|
|
127,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassifications
Certain reclassifications have been made to the prior period
financial statements to conform to the current year
presentation, including the classification of auction rate
securities as available-for-sale securities, which are reported
as short-term investments, instead of cash and cash equivalents.
The Company reclassified $170,175 of investments in auction rate
securities that were previously included in cash and cash
equivalents to short-term investments as of June 30, 2004.
The Company has included purchases and sales of auction rate
securities in the accompanying consolidated statements of cash
flows as
9
WEBMD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
a component of its investing activities. This reclassification
had no impact on the Companys results of operations or
cash flow from operations.
2005 Acquisition
On March 14, 2005, the Company acquired HealthShare
Technology, Inc. (HealthShare), a privately held
company that provides online tools that compare cost and quality
measures of hospitals for use by consumers, providers and health
plans. The total purchase consideration of HealthShare was
approximately $29,883, comprised of $29,533 in cash, net of cash
acquired, and $350 of estimated acquisition costs. In addition,
the Company has agreed to pay up to an additional $5,000 during
the three months ended March 31, 2006 if HealthShare
reaches certain revenue thresholds for the year ended
December 31, 2005. The acquisition was accounted for using
the purchase method of accounting and, accordingly, the purchase
price was allocated to the tangible and intangible assets
acquired and the liabilities assumed on the basis of their
respective fair values. In connection with the preliminary
allocation of the purchase price and intangible asset valuation,
goodwill of $23,141 and an intangible asset subject to
amortization of $10,000 were recorded. The Company does not
expect that the goodwill or intangible asset recorded will be
deductible for tax purposes. The intangible asset is content
with an estimated useful life of three years. The results of
operations of HealthShare have been included in the financial
statements of the Company from March 14, 2005, the closing
date of the acquisition, and are included in the WebMD Health
segment.
2004 Acquisitions
On December 24, 2004, the Company acquired MedicineNet,
Inc. (MedicineNet), a privately held operator of a
health information Web site for consumers. The total purchase
consideration of MedicineNet was approximately $17,209 comprised
of $16,732 in cash, net of cash acquired, and $477 of estimated
acquisition costs. In addition, the Company has agreed to pay up
to an additional $15,000 during the three months ended
March 31, 2006 if the number of page views on
MedicineNets Web sites exceeds certain thresholds during
the year ended December 31, 2005. The acquisition was
accounted for using the purchase method of accounting and,
accordingly, the purchase price was allocated to the tangible
and intangible assets acquired and the liabilities assumed on
the basis of their respective fair values. In connection with
the preliminary allocation of the purchase price and intangible
asset valuation, goodwill of $8,929 and intangible assets
subject to amortization of $7,200 were recorded. The Company
does not expect that the goodwill or intangible asset recorded
will be deductible for tax purposes. The intangible assets are
comprised of $5,600 relating to content with estimated useful
lives of three years, $900 relating to customer relationships
with estimated useful lives of two years and $700 relating to
acquired technology with an estimated useful life of three
years. The results of operations of MedicineNet have been
included in the WebMD Health segment.
During October 2004, the Company acquired Esters Filtertechnik
GmbH (Esters), a privately held distributor of
porous plastic products and components. The total purchase
consideration of Esters was approximately $3,333 comprised of
$3,160 in cash, net of cash acquired, and $173 of estimated
acquisition costs. The acquisition was accounted for using the
purchase method of accounting and, accordingly, the purchase
price was allocated to the tangible and intangible assets
acquired and the liabilities assumed on the basis of their
respective fair values. In connection with the preliminary
allocation of the purchase price, goodwill of $1,798 and an
intangible asset subject to amortization of $1,200 were
recorded. The Company does not expect that the goodwill or
intangible asset recorded will be deductible for tax purposes.
The intangible asset is customer relationships with an estimated
useful life of eleven years. The results of
10
WEBMD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
operations of Esters have been included in the financial
statements of the Company from the closing date of the
acquisition and are included in the Porex segment.
On October 1, 2004, the Company acquired RxList, LLC
(RxList), a privately held operator of an online
drug directory for consumers and healthcare professionals. The
total purchase consideration was approximately $5,455 comprised
of $4,500 in cash, $500 to be paid in 2006 and $455 of estimated
acquisition costs. In addition, the Company has agreed to pay up
to an additional $2,500 during each of the three month periods
ended March 31, 2006 and March 31, 2007, if the number
of page views on RxLists Web sites exceeds certain
thresholds during each of the three month periods ended
December 31, 2005 and 2006, respectively. The acquisition
was accounted for using the purchase method of accounting and,
accordingly, the purchase price was allocated to the tangible
and intangible assets acquired and the liabilities assumed on
the basis of their respective fair values. In connection with
the preliminary allocation of the purchase price and intangible
asset valuation, goodwill of $4,420 and an intangible asset
subject to amortization of $1,054 were recorded. The Company
expects that substantially all of the goodwill and intangible
asset recorded will be deductible for tax purposes. The
intangible asset is content with an estimated useful life of
five years. The results of operations of RxList have been
included in the financial statements of the Company from
October 1, 2004, the closing date of the acquisition, and
are included in the WebMD Health segment.
On August 11, 2004, the Company completed its acquisition
of VIPS, Inc. (ViPS), a privately held provider of
information technology, decision support solutions and
consulting services to government, Blue Cross Blue Shield and
commercial healthcare payers. ViPS develops and provides a broad
range of solutions for claims processing, provider performance
measurement, quality improvement, fraud detection, disease
management and predictive modeling. The total purchase
consideration for ViPS was approximately $166,608 comprised of
$165,208 in cash, net of cash acquired, and $1,400 of estimated
acquisition costs. The acquisition was accounted for using the
purchase method of accounting and, accordingly, the purchase
price was allocated to the tangible and intangible assets
acquired and the liabilities assumed on the basis of their
respective fair values. In connection with the preliminary
allocation of the purchase price, goodwill of $71,449 and
intangible assets subject to amortization of $84,000 were
recorded. The Company does not expect that the goodwill or
intangible assets recorded will be deductible for tax purposes.
The intangible assets are comprised of $38,800 relating to
customer relationships with estimated useful lives ranging from
ten to fifteen years, $34,800 relating to acquired technology
with estimated useful lives of five years and $10,400 relating
to a trade name with an estimated useful life of ten years. The
results of operations of ViPS have been included in the
financial statements of the Company from August 11, 2004,
the closing date of the acquisition, and are included in the
Emdeon Business Services (formerly known as WebMD Business
Services) segment.
On July 15, 2004, the Company acquired the assets of Epor,
Inc. (Epor), a privately held company based in Los
Angeles, California. Epor manufactures porous plastic implant
products for use in aesthetic and reconstructive surgery of the
head and face. The total purchase consideration for Epor was
approximately $2,547 comprised of $2,000 in cash, $490 to be
paid over five years and $57 of estimated acquisition costs. The
acquisition was accounted for using the purchase method of
accounting and, accordingly, the purchase price was allocated to
the tangible and intangible assets acquired and the liabilities
assumed on the basis of their respective fair values. In
connection with the preliminary allocation of the purchase
price, goodwill of $2,324 and an intangible asset subject to
amortization of $200 were recorded. The Company expects that
substantially all of the goodwill and intangible asset recorded
will be deductible for tax purposes. The intangible asset is a
non-compete agreement with an estimated useful life of five
years. The results of operations of Epor have been included in
the financial statements of the Company from July 15, 2004,
the closing date of the acquisition, and are included in the
Porex segment.
11
WEBMD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On April 30, 2004, the Company acquired Dakota Imaging,
Inc. (Dakota), a privately held provider of
automated healthcare claims processing technology and business
process outsourcing services. Dakotas technology and
services assist its customers in reducing costly manual
processing of healthcare documents and increase auto-payment of
medical claims through advanced data scrubbing. The Company paid
approximately $38,979 in cash, net of cash acquired, $527 of
acquisition costs and has agreed to pay up to an additional
$25,000 in cash over a three-year period beginning in April 2005
if certain financial milestones are achieved. No payment was
made in April 2005 in connection with the first earnout year
ending March 2005. The acquisition was accounted for using the
purchase method of accounting and, accordingly, the purchase
price was allocated to the tangible and intangible assets
acquired and the liabilities assumed on the basis of their
respective fair values. In connection with the initial
allocation of the purchase price, goodwill of $28,380 and
intangible assets subject to amortization of $13,100 were
recorded. The Company does not expect that the goodwill or
intangible assets recorded will be deductible for tax purposes.
The intangible assets are comprised of $4,500 relating to
customer relationships with estimated useful lives of ten years
and $8,600 relating to acquired technology with an estimated
useful life of five years. The results of operations of Dakota
have been included in the financial statements of the Company
from April 30, 2004, the closing date of the acquisition,
and are included in the Emdeon Business Services segment.
In 2004, the Company acquired one practice services company for
an aggregate cost of $70, which was paid in cash, and agreed to
pay up to $30 beginning in 2005 if the acquired company met
certain financial milestones. During the three months ended
June 30, 2005, the Company paid $30 in cash as a result of
achieving these milestones. In connection with the initial
allocation of the purchase price, intangible assets subject to
amortization of $85 were recorded, principally related to
customer relationships and non-compete agreements. The results
of operations of this company have been included in the
financial statements of the Company from the acquisition closing
date, and are included in the Emdeon Practice Services (formerly
known as WebMD Practice Services) segment.
Unaudited Pro Forma Information
The following unaudited pro forma financial information for the
six months ended June 30, 2004 gives effect to the
acquisition of ViPS including the amortization of intangible
assets, as if it had occurred as of January 1, 2004. The
information is provided for illustrative purposes only and is
not necessarily indicative of the operating results that would
have occurred if the transaction had been consummated on the
date indicated, nor is it necessarily indicative of future
operating results of the consolidated companies, and should not
be construed as representative of these results for any future
period. The remaining acquisitions in 2005 and 2004 have been
excluded as the pro forma impact of such acquisitions was not
significant to the period presented.
|
|
|
|
|
|
|
|
Six Months | |
|
|
Ended | |
|
|
June 30, 2004 | |
|
|
| |
Revenue
|
|
$ |
585,640 |
|
Net income
|
|
$ |
13,375 |
|
|
Income per common share:
|
|
|
|
|
|
Basic
|
|
$ |
0.04 |
|
|
|
|
|
|
Diluted
|
|
$ |
0.04 |
|
|
|
|
|
12
WEBMD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
3. |
Convertible Redeemable Exchangeable Preferred Stock |
On March 19, 2004, the Company issued $100,000 of
Convertible Redeemable Exchangeable Preferred Stock (the
Preferred Stock) in a private transaction to
CalPERS/PCG Corporate Partners, LLC (CalPERS/PCG Corporate
Partners). CalPERS/PCG Corporate Partners is a private
equity fund managed by the Pacific Corporate Group and
principally backed by California Public Employees
Retirement System, or CalPERS.
The Preferred Stock has a liquidation preference of $100,000 in
the aggregate and is convertible into 10,638,297 shares of
the Companys common stock in the aggregate, representing a
conversion price of $9.40 per share of common stock. The
Company may not redeem the Preferred Stock prior to March 2007.
Thereafter, the Company may redeem any portion of the Preferred
Stock at 105% of its liquidation preference; provided that any
redemption by the Company prior to March 2008 shall be subject
to the condition that the average closing sale price of the
Companys common stock is at least $13.16 per share,
subject to adjustment. The Company is required to redeem all
shares of the Preferred Stock then outstanding in March 2012, at
a redemption price equal to the liquidation preference of the
Preferred Stock, payable in cash or, at the Companys
option, in shares of the Companys common stock. If the
Companys common stock is used to redeem the Preferred
Stock, the number of shares to be issued will be determined by
valuing the common stock at 90% of its closing price during the
15 trading days preceding redemption.
If the average closing sales price of the Companys common
stock during the three-month period ended on the fourth
anniversary of the issuance date is less than $7.50 per
share, holders of the Preferred Stock will have a right to
exchange the Preferred Stock into the Companys
10% Subordinated Notes (10% Notes) due
March 2010. The 10% Notes may be redeemed, in whole or in
part, at any time thereafter at the Companys option at a
price equal to 105% of the principal amount of the
10% Notes being redeemed.
Holders of the Preferred Stock will not receive any dividends
unless the holders of common stock do, in which case holders of
the Preferred Stock will be entitled to receive ordinary
dividends in an amount equal to the ordinary dividends the
holders of the Preferred Stock would have received had they
converted such Preferred Stock into common stock immediately
prior to the record date for such dividend distribution. So long
as the Preferred Stock remains outstanding, the Company is
required to pay to CalPERS/ PCG Corporate Partners, on a
quarterly basis, an aggregate annual fee of 0.35% of the face
amount of the then outstanding Preferred Stock.
Holders of the Preferred Stock have the right to vote, together
with the holders of the Companys common stock on an as
converted to common stock basis, on matters that are put to a
vote of the holders common stock. The Certificate of
Designations for the Preferred Stock also provides that the
Company will not, without the prior approval of holders of 75%
of the shares of Preferred Stock then outstanding, voting as a
separate class, issue any additional shares of the Preferred
Stock, or create any other class or series of capital stock that
ranks senior to or on a parity with the Preferred Stock.
The Company incurred issuance costs related to the Preferred
Stock of approximately $1,885, which have been recorded against
the Preferred Stock in the accompanying consolidated balance
sheets. The issuance costs are being amortized to accretion of
convertible redeemable exchangeable preferred stock, using the
effective interest method over the period from issuance through
March 19, 2012. For the three and six months ended
June 30, 2005, $59 and $117, respectively, were recorded to
accretion of convertible redeemable exchangeable preferred stock.
13
WEBMD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
4. |
Convertible Subordinated Notes |
|
|
|
$350,000 1.75% Convertible Subordinated Notes due
2023 |
On June 25, 2003, the Company issued $300,000 aggregate
principal amount of 1.75% Convertible Subordinated Notes
due 2023 (the 1.75% Notes) in a private
offering. On July 7, 2003, the Company issued an additional
$50,000 aggregate principal amount of the 1.75% Notes.
Unless previously redeemed or converted, the 1.75% Notes
will mature on June 15, 2023. Interest on the
1.75% Notes accrues at the rate of 1.75% per annum and
is payable semiannually on June 15 and December 15,
commencing December 15, 2003. The Company will also pay
contingent interest of 0.25% per annum of the average
trading price of the 1.75% Notes during specified six month
periods, commencing on June 20, 2010, if the average
trading price of the 1.75% Notes for specified periods
equals 120% or more of the principal amount of the
1.75% Notes.
The 1.75% Notes are convertible into an aggregate of
22,742,040 shares of the Companys common stock
(representing a conversion price of $15.39 per share) if
the sale price of the Companys common stock exceeds 120%
of the conversion price for specified periods and in certain
other circumstances. The 1.75% Notes are redeemable by the
Company after June 15, 2008 and prior to June 20,
2010, subject to certain conditions, including the sale price of
the Companys common stock exceeding certain levels for
specified periods. If the 1.75% Notes are redeemed by the
Company during this period, the Company will be required to make
additional interest payments. After June 20, 2010, the
1.75% Notes are redeemable at any time for cash at 100% of
their principal amount. Holders of the 1.75% Notes may
require the Company to repurchase their 1.75% Notes on
June 15, 2010, June 15, 2013 and June 15, 2018,
for cash at 100% of the principal amount of the
1.75% Notes, plus accrued interest. Upon a change in
control, holders may require the Company to repurchase their
1.75% Notes for, at the Companys option, cash or
shares of the Companys common stock, or a combination
thereof, at a price equal to 100% of the principal amount of the
1.75% Notes being repurchased.
The Company incurred issuance costs related to the
1.75% Notes of approximately $10,354, which are included in
other assets in the accompanying consolidated balance sheets.
The issuance costs are being amortized to interest expense in
the accompanying consolidated statements of operations, using
the effective interest method over the period from issuance
through June 15, 2010, the earliest date on which holders
can demand redemption.
|
|
|
$300,000
31/4% Convertible
Subordinated Notes due 2007 |
On April 1, 2002, the Company issued $300,000 aggregate
principal amount of
31/4% Convertible
Subordinated Notes due 2007 (the
31/4% Notes)
in a private offering. Interest on the
31/4% Notes
accrued at the rate of
31/4% per
annum and was payable semiannually on April 1 and October
1. At the time of issuance, the
31/4% Notes
were convertible into an aggregate of approximately
32,386,916 shares of the Companys common stock
(representing a conversion price of $9.26 per share).
During the three months ended June 30, 2003, $1 principal
amount of the
31/4% Notes
was converted into 107 shares of the Companys common
stock in accordance with the provisions of the
31/4% Notes.
On June 2, 2005, the Company completed the redemption of
all of the outstanding
31/4% Notes.
During the three months ended June 30, 2005, holders of the
31/4% Notes
converted a total of $214,880 principal amount of the
31/4%
Notes into 23,197,650 shares of common stock of the
Company, plus cash in lieu of fractional shares, at a price of
$9.26 per share. The Company redeemed the balance of
$85,119 principal amount of the
31/4% Notes
at an aggregate redemption price, together with accrued interest
and redemption premium, of $86,694. The write-off of the
unamortized portion of the deferred issuance costs and the
payment of the redemption premium resulted in a total charge of
$1,902. This charge is included in other expense in the
accompanying consolidated statements of operations and in loss
on redemption of convertible debt in the accompanying
consolidated statements of cash flows.
14
WEBMD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Segment information has been prepared in accordance with
Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related
Information (SFAS No. 131). The
accounting policies of the segments are the same as the
accounting policies for the consolidated Company. Inter-segment
revenues represent sales of Emdeon Business Services products
into the Emdeon Practice Services customer base and are
reflected at rates comparable to those charged to third parties
for comparable products. The performance of the Companys
business is monitored based on income or loss before taxes,
non-cash and other items. Non-cash and other items include
depreciation, amortization, gain or loss on investments,
redemption of
31/4%
Notes, sales of property and equipment, costs and expenses
related to the investigation by the United States Attorney for
the District of South Carolina and the SEC (legal
expense), non-cash expenses related to advertising and
distribution services acquired in exchange for the
Companys equity securities in acquisitions and strategic
alliances, and stock compensation expense primarily related to
stock options issued and assumed in connection with acquisitions
and restricted stock issued to employees.
The Company has aligned its business into four operating
segments as follows:
Emdeon Business Services (formerly known as WebMD Business
Services) provides healthcare reimbursement cycle management
services for healthcare providers and transaction-related
administrative services for healthcare payers, together with
related technology solutions. Emdeon Business Services transmits
transactions electronically between healthcare payers and
providers and provides healthcare payers with transaction
processing technology, consulting services and outsourcing
services, including document management services for transaction
processing and print-and-mail services for the distribution of
checks, remittance advice and explanation of benefits. Emdeon
Business Services also provides automated patient billing
services to healthcare providers, including statement printing
and mailing services. In addition, Emdeon Business Services
provides software products, including decision support and data
warehousing solutions, and related maintenance services to Blue
Cross Blue Shield and commercial healthcare payers and performs
software maintenance and consulting services for certain
governmental agencies.
Emdeon Practice Services (formerly known as WebMD Practice
Services) develops and markets information technology
systems for healthcare providers and related services, primarily
under The Medical Manager, Intergy and Emdeon Network Services
brands. These systems and services allow physician offices to
automate their scheduling, billing and other administrative
tasks, to transmit transactions electronically, to maintain
electronic medical records and to automate documentation of
patient encounters.
