-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KA3CdqNM8oTfguUqQulijFZeCpylk8ElG7ze91tV9OgAtRMJTqxrv2KFl+PpnQqr XNvgm3g+H7zRg+FP2Qv5pA== 0000950144-01-004587.txt : 20010409 0000950144-01-004587.hdr.sgml : 20010409 ACCESSION NUMBER: 0000950144-01-004587 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WEBMD CORP /NEW/ CENTRAL INDEX KEY: 0001009575 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 943236644 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-24975 FILM NUMBER: 1589834 BUSINESS ADDRESS: STREET 1: RIVER DRIVE CENTER 2 STREET 2: 669 RIVER DR CITY: ELMWOOD PARK STATE: NJ ZIP: 07407 BUSINESS PHONE: 4088765000 MAIL ADDRESS: STREET 1: RIVER DRIVE CENTER 2 STREET 2: 669 RIVER DR CITY: ELMWOOD PARK STATE: NJ ZIP: 07407 FORMER COMPANY: FORMER CONFORMED NAME: HEALTHEON CORP DATE OF NAME CHANGE: 19980729 10-K 1 g68042e10-k.txt WEBMD CORPORATION 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER: 0-24975 WEBMD CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 94-3236644 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 669 RIVER DRIVE, CENTER 2 07407-1361 ELMWOOD PARK, NEW JERSEY (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE): (201) 703-3400 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $.0001 PER SHARE (TITLE OF EACH CLASS) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference into Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant (based upon the closing sale price of $6.50 on March 14, 2001, as reported on the Nasdaq Stock Market's National Market and, for purposes of this computation only, the assumption that Microsoft Corporation, Quintiles Transnational Corp. and all of the registrant's directors and executive officers are affiliates) was approximately $1,824,460,131. As of March 14, 2001, the registrant had outstanding 357,112,937 shares of common stock. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
PAGE ---- CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS................ 1 PART I Item 1. Business.................................................... 2 Item 2. Properties.................................................. 23 Item 3. Legal Proceedings........................................... 23 Item 4. Submission of Matters to a Vote of Security Holders......... 25 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 26 Item 6. Selected Financial Data..................................... 28 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 29 Item 7A. Quantitative and Qualitative Disclosures about Market Risk........................................................ 47 Item 8. Financial Statements and Supplementary Data................. 48 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 48 PART III Item 10. Directors and Executive Officers of the Registrant.......... 49 Item 11. Executive Compensation...................................... 49 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 49 Item 13. Certain Relationships and Related Transactions.............. 49 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................................... 50 Signatures............................................................... 51 Financial Statements..................................................... F-1 Exhibits................................................................. E-1
WebMD(R) and The Medical Manager(R) are registered trademarks of WebMD or its subsidiaries. i 3 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This annual report on Form 10-K contains both historical and forward-looking statements. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements within the meaning of section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are not based on historical facts, but rather reflect management's current expectations concerning future results and events. These forward-looking statements generally can be identified by use of statements that include phrases such as "believe," "expect," "anticipate," "intend," "plan," "foresee," "likely," "will" or other similar words or phrases. Similarly, statements that describe our objectives, plans or goals are or may be forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be different from any future results, performance and achievements expressed or implied by these statements. In addition to the risk factors described in "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Factors that may affect future results of operations" beginning on page 37, the following important risks and uncertainties could affect future results, causing these results to differ materially from those expressed in our forward-looking statements: - the expected benefits from our restructuring and integration efforts not being fully realized or not being realized within the expected time frames - the failure to achieve sufficient levels of physician utilization and market acceptance of new services or newly integrated services - the inability to successfully deploy new applications or newly integrated applications - the inability to attract and retain qualified personnel - outcome of pending litigation and claims - general economic, business or regulatory conditions affecting the Internet and healthcare communications industries being less favorable than expected. These factors and the risk factors described in "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Factors that may affect future results of operations" beginning on page 37 are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could have material adverse effects on our future results. The forward-looking statements included in this annual report on Form 10-K are made only as of the date of this annual report. We expressly disclaim any intent or obligation to update any forward-looking statements to reflect subsequent events or circumstances. 