WebMD Health provides health information services to
consumers, physicians and healthcare professionals through
online portals and specialized publications. WebMD Healths
public and private online portals provide access to news and
articles, searchable in-depth information and dynamic
interactive services. WebMD Healths public portals sell
advertising and sponsorship programs, including online
continuing medical education (CME) services, to companies
interested in reaching consumers and physicians online,
including pharmaceutical, biotechnology, medical device and
consumer products companies. WebMD Healths private portals
are licensed to employers and health plans for use by their
employees and members. In addition, WebMD Health publishes
medical reference textbooks, healthcare provider directories and
WebMD the Magazine, a consumer magazine distributed to
physician office waiting rooms.
Porex develops, manufactures and distributes proprietary
porous plastic products and components used in healthcare,
industrial and consumer applications, as well as in finished
products used in the medical device and surgical markets.
15
WEBMD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Summarized financial information for each of the Companys
operating segments and a reconciliation to net income are
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Emdeon Business Services
|
|
$ |
191,514 |
|
|
$ |
166,037 |
|
|
$ |
377,247 |
|
|
$ |
329,816 |
|
Emdeon Practice Services
|
|
|
78,596 |
|
|
|
71,773 |
|
|
|
151,614 |
|
|
|
142,779 |
|
WebMD Health
|
|
|
40,465 |
|
|
|
31,852 |
|
|
|
74,040 |
|
|
|
58,161 |
|
Porex
|
|
|
20,397 |
|
|
|
20,737 |
|
|
|
40,253 |
|
|
|
39,158 |
|
Inter-segment eliminations
|
|
|
(8,416 |
) |
|
|
(8,518 |
) |
|
|
(16,664 |
) |
|
|
(16,819 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
322,556 |
|
|
$ |
281,881 |
|
|
$ |
626,490 |
|
|
$ |
553,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes, non-cash and other items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Emdeon Business Services
|
|
$ |
40,420 |
|
|
$ |
28,914 |
|
|
$ |
78,673 |
|
|
$ |
58,764 |
|
Emdeon Practice Services
|
|
|
8,183 |
|
|
|
1,771 |
|
|
|
12,580 |
|
|
|
3,122 |
|
WebMD Health
|
|
|
4,350 |
|
|
|
7,626 |
|
|
|
9,201 |
|
|
|
12,168 |
|
Porex
|
|
|
6,064 |
|
|
|
6,275 |
|
|
|
11,461 |
|
|
|
11,317 |
|
Corporate
|
|
|
(13,299 |
) |
|
|
(14,228 |
) |
|
|
(26,925 |
) |
|
|
(27,533 |
) |
Interest income
|
|
|
3,936 |
|
|
|
4,511 |
|
|
|
8,257 |
|
|
|
9,994 |
|
Interest expense
|
|
|
(3,895 |
) |
|
|
(4,838 |
) |
|
|
(8,676 |
) |
|
|
(9,586 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,759 |
|
|
|
30,031 |
|
|
|
84,571 |
|
|
|
58,246 |
|
Taxes, non-cash and other items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(17,541 |
) |
|
|
(13,148 |
) |
|
|
(34,045 |
) |
|
|
(25,733 |
) |
Non-cash advertising and distribution services and stock
compensation
|
|
|
(3,102 |
) |
|
|
(8,727 |
) |
|
|
(7,380 |
) |
|
|
(15,725 |
) |
Legal expense
|
|
|
(4,283 |
) |
|
|
(2,215 |
) |
|
|
(8,443 |
) |
|
|
(4,252 |
) |
Other (expense) income, net
|
|
|
(1,712 |
) |
|
|
447 |
|
|
|
(5,544 |
) |
|
|
484 |
|
Income tax provision
|
|
|
(2,955 |
) |
|
|
(613 |
) |
|
|
(3,144 |
) |
|
|
(1,544 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
16,166 |
|
|
$ |
5,775 |
|
|
$ |
26,015 |
|
|
$ |
11,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2005 and December 31, 2004, the
Companys short-term investments and marketable debt
securities consisted of certificates of deposit, auction rate
securities, municipal bonds, asset backed securities, Federal
Agency Notes and U.S. Treasury Notes and marketable equity
securities consisted of equity investments in publicly traded
companies. All marketable securities are classified as
available-for-sale. The following table summarizes the amortized
cost basis and estimated fair value of the Companys
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
Cost Basis | |
|
Fair Value | |
|
Cost Basis | |
|
Fair Value | |
|
|
| |
|
| |
|
| |
|
| |
Cash and cash equivalents
|
|
$ |
35,930 |
|
|
$ |
35,930 |
|
|
$ |
46,019 |
|
|
$ |
46,019 |
|
Short-term investments
|
|
|
151,459 |
|
|
|
152,005 |
|
|
|
62,077 |
|
|
|
61,675 |
|
Marketable securities long term
|
|
|
326,984 |
|
|
|
327,276 |
|
|
|
516,188 |
|
|
|
515,881 |
|
The amortized cost and estimated fair value by maturity of
securities are shown in the following table. Securities are
classified according to their contractual maturities without
consideration of principal
16
WEBMD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
amortization, potential prepayments or call options.
Accordingly, actual maturities may differ from contractual
maturities.
|
|
|
|
|
|
|
|
|
|
|
|
Cost or | |
|
|
|
|
Amortized Cost | |
|
Fair Value | |
|
|
| |
|
| |
Due in one year or less
|
|
$ |
151,459 |
|
|
$ |
152,005 |
|
Due after one year through three years
|
|
|
325,492 |
|
|
|
323,182 |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
476,951 |
|
|
$ |
475,187 |
|
|
|
|
|
|
|
|
|
|
7. |
Comprehensive Income (Loss) |
Comprehensive income (loss) is comprised of net income and other
comprehensive loss. Other comprehensive loss includes certain
changes in equity that are excluded from net income, such as
changes in unrealized holding gains (losses) or gains (losses)
on available-for-sale marketable securities and foreign currency
translation adjustments. The following table presents the
components of other comprehensive loss for the three and six
months ended June 30, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Foreign currency translation losses
|
|
$ |
1,736 |
|
|
$ |
40 |
|
|
$ |
2,658 |
|
|
$ |
349 |
|
Unrealized losses on securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses)
|
|
|
1,788 |
|
|
|
(9,225 |
) |
|
|
(2,095 |
) |
|
|
(10,798 |
) |
|
Less: reclassification adjustment for net gains (losses)
realized in net income
|
|
|
190 |
|
|
|
447 |
|
|
|
(3,642 |
) |
|
|
363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on securities
|
|
|
1,598 |
|
|
|
(9,672 |
) |
|
|
1,547 |
|
|
|
(11,161 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
(138 |
) |
|
|
(9,712 |
) |
|
|
(1,111 |
) |
|
|
(11,510 |
) |
Net income
|
|
|
16,166 |
|
|
|
5,775 |
|
|
|
26,015 |
|
|
|
11,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$ |
16,028 |
|
|
$ |
(3,937 |
) |
|
$ |
24,904 |
|
|
$ |
(34 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The foreign currency translation losses are not currently
adjusted for income taxes as they relate to permanent
investments in non-U.S. subsidiaries.
Accumulated other comprehensive income includes the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Unrealized gains (losses) on securities
|
|
$ |
838 |
|
|
$ |
(709 |
) |
Foreign currency translation gains
|
|
|
6,008 |
|
|
|
8,666 |
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income
|
|
$ |
6,846 |
|
|
$ |
7,957 |
|
|
|
|
|
|
|
|
During the three months ended March 31, 2005, the Company
recorded a loss on investments of $4,251 related to marketable
debt securities which were identified by the Company as
securities to be liquidated in the event funds were needed for
redemption of the
31/4%
Notes. The loss represents the excess of the original book value
of those investments over the market value at March 31,
2005. Prior to the recognition of this loss, any excess of book
value over the market value of these investments was reflected
in accumulated other comprehensive income in the accompanying
consolidated balance sheet. In addition, during the six months
ended June 30, 2005, the Company recognized gains on the
sale of certain of its investments of $609. Both of the above
amounts are included in other expense (income) in the
accompanying consolidated statements of operations.
17
WEBMD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
8. |
Goodwill and Other Intangible Assets |
The changes in the carrying amount of goodwill for the year
ended December 31, 2004 and the six months ended
June 30, 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Emdeon | |
|
Emdeon | |
|
|
|
|
|
|
|
|
Business | |
|
Practice | |
|
WebMD | |
|
|
|
|
|
|
Services | |
|
Services | |
|
Health | |
|
Porex | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Balance as of January 1, 2004
|
|
$ |
585,988 |
|
|
$ |
182,809 |
|
|
$ |
36,843 |
|
|
$ |
38,808 |
|
|
$ |
844,448 |
|
|
Acquisitions during the period
|
|
|
99,829 |
|
|
|
|
|
|
|
14,942 |
|
|
|
4,122 |
|
|
|
118,893 |
|
|
Contingent consideration payments/accruals related to prior
period acquisitions
|
|
|
60,955 |
|
|
|
155 |
|
|
|
1,500 |
|
|
|
|
|
|
|
62,610 |
|
|
Tax reversals
|
|
|
(7,141 |
) |
|
|
(7,321 |
) |
|
|
|
|
|
|
|
|
|
|
(14,462 |
) |
|
Adjustments to finalize purchase price allocations
|
|
|
(1,263 |
) |
|
|
|
|
|
|
(116 |
) |
|
|
|
|
|
|
(1,379 |
) |
|
Effects of exchange rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
454 |
|
|
|
454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2005
|
|
|
738,368 |
|
|
|
175,643 |
|
|
|
53,169 |
|
|
|
43,384 |
|
|
|
1,010,564 |
|
|
Acquisition during the period
|
|
|
|
|
|
|
|
|
|
|
23,141 |
|
|
|
|
|
|
|
23,141 |
|
|
Contingent consideration payments related to prior period
acquisitions(b)
|
|
|
(1,106 |
) |
|
|
30 |
|
|
|
1,000 |
|
|
|
|
|
|
|
(76 |
) |
|
Tax reversals(a)
|
|
|
(3,294 |
) |
|
|
|
|
|
|
|
|
|
|
(545 |
) |
|
|
(3,839 |
) |
|
Adjustments to finalize purchase price allocations
|
|
|
566 |
|
|
|
|
|
|
|
(1,253 |
) |
|
|
|
|
|
|
(687 |
) |
|
Effects of exchange rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(511 |
) |
|
|
(511 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2005
|
|
$ |
734,534 |
|
|
$ |
175,673 |
|
|
$ |
76,057 |
|
|
$ |
42,328 |
|
|
$ |
1,028,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
In accordance with EITF 93-7, Uncertainties Related
to Income Taxes in a Purchase Business Combination, the
Company reduced goodwill and accrued liabilities by $1,148 and
$545 for the Emdeon Business Services and Porex segments during
the six months ended June 30, 2005. The reduction related
to the favorable resolution of estimated tax liabilities
established in connection with certain 2000 acquisitions.
Additionally, during the three and six months ended
June 30, 2005, the Company reduced goodwill by $2,146 as a
result of the reversal of a portion of the income tax valuation
allowances that were originally established in connection with
the purchase accounting of prior acquisitions within the Emdeon
Business Services segment. |
|
(b) |
|
During the six months ended June 30, 2005, the Company made
contingent consideration payments in the amount of $1,960, $30
and $1,000 for the Emdeon Business Services, Emdeon Practice
Services and WebMD Health segments 2004 and 2003
Acquisitions, respectively. In addition, during the six months
ended June 30, 2005, the Company adjusted goodwill by
$3,066 in connection with an over accrual of contingent
consideration in the Emdeon Business Services segment. |
18
WEBMD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Intangible assets subject to amortization consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
Gross | |
|
|
|
Gross | |
|
|
|
|
Carrying | |
|
Accumulated | |
|
|
|
Carrying | |
|
Accumulated | |
|
|
|
|
Amount | |
|
Amortization | |
|
Net | |
|
Amount | |
|
Amortization | |
|
Net | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Customer lists
|
|
$ |
370,481 |
|
|
$ |
(224,846 |
) |
|
$ |
145,635 |
|
|
$ |
369,704 |
|
|
$ |
(217,874 |
) |
|
$ |
151,830 |
|
Technology and patents
|
|
|
235,423 |
|
|
|
(162,557 |
) |
|
|
72,866 |
|
|
|
234,722 |
|
|
|
(155,687 |
) |
|
|
79,035 |
|
Trade names
|
|
|
40,716 |
|
|
|
(29,139 |
) |
|
|
11,577 |
|
|
|
40,716 |
|
|
|
(26,923 |
) |
|
|
13,793 |
|
Non-compete agreements and other
|
|
|
27,913 |
|
|
|
(4,742 |
) |
|
|
23,171 |
|
|
|
17,920 |
|
|
|
(2,069 |
) |
|
|
15,851 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
674,533 |
|
|
$ |
(421,284 |
) |
|
$ |
253,249 |
|
|
$ |
663,062 |
|
|
$ |
(402,553 |
) |
|
$ |
260,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense was $9,745 and $18,731 for the three and
six months ended June 30, 2005, respectively, and $6,125
and $12,140 for the three and six months ended June 30,
2004, respectively. Aggregate amortization expense for
intangible assets is estimated to be:
|
|
|
|
|
Year ended December 31, 2005 (July 1st to
December 31st)
|
|
$ |
18,249 |
|
2006
|
|
|
34,662 |
|
2007
|
|
|
33,369 |
|
2008
|
|
|
28,185 |
|
2009
|
|
|
20,698 |
|
Thereafter
|
|
|
118,086 |
|
|
|
9. |
Commitments and Contingencies |
In April 2004, the Company, through its Emdeon Business Services
segment, acquired Dakota, a provider of automated healthcare
claims processing technology and business process outsourcing
services.
On April 6, 2005, the Companys Dakota subsidiary
terminated, for cause, the employment of Sandeep Goel, who was
its President, and Pradeep Goel, who was its Chief Operating
Officer and Chief Technology Officer, each of whom was also a
shareholder of Dakota prior to its acquisition by Emdeon
Business Services. In addition, Dakota filed a complaint in the
Delaware Court of Chancery against Sandeep Goel and Pradeep Goel
alleging breach of their respective employment agreements and
related causes of action.
On May 9, 2005, the defendants filed an Answer and
Counterclaim against Dakota. In the Answer and Counterclaim,
defendants allege that Dakota did not have the right to
terminate them for cause and that Dakota violated provisions of
their employment agreements. Defendants seek damages for the
alleged breaches of their employment agreements. Defendants also
allege that Dakota, as well as the Company and Envoy
Corporation, a subsidiary of the Company, violated the merger
agreement pursuant to which Envoy acquired Dakota. Defendants
allege that the terminations and other actions taken by the
Company, Envoy and Dakota interfered with the defendants
rights with respect to potential contingent earn-out
consideration under provisions contained in the merger
agreement. The merger agreement provides for contingent
consideration based on achievement of certain financial
milestones in specified time periods and defendants seek damages
in excess of $25,000, the maximum aggregate amount of contingent
consideration that could be earned under the earn-out provisions
of the merger agreement.
We believe that the counterclaims are without merit and intend
to vigorously defend against them.
19
WEBMD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In the normal course of business, the Company and its
subsidiaries are involved in various other claims and legal
proceedings. While the ultimate resolution of these matters,
including those discussed in the Companys 2004 Annual
Report on Form 10-K under the heading Legal
Proceedings, has yet to be determined, the Company does
not believe that their outcome will have a material adverse
effect on the Companys consolidated financial position or
results of operations.
20
|
|
ITEM 2. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
This Item 2 contains forward-looking statements with
respect to possible events, outcomes or results that are, and
are expected to continue to be, subject to risks, uncertainties
and contingencies, including those identified in this Item. See
Forward-Looking Statements on page 3.
Overview
Managements discussion and analysis of financial condition
and results of operations, or MD&A, is provided as a
supplement to the consolidated financial statements and notes
thereto included elsewhere in this Quarterly Report and to
provide an understanding of our results of operations, financial
condition, and changes in financial condition. Our MD&A is
organized as follows:
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|
|
|
|
Introduction. This section provides a general description
of our company, a brief discussion of our operating segments, a
description of certain recent developments, and background
information on certain trends, strategies and other matters
discussed in this MD&A. |
|
|
|
Critical Accounting Policies and Estimates. This section
discusses those accounting policies that both are considered
important to our financial condition and results of operations,
and require us to exercise subjective or complex judgments in
their application. In addition, all of our significant
accounting policies, including our critical accounting policies,
are summarized in Note 1 to the Consolidated Financial
Statements contained in our 2004 Annual Report on Form 10-K
filed with the Securities and Exchange Commission. |
|
|
|
Results of Operations and Results of Operations by Operating
Segment. These sections provide our analysis and outlook for
the significant line items on our consolidated statements of
operations, on both a company-wide and a segment-by-segment
basis. |
|
|
|
Liquidity and Capital Resources. This section provides an
analysis of our liquidity and cash flows, as well as a
discussion of our outstanding debt and commitments, that existed
as of June 30, 2005. |
|
|
|
Recent Accounting Pronouncements. This section provides a
summary of the most recent authoritative accounting standards
and guidance that have either been recently adopted or may be
adopted in the future. |
|
|
|
Factors That May Affect Our Future Financial Condition or
Results of Operations. This section describes circumstances
or events that could have a negative effect on our financial
condition or results of operations, or that could change, for
the worse, existing trends in some or all of our businesses. The
factors discussed in this section are in addition to factors
that may be described elsewhere in this Quarterly Report. |
In this MD&A, dollar amounts are in thousands, unless
otherwise noted.
Introduction
WebMD Corporation is a Delaware corporation that was
incorporated in December 1995 and commenced operations in
January 1996 as Healtheon Corporation. We changed our name to
Healtheon/ WebMD Corporation in November 1999 and to WebMD
Corporation in September 2000. Our common stock has traded on
the Nasdaq National Market under the symbol HLTH
since February 11, 1999.
We have aligned our business into four operating segments as
follows:
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|
|
|
|
Emdeon Business Services (formerly known as WebMD Business
Services). We provide healthcare reimbursement cycle
management services for healthcare providers and
transaction-related administrative services for healthcare
payers, together with related technology solutions. We transmit
transactions electronically between healthcare payers and
providers and provide healthcare payers with transaction
processing technology, consulting services and outsourcing
services, |
21
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|
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|
|
including document management services for transaction
processing and print-and-mail services for the distribution of
checks, remittance advice and explanation of benefits. We also
provide automated patient billing services to healthcare
providers, including statement printing and mailing services. In
addition, we provide software products, including decision
support and data warehousing solutions, and related maintenance
services to Blue Cross Blue Shield and commercial healthcare
payers and perform software maintenance and consulting services
for certain governmental agencies. |
|
|
|
Emdeon Practice Services (formerly known as WebMD Practice
Services). We develop and market information technology
systems for healthcare providers and related services, primarily
under The Medical Manager, Intergy and Emdeon Network Services
brands. These systems and services allow physician offices to
automate their scheduling, billing and other administrative
tasks, to transmit transactions electronically, to maintain
electronic medical records and to automate documentation of
patient encounters. |
|
|
|
WebMD Health. We provide health information services to
consumers, physicians and healthcare professionals through
online portals and specialized publications. Our public and
private online portals provide access to news and articles,
searchable in-depth information and dynamic interactive
services. Our public portals sell advertising and sponsorship
programs, including online continuing medical education
(CME) services, to companies interested in reaching
consumers and physicians online, including pharmaceutical,
biotechnology, medical device and consumer products companies.