1 4 PART I ITEM 1. BUSINESS GENERAL INFORMATION WebMD Corporation is a Delaware corporation that was incorporated in December 1995 and commenced operations in January 1996 as Healtheon Corporation. Our common stock has traded on the Nasdaq National Market under the symbol "HLTH" since February 11, 1999. Our principal executive offices are located at 669 River Drive, Center 2, Elmwood Park, New Jersey 07407-1361 and our telephone number is (201) 703-3400. OVERVIEW OF OUR BUSINESS We provide a range of transaction and information services and technology solutions for participants across the entire continuum of healthcare, including physicians and other healthcare providers, payers, patients and suppliers. Our products and services promote administrative efficiency and assist in reducing the cost of healthcare and creating better patient outcomes. We have brought together in one company the nation's largest processor of electronic healthcare transactions, leading provider of physician practice management systems and most trafficked healthcare Web site. The integration of these and other businesses acquired by us has been our focus during the past six months. We are well along in the process of eliminating redundancies, integrating operations and rationalizing the product lines, projects and arrangements that were not profitable or strategic to us, as described more fully under "Restructuring and integration" beginning on page 3. We have turned our attention to accelerating the growth of our business, making it profitable and taking advantage of opportunities for cross-selling additional and integrated products and services to existing customers. For a discussion of these efforts, see "Current strategic initiatives" beginning on page 6. Our core business encompasses the following products and services: - Transaction services. Through our transaction network, we transmit electronic transactions between physicians, pharmacies, dentists, hospitals, laboratory companies, other ancillary providers and payers. We offer value-added solutions designed to increase productivity for both providers and payers, to speed healthcare reimbursements and to improve communications among healthcare participants. From simple point-of-service devices to integrated transaction processing applications and Internet solutions, we offer a full suite of products and services to automate key business and clinical functions. -- The electronic transactions that we facilitate include administrative transactions, such as claims submission and status inquiry, eligibility and patient coverage verification, and clinical transactions, such as lab test ordering and reporting of results. -- Most of these transactions are conducted by providers using computers, modems and ordinary phone lines to connect to our clearinghouse. Information is typically sent from the provider's billing or practice management system to our clearinghouse, where it is validated for format and completeness then sent to the payer's computer. An increasing number of these transactions are being transmitted via the Internet. In either case, there are important advantages for healthcare participants utilizing electronic transactions over paper transactions: electronic claims reduce costs and are processed more quickly and accurately. We are focused on assisting healthcare participants in increasing the number of electronic transactions and reducing the number of costly paper transactions. 2 5 - Physician services. We develop and market integrated physician practice management systems, including administrative, financial and clinical applications, under The Medical Manager(R) brand. These proprietary systems enable physicians and their administrative staffs to efficiently manage their practices while delivering quality patient care in a dynamic healthcare environment. -- We are integrating our practice management systems with the transaction services and portal services that we offer, in order to provide integrated transactional capabilities and secure connections between physician offices and other healthcare participants. -- We continue to improve our products by working with state-of-the-art technology, such as graphical user interface, wireless devices, Web technology and relational database technology. We are also addressing the current needs of the healthcare industry with our electronic medical records, real-time electronic data interchange, or EDI, and imaging products. - Portal services. We offer a variety of online services for consumers, physicians and physician office managers through our Web site, WebMD.com. At this site, consumers can access health and wellness news and information, support communities, interactive tools and opportunities to purchase health-related products and services through WebMD Health. Our communities allow consumers to participate in real-time discussion and support networks over the Internet. Physicians can access daily medical news, continuing medical education courses, medical journals and databases and opportunities to purchase other products and services through WebMD Practice. Physicians and office managers can use our portal to access our Internet-based transaction services through WebMD Office. -- In early March 2001, we migrated members of OnHealth's consumer portal to WebMD Health and began the integration of OnHealth's content and interactive tools into WebMD Health. -- We distribute our WebMD Health content and services to leading general consumer Internet portals and media distribution partners, including MSN, Excite@Home, Terra Lycos and News Corporation. We also provide content and services to payers' and other healthcare partners' Web sites for use by their affiliated physicians and plan members. For a more complete description of our transaction, physician and portal services and the solutions that we offer, see "Our products and services" beginning on page 8. We are in the process of integrating our transaction services, physician services and portal services into comprehensive solutions that can address the administrative, financial and clinical management needs of physician practices and the needs of payers to have more effective channels of communication to physicians. We believe that by incorporating our solutions into the workflow of the physician office, we will be well-positioned to create significant improvements in the way that information is used by the healthcare system, enabling increased efficiency, better decision-making and, ultimately, higher quality patient care at a lower cost. RESTRUCTURING AND INTEGRATION General In November 1999, Healtheon Corporation completed mergers with WebMD, Inc., MedE America Corporation and Greenberg News Networks, Inc., known as Medcast. Following these mergers, Healtheon changed its name to Healtheon/WebMD Corporation. Healtheon/WebMD completed acquisitions of Kinetra LLC and Envoy Corporation in January 2000 and May 2000, respectively. On September 12, 2000, Healtheon/WebMD completed mergers with Medical Manager Corporation, CareInsite, Inc. and OnHealth Network Company and changed its name to WebMD Corporation. For additional information regarding these transactions, see note 2 to the consolidated financial statements in this annual report. After the mergers with Medical Manager, CareInsite and OnHealth, our board of directors approved a restructuring and integration plan, with the objective of eliminating duplication and redundancies as a 3 6 result of all the acquisitions made by us since November 1999 and consolidating our operational infrastructure into a common platform to more serve our customers. Additionally, as part of our restructuring and integration efforts, we also undertook a review of our existing strategic relationships in light of several criteria, including strategic relevance to both us and our partners, potential conflicts with other agreements as a result of the numerous acquisitions made by us, profitability and impact on future revenue streams. As a result of this process, we are in discussions with several of our partners in an effort to redefine the relationships in a manner that better serves the needs of each party. These discussions have already resulted in revisions to some of our strategic relationships, including those discussed below. It is possible that, as a result of continuing discussions, additional relationships may be revised or terminated, which may result in additional restructuring and integration charges. In connection with our restructuring and integration efforts, we recorded restructuring and integration charges of $452.9 million, of which $380.0 million were non-cash charges, in the year ended December 31, 2000. As we continue our consolidation and integration efforts, we are likely to incur additional costs relating to asset impairments and write-offs, severance, employee retention arrangements related to exit activities, moving and relocations that will be expensed according to the applicable accounting guidelines. We expect our restructuring and integration efforts will continue during 2001. For additional information regarding our restructuring and integration efforts, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Restructuring and integration charges" on page 33 and note 4 to the consolidated financial statements in this annual report. News Corporation We revised our strategic relationship with The News Corporation Limited and its affiliates in late December 2000. Under the revised relationship, we retain the right to receive $205 million in domestic media services from News Corporation over ten years and will continue to provide content for use across News Corporation's media properties for the next four years. News Corporation transferred to us its 50% interest in the international joint venture between WebMD and News Corporation and was relieved of its commitment to provide any future capital to the international joint venture and its commitment to provide international media services. We transferred our interest in The Health Network, a health-focused cable network, to News Corporation. We were relieved of all future capital commitments to The Health Network. In connection with the revisions to the relationship, News Corporation surrendered 155,951 shares of our Series A convertible preferred stock, which would have converted into 21,282,645 shares of our common stock. We granted to News Corporation a warrant to acquire 3,000,000 shares of our common stock at an exercise price of $15 per share. Included in our restructuring and integration charge for 2000 is a non-cash charge of approximately $279.0 million as a result of this transaction. DuPont Also in late December 2000, we agreed to terminate our strategic alliance with E.I. du Pont de Nemours and Company. Under the terminated agreement, it was contemplated that DuPont would provide healthcare content to our consumer and physician portals and would lead the creation of a variety of programs and services for the pharmaceutical industry. In addition, until March 2004 when the agreement would have expired, DuPont would have been obligated to continue to sponsor physician subscriptions to our physician portal and to participate in our portal distribution relationships and would have been entitled to share in revenue generated by our healthcare portals. We are exploring the possibility of future collaboration in the food and nutrition area. In connection with the termination of the existing agreement, DuPont surrendered a portion of its warrant to purchase 6,946,966 shares of our common stock and retained a right to purchase 3,000,000 shares of our common stock at an exercise price of $8.00 per share. Included in our restructuring and integration charge for 2000 is $33.8 million related to the write off of prepaid content and services related to this contractual relationship. 4 7 Microsoft On March 22, 2001, we executed a non-binding letter of intent with Microsoft Corporation to revise our strategic relationship, which was originally entered into in May 1999. Under the revised relationship, we will work together with Microsoft to promote WebMD as the primary provider of health programming on MSN and other Microsoft-affiliated Web sites, as well as to promote Microsoft technologies as the core platform for ULTIA, our new wireless handheld solution for physicians. For information about ULTIA, see "Current strategic initiatives -- Release of handheld solution" on page 6. We will also work with Microsoft to enable Intergy, our next-generation practice management system, to run on Windows 2000 and SQL Server 2000. For information about Intergy, see "Our products and services -- Physician services -- Intergy" on page 12. As part of the revised relationship: - Microsoft will provide performance-based funding tied to the roll-out of ULTIA - We will adopt the PocketPC and other Microsoft technologies as our portal and wireless development platform - We will make Intergy available to run on Windows 2000 and SQL Server 2000 - We will transition our WebMD.com portal to certain Microsoft technologies - Microsoft has agreed to provide consulting services, support and other resources in connection with these undertakings - We will program the majority of the MSN health channel, and will have a majority share of revenue derived from advertising, sponsorship and e-commerce on the MSN health channel site and will no longer pay carriage fees to Microsoft - Microsoft will no longer be responsible for funding the sponsorship of subscriptions to our physician portal - We will not be required to share with Microsoft revenue generated by physician usage of our healthcare portals. The revisions to our relationship with Microsoft are subject to execution of definitive documentation. We cannot provide assurance that definitive agreements will be executed. Others We have recently revised our relationship with IDX Systems Corporation, a provider of physician practice management systems. IDX has agreed that WebMD will be IDX's provider of electronic claim transactions with commercial payers for physician groups that connect to payers via IDX's eCommerce Services gateway. IDX has also agreed to feature to its customers WebMD's full suite of real-time transaction processing services for commercial payers. We are currently well along in the process