Our private portals are licensed to employers and health plans
for use by their employees and members. In addition, we publish
medical reference textbooks, healthcare provider directories and
WebMD the Magazine, a consumer magazine distributed to
physician office waiting rooms. |
|
|
|
Porex. We develop, manufacture and distribute proprietary
porous plastic products and components used in healthcare,
industrial and consumer applications, as well as in finished
products used in the medical device and surgical markets. |
WebMD Health IPO. As previously announced, WebMD Health
Corp. (formerly known as WebMD Health Holdings, Inc.), a wholly
owned subsidiary formed by us to be a holding company for our
WebMD Health segment, has filed a Registration Statement on
Form S-1 with respect to an initial public offering of its
Class A common stock, which would have one vote per share.
We expect that WebMD Health will sell between 10% and 14% of its
equity to the public in the offering. We would own the remaining
equity of WebMD Health in the form of Class B common stock,
which would have ten votes per share, and would control WebMD
Health. The timing for the sale has not yet been determined. We
believe that the benefits of an initial public offering by WebMD
Health Corp. include:
|
|
|
|
|
creating a security that allows investors to participate
directly in the performance of our WebMD Health segment; |
|
|
|
enabling us to motivate WebMD Health employees through equity
compensation plans that provide for equity participation in that
business; and |
|
|
|
enabling WebMD Health to make acquisitions using its own equity
as consideration. |
Because the WebMD name has been more closely
associated with WebMD Healths business and its Web sites
than with our other businesses, our Board of Directors has
determined that WebMD Health will, following its initial public
offering, have the sole right to use the name WebMD
and related trademarks and that our other businesses will cease
to use that name except, under a temporary license from WebMD
Health, as needed for an orderly transition. We believed that
the WebMD name was not strongly associated with any
of our other businesses, none of which has had a long history of
using the name. In addition, we believed that not only would the
businesses included in our Emdeon Practice Services and Emdeon
Business Services segments not be harmed by ceasing to use
WebMD as a brand, they would be likely to benefit
from use of new branding and related marketing campaigns that
emphasize the breadth of the product and service offerings of
those businesses. Many of the products and services of
22
those businesses have not been associated by customers with the
WebMD name, but instead have been associated with
names of companies that we acquired, including ABF, Medifax and
ExpressBill. Accordingly, in August 2005, we began to use Emdeon
in the names of those segments. We are also using Emdeon as a
brand for many of the products and services of those segments.
There has not been any change in the name of our Porex segment
or its branding. We plan to seek stockholder approval, at our
Annual Meeting of Stockholders on September 29, 2005, for
changing our corporate name from WebMD Corporation to Emdeon
Corporation and, on August 4, 2005, filed preliminary proxy
materials with the SEC that include a proposal relating to the
name change.
We intend to enter into a number of agreements with WebMD Health
governing the future relationship of the companies, including a
services agreement, a tax sharing agreement, and a release and
indemnity agreement. These agreements cover a variety of
matters, including responsibility for certain liabilities,
including tax liabilities, as well as matters related to
providing WebMD Health with administrative services, such as
payroll, accounting, tax, employee benefit plan, employee
insurance, intellectual property, legal and information
processing services. The specific services and the terms on
which those services will be provided will be determined prior
to completion of the offering. It is our intention that, under
the services agreement, we will receive an amount that
reasonably approximates our cost of providing services to WebMD
Health. We expect to agree to make the services available to
WebMD Health for up to five years. However, we expect that
WebMD Health would not be required, under the services
agreement, to continue to obtain services from us and would be
able to terminate services, in whole or in part, at any time
generally by providing, with respect to the specified services
or groups of services, 60 days prior notice and, in
some cases, paying a nominal termination fee to cover costs
relating to the termination.
Redemption of
31/4% Convertible
Subordinated Notes. On June 2, 2005, we completed the
redemption of all of our outstanding
31/4% Convertible
Subordinated Notes due 2007. During the three months ended
June 30, 2005, holders of the
31/4% Notes
converted a total of $214,880 principal amount of the
31/4% Notes
into 23,197,650 shares of our common stock, plus cash in
lieu of fractional shares, at a price of $9.26 per share.
We redeemed the balance of $85,119 principal amount of the
31/4% Notes
at an aggregate redemption price, together with accrued interest
and redemption premium, of $86,694. The write-off of the
unamortized portion of the deferred issuance costs and the
payment of the redemption premium resulted in a total charge of
$1,902. This charge is included in other expense in the
accompanying consolidated statements of operations and in loss
on redemption of convertible debt in the accompanying
consolidated statements of cash flows.
|
|
|
Background Information on Certain Trends and Strategies |
Diversification of Emdeon Business Services. Submission
of claims electronically assists healthcare payers in reducing
the cost of processing and servicing claims and can expedite the
reimbursement process for providers. However, this is just a
starting point for increasing administrative efficiency. We are
continuing our efforts to transform Emdeon Business Services
from an electronic transactions clearinghouse to a provider of
more comprehensive reimbursement cycle management services for
healthcare providers and transaction-related administrative
services for healthcare payers. As we had expected, during the
first half of 2005, our revenue and earnings from providing
electronic clearinghouse services for healthcare transactions,
on their own, declined. We expect that to continue during the
rest of 2005. However, the revenue and earnings of our business
process outsourcing and other transaction-related services
offset this decline during the first half of 2005 and, in
general, we expect that to continue during the rest of 2005. It
is possible that, during certain reporting periods, revenue from
basic clearinghouse services could decline faster than we are
able to increase the revenue from our additional services, in
part because of the length of the implementation cycle for the
additional services. We intend to continue the transformation of
Emdeon Business Services by developing or acquiring additional
transaction-related services and updating our existing ones. Our
strategy is to continue to increase the value we are able to
provide our payer and provider customers in all aspects of their
adoption and implementation of information technology solutions
for healthcare transactions.
23
Transaction Processing Infrastructure Investments. Our
electronic transaction services automate the data exchange
between healthcare providers and payers for patient eligibility
and benefits information, claims transactions, remittance
information, referrals, claim status information and other
processes. During 2003 and 2004, the key area of focus for
Emdeon Business Services, with respect to its operational and
technological infrastructure, was preparing for and implementing
the transaction standards of the Health Insurance Portability
and Accountability Act of 1996 (HIPAA) and working with our
customers on their own implementations. We incurred significant
costs in these HIPAA implementation efforts. Our goal during the
remainder of 2005 and in 2006 is to implement infrastructure
improvements that enable us to provide our services more
efficiently, to consolidate and integrate the infrastructure
used by the companies we have acquired and to create additional
value-added services for healthcare payers and providers. We
expect to make significant capital expenditures on Emdeon
Business Services infrastructure improvements in 2005 and 2006.
Governmental Initiatives Relating to Healthcare Information
Technology. There are currently numerous federal, state and
private initiatives seeking ways to increase the use of
information technology in healthcare. These initiatives are
generally intended to foster improvements in the quality of
care, while reducing costs. A key focus of many of these
initiatives is creating incentives for healthcare providers to
make investments in information technology or reducing the costs
of doing so. Most significantly, in April 2004, Executive Order
13335 directed the appointment of a National Coordinator for
Health Information Technology to coordinate programs and
policies regarding health information technology across the
federal government. The National Coordinator is charged with
directing the health information technology programs within the
Department of Health and Human Services, or HHS, and
coordinating them with those of other relevant Executive Branch
agencies. We believe that we are a good candidate to work with
HHS on its initiatives and projects as a result of our
experience working with parties throughout the healthcare
industry, including
|
|
|
|
|
processing large volumes of electronic healthcare transactions
for healthcare payers and providers; |
|
|
|
providing electronic health records and practice management
software to medical practices and clinics; |
|
|
|
providing IT services to private and governmental healthcare
payers; and |
|
|
|
providing personal health records and other health information
services to consumers. |
Critical Accounting Policies and Estimates
Our discussion and analysis of WebMDs financial condition
and results of operations are based upon our Consolidated
Financial Statements and Notes to Consolidated Financial
Statements, which were prepared in conformity with
U.S. generally accepted accounting principles. The
preparation of the consolidated financial statements requires us
to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and
accompanying notes. We base our estimates on historical
experience, current business factors, and various other
assumptions that we believe are necessary to form a basis for
making judgments about the carrying values of assets and
liabilities and disclosure of contingent assets and liabilities.
We are subject to uncertainties such as the impact of future
events, economic, environmental and political factors, and
changes in our business environment; therefore, actual results
could differ from these estimates. Accordingly, the accounting
estimates used in preparation of our financial statements will
change as new events occur, as more experience is acquired, as
additional information is obtained and as our operating
environment changes. Changes in estimates are made when
circumstances warrant. Such changes in estimates and refinements
in estimation methodologies are reflected in reported results of
operations; if material, the effects of changes in estimates are
disclosed in the notes to our consolidated financial statements.
We evaluate our estimates on an ongoing basis, including those
related to revenue recognition, short-term and long-term
investments, deferred tax assets, income taxes, collectibility
of customer receivables, prepaid advertising and distribution
services, long-lived assets including goodwill and other
intangible
24
assets, software development costs, inventory valuation, certain
accrued expenses, contingencies, litigation and the value
attributed to warrants issued for services.
We believe the following reflects our critical accounting
policies and our more significant judgments and estimates used
in the preparation of our consolidated financial statements:
|
|
|
|
|
Revenue Our revenue recognition policies for
each reportable segment are as follows: |
|
|
|
Emdeon Business Services. Healthcare payers and providers
pay us fees for transaction services, generally on either a per
transaction basis or, in the case of some providers, on a
monthly fixed fee basis. Healthcare payers and providers also
pay us fees for patient statement and paid-claims communication
services, typically on a per statement or per communication
basis. Additionally, payers, including government payers, pay us
fees to license decision support software and provide related
support and maintenance for that decision support software, and
provide information technology consulting services. Healthcare
payers pay us annual license fees, which are based on the number
of covered members, for use of our software and pay us time and
materials fees for providing business and information technology
consulting services to them. The professional consulting
services we provide to certain governmental agencies are
typically billed on a cost-plus fee structure. |
|
|
Revenue for transaction services, patient statement and
paid-claims communication services is recognized as the services
are provided. Decision support software and the related support
and maintenance agreements are generally sold as bundled
time-based license agreements and, accordingly, the revenue for
both the software and related support and maintenance is
recognized ratably over the term of the license and maintenance
agreement. Revenue for consulting services is recognized as the
services are provided. |
|
|
Emdeon Practice Services. Healthcare providers pay us
fees to license our Medical Manager and Intergy practice
management systems and Intergy EHR electronic medical records
system. Our practice management systems are sold as
multiple-element arrangements as these software arrangements
typically include related hardware, support and maintenance
agreements and implementation and training services. We also
charge healthcare providers fees for transmitting, through
Emdeon Network Services, transactions to payers and billing
statements to patients. We recognize revenue from these fees,
which are generally paid on a per transaction or monthly basis,
as we provide the service. |
|
|
Software revenue is recognized in accordance with SOP
No. 97-2, Software Revenue Recognition, as
amended by SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain
Transactions. Software license revenue is recognized when
a customer enters into a non-cancelable license agreement, the
software product has been delivered, there are no uncertainties
surrounding product acceptance, there are no significant future
performance obligations, the license fees are fixed or
determinable and collection of the license fee is considered
probable. Amounts received in advance of meeting these criteria
are deferred. As required by SOP 98-9, the Company
determines the value of the software component of its
multiple-element arrangements using the residual method as
vendor specific objective evidence (VSOE) of fair
value exists for the undelivered elements such as the support
and maintenance agreements and related implementation and
training services, but not for all the delivered elements such
as the software itself. The residual method requires revenue to
be allocated to the undelivered elements based on the fair value
of such elements, as indicated by VSOE. VSOE is based on the
price charged when an element is sold separately. |
|
|
The vast majority of our practice management and medical records
systems include support and maintenance agreements of the
underlying software and hardware. These arrangements provide
customers with rights to unspecified software product upgrades
released during the term of the support period, as well as
Internet and telephone access to technical support personnel.
Revenue from support and maintenance agreements is recognized
ratably over the term of the arrangement, |
25
|
|
|
typically one year or less. Additionally, many of our software
arrangements include implementation and training services.
Revenues from these services are accounted for separately from
the software revenue, as they are not essential to the
functionality of any other element of the software arrangement,
and are generally recognized as the services are performed. |
|
|
WebMD Health. Revenues from advertising are recognized as
advertisements are delivered or as publications are distributed.
Revenues from sponsorship arrangements, content syndication and
distribution arrangements and licenses of our healthcare
management tools and private online portals are recognized
ratably over the term of the applicable agreement. Revenue from
the sponsorship of CME is recognized over the period we deliver
the minimum number of CME credit hours required by the
applicable agreements. Subscription revenue is recognized over
the subscription period. When contractual arrangements contain
multiple elements, revenue is allocated to the elements based on
their relative fair values, determined using prices charged when
elements are sold separately. |
|
|
Porex. We develop, manufacture and distribute porous
plastic products and components. For standard products, we
recognize revenue upon shipment of product, net of sales returns
and allowances. For sales of certain custom products, we
recognize revenue upon completion and customer acceptance.
Recognition of amounts received in advance of meeting these
criteria is deferred until we meet these criteria. |
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|
|
Long-Lived Assets Our long-lived assets
consist of property and equipment, goodwill and other intangible
assets. Goodwill and other intangible assets arise from the
acquisitions we have made. The amount assigned to intangible
assets is subjective and based on our estimates of the future
benefit of the intangible asset using accepted valuation
techniques, such as discounted cash flow and replacement cost
models. Our long-lived assets, excluding goodwill, are amortized
over their estimated useful lives, which we determined based on
the consideration of several factors, including the period of
time the asset is expected to remain in service. We evaluate the
carrying value and remaining useful lives of long-lived assets,
excluding goodwill, whenever indicators of impairment are
present. We evaluate the carrying value of goodwill annually, or
whenever indicators of impairment are present. We use a
discounted cash flow approach to determine the fair value of
goodwill. There was no impairment of goodwill noted as a result
of our impairment testing in 2004. |
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|
|
Investments Our investments, at June 30,
2005, consisted principally of certificates of deposit,
municipal bonds, auction rate securities, asset-backed
securities, Federal Agency Notes, U.S. Treasury Notes and
marketable equity securities in publicly traded companies. Each
reporting period we evaluate the carrying value of our
investments and record a loss on investments when we believe an
investment has experienced a decline in value that is other than
temporary. Our investments are classified as available-for-sale
and are carried at fair value. We do not recognize gains on an
investment until sold. Unrealized gains and losses are recorded
as a component of accumulated other comprehensive income. Future
changes in market or economic conditions or operating results of
our investments could result in gains or losses or an inability
to recover the carrying value of the investments that may not be
reflected in an investments carrying value. For the six
months ended June 30, 2005, we recognized a loss of $4,251
for unrealized losses on marketable debt securities that we
determined were not temporary in nature. |
|
|
|
Deferred Tax Assets Our deferred tax assets
are comprised primarily of net operating loss carryforwards. At
June 30, 2005, we had net operating loss carryforwards of
approximately $2.0 billion. These loss carryforwards may be
used to offset taxable income in future periods, reducing the
amount of taxes we might otherwise be required to pay. Due to a
lack of a history of generating taxable income, we record a
valuation allowance equal to 100% of our net deferred tax
assets. In the event that we are able to generate taxable
earnings in the future and determine it is more likely than not
that we can realize our deferred tax assets, an adjustment to
the valuation allowance would be made which may increase income
in the period that such determination was made. |
26
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|
|
|
|
Tax Contingencies Our tax contingencies are
recorded to address potential exposures involving tax positions
we have taken that could be challenged by tax authorities. These
potential exposures result from the varying application of
statutes, rules, regulations and interpretations. Our estimates
of tax contingencies reflect assumptions and judgments about
potential actions by taxing jurisdictions. We believe that these
assumptions and judgments are reasonable; however, our accruals
may change in the future due to new developments in each matter
and the ultimate resolution of these matters may be greater or
less than the amount that we have accrued. |
Results of Operations
The following table sets forth our consolidated statements of
operations data and expresses that data as a percentage of
revenue for the periods presented (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, | |
|
Six Months Ended June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
$ | |
|
% | |
|
$ | |
|
% | |
|
$ | |
|
% | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Revenue
|
|
$ |
322,556 |
|
|
|
100.0 |
|
|
$ |
281,881 |
|
|
|
100.0 |
|
|
$ |
626,490 |
|
|
|
100.0 |
|
|
$ |
553,095 |
|
|
|
100.0 |
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations
|
|
|
181,950 |
|
|
|
56.4 |
|
|
|
163,961 |
|
|
|
58.2 |
|
|
|
354,113 |
|
|
|
56.5 |
|
|
|
326,603 |
|
|
|
59.0 |
|
|
Development and engineering
|
|
|
14,457 |
|
|
|
4.5 |
|
|
|
12,991 |
|
|
|
4.6 |
|
|
|
29,097 |
|
|
|
4.6 |
|
|
|
24,087 |
|
|
|
4.4 |
|
|
Sales, marketing, general and administrative
|
|
|
83,533 |
|
|
|
25.9 |
|
|
|
83,298 |
|
|
|
29.5 |
|
|
|
165,670 |
|
|
|
26.4 |
|
|
|
160,292 |
|
|
|
29.0 |
|
|
Depreciation and amortization
|
|
|
17,541 |
|
|
|
5.4 |
|
|
|
13,148 |
|
|
|
4.7 |
|
|
|
34,045 |
|
|
|
5.4 |
|
|
|
25,733 |
|
|
|
4.6 |
|
|
Legal expense
|
|
|
4,283 |
|
|
|
1.3 |
|
|
|
2,215 |
|
|
|
0.8 |
|
|
|
8,443 |
|
|
|
1.3 |
|
|
|
4,252 |
|
|
|
0.8 |
|
|
Interest income
|
|
|
3,936 |
|
|
|
1.2 |
|
|
|
4,511 |
|
|
|
1.6 |
|
|
|
8,257 |
|
|
|
1.3 |
|
|
|
9,994 |
|
|
|
1.8 |
|
|
Interest expense
|
|
|
3,895 |
|
|
|
1.2 |
|
|
|
4,838 |
|
|
|
1.7 |
|
|
|
8,676 |
|
|
|
1.4 |
|
|
|
9,586 |
|
|
|
1.7 |
|
|
Other expense (income), net
|
|
|
1,712 |
|
|
|
0.6 |
|
|
|
(447 |
) |
|
|
(0.2 |
) |
|
|
5,544 |
|
|
|
1.0 |
|
|
|
(484 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision
|
|
|
19,121 |
|
|
|
5.9 |
|
|
|
6,388 |
|
|
|
2.3 |
|
|
|
29,159 |
|
|
|
4.7 |
|
|
|
13,020 |
|
|
|
2.4 |
|
|
Income tax provision
|
|
|
2,955 |
|
|
|
0.9 |
|
|
|
613 |
|
|
|
0.3 |
|
|
|
3,144 |
|
|
|
0.5 |
|
|
|
1,544 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
16,166 |
|
|
|
5.0 |
|
|
$ |
5,775 |
|
|
|
2.0 |
|
|
$ |
26,015 |
|
|
|
4.2 |
|
|
$ |
11,476 |
|
|
|
2.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue is derived from our four business segments: Emdeon
Business Services, Emdeon Practice Services, WebMD Health and
Porex. Emdeon Business Services provides: electronic
transmission services for medical, dental and pharmacy
transactions and related technology solutions, consulting
services and outsourcing services for healthcare payers,
including document management services for transaction
processing and print-and-mail services for the distribution of
checks, remittance advice and explanation of benefits; and
automated patient billing services for healthcare providers,
including statement printing and mailing services. Additionally,
Emdeon Business Services provides software products including
decision support and data warehousing, and related maintenance
services to Blue Cross Blue Shield and commercial healthcare
payers, and performs software maintenance and consulting
services for certain governmental agencies. A significant
portion of Emdeon Business Services revenue is generated from
the countrys largest national and regional healthcare
payers. Emdeon Practice Services provides information technology
systems for healthcare providers, including administrative,
financial and clinical applications, primarily under The Medical
Manager, Intergy and Emdeon Network Services brands. Emdeon
Practice Services also provides support and maintenance services
related to the hardware and software associated with our
practice management systems. WebMD Health services include
advertising, sponsorship, continuing medical education (CME),
content syndication and distribution, and licenses of private
online portals to employers and healthcare payers for use by
their employees and plan members. Our customers include
pharmaceutical companies, biotech companies, medical device
companies and media companies. Our Porex revenue includes the
sale of porous plastic components used to control the flow of
fluids and
27
gases for use in healthcare, industrial and consumer
applications, as well as in finished products used in the
medical device and surgical markets.
Cost of operations consists of costs related to services and
products we provide to customers and costs associated with the
operation and maintenance of our networks. These costs include
salaries and related expenses for network operations personnel
and customer support personnel, telecommunication costs,
maintenance of network equipment, cost of postage related to our
automated print-and-mail services and paid-claims communication
services, cost of hardware related to the sale of practice
management systems, a portion of facilities expenses, leased
personnel and facilities costs, sales commissions paid to
certain distributors of our Emdeon Business Services products
and non-cash expenses related to content and distribution
services. In addition, cost of operations includes raw
materials, direct labor and manufacturing overhead, such as
fringe benefits and indirect labor related to our Porex segment.
Development and engineering expense consists primarily of
salaries and related expenses associated with the development of
applications and services. Expenses include compensation paid to
development and engineering personnel, fees to outside
contractors and consultants, and the maintenance of capital
equipment used in the development process.
Sales, marketing, general and administrative expense consists
primarily of advertising, product and brand promotion, salaries
and related expenses for sales, administrative, finance, legal,
information technology, human resources and executive personnel.
These expenses include items related to account management and
marketing personnel, commissions, costs and expenses for
marketing programs and trade shows, and fees for professional
marketing and advertising services, as well as fees for
professional services, costs of general insurance and costs of
accounting and internal control systems to support our
operations. Also included are non-cash expenses related to
advertising and distribution services acquired in exchange for
our equity securities and non-cash stock compensation expense.
Legal expense consists of costs and expenses incurred related to
the investigation by the United States Attorney for the District
of South Carolina and the SEC.
Our discussions throughout MD&A make references to certain
non-cash expenses. We consider non-cash expenses to be those
expenses that result from the issuance of our equity
instruments. The following is a summary of our principal
non-cash expenses:
|
|
|
|
|
Non-cash advertising expense. Expense related to the
usage of our prepaid advertising inventory that we received from
News Corporation in exchange for equity instruments we issued in
connection with an agreement we entered into with News
Corporation in 1999 and subsequently amended in 2000. Our
non-cash advertising expense is included in cost of operations
when we utilize prepaid advertising in conjunction with online
advertising and sponsorship programs. Our non-cash advertising
expense is included in sales, marketing, general and
administrative expense when we utilize the prepaid advertising
for promotion of our brand. |
|
|
|
Non-cash distribution expense. Expense related to the
amortization of a warrant that we issued to AOL as part of a
strategic alliance we entered into with Time Warner in May 2001
under which we became the primary provider of healthcare
content, tools and services for use on certain AOL properties.
The value of the warrant was amortized over the original
three-year term of the strategic alliance and accordingly we
have not recorded any non-cash distribution expense since April
2004. |
|
|
|
Non-cash stock compensation expense. Expense related to
restricted stock awards in our common stock that have been
granted to certain of our employees as well as the intrinsic
value of the unvested portion of stock options assumed in
connection with certain acquisitions in 2000 and options granted
in 2000 with exercise prices less than the fair market value of
our stock on the date of grant. Non-cash stock compensation
expense is reflected in sales, marketing, general and
administrative expense within the accompanying consolidated
statements of operations. |
The following discussion includes a comparison of the results of
operations for the three and six months ended June 30, 2005
to the three and six months ended June 30, 2004.
28
Revenues for the three months ended June 30, 2005 were
$322,556, compared to $281,881 a year ago. The Emdeon Business
Services, WebMD Health and Emdeon Practice Services segments
were responsible for $25,477, $8,613 and $6,823, respectively,
of the revenue increase for the quarter, which was partially
offset by a decrease in revenue of $340 in Porex. In addition,
there was a decrease of $102 in inter-segment eliminations.
Revenues for the six months ended June 30, 2005 were
$626,490, compared to $553,095 a year ago. The Emdeon Business
Services, WebMD Health, Emdeon Practice Services and Porex
segments were responsible for $47,431, $15,879, $8,835 and
$1,095, respectively, of the revenue increase for the six months
ended June 30, 2005. In addition, there was a decrease of
$155 in inter-segment eliminations.
Revenue from customers acquired through the 2005 Acquisition and
2004 Acquisitions contributed $26,995, of the overall increase
in revenue of $40,675 for the three months ended June 30,
2005, and $51,830 of the overall increase in revenue of $73,395
for the six months ended June 30, 2005. For purposes of
this discussion, only revenue from existing customers of the
acquired business on the date of the acquisition is considered
to be revenue from acquired customers. We integrate acquisitions
as quickly as practicable and only revenue recognized during the
first twelve months following the quarter in which the
acquisition closed is considered to be revenue from acquired
customers. The remaining increase in revenues is largely
attributable to increased revenues in our WebMD Health segment
from licensing of our private online portal services to large
employers and health plans and from increased advertising and
sponsorship revenues from pharmaceutical and medical device
companies as well as increased revenues in our Emdeon Practice
Services segment related to higher systems revenue, Network
Services revenue and maintenance revenue.
Cost of Operations. Cost of operations was $181,950 and
$354,113 for the three and six months ended June 30, 2005,
compared to $163,961 and $326,603 in the prior year periods. Our
cost of operations represented 56.4% and 56.5% of revenue for
the three and six months ended June 30, 2005, compared to
58.2% and 59.0% for the three and six months ended June 30,
2004. Favorably impacting cost of operations as a percentage of
revenue for the three and six months ended June 30, 2005
compared to a year ago, was the impact of productivity gains as
a result of streamlining our delivery and service infrastructure
within the Emdeon Practice Services operating segment as well as
lower sales commissions paid to our channel partners and lower
data communication expenses in our Emdeon Business Services
segment. Offsetting these items for the three months ended
June 30, 2005 were increased compensation related costs in
our WebMD Health segment due to increased headcount, as well as
higher costs associated with our April and June 2005 issues of
WebMD the Magazine. Included in cost of operations were
non-cash expenses related to advertising services of $217 in
both the three and six months ended June 30, 2005, compared
to $346 and $601 in the prior year periods.
Development and Engineering. Development and engineering
expense was $14,457 and $29,097 for the three and six months
ended June 30, 2005, compared to $12,991 and $24,087 in the
prior year periods. Our development and engineering expenses
represented 4.5% and 4.6% of revenue for the three and six
months ended June 30, 2005, compared to 4.6% and 4.4% for
the three and six months ended June 30, 2004. The increase
in development and engineering expense was primarily
attributable to the ViPS, Dakota and HealthShare operations
which, due to the timing of these acquisitions, were excluded or
partially excluded from our results for the three and six months
ended June 30, 2004. Also contributing to the increase in
development and engineering expense for the three and six months
ended June 30, 2005, compared to a year ago, was the
increased investment in our product development efforts within
the Emdeon Practice Services segment.
Sales, Marketing, General and Administrative. Sales,
marketing, general and administrative expense was $83,533 and
$165,670 for the three and six months ended June 30, 2005,
compared to $83,298 and $160,292 in the prior year periods. Our
sales, marketing, general and administrative expenses represented
29
25.9% and 26.4% of revenue for the three and six months ended
June 30, 2005, compared to 29.5% and 29.0% of revenue for
the three and six months ended June 30, 2004. Included in
sales, marketing, general and administrative expense are
non-cash expenses related to advertising services, distribution
services and stock compensation. Non-cash expenses related to
advertising and distribution services were $2,169 and $4,796 for
the three and six months ended June 30, 2005, compared to
$5,645 and $10,683 in the prior year periods. The decrease in
non-cash advertising and distribution expense was the result of
lower utilization of our prepaid advertising inventory during
the three and six months ended June 30, 2005, as well as a
decline in the expense related to our distribution arrangement
with AOL which was fully amortized in May of 2004. Non-cash
stock compensation was $716 and $2,367 for the three and six
months ended June 30, 2005, compared to $2,736 and $4,441
in the prior year periods. The decrease in non-cash stock
compensation is primarily related to the vesting schedule of
options issued and assumed in connection with business
combinations and the restricted stock issued to certain
employees in March 2004.
Sales, marketing, general and administrative expense, excluding
the non-cash expenses discussed above, was $80,648 and $158,507
or 25.0% and 25.3% of revenue, for the three and six months
ended June 30, 2005, compared to $74,917 and $145,168 or
26.6% and 26.2% of revenue in the prior year periods. The
decrease in sales, marketing, general and administrative
expense, excluding the non-cash expenses discussed above, as a
percentage of revenue, was due to lower professional service
costs related to our implementation efforts with respect to the
HIPAA transaction standards and our readiness efforts related to
Section 404 of the Sarbanes-Oxley Act of 2002. Our
implementation efforts with respect to the HIPAA transaction
standards were substantially completed in the fourth quarter of
2004. Also contributing to the decrease in our sales, marketing,
general and administrative expense, as a percentage of revenue,
was the inclusion of the ViPS operations in the current period,
which have lower administrative expenses. Offsetting this
decrease in expense, as a percentage of revenue, was
approximately $3,100 of severance and recruiting expenses within
our WebMD Health segment.
Depreciation and Amortization. Depreciation and
amortization expense was $17,541 and $34,045 for the three and
six months ended June 30, 2005, compared to $13,148 and
$25,733 in the prior year periods. Depreciation and amortization
expense represented 5.4% of revenue for the three and six months
ended June 30, 2005, compared to 4.7% and 4.6% of revenue
in the prior year periods. The increase was primarily due to
additional depreciation and amortization expense relating to the
2005 Acquisition and 2004 Acquisitions and as a result of
capital expenditures made in our Emdeon Practice Services
segment during 2004. These increases were slightly offset by a
decrease in amortization expense as a result of the intangible
asset for Medifaxs trade name becoming fully amortized
since the beginning of the prior year periods.
Legal Expense. Legal expense was $4,283 and $8,443 for
the three and six months ended June 30, 2005, compared to
$2,215 and $4,252 in the prior year periods. Legal expense
represents the costs and expenses incurred related to the
investigation by the United States Attorney for the District of
South Carolina and the SEC. Over the course of the
investigation, we expect that these costs may continue to be
significant.
Interest Income. Interest income was $3,936 and $8,257
during the three and six months ended June 30, 2005,
compared to $4,511 and $9,994 in the prior year periods. This
decrease was primarily due to lower average investment balances.
Interest Expense. Interest expense was $3,895 and $8,676
for the three and six months ended June 30, 2005, compared
to $4,838 and $9,586 in the prior year periods. The decrease for
both periods is due to the redemption of the
31/4%
Notes on June 2, 2005.
Other Expense (Income), Net. Other expense (income) for
the three and six months ended June 30, 2005 represents a
loss of $1,712 and $5,544, compared to a gain of $447 and $484
in the prior year periods. Other expense (income) during the
three and six months ended June 30, 2005 includes a loss of
$1,902 related to the redemption of the
31/4%
Notes on June 2, 2005. During the three months ended
March 31, 2005, we recorded $4,251 for unrealized losses on
marketable securities that we identified as securities to be
liquidated in the event funds were needed for redemption of our
31/4%
Notes. Included in
30
other expense (income) for the three and six months ended
June 30, 2005 is $190 and $609, compared to $447 and $484
in the prior year periods, related to net gains on the sale of
marketable securities and on the sale of property and equipment.
Income Tax Provision. The income tax provision of $2,955
and $3,144 for the three and six months ended June 30, 2005
and $613 and $1,544 for the three and six months ended
June 30, 2004, includes tax expense for operations that are
profitable in certain state and foreign jurisdictions. In
addition, the three and six months ended June 30, 2005
includes a provision for federal taxes that has not been reduced
by the decrease in valuation allowance as these tax benefits
were acquired through business combinations.
Results of Operations by Operating Segment
We evaluate the performance of our business segments based upon
income or loss before taxes, non-cash and other items. Non-cash
and other items include depreciation, amortization, gain or loss
on investments, redemption of
31/4%
Notes, sales of property and equipment, costs and expenses
related to the investigation by the United States Attorney for
the District of South Carolina and the SEC (legal
expense), non-cash expenses related to advertising and
distribution services acquired in exchange for our equity
securities in acquisitions and strategic alliances, and stock
compensation expense primarily related to stock options issued
and assumed in connection with acquisitions and restricted stock
issued to employees. The accounting policies of the segments are
consistent with those described in the summary of significant
accounting policies in Note 1 to the consolidated financial
statements contained in our 2004 Annual Report on
Form 10-K. We record inter-segment revenues at rates
comparable to those charged to third parties for comparable
services. Inter-segment revenues are eliminated in consolidation.
Summarized financial information for each of our operating
segments and a reconciliation to net income are presented below
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Emdeon Business Services
|
|
$ |
191,514 |
|
|
$ |
166,037 |
|
|
$ |
377,247 |
|
|
$ |
329,816 |
|
Emdeon Practice Services
|
|
|
78,596 |
|
|
|
71,773 |
|
|
|
151,614 |
|
|
|
142,779 |
|
WebMD Health
|
|
|
40,465 |
|
|
|
31,852 |
|
|
|
74,040 |
|
|
|
58,161 |
|
Porex
|
|
|
20,397 |
|
|
|
20,737 |
|
|
|
40,253 |
|
|
|
39,158 |
|
Inter-segment eliminations
|
|
|
(8,416 |
) |
|
|
(8,518 |
) |
|
|
(16,664 |
) |
|
|
(16,819 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
322,556 |
|
|
$ |
281,881 |
|
|
$ |
626,490 |
|
|
$ |
553,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes, non-cash and other items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Emdeon Business Services
|
|
$ |
40,420 |
|
|
$ |
28,914 |
|
|
$ |
78,673 |
|
|
$ |
58,764 |
|
Emdeon Practice Services
|
|
|
8,183 |
|
|
|
1,771 |
|
|
|
12,580 |
|
|
|
3,122 |
|
WebMD Health
|
|
|
4,350 |
|
|
|
7,626 |
|
|
|
9,201 |
|
|
|
12,168 |
|
Porex
|
|
|
6,064 |
|
|
|
6,275 |
|
|
|
11,461 |
|
|
|
11,317 |
|
Corporate
|
|
|
(13,299 |
) |
|
|
(14,228 |
) |
|
|
(26,925 |
) |
|
|
(27,533 |
) |
Interest income
|
|
|
3,936 |
|
|
|
4,511 |
|
|
|
8,257 |
|
|
|
9,994 |
|
Interest expense
|
|
|
(3,895 |
) |
|
|
(4,838 |
) |
|
|
(8,676 |
) |
|
|
(9,586 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,759 |
|
|
|
30,031 |
|
|
|
84,571 |
|
|
|
58,246 |
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Taxes, non-cash and other items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(17,541 |
) |
|
|
(13,148 |
) |
|
|
(34,045 |
) |
|
|
(25,733 |
) |
Non-cash advertising and distribution services and stock
compensation
|
|
|
(3,102 |
) |
|
|
(8,727 |
) |
|
|
(7,380 |
) |
|
|
(15,725 |
) |
Legal expense
|
|
|
(4,283 |
) |
|
|
(2,215 |
) |
|
|
(8,443 |
) |
|
|
(4,252 |
) |
Other (expense) income, net
|
|
|
(1,712 |
) |
|
|
447 |
|
|
|
(5,544 |
) |
|
|
484 |
|
Income tax provision
|
|
|
(2,955 |
) |
|
|
(613 |
) |
|
|
(3,144 |
) |
|
|
(1,544 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
16,166 |
|
|
$ |
5,775 |
|
|
$ |
26,015 |
|
|
$ |
11,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following discussion is a comparison of the results of
operations for each of our operating segments for the three and
six months ended June 30, 2005 to the three and six months
ended June 30, 2004.
Emdeon Business Services. Revenues were $191,514 and
$377,247 for the three and six months ended June 30, 2005,
an increase of $25,477 or 15.3% and $47,431 or 14.4%, compared
to the prior year periods. Revenues from customers acquired
through the 2004 Acquisitions contributed $23,996 and $47,195 to
the increase in revenue for the three and six months ended
June 30, 2005. Excluding the 2004 Acquisitions, revenue
increased as a result of growth in our paid claims communication
services and our patient statement services, offset by the
continued decrease in revenue for traditional medical services
and EDI revenues.
Income before taxes, non-cash and other items was $40,420 and
$78,673 for the three and six months ended June 30, 2005,
compared to $28,914 and $58,764 in the prior year periods. As a
percentage of revenue, income before taxes, non-cash and other
items was 21.1% and 20.9% for the three and six months ended
June 30, 2005, compared to 17.4% and 17.8% for the prior
year periods. The increase in our operating margin is primarily
the result of lower sales commissions paid to our channel
partners, lower data communication expenses and lower
professional service costs related to our implementation efforts
with respect to the HIPAA transaction standards, which were
substantially completed in the fourth quarter of 2004. These
lower costs for the three and six months ended June 30,
2005 were slightly offset by the ViPS and Dakota acquisitions,
which had lower operating margins compared to other services
offered by the Emdeon Business Services segment.
Emdeon Practice Services. Revenues were $78,596 and
$151,614 for the three and six months ended June 30, 2005,
an increase of $6,823 or 9.5% and $8,835 or 6.2%, compared to
the prior year periods. The increase in revenue for the three
months ended June 30, 2005, compared to the prior year
period, was due to higher Network Services revenue, higher
systems revenues and higher maintenance revenues. The increase
in revenue during the six months ended June 30, 2005
compared to the prior year period was primarily driven by higher
systems revenues and higher maintenance revenues. Increased
maintenance revenues reflect continued higher renewals of our
maintenance and support service contracts.
Income before taxes, non-cash and other items was $8,183 and
$12,580 for the three and six months ended June 30, 2005,
compared to $1,771 and $3,122 in the prior year periods. As a
percentage of revenue, income before taxes, non-cash and other
items was 10.4% and 8.3% for the three and six months ended
June 30, 2005, compared to 2.5% and 2.2% for the prior year
periods. The increased operating margin is due to revenue mix as
well as improvements in our delivery and service infrastructure.