of negotiating a new arrangement with AOL Time Warner, Inc. to replace the former arrangement between AOL and CareInsite. We are also currently in the process of negotiating new arrangements with Medic Computer Systems, Inc. and others that would replace prior arrangements and better serve the needs of each party. We cannot provide assurance that these negotiations will be successful and, if not successful, we cannot provide assurance that we will be able to have relationships with these parties. Disposition of Porex As we announced on September 28, 2000, our board of directors approved management's plan to dispose of Porex Corporation and related subsidiaries, our plastics and filtration technologies business that we refer to collectively as Porex, which we acquired in our merger with Medical Manager on September 12, 2000. Porex designs, manufactures and distributes porous and solid plastic components and 5 8 products used in life sciences, healthcare, industrial and consumer applications. We expect to complete the disposition later this year. We cannot guarantee that the disposition of this business will be successfully completed in a timely manner, or at all. Accordingly, the proceeds of such disposition may not be available when expected, which may limit our ability to execute strategies important to our company. Porex is a leading developer, manufacturer and distributor of porous plastic products, with an operating history exceeding 35 years. Porous plastics are permeable plastic structures having omni-directional interconnecting pores -- that is, porous in all directions to the flow of fluids and gases. These pores allow the plastic to control the flow of liquids and gases by filtering, wicking, venting, diffusing or dispensing them. Porous plastic materials can be molded from several thermoplastic raw materials and are produced by Porex at its own manufacturing facilities as fabricated devices, custom-molded shapes, sheets, tubes or rods depending on application or customer specifications. Porex designs porous plastic components to the specifications of manufacturing customers for incorporation into their products, including water filters for industrial use, plastic vents used in automobile batteries, porous tips or nibs for highlighting pens and colored markers and deodorant and fragrance applicators. Porex also produces finished products in several market areas including life sciences, pneumatics and clinical laboratory markets. These finished products include plastic disposable laboratory products for liquid handling in clinical and diagnostic research, disposable pipette tips and blood serum filters. Porex also develops and manufactures proprietary injection molded medical components and finished medical devices, including components and devices for intravenous drug delivery systems. Porex's surgical products group manufactures surgical implant materials used in plastic and reconstructive surgery. CURRENT STRATEGIC INITIATIVES We are currently focused on continuing to improve connectivity and communication among healthcare providers, payers, patients and suppliers and continuing to increase the percentage of healthcare transactions that are handled electronically, whether through the Internet or other EDI methods. Our goal remains achieving bi-directional, real-time information flows between healthcare providers and payers that are fully integrated into the workflow of the provider. However, our ability to achieve this goal is limited by the current state of the communications infrastructure in most physician offices. In the future, as persistent broadband connections become more widespread, we believe that our ability to deliver coordinated and integrated products and services will provide us with a strong foundation for succeeding in our goals. Our current strategic initiatives are designed to provide a basis for achieving these goals, while also pursuing the near-term goal of increasing usage of, and revenue from, our products and services. Our key current initiatives include: - Release of handheld solution. We are currently preparing for the release, in selected geographic areas, of ULTIA, our wireless point-of-care solution. This product combines the power of The Medical Manager software's proven clinical and administrative systems with the convenience of mobile handheld connectivity using a Compaq(R) iPaq(R). From anywhere in the office, healthcare providers will be able to use this wireless local area network, or LAN, device to access information stored within, or to enter data into, The Medical Manager system, giving them instant access at the point of care to: -- appointment schedules, hospital rounds information and clinical tasks needing the provider's attention -- a user-friendly electronic prescription writer, with integrated drug utilization review and formulary checking, which electronically submits prescriptions to the patient's chosen pharmacy and, at the same time, adds prescription information directly to the patient's electronic medical record in The Medical Manager software, the roll-out of which will occur in connection with the roll-out of ULTIA -- electronic lab ordering and reporting of results, available through the provider's Medical Manager system, which can then be viewed using ULTIA 6 9 -- their patients' electronic medical records, including progress notes, medications, lab results, procedure histories and other information and transcribed patient documentation -- a fully customized, online encounter form for capturing patient charges, which displays procedure and diagnosis codes in customized checklists and automatically posts charge information to The Medical Manager system -- medical content from our physician portal. In addition, to the extent wireless Internet access is available, ULTIA will allow providers to securely access The Medical Manager system and the functionalities available in the office through the remote access feature of an integrated portal, as described below. We believe that our handheld solution has the potential to improve the way providers deliver care. In addition, we expect that it will help us promote adoption of the transaction and portal services to which it provides access. For example, in connection with the roll-out of our handheld solution, we plan to roll out our online prescription writer and related connectivity services and our integrated portal with remote access capabilities, as described below. It is our intention to pursue similar handheld initiatives with respect to other practice management systems in the future. Our March 22, 2001 letter of intent with Microsoft contemplates that Microsoft will provide performance-based funding tied to the roll-out of ULTIA and our new integrated portal services for physicians and will provide consulting services, support and other resources in connection with these undertakings. For additional information regarding our Microsoft relationship, see "Restructuring and integration -- Microsoft" on page 5. - Roll-out of integrated physician portal with remote access capabilities. We are preparing to roll out integrated portal services that will allow physicians whose offices use The Medical Manager practice management system and other systems to remotely access, via the Internet, information contained in their office's practice management system. This remote access feature will enable physicians to view in a secure manner information residing on their office-based computer system from any personal computer or other device with a connection to the Internet. We also intend to enable this capability for other practice management systems. - Strengthen relationships with pharmaceutical companies. We intend to continue to try to develop stronger relationships with the pharmaceutical industry, both by expanding existing relationships and increasing the base of pharmaceutical companies to which we provide services. Our strategy is to develop the ability to generate fees from communicating clinical messages at the point of care in accordance with patient- and plan-specific guidelines, including messaging regarding formulary compliance and disease management programs. We also intend to partner with pharmaceutical companies who can benefit from sponsoring healthcare content on WebMD.com and our ability to deliver educational materials and other sponsored programs, as well as advertisements, to an online audience with attractive demographic characteristics. - Market a single solution for claims processing to providers. We are actively extending the functionality of our clearinghouse and expanding the distribution of these services through direct and indirect channels. The goal of this initiative is to provide a single solution for providers and practice management system vendors for sending claims electronically to government, Blue Cross and Blue Shield and commercial payers. As part of this initiative, we are expanding our connectivity to support a broader set of transaction services to non-commercial payers in key markets as well as improving the functional capability of our claims and accounts receivable management solutions in order to improve the quality and value of our services to both payers and providers. We intend to actively market these expanded services directly to healthcare providers and through our practice management system partners. - Utilize our portal services to expand our healthcare partner relationships. We believe that our consumer user base represents an attractive audience to a variety of partners and potential partners 7 10 who are interested in influencing consumer healthcare decisions. We intend to enable our healthcare partners to take advantage of our portal services and broad online distribution platform to bring patients, members and customers to their brands. We believe our healthcare partners can reduce their costs of acquiring, retaining and servicing their customers by integrating our portal content and services into their existing marketing and customer service efforts. We believe that these initiatives will provide additional revenue streams to us and accelerate our achievement of profitability. However, there can be no assurance as to the timing or amount of the financial or other benefits from particular strategies or initiatives, all of which are subject to the risks and uncertainties described in "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Factors that may affect future results of operations" beginning on page 37. OUR PRODUCTS AND SERVICES There are many types of transactions, information exchanges and other communications that occur between the various participants in the healthcare industry, including physicians, patients, pharmacies, dentists, hospitals, billing services, commercial insurance companies, pharmacy benefit managers, managed care organizations, state and federal government agencies and others. We offer a comprehensive suite of transaction and information services and technology solutions to healthcare industry participants. These integrated and stand-alone products and services are designed to facilitate transactions, information exchange and communication among healthcare industry participants and to operate on various platforms, including the Internet, private intranets and other networks. Transaction services Our transaction services include the combined connectivity and transaction services formerly provided by Healtheon, Envoy, Kinetra, MedE America and CareInsite. The customers for our transaction services consist of healthcare providers, such as physicians, pharmacies, dentists and hospitals, and healthcare payers, including Medicare and Medicaid agencies, Blue Cross and Blue Shield organizations, pharmaceutical benefit managers, commercial health insurance companies and managed care organizations. We provide those customers the administrative and clinical connectivity and transaction services described below through an integrated electronic transaction processing system, which includes proprietary software, host computer hardware, network management, switching services and interfaces. Most of these transactions are conducted by providers using computers, modems and ordinary phone lines to connect to our clearinghouse. Information is typically sent from the provider's billing or practice management system to the clearinghouse, where it is validated for format and completeness then sent to the payer's computer. An increasing number of these transactions are being transmitted via the Internet. We believe that we are an industry leader in our own regulatory compliance practices and that we are well-positioned to assist payers, providers and other healthcare participants with the implementation of their own regulatory compliance practices, including their need to meet the requirements of regulations issued under the Healthcare Insurance Portability and Accountability Act of 1996, or HIPAA. We will market compliant provider transaction methods and applications, as well as offering our payer customers and other healthcare participants integration tools for transaction translation and data support that can be used to foster their own compliance. Medical, pharmacy and dental administrative services. Our administrative services provide connectivity and transaction processing services needed for providers and payers in the healthcare industry to automate key business functions and communicate with each other. Through our clearinghouse, we provide an electronic link, directly and indirectly through other clearinghouses or healthcare information system vendors, using traditional EDI services and Internet-based services, to healthcare providers in the medical, pharmacy and dental markets and to multiple third party payers. Our administrative services include claims submission and status inquiry, eligibility and patient benefit coverage verification, referrals and authorizations, claims data capture and editing, electronic remittance advice, patient billing services, credit and debit card processing and formulary management. 