This increased operating margin is slightly offset during the
six months ended June 30, 2005 by approximately $1,300 of
severance provided to former members of management and for other
employees.
WebMD Health. Revenues were $40,465 and $74,040 for the
three and six months ended June 30, 2005, an increase of
$8,613 or 27.0% and $15,879 or 27.3%, compared to the prior year
periods. The increase in revenues is the result of increased
sales from licensing our private online portal services to
32
employers and health plans and from advertising and sponsorship
revenues from our pharmaceutical and medical device customers.
Also contributing to the increases for the three and six months
ended June 30, 2005 is $2,669 and $3,872, respectively from
customers acquired through both the 2005 Acquisition and 2004
Acquisitions. Partially offsetting these increases during the
three and six months ended June 30, 2005, is the loss of
revenue from our content syndication agreement with News
Corporation, which expired in January of 2005. Included in
revenue was $1,000 during the six months ended June 30,
2005, compared to revenue of $3,000 and $6,000 during the three
and six months ended June 30, 2004 related to the News
Corporation agreement.
Income before taxes, non-cash and other items was $4,350 and
$9,201 for the three and six months ended June 30, 2005,
compared to $7,626 and $12,168 in the prior year periods. As a
percentage of revenue, income before taxes, non-cash and other
items was 10.8% and 12.4% for the three and six months ended
June 30, 2005, compared to 23.9% and 20.9% for the prior
year periods. These decreases in operating margin were due to
increased expenses in the areas of website operations and
development, specifically information technology and creating
and licensing content, as well as the decline in revenues due to
the expiration of the content syndication agreement with News
Corporation referred to above. Additionally, we incurred charges
of approximately $3,600 during the three months ended
June 30, 2005 primarily related to severance and recruiting
expenses. Partially offsetting this decrease in operating margin
during the three months ended June 30, 2005 was the
inclusion of the 2005 Acquisition and 2004 Acquisitions which on
a combined basis have higher operating margins compared to the
other operations of the WebMD Health segment.
Porex. Revenues were $20,397 and $40,253 for the three
and six months ended June 30, 2005, a decrease of $340 or
1.6% and an increase of $1,095 or 2.8%, compared to the prior
year periods. The decrease in revenues for the three months
ended June 30, 2005, compared to the prior year period, was
due to increased pricing pressure for certain of our products
and the delay of certain of our customers product launches
for which we produce some of the components. Additionally, the
three and six months ended June 30, 2005 included revenues
from customers acquired through our 2004 Acquisitions, the
favorable shift in foreign exchange rates and higher sales of
surgical implant products. Revenues from customers acquired
through the 2004 Acquisitions contributed $330 and $763 for the
three and six months ended June 30, 2005.
Income before taxes, non-cash and other items was $6,064 and
$11,461 for the three and six months ended June 30, 2005,
compared to $6,275 and $11,317 in the prior year periods. As a
percentage of revenue, income before taxes, non-cash and other
items was 29.7% and 28.5% for the three and six months ended
June 30, 2005, compared to 30.3% and 28.9% for the prior
year periods. These decreases in operating margin were due to
slightly higher personnel and professional costs.
Corporate. Corporate includes expenses shared across all
segments, such as executive personnel, corporate finance, legal,
human resources and risk management. Corporate expenses were
$13,299 or 4.1% of revenue and $26,925 or 4.3% of revenue for
the three and six months ended June 30, 2005, compared to
$14,228 or 5.0% of revenue and $27,533 or 5.0% of revenue for
the prior year period. These expenses, in absolute dollars and
as a percentage of revenue, decreased as a result of lower
professional costs related to our Sarbanes-Oxley readiness
efforts and lower personnel related costs. Additionally, our
corporate expenses as a percentage of revenue continue to
decrease when compared to the prior periods reflecting our
ability to increase revenues without a proportionate increase in
corporate costs.
Inter-Segment Eliminations. The decrease in inter-segment
eliminations for the three and six months ended June 30,
2005 compared to a year ago resulted from lower sales of Emdeon
Business Services products into the Emdeon Practice Services
customer base.
Liquidity and Capital Resources
We have incurred significant operating and net losses since we
began operations and, as of June 30, 2005, had an
accumulated deficit of approximately $10.1 billion. We plan
to continue to invest in acquisitions, strategic relationships,
infrastructure and product development.
33
As of June 30, 2005, we had approximately $187,935 in cash
and cash equivalents and short-term investments and working
capital of $184,519. Additionally, we had long-term investments
of $323,182 in marketable debt securities and $4,094 in
marketable equity securities. We invest our excess cash
principally in U.S. Treasury obligations and Federal Agency
Notes and expect to do so in the future. As of June 30,
2005, all of our marketable securities were classified as
available-for-sale.
Cash provided by operating activities was $62,700 for the six
months ended June 30, 2005, compared to cash provided by
operating activities of $40,648 for the six months ended
June 30, 2004. The cash provided by operating activities
for the six months ended June 30, 2005 was attributable to
net income of $26,015 and non-cash and non-operating items of
$52,024, partially offset by net changes in operating assets and
liabilities of $15,339. The impact of changes in operating
assets and liabilities may change in future periods, depending
on the timing of each period end in relation to items such as
internal payroll and billing cycles, payments from customers,
payments to vendors, interest payments and interest receipts
relating to our investments in marketable securities. The cash
provided by operating activities for the six months ended
June 30, 2004 was attributable to net income of $11,476 and
non-cash and non-operating items of $45,386, partially offset by
net changes in operating assets and liabilities of $16,214. The
non-cash and non-operating items consist of depreciation and
amortization, non-cash expenses related to advertising and
distribution services and stock-based compensation, bad debt
expense, amortization of debt issuance costs, loss on the
redemption of convertible debt, losses and gains on investments
and gains on sales of property and equipment.
Cash used in investing activities was $16,104 for the six months
ended June 30, 2005, compared to cash used in investing
activities of $161,652 for the six months ended June 30,
2004. Cash used in investing activities for the six months ended
June 30, 2005 included $190,673 of proceeds from maturities
and sales of available-for-sale securities offset by $94,350 of
purchases of available-for-sale securities. Cash paid for
business combinations, net of cash acquired, was $74,110, which
primarily related to an ABF contingent consideration payment and
the 2005 Acquisition of HealthShare. Cash used in investing
activities for the six months ended June 30, 2004 included
$1,011,914 of proceeds from maturities and sale of
available-for-sale securities offset by $1,103,876 of purchases
of available-for-sale securities. Cash paid for business
combinations for the six months ended June 30, 2004, net of
cash acquired, was $58,060, which primarily related to the 2004
Acquisition of Dakota and an ABF contingent consideration
payment of $17,455. Investments in property and equipment were
$38,717 for the six months ended June 30, 2005, compared to
$12,047 a year ago. Our investments in property and equipment
during the six months ended June 30, 2005 included
approximately $14,000 related to the build-out of WebMD
Healths new corporate offices in New York City.
Cash used in financing activities was $55,561 for the six months
ended June 30, 2005, compared to cash provided by financing
activities of $117,992 for the six months ended June 30,
2004. Cash used in financing activities for the six months ended
June 30, 2005 consisted of cash paid of $86,694 for the
redemption of the
31/4% Notes
in June 2005, partially offset by $31,437 related to the
issuance of common stock, primarily resulting from exercises of
employee stock options. Cash provided by financing activities
for the six months ended June 30, 2004 principally related
to the net proceeds of $98,115 from the issuance of our
Convertible Redeemable Exchangeable Preferred Stock and proceeds
of $25,011 related to the issuance of common stock, primarily
related to exercises of employee stock options. For the six
months ended June 30, 2004, $4,877 was used for repurchases
of our common stock. We did not repurchase our common stock
during the six months ended June 30, 2005.
Our principal commitments at June 30, 2005 were our
commitments related to the $350,000 1.75% Convertible
Subordinated Notes due in June of 2023, the $100,000 Convertible
Redeemable Exchangeable Preferred Stock due in 2012, obligations
under operating leases and contingent consideration payments of
up to an aggregate of $144,576 related to certain acquisitions
achieving certain milestones.
We believe that, for the foreseeable future, we will have
sufficient cash resources to meet the commitments described
above and our current anticipated working capital and capital
expenditure requirements, including the capital requirements
related to the roll-out of new or updated products in 2005
34
and 2006. Our future liquidity and capital requirements will
depend upon numerous factors, including retention of customers
at current volume and revenue levels, our existing and new
application and service offerings, competing technological and
market developments, costs of maintaining and upgrading the
information technology platforms and communications systems that
Emdeon Business Services and WebMD Health use to provide their
services, potential future acquisitions and additional
repurchases of our common stock. We may need to raise additional
funds to support expansion, develop new or enhanced applications
and services, respond to competitive pressures, acquire
complementary businesses or technologies or take advantage of
unanticipated opportunities. If required, we may raise such
additional funds through public or private debt or equity
financing, strategic relationships or other arrangements. There
can be no assurance that such financing will be available on
acceptable terms, if at all, or that such financing will not be
dilutive to our stockholders.
WebMD Health Corp., a wholly owned subsidiary of WebMD formed to
be a holding company for our WebMD Health segment, has filed a
Registration Statement on Form S-1 with respect to an
initial public offering of its Class A common stock. As
previously announced, WebMD Health Corp. intends to sell
approximately 10%-14% of its equity in the offering. See
Introduction Recent
Developments. Our current intention is that WebMD Health
Corp. will retain all of the proceeds of the offering. The
offering will not result in any changes to the terms of our
long-term debt or other principal commitments and we believe
that we will continue, for the foreseeable future after the
offering, to have sufficient cash resources to meet the
commitments described above in this section and that WebMD
Health Corp. will, as a result of its retention of the proceeds
of the offering, also have sufficient cash resources to meet its
commitments and anticipated working capital and capital
expenditure requirements.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 123, (Revised
2004): Share-Based Payment (SFAS 123R),
which replaces SFAS No. 123, Accounting for
Stock-Based Compensation, (SFAS 123) and
supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees. SFAS 123R requires all
share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements
based on their fair values beginning with the fiscal year that
begins after June 15, 2005. The pro forma disclosures
previously permitted under SFAS 123 no longer will be an
alternative to financial statement recognition. We are required
to adopt SFAS 123R in the first quarter of fiscal 2006,
beginning January 1, 2006. Under SFAS 123R, we must
determine the appropriate fair value model to be used for
valuing share-based payments, the amortization method for
compensation cost and the transition method to be used at the
date of adoption. The transition methods include prospective and
retroactive adoption options. Under the retroactive option,
prior periods may be restated either as of the beginning of the
year of adoption or for all periods presented. The prospective
method requires that compensation expense be recorded for all
unvested stock options and restricted stock at the beginning of
the first quarter of adoption of SFAS 123R. We are
evaluating the requirements of SFAS 123R and expect that
the adoption of SFAS 123R will have a material impact on
the consolidated results of operations and earnings per share.
We have not yet determined the method of adoption or the effect
of adopting SFAS 123R.
Factors That May Affect Our Future Financial Condition or
Results of Operations
This section describes circumstances or events that could have a
negative effect on our financial results or operations or that
could change, for the worse, existing trends in some or all of
our businesses. The occurrence of one or more of the
circumstances or events described below could have a material
adverse effect on our financial condition, results of operations
and cash flows or on the trading prices of the common stock and
convertible notes that we have issued. The risks and
uncertainties described below are not the only ones facing our
company. Additional risks and uncertainties that are not
currently known to us or that we currently believe are
immaterial may also adversely affect our business and operations.
35
Risks Related to the Businesses of
Emdeon Business Services and Emdeon Practice Services
|
|
|
The financial results of Emdeon Business Services could be
adversely affected if payers conduct electronic data
interchange, or EDI, transactions without using a clearinghouse
or if their ability to do so allows them to terminate or modify
their relationships with us |
There can be no assurance that healthcare payers will continue
to use Emdeon Business Services and other independent companies
to transmit healthcare transactions. Some payers currently offer
electronic data transmission services to healthcare providers
that bypass third-party EDI service providers such as Emdeon
Business Services. In addition, some payers currently offer
electronic data transmission services through affiliated
clearinghouses that compete with Emdeon Business Services. See
Some of our customers compete with us and some, instead of
using a third party provider, perform internally some of the
services that we offer below. We cannot provide assurance
that we will be able to maintain our existing relationships with
payers or develop new relationships on satisfactory terms, if at
all. Although we believe the use of clearinghouses will continue
to be the most efficient way for most providers to transact
electronically with multiple payers, the HIPAA transaction
standards may facilitate use of EDI links for transmission of
transactions between a greater number of healthcare payers and
providers without use of a clearinghouse. Any significant
increase in the utilization of links between healthcare
providers and payers without use of a third party clearinghouse
could have a material adverse effect on Emdeon Business
Services transaction volume and financial results. In
addition, any increase in the ability of payers to bypass third
party EDI service providers may adversely affect the terms and
conditions we are able to negotiate in our agreements with them,
which could also have a material adverse impact on Emdeon
Business Services business and financial results.
|
|
|
Some of our customers compete with us and some, instead of
using a third party provider, perform internally some of the
services that we offer |
Some of our existing payer and provider customers and some of
our strategic partners compete with us or may plan to do so or
belong to alliances that compete with us or plan to do so,
either with respect to the same products and services we provide
to them or with respect to some of our other lines of business.
See Business Competition for Our Healthcare
Information Services and Technology Solutions in our
Annual Report on Form 10-K for the year ended
December 31, 2004. For example, some payers currently
offer, through affiliated clearinghouses, Web portals and other
means, electronic data transmission services to healthcare
providers that allow the provider to bypass third party EDI
service providers such as Emdeon Business Services, and
additional payers may do so in the future. The ability of payers
to do so may adversely affect the terms and conditions we are
able to negotiate in our connectivity agreements with them and
our transaction volume. We cannot provide assurance that we will
be able to maintain our existing relationships for connectivity
services with payers or develop new relationships on
satisfactory terms, if at all. In addition, some of our services
allow healthcare payers to outsource business processes that
they have been or could be performing internally and, in order
for us to be able to compete, use of our services must be more
efficient for them than use of internal resources.
|
|
|
Emdeon Business Services transaction volume and
financial results could be adversely affected if we do not
maintain relationships with practice management system vendors
and large submitters of healthcare EDI transactions |
We have developed relationships with practice management system
vendors and large submitters of healthcare claims to increase
the usage of our Emdeon Business Services transaction services.
Emdeon Practice Services is a competitor of these practice
management system vendors. Some of these vendors have, as a
result of our ownership of Emdeon Practice Services or for other
reasons, chosen to diminish or terminate their relationships
with Emdeon Business Services, and others may do so in the
future. Some other large submitters of claims compete with, or
may have significant relationships with entities that compete
with, Emdeon Business Services or WebMD Health. We could also
lose transaction volume from
36
practice management system vendors and other large submitters of
claims if the payments we offer them as an inducement to use our
transaction services are not competitive with other alternatives
available to them. To the extent that we are not able to
maintain mutually satisfactory relationships with the larger
practice management system vendors and large submitters of
healthcare EDI transactions, Emdeon Business Services
transaction volume and financial results could be adversely
affected.
|
|
|
Contractual relationships with governmental customers may
impose special burdens on us and provide special benefits to
those customers, including the right to change or terminate the
contract in response to budgetary constraints or policy
changes |
A portion of Emdeon Business Services revenues comes from
customers that are governmental agencies. The acquisition of
ViPS has increased that portion and we intend to seek additional
government contracts and subcontracts. Government contracts and
subcontracts may be subject to some or all of the following:
|
|
|
|
|
termination when appropriated funding for the current fiscal
year is exhausted; |
|
|
|
termination for the governmental customers convenience,
subject to a negotiated settlement for costs incurred and profit
on work completed, along with the right to place contracts out
for bid before the full contract term, as well as the right to
make unilateral changes in contract requirements, subject to
negotiated price adjustments; |
|
|
|
most-favored pricing disclosure requirements that
are designed to ensure that the government can negotiate and
receive pricing akin to that offered commercially and
requirements to submit proprietary cost or pricing data to
ensure that government contract pricing is fair and reasonable; |
|
|
|
commercial customer price tracking requirements that require
contractors to monitor pricing offered to a specified class of
customers and to extend price reductions offered to that class
of customers to the government; |
|
|
|
reporting and compliance requirements related to, among other
things: equal employment opportunity, affirmative action for
veterans and for workers with disabilities, and accessibility
for the disabled; |
|
|
|
broader audit rights than we would usually grant to
non-governmental customers; and |
|
|
|
specialized remedies for breach and default, including setoff
rights, retroactive price adjustments, and civil or criminal
fraud penalties, as well as mandatory administrative dispute
resolution procedures instead of state contract law remedies. |
In addition, certain violations of federal law may subject
government contractors to having their contracts terminated and,
under certain circumstances, suspension and/or debarment from
future government contracts. Finally, some of our governmental
contracts are priced based on our cost of providing products and
services. Those contracts are subject to regulatory
cost-allowability standards and a specialized system of cost
accounting standards.
|
|
|
Lengthy sales, installation and implementation cycles for
some Emdeon Business Services applications and some Emdeon
Practice Services applications may result in unanticipated
fluctuations in their revenues |
Emdeon Practice Services. Emdeon Practice Services is
seeking to increase its sales to larger physician groups and
clinics. These sales are typically not only larger in size, but
also involve more complex practice management and electronic
medical records applications. As a result, we expect longer
sales, contracting and implementation cycles for these
customers. These sales may be subject to delays due to
customers internal procedures for approving large
expenditures and for deploying new technologies; implementation
may be subject to delays based on the availability of the
internal customer resources needed. We are unable to control
many of the factors that will influence the timing of the buying
decisions of potential customers or the pace at which
installation and training may occur. Unexpected delays in
37
these sales or in their implementation may result in
unanticipated fluctuations in the revenues of Emdeon Practice
Services.
ViPS. ViPS, which is included in our Emdeon Business
Services segment, provides licensed software products and
related services to payers and information technology services
to government customers. The period from our initial contact
with a potential ViPS client and the purchase of our solution by
the client is difficult to predict. In the past, it has
generally ranged from six to 12 months, but in some cases
has extended much longer. Sales by ViPS may be subject to delays
due to customers internal procedures for approving large
expenditures, due to delays in government funding and due to
other factors outside of our control. The time it takes to
implement a licensed software solution is also difficult to
predict and has lasted as long as 12 months from contract
execution to the commencement of live operation. Implementation
may be subject to delays based on the availability of the
internal resources of the client that are needed and other
factors outside of our control. As a result, we have only
limited ability to forecast the timing of revenue from new ViPS
sales. During the sales cycle and the implementation period, we
may expend substantial time, effort and money preparing contract
proposals and negotiating the contract without receiving any
related revenue.
|
|
|
Emdeon Practice Services faces competition in providing
support services to owners of The Medical Manager and other
systems |
Emdeon Practice Services faces competition for the support
services it markets to owners of The Medical Manager systems, as
well as for similar services that we market to owners of certain
other practice management systems that we have acquired.
Physician practices may seek such support from third parties,
including businesses that support or manage information
technology for various types of clients and businesses that
specialize in systems for physicians, some of whom may formerly
have been independent dealers of The Medical Manager software or
of practice management systems we have acquired. We cannot
provide assurance that we will be able to compete successfully
against these service providers. In addition, some physician
practices, especially larger ones, may use their own employees
and other internal resources to support their practice
management systems. Some of our clients have terminated their
support services contracts in the past and we expect such
terminations to occur in the future.