8 11 Our administrative services reduce paperwork and the need for communication by telephone and fax, resulting in costs savings for payers and providers. These services also expedite the reimbursement process, which can result in a lower average number of outstanding accounts receivable days for providers. A further benefit to payers is that they are able to more easily detect fraud and screen for unusual utilization trends. In addition, the availability of online encounter and referral information provides more efficient medical cost management for managed care organizations and networked providers. Providers, including physicians, dentists, pharmacies and hospitals, access our transaction services both directly and through their affiliations with integrated delivery networks, clinics and physician practice management companies. Providers initiate transactions using our applications, their practice management systems and other computer systems or networks. Providers submit transactions to us by modem connections using regular telephone lines, using dedicated phone lines and over the Internet. We work with numerous practice management system vendors, clearinghouses and other physician service providers to provide integrated transaction processing between their systems and our clearinghouse. These clearinghouse services are provided through a dedicated network that we maintain consisting of dial-up connections, lines leased from common carriers and computer networks. We maintain direct connections with many healthcare payers, including Medicare and Medicaid agencies, Blue Cross and Blue Shield organizations, commercial insurance companies and managed care organizations. These direct connections typically consist of dedicated networks between the payer and our clearinghouse. Most transactions are currently transmitted to the payers using our proprietary software and dedicated telephone lines, with an increasing number of transactions transmitted via the Internet. Providers can use our services to verify patient enrollment and eligibility and to obtain authorization for services from payers and for approval of referrals to other providers at the point of care. Providers can submit real-time or batch claims to us for processing and reimbursement by payers and inquire as to the status of claims previously submitted. Batch claims are collected throughout the day and submitted to us in bulk, which we then sort, format and edit to meet a particular payer's requirements before transmission to the payer. Providers can receive electronic remittance advice which provides payer payment information and an explanation of the settlement of a related claim. We also offer automated patient billing services to providers that include electronic data transmission and formatting, statement printing and mailing services. A standard administrative pharmacy transaction consists of the inquiry, by the pharmacy, through a point-of-service terminal or personal computer terminal, to determine whether the patient is covered by a benefit program. After eligibility is confirmed, the claim is settled and the payer transmits to the pharmacy the amount and timing of the pending payment. Lab ordering and reporting services. We provide clinical lab ordering and reporting services through dedicated terminals and teleprinters and through Internet-based products. These products support the ordering of clinical tests and the reporting of test results between providers and labs. Prescription writing services. We plan to provide services to support this functionality for our handheld point-of-care solution. We have completed a pilot roll-out of our prescription writing services, which include prescription writing and routing, drug utilization review, including drug interaction screening, and access to formularies. Launch of WebMD Office. Through our recently launched WebMD Office Internet-based service, accessible through WebMD.com, office staff in all provider settings can access our Internet-based transaction services. In February 2001, we began to migrate our office staff users to WebMD Office. WebMD Office is intended to replace all other Internet-based transaction services previously offered by us. Physician services We provide comprehensive physician practice management information systems to physician organizations and other providers of healthcare services in the United States. We develop, market and support The Medical Manager(R) practice management system, which addresses the financial, administrative, clinical and practice management needs of physician practices. The system has been implemented in 9 12 a wide variety of practice settings from small physician groups to large clinics. These proprietary systems enable physicians and their administrative staffs to efficiently manage their practices while delivering quality patient care in a constantly changing healthcare environment. We are currently preparing for the release, in selected geographic areas, of ULTIA, our wireless handheld solution. We expect that providers will be able to use ULTIA to access their Medical Manager systems, as described more fully under "Current strategic initiatives -- Release of handheld solution" on page 6. The Medical Manager software is an integrated practice management system encompassing patient care, clinical, financial and management applications. Due to its scalable design, The Medical Manager software is a cost-effective solution in a stand-alone or enterprise-wide environment. The Medical Manager system is designed to operate on a wide range of the hardware platforms used by small, medium and large sized practices. Its modular, fully integrated product portfolio allows clients to add incremental capabilities to existing information systems while minimizing the need for capital investments. The Medical Manager system provides physician practices with a broad range of patient care and practice management features, including: Core Application. The Medical Manager Core Application includes base financial, clinical and practice management functions.
- --------------------------------------------------------------------------------------------------------- PRODUCT DESCRIPTION - --------------------------------------------------------------------------------------------------------- The Medical Manager Software - Provides accounts receivable, insurance billing, basic appointment scheduling and recalls, clinical history, financial history, referral of physician information, encounter form tracking, e-mail, office notes, hospital rounds and over 150 standard reports MMClient - A Graphical User Interface/Windows(R)-based Ultra-Thin Client user interface to The Medical Manager software connecting to either a Windows 2000/NT(R) or a UNIX server
Office Management. The Medical Manager Office Management application automates the essential administrative tasks of a physician practice.
- --------------------------------------------------------------------------------------------------------- PRODUCT DESCRIPTION - --------------------------------------------------------------------------------------------------------- Automated Collections - Maintains notes, promise to pay dates, budget payments, next action to be taken indicators and prints collection letters - Automates "tickler" system to alert the user when an account needs attention Chart and X-Ray Locator - Tracks the location of a patient's medical and X-ray charts Advanced Billing - Handles sophisticated billing needs Custom Report Writer - Provides access to all data elements of The Medical Manager software - Allows for the creation of user defined custom reports Multiple Resource Scheduling - Includes multi-resource display, search and posting of scheduled appointments; coordinates the utilization of exam rooms and equipment and schedules of teams of physicians, nurses, therapists and others whose services are needed within a specific time sequence
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- --------------------------------------------------------------------------------------------------------- PRODUCT DESCRIPTION - --------------------------------------------------------------------------------------------------------- Patient Flow Tracking - Allows patient encounters to be tracked from the time the patient makes the appointment, through encounters in the waiting room, examination rooms, labs and other areas Case Management System - Tracks all clinical events related to a specific case Laser Form Generator - Encounter forms, prescriptions, insurance forms, patient bills and statements, referrals, letterheads and other forms can be printed Patient Advisory System - Allows the practice to locate and print patient education sheets on a variety of topics spanning many different medical specialties
Managed Care Applications. Managed Care Applications allow physicians to contain costs and deliver a higher quality of care in capitated environments.
- --------------------------------------------------------------------------------------------------------- PRODUCT DESCRIPTION - --------------------------------------------------------------------------------------------------------- Managed Care - In addition to the managed care features offered in the base system, supports the full functions required to track incoming as well as outgoing referrals to facilities and specialists Claims Adjudication - Fully integrated with the Managed Care module, provides full risk management capabilities, including the processing of received claims, comparing the claim against authorized services to determine amounts due, generating checks for payments and producing an Explanation of Benefits
Clinical Applications. The Medical Manager Clinical Applications provide fully integrated components of a patient's medical record that contain the functionality and knowledge bases required in today's practices.