Risks Related to the Businesses of WebMD Health
|
|
|
WebMD Healths online businesses are difficult to
evaluate because they have a limited operating history |
WebMD Healths online businesses have a limited operating
history and participate in relatively new and rapidly evolving
markets. These businesses have undergone significant changes
during their short history, including changes in the services
provided and changes in ownership and management, and may
continue to change as a result of changes in market conditions,
their regulatory environment and other factors outside of our
control. We cannot assure you that our current business strategy
will be successful in the long term.
Many companies with business plans based on providing healthcare
information through the Internet have failed to be profitable
and some have filed for bankruptcy and/or ceased operations.
WebMD Health has only been profitable in three of our historical
fiscal quarters and, even if demand from users exists, we cannot
assure you that WebMD Health will be profitable in the future.
|
|
|
The timing of WebMD Healths advertising and sponsorship
revenues may vary significantly from quarter to quarter, which
could have adverse effects on its operating results |
WebMD Healths advertising and sponsorship revenues may
vary significantly from quarter to quarter due to a number of
factors, not all of which are in our control, and any of which
may be difficult to forecast accurately. The majority of WebMD
Healths advertising and sponsorship contracts are for
terms of approximately four to 12 months. WebMD Health has
relatively few longer term contracts. We cannot
38
assure you that WebMD Healths current customers will
continue to participate in advertising and sponsorship programs
beyond the terms of their existing contracts or that they will
enter into any additional contracts for new programs.
In addition, the time between the date of initial contact with a
potential advertiser or sponsor regarding a specific program and
the execution of a contract with the advertiser or sponsor for
that program may be lengthy, especially for larger contracts,
and may be subject to delays over which we have little or no
control, including as a result of budgetary constraints of the
advertiser or sponsor or their need for internal approvals.
Factors that could affect the timing of our revenues from
advertisers and sponsors include:
|
|
|
|
|
timing of Food and Drug Administration, or FDA, approval for new
products or for new approved uses for existing products; |
|
|
|
seasonal factors relating to the prevalence of specific health
conditions and other seasonal factors that may affect the timing
of promotional campaigns for specific products; and |
|
|
|
the scheduling of conferences for physicians and other
healthcare professionals. |
|
|
|
Lengthy sales and implementation cycles for WebMD
Healths private online portals make it difficult to
forecast revenues from these applications |
WebMD Health provides private online portals to employers and
payers for use by their employees and members. The period from
WebMD Healths initial contact with a potential client for
a private online portal and the first purchase of a solution by
the client is difficult to predict. In the past, it has
generally ranged from six to 12 months, but in some cases
has been longer. These sales may be subject to delays due to
clients internal procedures for approving large
expenditures and other factors beyond our control. The time it
takes to implement a customized private online portal is also
difficult to predict and has lasted as long as six months from
contract execution to the commencement of live operation.
Implementation may be subject to delays based on the
availability of the internal resources of the client that are
needed and other factors outside of our control. As a result, we
have limited ability to forecast the timing of revenue from new
clients. This, in turn, makes it more difficult to predict WebMD
Healths financial performance from quarter to quarter.
During the sales cycle and the implementation period, WebMD
Health may expend substantial time, effort and money preparing
contract proposals, negotiating contracts and implementing the
private online portal without receiving any related revenue. In
addition, many of the expenses related to providing online
portals are relatively fixed in the short-term, including
personnel costs and technology and infrastructure costs. Even if
WebMD Healths revenues from providing private online
portals is lower than expected, WebMD Health may not be able to
reduce its short-term spending in response. Any shortfall in
revenue would have a direct impact on WebMD Healths
results of operations.
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If WebMD Health is unable to provide content that attracts
and retains users to The WebMD Health Network at a level that is
attractive to advertisers and sponsors, WebMD Healths
revenues will be reduced |
We believe that interest in WebMD Healths public portals
for consumers, physicians and healthcare professionals is based
upon WebMD Healths ability to make available high quality
health content, decision-support tools and other services that
meet the needs of its users. Its ability to do so depends, in
turn, on:
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its ability to hire and retain qualified authors, journalists
and independent writers; |
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its ability to license quality content from third
parties; and |
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its ability to monitor and respond to increases and decreases in
user interest in specific topics. |
39
We cannot assure you that WebMD Health will be able to continue
to get needed content at a reasonable cost. If WebMD Health is
unable to provide content that attracts and retains users of
The WebMD Health Network at a level that is attractive to
advertisers and sponsors, WebMD Healths revenues will be
reduced. In addition, WebMD Healths ability to deploy new
interactive tools and other features will require it to continue
to improve the technology underlying its Web sites. The required
changes may be significant and expensive, and there can be no
assurance that WebMD Health will be able to execute them quickly
and efficiently.
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If WebMD Health is unable to provide high quality healthcare
content for its publishing services business that attracts and
retains users, its revenues will be reduced |
We believe that interest in WebMD Healths publications for
physicians, such as The Little Blue Book and ACP
Medicine and ACS Surgery: Principles and Practice, is
based upon its ability to make available up-to-date, high
quality health content that meets the needs of its physician
users. Although WebMD Health has been able to continue to update
and maintain the physician practice information that it
publishes in The Little Blue Book, if it is unable to
continue to do so for any reason, the value of The Little
Blue Book would diminish and interest in this publication
and advertising in this publication would be adversely affected.
Similarly, WebMD Healths ability to maintain or increase
the subscriptions to ACP Medicine and ACS Surgery
is based upon its ability to make available up-to-date, high
quality content which depends on its ability to retain qualified
physician authors and writers in the disciplines covered by
these publications. We cannot assure you that WebMD Health will
be able to retain qualified physician editors or authors to
provide and review needed content at a reasonable cost. If WebMD
Health is unable to provide content that attracts and retains
subscribers, subscriptions to these products will be reduced. In
addition, the American College of Physicians permits WebMD
Health to use the ACP name in the title of ACP Medicine
and the American College of Surgeons permits WebMD Health to
use the name ACS in the title of ACS Surgery: Principles and
Practice. If WebMD Health loses the right to use the ACP or
ACS name in its publications, subscribers may find the
publication less attractive and cease to subscribe to these
publications.
WebMD the Magazine was launched in April 2005 and as a
result has a very short operating history. We cannot assure you
that WebMD the Magazine will be able to attract
advertisers to make this publication successful in the long term.
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A decline in user traffic levels for The WebMD Health Network
could have a material adverse effect on its advertising and
sponsorship revenues |
We cannot assure you that WebMD Health will be able to continue
to attract a large audience of health-involved consumers and
clinically-active healthcare professionals to The WebMD
Health Network. WebMD Health generates revenues by, among
other things, selling sponsorships of specific pages, sections
or events on its network of publicly available online Web sites
for healthcare providers and consumers and related e-mailed
newsletters. WebMD Healths advertisers and sponsors
include pharmaceutical, biotech, medical device and consumer
products companies that are interested in communicating with and
educating our audience or parts of our audience. We cannot
provide assurance that WebMD Health will be able to retain or
increase usage of its online public portals by consumers and
physicians. There are numerous other online and offline sources
of healthcare information services that compete with WebMD
Health for traffic. In addition, since users may be attracted to
The WebMD Health Network as a result of a specific
condition or for a specific purpose, it is difficult for us to
predict the rate at which users will return. Further, some users
may visit The WebMD Health Network as a result of its
existing third party relationships and, as a result, WebMD
Healths traffic may vary based on the amount of traffic to
Web sites of these third parties and other factors outside its
control. If one or more of these third parties engages in
conduct that negatively affects users of those third party Web
sites, users that come to The WebMD Health Network
through these third party Web sites may decrease. A decline in
user traffic levels
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or a reduction in the number of pages viewed by users may cause
WebMD Healths revenues to decrease and could have a
material adverse effect on its results of operations.
Although a substantial majority of the visitors to The WebMD
Health Network and the page views generated on The WebMD
Health Network are from Web sites WebMD Health owns, some
are from Web sites owned by third parties that carry WebMD
Healths content and, as a result, WebMD Healths
traffic may vary based on the amount of traffic to Web sites of
these third parties and other factors outside our control.
During the six months ended June 30, 2005, AOL accounted
for approximately 17% of The WebMD Health Networks
unique users and approximately 8% of its aggregate page views
and other third party Web sites accounted for approximately 7%
of The WebMD Health Networks unique users and
approximately 5% of its aggregate page views during such period.
In the event that our relationship with AOL or other third party
Web sites is terminated, the user traffic and page views in
The WebMD Health Network may be negatively affected,
which may negatively affect WebMD Healths results of
operations.
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WebMD Health may be unsuccessful in its efforts to increase
advertising and sponsorship revenue from consumer products
companies |
Most of WebMD Healths advertising and sponsorship revenues
have, in the past, come from pharmaceutical, biotechnology and
medical device companies. During the past year, WebMD Health has
begun to focus on increasing sponsorship revenue from consumer
products companies that are interested in communicating
health-related or safety-related information about their
products to its audience. However, while a number of consumer
products companies have indicated an intent to increase the
portion of their promotional spending used on the Internet, we
cannot assure you that these advertisers and sponsors will find
WebMD Healths consumer Web sites to be as effective as
other Web sites or traditional media for promoting their
products and services. If WebMD Health encounters difficulties
in competing with the other alternatives available to consumer
products companies, this portion of its business may develop
more slowly than we expect or may fail to develop.
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WebMD Health may be subject to claims brought against it as a
result of content it provides |
WebMD Health has editorial procedures in place to provide
quality control of the information that it publishes or
provides. However, there can be no assurance that its editorial
and other quality control procedures will be sufficient to
ensure that there are no errors or omissions in particular
content. Consumers access health-related information on WebMD
Healths public Web sites and through its private online
portals, including information regarding particular medical
conditions and possible adverse reactions or side effects from
medications. If WebMD Healths content, or content it
obtains from third parties, contains inaccuracies, it is
possible that users of those sites or other third parties may
seek to sue WebMD Health for various causes of action. Although
our Web sites contain terms and conditions of use, including
disclaimers of liability that are intended to reduce or
eliminate our liability to users, the law governing the validity
and enforceability of online agreements, including those
disclaimers, is new and evolving. Even if potential claims do
not result in liability to WebMD Health, investigating and
defending against these claims could be expensive and time
consuming and could divert managements attention away from
our operations. In addition, WebMD Healths business is
based on establishing itself as a trustworthy and dependable
source of healthcare information. Allegations of impropriety or
negligence, even if unfounded, could harm its reputation and
business.
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WebMD Health faces potential liability related to the privacy
and security of personal information it collects on its Web
sites |
Internet user privacy has become a controversial issue both in
the United States and abroad. Web Health has privacy policies
posted on its public Web sites and its private online portals
that we believe comply with applicable laws requiring notice to
users about its information collection, use and disclosure
practices. However, whether and how existing privacy and
consumer protection laws in various jurisdictions apply to the
Internet is still uncertain and may take years to resolve. Any
legislation or regulation in the area of privacy of personal
information could affect the way WebMD Health operates its
public Web sites
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and its private online portals and could harm its business.
Further, we can give no assurance that the privacy policies and
other statements on WebMD Healths Web sites, or its
practices, will be found sufficient to protect it from liability
or adverse publicity in this area.
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Changes in industry guidelines or government regulation could
adversely affect our online Medscape CME offerings |
Our CME activities are planned and implemented in accordance
with the Essential Areas and Policies of the Accreditation
Council for Continuing Medical Education, or ACCME, which
oversees providers of CME credit, and other applicable
accreditation standards. In September 2004, ACCME revised its
standards for commercial support of CME. The revised standards
are intended to ensure, among other things, that CME activities
of ACCME-accredited providers are independent of providers of
healthcare goods and services that fund the development of CME.
ACCME required accredited providers to implement these standards
by May 2005. Implementation has required additional disclosures
to CME participants about those in a position to influence
content and other adjustments to the management and operations
of our CME programs. We believe we have modified our procedures
as appropriate to meet the revised standards. However, we cannot
be certain whether these adjustments will ensure that we meet
the new standards or predict whether ACCME may impose additional
requirements.
In the event that ACCME concludes that we have not met its
revised standards relating to CME, we would not be permitted to
offer accredited ACCME activities to physicians and healthcare
professionals, and we may be required, instead, to use third
parties to accredit such CME-related services on Medscape
from WebMD. In addition, any failure to maintain our status
as an accredited ACCME provider as a result of a failure to
comply with existing or new ACCME standards could discourage
potential sponsors from engaging in CME or education related
activities with us, which could have a material adverse effect
on our business.
CME activities may also be subject to government regulation by
the FDA, the Office of Inspector General, or HHS, the federal
agency responsible for interpreting certain federal laws
relating to healthcare, and state regulatory agencies.
During the past several years, educational programs, including
CME, directed toward physicians have been subject to increased
scrutiny to ensure that sponsors do not influence or control the
content of the program. In response to governmental and industry
initiatives, pharmaceutical companies and medical device
companies have been developing and implementing internal
controls and procedures that promote adherence to applicable
regulations and requirements. In implementing these controls and
procedures, different clients may interpret the regulations and
requirements differently and may implement procedures or
requirements that vary from client to client. These controls and
procedures:
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may discourage pharmaceutical companies from engaging in
educational activities; |
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may slow their internal approval for such programs; |
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may reduce the volume of sponsored educational programs
implemented through our Medscape Web site to levels that are
lower than in the past; and |
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may require us to make changes to how we offer or provide
educational programs, including CME. |
In addition, future changes to existing regulations or
accreditation standards, or to the internal compliance programs
of potential clients may further discourage or prohibit
pharmaceutical companies from engaging in educational activities
with us, or may require us to make further changes in the way we
offer or provide educational programs.
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Risks Related to the Development and Performance of the
Products and Services
of Emdeon Business Services, Emdeon Practice Services and
WebMD Health
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Our ability to generate revenue could suffer if we do not
continue to update and improve our existing products and
services and develop new ones |
We must introduce new healthcare information services and
technology solutions and improve the functionality of our
existing products and services in a timely manner in order to
retain existing customers and attract new ones. However, we may
not be successful in responding to technological and regulatory
developments and changing customer needs. The pace of change in
the markets we serve is rapid, and there are frequent new
product and service introductions by our competitors and by
vendors whose products and services we use in providing our own
products and services. If we do not respond successfully to
technological and regulatory changes and evolving industry
standards, our products and services may become obsolete.
Technological changes may also result in the offering of
competitive products and services at lower prices than we are
charging for our products and services, which could result in
our losing sales unless we lower the prices we charge. In
addition, there can be no assurance that the products we develop
or license will be able to compete with the alternatives
available to our customers. For more information about the
competition we face, see Business Healthcare
Information Services and Technology Solutions
Competition for Our Healthcare Information Services and
Technology Solutions in our Annual Report on
Form 10-K for the year ended December 31, 2004.
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Developing and implementing new or updated products and
services may take longer and cost more than expected |
We rely on a combination of internal development, strategic
relationships, licensing and acquisitions to develop our
products and services. The cost of developing new healthcare
information services and technology solutions is inherently
difficult to estimate. Our development and implementation of
proposed products and services may take longer than originally
expected, require more testing than originally anticipated and
require the acquisition of additional personnel and other
resources. If we are unable to develop new or updated products
and services on a timely basis and implement them without
significant disruptions to the existing systems and processes of
our customers, we may lose potential sales and harm our
relationships with current or potential customers.
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New or updated products and services will not become
profitable unless they achieve sufficient levels of market
acceptance |
There can be no assurance that customers and potential customers
will accept from us new or updated products and services or
products and services that result from integrating existing
and/or acquired products and services, including:
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our updated electronic medical records products; |
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the business process outsourcing services for payers we have
developed internally and through acquisition; and |
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our updated clinical transaction services. |
The future results of Emdeon Practice Services and Emdeon
Business Services will depend, in significant part, on the
success of these products and services and on our ability to
keep our other information technology and connectivity products
up to date. Providers and payers may choose to use similar
products and services offered by our competitors if they are
already using products and services of those competitors and
have made extensive investments in hardware, software and
training relating to the competitors existing products and
services. Even providers and payers who are already our
customers may not purchase new or updated products or services,
especially when they are initially offered and if they require
changes in equipment or workflow. In addition, there can be no
assurance that payers who use our services for sending and
receiving claims will use our other pre- and post-adjudication
services.
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For services we are developing or may develop in the future,
there can be no assurance that we will attract sufficient
customers or that such services will generate sufficient
revenues to cover the costs of developing, marketing and
providing those services. Furthermore, there can be no assurance
that any pricing strategy that we implement for any new products
and services will be economically viable or acceptable to the
target markets. Failure to achieve broad penetration in target
markets with respect to new or updated products and services
could have a material adverse effect on our business prospects.
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Achieving market acceptance of new or updated products and
services is likely to require significant efforts and
expenditures |
Achieving market acceptance for new or updated products and
services is likely to require substantial marketing efforts and
expenditure of significant funds to create awareness and demand
by participants in the healthcare industry. In addition,
deployment of new or updated products and services may require
the use of additional resources for training our existing sales
force and customer service personnel and for hiring and training
additional salespersons and customer service personnel. There
can be no assurance that the revenue opportunities from new or
updated products and services will justify amounts spent for
their development, marketing and roll-out.
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We could be subject to breach of warranty, product liability
or other claims if our software products, information technology
systems or transmission systems contain errors or experience
failures |
Errors in the software and systems we provide to customers or
the software and systems we use to provide services could cause
serious problems for our customers. For example, errors in our
transaction processing systems can result in healthcare payers
paying the wrong amount or making payments to the wrong payee.
If problems like these occur, our customers may seek
compensation from us or may seek to terminate their agreements
with us, withhold payments due to us, seek refunds from us of
part or all of the fees charged under those agreements or
initiate litigation or other dispute resolution procedures. We
also provide products and services that assist in healthcare
decision-making, including some that relate to patient medical
histories and treatment plans. If these products malfunction or
fail to provide accurate and timely information, we could be
subject to product liability claims. In addition, we could face
breach of warranty or other claims or additional development
costs if our software and systems do not meet contractual
performance standards, do not perform in accordance with their
documentation, or do not meet the expectations that our
customers have for them. Our software and systems are inherently
complex and, despite testing and quality control, we cannot be
certain that errors will not be found in prior versions, current
versions or future versions or enhancements. See also
During times when we are making significant changes to our
products and services, there are increased risks of performance
problems below.
We attempt to limit, by contract, our liability for damages
arising from our negligence, errors or mistakes. However,
contractual limitations on liability may not be enforceable in
certain circumstances or may otherwise not provide sufficient
protection to us from liability for damages. We maintain
liability insurance coverage, including coverage for errors and
omissions. However, it is possible that claims could exceed the
amount of our applicable insurance coverage, if any, or that
this coverage may not continue to be available on acceptable
terms or in sufficient amounts. Even if these claims do not
result in liability to us, investigating and defending against
them could be expensive and time consuming and could divert
managements attention away from our operations. In
addition, negative publicity caused by these events may delay
market acceptance of our products and services, including
unrelated products and services.
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Performance problems with our systems or system failures
could cause us to lose business or incur liabilities |
Our customer satisfaction and our business could be harmed if we
experience transmission delays or failures or loss of data in
the systems we use to provide services to our customers,
including the transaction-related services that Emdeon Business
Services provides to healthcare payers and providers and the
online services that WebMD Health provides. These systems are
complex and, despite testing and quality control, we cannot be
certain that problems will not occur or that they will be
detected and
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corrected promptly if they do occur. See also During times
when we are making significant changes to our products and
services, there are increased risks of performance
problems below. To operate without interruption, both we
and the service providers we use must guard against:
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damage from fire, power loss and other natural disasters; |
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communications failures; |
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software and hardware errors, failures or crashes; |
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security breaches, computer viruses and similar disruptive
problems; and |
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other potential interruptions. |
We have contingency plans for emergencies with the systems we
use to provide services; however, we have limited backup
facilities if these facilities are not functioning. The
occurrence of a major catastrophic event or other system failure
at any of our facilities or at a third-party facility we use
could interrupt our services or result in the loss of stored
data, which could have a material adverse impact on our business
or cause us to incur material liabilities. Although we maintain
insurance for our business, we cannot guarantee that our
insurance will be adequate to compensate us for all losses that
may occur or that this coverage will continue to be available on
acceptable terms or in sufficient amounts.
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During times when we are making significant changes to our
products and services or to systems we use to provide services,
there are increased risks of performance problems |
If we do not respond successfully to technological and
regulatory changes and evolving industry standards, our products
and services may become obsolete. See Our ability to
generate revenue could suffer if we do not continue to update
and improve our existing products and services and develop new
ones above. The software and systems that we sell and that
we use to provide services are inherently complex and, despite
testing and quality control, we cannot be certain that errors
will not be found in any enhancements, updates and new versions
that we market or use. Even if new products and services do not
have performance problems, our technical and customer service
personnel may have difficulties in installing them or in their
efforts to provide any necessary training and support to
customers.
We expect to make significant changes later in 2005 and during
2006 to the hardware and software Emdeon Business Services uses
to provide connectivity services and to the systems WebMD Health
uses to create, manage and deliver its portals. Our
implementation of changes in these platforms may cost more than
originally expected, may take longer than originally expected,
and may require more testing than originally anticipated. While
the new hardware and software will be tested before it is used
in production, we cannot be sure that the testing will uncover
all problems that may occur in actual use. If significant
problems occur as a result of these changes, we may fail to meet
our contractual obligations to customers, which could result in
claims being made against us or in the loss of customer
relationships. In addition, we cannot provide assurance that
changes in these platforms will provide the additional
functionality and other benefits that were originally expected.
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If our systems or the Internet experience security breaches
or are otherwise perceived to be insecure, our business could
suffer |
A security breach could damage our reputation or result in
liability. We retain and transmit confidential information,
including patient health information, in our processing centers
and other facilities. It is critical that these facilities and
infrastructure remain secure and be perceived by the marketplace
as secure. We may be required to expend significant capital and
other resources to protect against security breaches and hackers
or to alleviate problems caused by breaches. Despite the
implementation of security measures, this infrastructure or
other systems that we interface with, including the Internet and
related systems, may be vulnerable to physical break-ins,
hackers, improper employee or contractor access, computer
viruses, programming errors, attacks by third parties or similar
disruptive problems. Any compromise of our security, whether as
a result of our own systems or systems that they interface with,
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could reduce demand for our services. See also
Business Government Regulation
Health Insurance Portability and Accountability Act of
1996 Security Standards in our Annual Report
on Form 10-K for the year ended December 31, 2004.
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Performance problems with Emdeon Business Services
systems could affect our relationships with customers of Emdeon
Practice Services |
Emdeon Business Services provides the transaction services used
by the Network Services customers of Emdeon Practice Services.
Disruptions to those services could cause some of those
customers to obtain some or all of their software support
requirements from competitors of ours or could cause some
customers to switch to a competing physician practice management
or billing software solution.
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Emdeon Business Services ability to provide transaction
services depends on services provided by telecommunications
companies |
Emdeon Business Services relies on a limited number of suppliers
to provide some of the telecommunications services necessary for
its transaction services. The telecommunications industry has
been subject to significant changes as a result of changes in
technology, regulation and the underlying economy. In the past
several years, many telecommunications companies have
experienced financial problems and some have sought bankruptcy
protection. Some of these companies have discontinued
telecommunications services for which they had contractual
obligations to Emdeon Business Services. Emdeon Business
Services inability to source telecommunications services
at reasonable prices due to a loss of competitive suppliers
could affect its ability to maintain its margins until it is
able to raise its prices to its customers and, if it is not able
to raise its prices, could have a material adverse effect on its
financial results.
Risks Applicable to Our Use of the Internet
Most of WebMD Healths services are provided through the
Internet. In addition, Emdeon Business Services and Emdeon
Practice Services provide some Internet-based services and use
the Internet to receive some data from customers. The following
risks apply to our use of the Internet in our businesses:
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Our Internet-based services are dependent on the development
and maintenance of the Internet infrastructure |
Our ability to deliver our Internet-based services is dependent
on the development and maintenance of the infrastructure of the
Internet by third parties. This includes maintenance of a
reliable network backbone with the necessary speed, data
capacity and security, as well as timely development of
complementary products such as high-speed modems, for providing
reliable Internet access and services. The Internet has
experienced, and is likely to continue to experience,
significant growth in the number of users and the amount of
traffic. If the Internet continues to experience increased
usage, the Internet infrastructure may be unable to support the
demands placed on it. In addition, the reliability and
performance of the Internet may be harmed by increased usage.
The Internet has experienced a variety of outages and other
delays as a result of damages to portions of its infrastructure,
and it could face outages and delays in the future. These
outages and delays could reduce the level of Internet usage as
well as the availability of the Internet to us for delivery of
our Internet-based services. In addition, our customers who
utilize our Web-based services depend on Internet service
providers, online service providers and other Web site operators
for access to our Web site. All of these providers have
experienced significant outages in the past and could experience
outages, delays and other difficulties in the future due to
system failures unrelated to our systems. Any significant
interruptions in our services or increases in response time
could result in a loss of potential or existing users of and
advertisers and sponsors on our Web site and, if sustained or
repeated, could reduce the attractiveness of our services.
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Delivery of Web-based services requires uninterrupted
communications and computer service from third-party service
providers and our own systems |
Our Web-based services, including WebMD Healths public Web
sites and private online portals, are designed to operate
24 hours a day, seven days a week, without interruption. To
do so, we rely on internal systems as well as communications and
hosting services provided by third parties. We have experienced
periodic system interruptions in the past, and we cannot
guarantee that they will not occur again. We do not maintain
redundant systems or facilities for some of these services. In
the event of a catastrophic event at one of our data centers, we
may experience an extended period of system unavailability,
could negatively impact our business. See
Risks Related to the Development and
Performance of Our Products and Services Performance
problems with our systems or system failures could cause us to
lose business or incur liabilities above. In addition,
some of our Web-based services may, at times, be required to
accommodate higher than expected volumes of traffic. At those
times, we may experience slower response times or system
failures. Any sustained or repeated interruptions or disruptions
in these systems or increase in their response times could
damage our relationships with clients, customers, advertisers
and sponsors.
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Third parties may challenge the enforceability of our online
agreements |
The law governing the validity and enforceability of online
agreements and other electronic transactions is evolving. We
could be subject to claims by third parties that the online
terms and conditions for use of our Web sites, including
disclaimers or limitations of liability, are unenforceable. A
finding by a court that these terms and conditions or other
online agreements are invalid could harm our business.
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Government regulation of the Internet could adversely affect
our business |
The Internet and its associated technologies are subject to
government regulation. Our failure, or the failure of our
business partners, to accurately anticipate the application of
laws and regulations affecting our products and services and the
manner in which we deliver them, or any other failure to comply,
could create liability for us, result in adverse publicity, or
negatively affect our business. In addition, new laws and
regulations, or new interpretations of existing laws and
regulations, may be adopted with respect to the Internet or
other online services covering user privacy, patient
confidentiality, consumer protection and other issues, including
pricing, content, copyrights and patents, distribution, and
characteristics and quality of products and services. We cannot
predict whether these laws or regulations will change or how
such changes will affect our business. For more information
regarding government regulation of the Internet to which we are
or may be subject, see Business Government
Regulation in our Annual Report on Form 10-K for the
year ended December 31, 2004.
Risks Related to Providing Products and Services to the
Healthcare Industry
Almost all of the revenues of WebMD Health, Emdeon Business
Services and Emdeon Practice Services come from customers in
various parts of the healthcare industry. In addition, a
significant portion of Porexs revenues come from products
used in healthcare or related applications. The following risks
arise out of this:
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Developments in the healthcare industry could adversely
affect our business |
Developments that result in a reduction of expenditures by
customers or potential customers in the healthcare industry
could have a material adverse effect on our business. General
reductions in expenditures by healthcare industry participants
could result from, among other things:
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government regulation or private initiatives that affect the
manner in which healthcare providers interact with patients,
payers or other healthcare industry participants, including
changes in pricing or means of delivery of healthcare products
and services (for additional discussion of the potential |
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effects of regulatory matters on our business and on
participants in the healthcare industry, see the other
Risks Related to Providing Products and Services to the
Healthcare Industry described below in this section and
Business Government Regulation in our
Annual Report on Form 10-K for the year ended
December 31, 2004); |
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consolidation of healthcare industry participants; |
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reductions in governmental funding for healthcare; and |
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adverse changes in business or economic conditions affecting
healthcare payers or providers, pharmaceutical companies,
medical device manufacturers or other healthcare industry
participants. |
Even if general expenditures by industry participants remain the
same or increase, developments in the healthcare industry may
result in reduced spending on information technology and
services or in some or all of the specific segments of that
market we serve or are planning to serve. For example, use of
our products and services could be affected by:
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changes in the billing patterns of healthcare providers; |
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changes in the design of health insurance plans; |
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changes in the contracting methods payers use in their
relationships with providers; and |
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decreases in marketing expenditures by pharmaceutical companies
or medical device manufacturers, including as a result of
governmental regulation or private initiatives that discourage
or prohibit promotional activities by pharmaceutical or medical
device companies. |
In addition, our customers expectations regarding pending
or potential industry developments may also affect their
budgeting processes and spending plans with respect to products
and services of the types we provide. See also
Governmental and private initiatives to support adoption
of healthcare information technology may encourage additional
companies to enter our markets or result in the development of
technology solutions that compete with ours below.
WebMD Healths advertising and sponsorship revenues are
particularly dependent on pharmaceutical, biotechnology and
medical device companies. WebMD Healths business will be
adversely impacted if, as a result of changes in business,
economic or regulatory conditions or other factors affecting the
pharmaceutical, biotechnology or medical device industries,
pharmaceutical, biotechnology or medical device companies reduce
or postpone:
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spending on marketing and educational services; |
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their use of the Internet as a vehicle for marketing and
education; or |
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their use of any specific service or combination of services
that we provide. |
The healthcare industry has changed significantly in recent
years and we expect that significant changes will continue to
occur. However, the timing and impact of developments in the
healthcare industry are difficult to predict. We cannot provide
assurance that the markets for our products and services will
continue to exist at current levels or that we will have
adequate technical, financial and marketing resources to react
to changes in those markets.
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Governmental and private initiatives to support adoption of
healthcare information technology may encourage additional
companies to enter our markets or result in the development of
technology solutions that compete with ours |
There are currently numerous federal, state and private
initiatives and studies seeking ways to increase the use of
information technology in healthcare, including in the
physicians office, as a means of improving care and
reducing costs. For example, the Department of Health and Human
Services (HHS) issued a report during 2004 entitled The
Decade of Health Information Technology: Delivering
Consumer-centric and Information-rich Health Care. At
WebMD, an important part of our mission has
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been fostering adoption of information technology and electronic
communications in healthcare. Accordingly, we welcome
governmental and private initiatives designed to achieve the
same goals. However, these initiatives may encourage more
companies to enter our markets or result in the development of
technology solutions that compete with ours. For example, as
part of its initiatives, HHS has indicated that it intends to
facilitate the development and transfer of knowledge and
technology used by the federal government to the private sector.
As a result, the Centers for Medicare & Medicaid Services
has been collaborating with the Veterans Health Administration
(VHA) and other key federal agencies on the development and
distribution of electronic health record software called
VistA-Office EHR for use in clinics and
physician offices, based on the VistA system VHA uses for its
own hospitals. VistA-Office EHR will compete with our
IntergyEHR solution and appears likely to be offered at a
significantly lower cost than IntergyEHR.
The effect that these initiatives may have on our business is
difficult to predict and there can be no assurances that we will
adequately address the risks created by these initiatives or
that we will be able to take advantage of any resulting
opportunities. In addition, competition from information
technology products and services made available to healthcare
providers on a not-for-profit or other low-cost basis by or on
behalf of governmental entities, including VistA-Office EHR,
could have an adverse impact on sales of our products and
services, including IntergyEHR.
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Government regulation of healthcare creates risks and
challenges with respect to our compliance efforts and our
business strategies |
The healthcare industry is highly regulated and is subject to
changing political, legislative, regulatory and other
influences. Existing and new laws and regulations affecting the
healthcare industry could create unexpected liabilities for us,
cause us to incur additional costs and could restrict our
operations. Many healthcare laws are complex and their
application to specific products and services may not be clear.
In particular, many existing healthcare laws and regulations,
when enacted, did not anticipate the healthcare information
services and technology solutions that we provide. However,
these laws and regulations may nonetheless be applied to our
products and services. Our failure to accurately anticipate the
application of these laws and regulations, or other failure to
comply, could create liability for us, result in adverse
publicity and negatively affect our businesses. Some of the
risks we face from healthcare regulation are as follows:
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because we are in the business of applying information
technology to healthcare, various aspects of HIPAA have had and
are expected to continue to have significant consequences for
Emdeon Business Services and Emdeon Practice Services and, to a
lesser extent, WebMD Health; |
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because our WebMD Health business involves advertising and
promotion of prescription and over-the-counter drugs and medical
devices, any increase in regulation of these areas by the
Federal Drug Administration or the Federal Trade Commission
could make it more difficult for us to contract for sponsorships
and advertising; |
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because we sell items and services to healthcare providers and
physicians, our sales and promotional practices must comply with
federal and state anti-kickback laws; |
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our healthcare connectivity and transaction-related
administrative services must be provided in compliance with
federal and state false claims laws; and |
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in providing health information to consumers, we must not engage
in activities that could be deemed to be practicing medicine and
a violation of applicable laws. |
For more information regarding the risks that healthcare
regulation creates for our businesses, see
Business Government Regulation in our
Annual Report on Form 10-K for the year ended
December 31, 2004.
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Risks Related to Porexs Business and Industry
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Porexs success depends upon demand for its products,
which in some cases ultimately depends upon end-user demand for
the products of its customers |
Demand for our Porex products may change materially as a result
of economic or market conditions and other trends that affect
the industries in which Porex participates. In addition, because
a significant portion of our Porex products are components that
are eventually integrated into or used with products
manufactured by customers for resale to end-users, the demand
for these product components is dependent on product development
cycles and marketing efforts of these other manufacturers, as
well as variations in their inventory levels, which are factors
that we are unable to control. Accordingly, the amount of
Porexs sales to manufacturer customers can be difficult to
predict and subject to wide quarter-to-quarter variances.
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Porexs product offerings must meet changing customer
requirements |
A significant portion of our Porex products are integrated into
end products used by manufacturing companies in various
industries, some of which are characterized by rapidly changing
technology, evolving industry standards and frequent new product
introductions. Accordingly, to satisfy its customers, Porex must
develop and introduce, in a timely manner, products that meet
changing customer requirements at competitive prices. To do
this, Porex must:
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develop new uses of existing porous plastics technologies and
applications; |
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innovate and develop new porous plastics technologies and
applications; |
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commercialize those technologies and applications; |
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manufacture at a cost that allows it to price its products
competitively; |
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manufacture and deliver its products in sufficient volumes and
on time; |
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accurately anticipate customer needs; and |
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differentiate its offerings from those of its competitors. |
We cannot assure you that Porex will be able to develop new or
enhanced products or that, if it does, those products will
achieve market acceptance. If Porex does not introduce new
products in a timely manner and make enhancements to existing
products to meet the changing needs of its customers, some of
its products could become obsolete over time, in which case
Porexs customer relationships, revenue and operating
results would be negatively impacted.
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Potential new or enhanced Porex products may not achieve
sufficient sales to be profitable or justify the cost of their
development |
We cannot be certain, when we engage in Porex research and
development activities, whether potential new products or
product enhancements will be accepted by the customers for which
they are intended. Achieving market acceptance for new or
enhanced products may require substantial marketing efforts and
expenditure of significant funds to create awareness and demand
by potential customers. In addition, sales and marketing efforts
with respect to these products may require the use of additional
resources for training our existing Porex sales forces and
customer service personnel and for hiring and training
additional salespersons and customer service personnel. There
can be no assurance that the revenue opportunities from new or
enhanced products will justify amounts spent for their
development and marketing. In addition, there can be no
assurance that any pricing strategy that we implement for any
new or enhanced Porex products will be economically viable or
acceptable to the target markets.
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Porex may not be able to source the raw materials it needs or
may have to pay more for those raw materials |
Some of Porexs products require high-grade plastic resins
with specific properties as raw materials. While Porex has not
experienced any material difficulty in obtaining adequate
supplies of high-grade plastic resins that meet its
requirements, it relies on a limited number of sources for some
of these plastic resins. If Porex experiences a reduction or
interruption in supply from these sources, it may not be able to
access alternative sources of supply within a reasonable period
of time or at commercially reasonable rates, which could have a
material adverse effect on its business and financial results.
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Disruptions in Porexs manufacturing operations could
have a material adverse effect on its business and financial
results |
Any significant disruption in Porexs manufacturing
operations, including as a result of fire, power interruptions,
equipment malfunctions, labor disputes, material shortages,
earthquakes, floods, computer viruses, sabotage, terrorist acts
or other force majeure, could have a material adverse effect on
Porexs ability to deliver products to customers and,
accordingly, its financial results.
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Porex may not be able to keep third parties from using
technology it has developed |
Porex uses proprietary technology for manufacturing its porous
plastics products and its success is dependent, to a significant
extent, on its ability to protect the proprietary and
confidential aspects of its technology. Although Porex owns
certain patents, it relies primarily on non-patented proprietary
manufacturing processes. To protect its proprietary processes,
Porex relies on a combination of trade secret laws, license
agreements, nondisclosure and other contractual provisions and
technical measures, including designing and manufacturing its
porous molding equipment and most of its molds in-house. Trade
secret laws do not afford the statutory exclusivity possible for
patented processes. There can be no assurance that the legal
protections afforded to Porex or the steps taken by Porex will
be adequate to prevent misappropriation of its technology. In
addition, these protections do not prevent independent
third-party development of competitive products or services.
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The nature of Porexs products exposes it to product
liability claims that may not be adequately covered by indemnity
agreements or insurance |
The products sold by Porex, whether sold directly to end-users
or sold to other manufacturers for inclusion in the products
that they sell, expose it to potential risk of product liability
claims, particularly with respect to Porexs life sciences,
clinical, surgical and medical products. Some of Porexs
products are designed to be permanently implanted in the human
body. Design defects and manufacturing defects with respect to
such products sold by Porex or failures that occur with the
products of Porexs manufacturer customers that contain
components made by Porex could result in product liability
claims and/or a recall of one or more of Porexs products.
Porex believes that it carries adequate insurance coverage
against product liability claims and other risks. We cannot
assure you, however, that claims in excess of Porexs
insurance coverage will not arise. In addition, Porexs
insurance policies must be renewed annually. Although Porex has
been able to obtain adequate insurance coverage at an acceptable
cost in the past, we cannot assure you that Porex will continue
to be able to obtain adequate insurance coverage at an
acceptable cost.
In most instances, Porex enters into indemnity agreements with
its manufacturing customers. These indemnity agreements
generally provide that these customers would indemnify Porex
from liabilities that may arise from the sale of their products
that incorporate Porex components to, or the use of such
products by, end-users. While Porex generally seeks contractual
indemnification from its customers, any such indemnification is
limited, as a practical matter, to the creditworthiness of the
indemnifying party. If Porex does not have adequate contractual
indemnification available, product liability claims, to the
extent not covered by insurance, could have a material adverse
effect on its business, operating results and financial
condition.
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Since March 1991, Porex has been named as one of many
co-defendants in a number of actions brought by recipients of
mammary implants distributed by Porex in the United States. For
a description of these actions, see the information under
Legal Proceedings Porex Mammary Implant
Litigation in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2004.
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Economic, political and other risks associated with
Porexs international sales and geographically diverse
operations could adversely affect Porexs operations and
financial results |
Since Porex sells its products worldwide, its business is
subject to risks associated with doing business internationally.
In addition, Porex has manufacturing facilities in the United
Kingdom, Germany and Malaysia. Accordingly, Porexs
operations and financial results could be harmed by a variety of
factors, including:
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changes in foreign currency exchange rates; |
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changes in a specific countrys or regions political
or economic conditions, particularly in emerging markets; |
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trade protection measures and import or export licensing
requirements; |
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potentially negative consequences from changes in tax laws; |
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differing protection of intellectual property; and |
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unexpected changes in regulatory requirements. |
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Environmental regulation could adversely affect Porexs
business |
Porex is subject to foreign and domestic environmental laws and
regulations and is subject to scheduled and random checks by
environmental authorities. Porexs business involves the
handling, storage and disposal of materials that are classified
as hazardous. Although Porexs safety procedures for
handling, storage and disposal of these materials are designed
to comply with the standards prescribed by applicable laws and
regulations, Porex may be held liable for any environmental
damages that result from Porexs operations. Porex may be
required to pay fines, remediation costs and damages, which
could have a material adverse effect on its results of
operations.
Risks Applicable to Our Entire Company
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The ongoing investigations by the United States Attorney for
the District of South Carolina and the SEC could negatively
impact our company and divert management attention from our
business operations |
The United States Attorney for the District of South Carolina is
conducting an investigation of our company. Based on the
information available to WebMD as of the date of this Quarterly
Report, we believe that the investigation relates principally to
issues of financial accounting improprieties for Medical Manager
Corporation, a predecessor of WebMD (by its merger into WebMD in
September 2000), and our Medical Manager Health Systems
subsidiary; however, we cannot be sure of the
investigations exact scope or how long it may continue. In
addition, WebMD understands that the SEC is conducting a formal
investigation into this matter. Adverse developments in
connection with the investigations, if any, including as a
result of matters that the authorities or WebMD may discover,
could have a negative impact on our company and on how it is
perceived by investors and potential investors and customers and
potential customers. In addition, the management effort and
attention required to respond to the investigations and any such
developments could have a negative impact on our business
operations. For additional information, see Legal
Proceedings in our Annual Report on Form 10-K for the
year ended December 31, 2004.
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WebMD intends to continue to fully cooperate with the
authorities in this matter. While we are not able to estimate,
at this time, the amount of the expenses that we will incur in
connection with the investigations, we expect that they may
continue to be significant.
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We face significant competition for our products and
services |
The markets in which we operate are intensely competitive,
continually evolving and, in some cases, subject to rapid
technological change. Many of our competitors have greater
financial, technical, product development, marketing and other
resources than we do. These organizations may be better known
than we are and have more customers than we do. We cannot
provide assurance that we will be able to compete successfully
against these organizations or any alliances they have formed or
may form. For more information about the competition we face,
see Business Healthcare Information Services
and Technology Solutions Competition for Our
Healthcare Information Services and Technology Solutions
and Business Porex
Competition in our Annual Report on Form 10-K for the
year ended December 31, 2004.
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Third parties may bring claims as a result of the activities
of our strategic partners or resellers of our products and
services |
We could be subject to claims by third parties, and to
liability, as a result of the activities, products or services
of our strategic partners or resellers of our products and
services. Even if these claims do not result in liability to us,
investigating and defending these claims could be expensive,
time-consuming and result in adverse publicity that could harm
our business.
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Our success depends, in part, on our attracting and retaining
qualified executives and employees |
The success of our business depends, in part, on our ability to
attract and retain qualified executives, writers and editors,
software developers and other technical personnel and sales and
marketing personnel. We anticipate the need to hire and retain
qualified employees in these areas from time to time. We cannot
assure you that we will be able to hire or retain a sufficient
number of qualified personnel to meet our requirements, or that
we will be able to do so at the salary and benefit costs that
are acceptable to us. Failure to do so may have an adverse
effect on our business.
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We may not be successful in protecting our intellectual
property and proprietary rights |
Our intellectual property is important to all of our businesses.
We rely on a combination of trade secret, patent and other
intellectual property laws and confidentiality procedures and
non-disclosure contractual provisions to protect our
intellectual property. We believe that our non-patented
proprietary technologies and business and manufacturing
processes are protected under trade secret, contractual and
other intellectual property rights. However, those rights do not
afford the statutory exclusivity provided by patented processes.
In addition, the steps that we take to protect our intellectual
property, proprietary information and trade secrets may prove to
be inadequate and, whether or not adequate, may be expensive.
There can be no assurance that we will be able to detect
potential or actual misappropriation or infringement of our
intellectual property, proprietary information or trade secrets.
Even if we detect misappropriation or infringement by a third
party, there can be no assurance that we will be able to enforce
our rights at a reasonable cost, or at all. In addition, our
rights to intellectual property, proprietary information and
trade secrets may not prevent independent third-party
development and commercialization of competing products or
services.
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Third parties may claim that we are infringing their
intellectual property, and we could suffer significant
litigation or licensing expenses or be prevented from selling
products or services |
We could be subject to claims that we are misappropriating or
infringing intellectual property or other proprietary rights of
others. These claims, even if not meritorious, could be
expensive to defend and divert managements attention from
our operations. If we become liable to third parties for
infringing these
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rights, we could be required to pay a substantial damage award
and to develop non-infringing technology, obtain a license or
cease selling the products or services that use or contain the
infringing intellectual property. We may be unable to develop
non-infringing products or services or obtain a license on
commercially reasonable terms, or at all. We may also be
required to indemnify our customers if they become subject to
third-party claims relating to intellectual property that we
license or otherwise provide to them, which could be costly.
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We have incurred and may continue to incur losses |
We began operations in January 1996 and, until 2004, had
incurred net losses in each year since our inception and, as of
June 30, 2005, we had an accumulated deficit of
approximately $10.1 billion. We currently intend to
continue to invest in infrastructure development, applications
development, marketing and acquisitions. Whether we continue to
incur losses in a particular period will depend on, among other
things, the amount of such investments and whether those
investments lead to increased revenues.
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We may be subject to litigation |
Our business and operations may subject us to claims, litigation
and other proceedings brought by private parties and
governmental authorities. For information regarding certain
proceedings to which we are currently a party, see Legal
Proceedings in our Annual Report on Form 10-K for the
year ended December 31, 2004 and our Quarterly Report on
Form 10-Q for the quarter ended March 31, 2005.
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Acquisitions, business combinations and other transactions
may be difficult to complete and, if completed, may have
negative consequences for our business and our
securityholders |
Our company has been built, in part, through a series of
acquisitions. We intend to continue to seek to acquire or to
engage in business combinations with companies engaged in
complementary businesses. In addition, we may enter into joint
ventures, strategic alliances or similar arrangements with third
parties. These transactions may result in changes in the nature
and scope of our operations and changes in our financial
condition. Our success in completing these types of transactions
will depend on, among other things, our ability to locate
suitable candidates and negotiate mutually acceptable terms with
them, as well as the availability of financing. Significant
competition for these opportunities exists, which may increase
the cost of and decrease the opportunities for these types of
transactions. Financing for these transactions may come from
several sources, including:
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cash and cash equivalents on hand and marketable securities; |
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proceeds from the incurrence of indebtedness; and |
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proceeds from the issuance of additional common stock, preferred
stock, convertible debt or other securities. |
Our issuance of additional securities could:
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cause substantial dilution of the percentage ownership of our
stockholders at the time of the issuance; |
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cause substantial dilution of our earnings per share; |
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subject us to the risks associated with increased leverage,
including a reduction in our ability to obtain financing or an
increase in the cost of any financing we obtain; |
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subject us to restrictive covenants that could limit our
flexibility in conducting future business activities; and |
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adversely affect the prevailing market price for our outstanding
securities. |
We do not intend to seek securityholder approval for any such
acquisition or security issuance unless required by applicable
law or regulation or the terms of existing securities.
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Our business will suffer if we fail to successfully integrate
acquired businesses and technologies or to assess the risks in
particular transactions |
We have in the past acquired, and may in the future acquire,
businesses, technologies, services, product lines and other
assets. The successful integration of the acquired businesses
and assets into our operations, on a cost-effective basis, can
be critical to our future performance. The amount and timing of
the expected benefits of any acquisition, including potential
synergies between our company and the acquired business, are
subject to significant risks and uncertainties. These risks and
uncertainties include, but are not limited to, those relating to:
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our ability to maintain relationships with the customers of the
acquired business; |
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our ability to cross-sell products and services to customers
with which we have established relationships and those with
which the acquired businesses have established relationships; |
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our ability to retain or replace key personnel; |
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potential conflicts in payer, provider, strategic partner,
sponsor or advertising relationships; |
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our ability to coordinate organizations that are geographically
diverse and may have different business cultures; and |
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compliance with regulatory requirements. |
We cannot guarantee that any acquired businesses will be
successfully integrated with our operations in a timely or
cost-effective manner, or at all. Failure to successfully
integrate acquired businesses or to achieve anticipated
operating synergies, revenue enhancements or cost savings could
have a material adverse effect on our business, financial
condition and results of operations.
Although our management attempts to evaluate the risks inherent
in each transaction and to value acquisition candidates
appropriately, we cannot assure you that we will properly
ascertain all such risks or that acquired businesses and assets
will perform as we expect or enhance the value of our company as
a whole. In addition, acquired companies or businesses may have
larger than expected liabilities that are not covered by the
indemnification, if any, that we are able to obtain from the
sellers.
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We may not be able to raise additional funds when needed for
our business or to exploit opportunities |
Our future liquidity and capital requirements will depend upon
numerous factors, including the success of the integration of
our businesses, our existing and new applications and service
offerings, competing technologies and market developments,
potential future acquisitions and additional repurchases of our
common stock. We may need to raise additional funds to support
expansion, develop new or enhanced applications and services,
respond to competitive pressures, acquire complementary
businesses or technologies or take advantage of unanticipated
opportunities. If required, we may raise such additional funds
through public or private debt or equity financing, strategic
relationships or other arrangements. There can be no assurance
that such financing will be available on acceptable terms, if at
all, or that such financing will not be dilutive to our
stockholders.
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We expect that accounting for employee stock options using
the fair value method will have a material impact on our
consolidated results of operations and earnings per share |
The FASB has issued SFAS 123R, which will require us to
recognize, in our financial statements, all share-based payments
to our employees, including grants of employee stock options,
based on their fair values beginning with the first quarter of
2006. WebMD expects that the adoption of SFAS 123R will
have a material impact on our consolidated results of operations
and earnings per share. See Note 1 to the Consolidated
Financial Statements included in this Quarterly Report for more
information regarding accounting for stock-based compensation
plans. We cannot predict what effect the reduction in our net
income may have on the market prices of WebMDs securities.
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We cannot assure you that the proposed initial public
offering by WebMD Health Corp. will be successfully completed
and, if completed, the offering may expose holders of WebMD
common stock to additional risks |
WebMD Health Corp., a wholly owned subsidiary of WebMD formed to
be a holding company for our WebMD Health segment, has filed a
Registration Statement on Form S-1 with respect to an
initial public offering of its Class A common stock. As
previously announced, WebMD Health Corp. intends to sell
approximately 10%-14% of its equity in the offering. The
proposed initial public offering is subject to a number of
uncertainties, both within and outside of our control, including
those related to prevailing market conditions. As a result, we
cannot assure you that the initial public offering will be
successfully completed or, if completed, that it would occur
within a specified time period.
If the initial public offering is completed, WebMD Health Corp.
would be a new public company. We are unable to predict what the
market prices of our common stock and WebMD Health Corp. common
stock would be after the initial public offering. We cannot
assure you that the initial public offering, if completed, will
produce any increase for our stockholders in the market value of
their holdings in our company. In addition, the market prices of
our common stock and WebMD Health Corp. common stock could be
highly volatile for several months after the initial public
offering and may each continue to be more volatile than our
common stock would have been if a transaction had not occurred.
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Our use of a new corporate name and the related rebranding of
some of our products and services could cause temporary
disruptions in some of our businesses |
As previously announced and as discussed above in
Introduction Recent Developments, we
plan to seek stockholder approval, at our 2005 Annual Meeting of
Stockholders, for changing our corporate name from WebMD
Corporation to Emdeon Corporation and have begun to use Emdeon
in the names of two of our segments, Emdeon Business Services
and Emdeon Practice Services, and as a brand for some of their
products and services. Until the Emdeon name becomes recognized
in the markets in which we compete, we could experience some
confusion by existing and potential customers and temporarily be
at a competitive disadvantage. Although we intend to devote
significant resources to publicizing our new name and
communicating with existing and potential customers, the
transition period may take longer than anticipated and there
may, during that period, be temporary disruptions in some of our
businesses.
56
|
|
ITEM 3. |
Quantitative and Qualitative Disclosures About Market
Risk |
Interest Rate Sensitivity
The primary objective of our investment activities is to
preserve principal and maintain adequate liquidity, while at the
same time maximizing the yield we receive from our investment
portfolio. This objective is accomplished by adherence to our
investment policy, which establishes the list of eligible
securities and credit requirements for each investment.
Changes in prevailing interest rates will cause the principal
amount of the investment to fluctuate. To minimize this risk, we
maintain our portfolio of cash equivalents, short-term
investments and marketable securities in commercial paper,
non-government debt securities, money market funds and highly
liquid United States Treasury notes. We view these high grade
securities within our portfolio as having similar market risk
characteristics.
Principal amounts expected to mature are $0.4 million,
$334.7 million and $115.0 million during the remainder
of 2005, 2006 and 2007, respectively. These include investments
totaling $352.6 million in Federal Agency Notes that are
callable subjecting us to interest rate risk on the reinvestment
of these securities. We believe that the impact of any call and
resulting reinvestment of proceeds would not have a material
effect on our financial condition or results of operations.
We have not utilized derivative financial instruments in our
investment portfolio.
Exchange Rate Sensitivity
Currently, substantially all of our sales and expenses are
denominated in United States dollars; however, Porex is exposed
to fluctuations in foreign currency exchange rates, primarily
the rate of exchange of the United States dollar against the
Euro. This exposure arises primarily as a result of translating
the results of Porexs foreign operations to the United
States dollar at exchange rates that have fluctuated from the
beginning of the accounting period. Porex has not engaged in
foreign currency hedging activities to date. Foreign currency
translation losses were $1.7 million and $2.7 million,
during the three and six month periods ended June 30, 2005,
respectively, and $0.0 million and $0.3 million,
during the three and six month periods ended June 30, 2004,
respectively.
|
|
ITEM 4. |
Controls and Procedures |
As required by Exchange Act Rule 13a-15(b), WebMD
management, including the Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness
of WebMDs disclosure controls and procedures, as defined
in Exchange Act Rule 13a-15(e), as of June 30, 2005.
Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that WebMDs disclosure
controls and procedures provided reasonable assurance that all
material information required to be filed in this Quarterly
Report has been made known to them in a timely fashion.
In connection with the evaluation required by Exchange Act
Rule 13a-15(d), WebMD management, including the Chief
Executive Officer and Chief Financial Officer, concluded that no
changes in WebMDs internal control over financial
reporting occurred during the second quarter of 2005 that have
materially affected, or are reasonably likely to materially
affect, WebMDs internal control over financial reporting.
57
PART II
OTHER INFORMATION
|
|
ITEM 2. |
Unregistered Sales of Equity Securities and Use of
Proceeds |
(c) The following table provides information about
purchases by WebMD during the three months ended June 30,
2005 of equity securities that are registered by us pursuant to
Section 12 of the Exchange Act:
Issuer Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number | |
|
|
|
|
|
|
|
|
(or Approximate | |
|
|
|
|
|
|
Total Number of | |
|
Dollar Value) of | |
|
|
|
|
|
|
Shares Purchased as | |
|
Shares that May Yet | |
|
|
|
|
|
|
Part of Publicly | |
|
Be Purchased Under | |
|
|
Total Number of | |
|
Average Price Paid | |
|
Announced Plans or | |
|
the Plans or | |
Period |
|
Shares Purchased | |
|
per Share | |
|
Programs | |
|
Programs | |
|
|
| |
|
| |
|
| |
|
| |
04/01/05-04/30/05
|
|
|
440 |
(1) |
|
$ |
8.95 |
|
|
|
|
|
|
$ |
61,531,935 |
|
05/01/05-05/31/05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
61,531,935 |
|
06/01/05-06/30/05
|
|
|
575 |
(1) |
|
$ |
9.46 |
|
|
|
|
|
|
$ |
61,531,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,017 |
|
|
$ |
9.24 |
|
|
|
|
|
|
$ |
61,531,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Represents shares withheld from restricted stock awards that
vested during the three months ended June 30, 2005 to
satisfy the withholding tax requirements related to the vesting
of the awards. |
ITEM 6. Exhibits
The exhibits listed in the accompanying Exhibit Index on
page E-1 are filed or furnished as part of this Quarterly Report.
58
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
Andrew C. Corbin |
|
Executive Vice President and Chief |
|
Financial Officer |
Date: August 9, 2005
59
EXHIBIT INDEX
|
|
|
|
|
Exhibit No. |
|
Description |
|
|
|
|
3 |
.1 |
|
Eleventh Amended and Restated Certificate of Incorporation of
Registrant, as amended (incorporated by reference to
Exhibit 3.1 to Registrants Quarterly Report on
Form 10-Q for the quarter ended September 30, 2004) |
|
3 |
.2 |
|
Certificate of Designations for Convertible Redeemable
Exchangeable Preferred Stock, as amended (incorporated by
reference to Exhibit 3.2 to the Registrants Quarterly
Report on Form 10-Q for the quarter ended
September 30, 2004) |
|
3 |
.3 |
|
Amended and Restated Bylaws of Registrant, as currently in
effect (incorporated by reference to Exhibit 3.2 of the
Registrants Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004) |
|
31 |
.1 |
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer of Registrant |
|
31 |
.2 |
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer of Registrant |
|
32 |
.1 |
|
Section 1350 Certification of Chief Executive Officer of
Registrant |
|
32 |
.2 |
|
Section 1350 Certification of Chief Financial Officer of
Registrant |
E-1