- --------------------------------------------------------------------------------------------------------- PRODUCT DESCRIPTION - --------------------------------------------------------------------------------------------------------- OmniChart - Enables the practice to create and maintain a patient's medical record using the laboratory interface module, prescription writer, view patient chart, clinical task manager and the transcription management system OmniDoc - Automates the documentation of a patient encounter at the point of care by allowing a provider to easily generate progress notes using the Medcin(R) knowledge base, eliminating the need for dictation and transcription Quality Care Guidelines - Automates the process of tracking both the curative and preventive services the practice has specified that it wishes to perform
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- --------------------------------------------------------------------------------------------------------- PRODUCT DESCRIPTION - --------------------------------------------------------------------------------------------------------- Document and Image Management System - Allows a practice to organize and store forms and documents as images, and to instantly retrieve these images and associated image information to the screen as part of the patient's medical record DIM(DX) - The diagnostic version of the Document and Image Management System, allows a practice to organize and store X-rays and other diagnostic images, as well as forms and documents, as images and to instantly retrieve these images to the screen as part of the patient's medical record
Electronic Connectivity. The Medical Manager supports, and can be integrated with, our transaction services as well as similar services from other connectivity providers. Using The Medical Manager system, providers can generate reports regarding electronically submitted claims that have been accepted or rejected. Other Medical Manager products. We offer several other Medical Manager products, the functionality of which has been customized to the following specialty markets: radiology vertical market, public health and community health vertical market and the family planning vertical market. Other practice management systems. Through our acquisitions of various businesses, we have also obtained ownership of other practice management systems with smaller user bases. We currently maintain these other systems and provide periodic updates to the users of these systems. Intergy. We are currently in the last stages of developing Intergy, our new physician practice management system. Designed from the ground up, Intergy combines a graphical user interface, or GUI, and a relational database environment with advanced Web-enabled technology to address the current needs of healthcare providers for administrative and clinical solutions. Intergy has been designed to provide a user-friendly environment with data storage capacity that will easily accommodate the largest of our installations. We intend to continue to develop and support The Medical Manager system following the release of Intergy. Portal services Our Web site, WebMD.com, offers a single destination for the exchange of healthcare information and supports a broad range of healthcare transactions delivered over our secure, Internet-based platform. WebMD.com provides access to a free healthcare portal for consumers through WebMD Health and fee-based services for healthcare professionals through WebMD Practice. 12 15 WebMD Health. Our consumer portal, WebMD Health, provides consumers with health and wellness news and information, support communities, interactive tools and opportunities to purchase health-related products and services. Our communities allow consumers to participate in real-time discussion and support networks over the Internet. Consumers have free online access to multiple areas on WebMD Health, including:
- ------------------------------------------------------------------------------------------------------------------- CONTENT OR SERVICE FEATURES - ------------------------------------------------------------------------------------------------------------------- WebMD today - Offers proprietary, medically reviewed health and wellness news articles written daily by our staff of journalists WebMD live events - Offers daily scheduled live chat events, including audio and video Webcasts, with healthcare experts and celebrity guests discussing relevant health issues, with archives from each event added to our searchable database Medical information - Allows consumers to research current information relating to diseases and common health conditions - Provides searchable access to easy-to-read content, in our medical library, including: -- articles in our self-care advisor -- drug and herb references from leading publications, including Physician's Desk Reference(R) -- clinical trials and research study information -- an overview of health topics currently in the news -- our ask our experts service, where consumers can post their health questions for experts -- a medical encyclopedia -- a patient's guide to medical tests -- health topics A-Z, an alphabetical listing of articles on specific health conditions and concerns -- interactive, illustrated presentations that explain common health conditions and diseases Member services - Provides access to over 50 support communities allowing consumers to share experiences and exchange information with other members who share their health condition or concern - Provides access to chat rooms, message boards and posted member columns focused on chronic health conditions and relevant health topics Health and wellness - Offers access to content covering various wellness topics, including diet and nutrition, alternative medicine and emotional wellness - Provides parenting and pregnancy news and information
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- ------------------------------------------------------------------------------------------------------------------- CONTENT OR SERVICE FEATURES - ------------------------------------------------------------------------------------------------------------------- - Offers access to various programs developed by Dr. Dean Ornish related to nutrition, exercise, stress management and relationship information - Offers access to information relating to recreational fitness activities and sports medicine topics Find a physician and health plan - Allows consumers to search for a physician, dentist or mammography or maternity center in their area - Allows consumers to research features of their health plan Health-E-Tools - Provides access to over 80 interactive calculators, quizzes and slide shows to assess or demonstrate health topics, including an immunization planner, health risk appraisal, diet and fitness journal, body mass index, calorie counter and target heart rate calculator Shopping - Allows consumers access through our online e-commerce strategic partners to: -- fill pharmacy prescriptions and purchase a wide range of health, beauty and wellness products -- purchase sports and fitness equipment MyHealthRecord - Allows members to establish and maintain a private record of their family's health in a single, secure place - Allows members to print out health reports and medical emergency identification cards for their family E-Newsletters - Allows consumers to receive personalized e-mail newsletters on general health-related subjects and topics targeted to their health concerns
WebMD Practice. Our healthcare provider portal, WebMD Practice, offers physicians, clinicians and physician office staff online access to daily medical news, medical reference information, continuing medical education, tools for creating customized practice Web sites and opportunities to purchase other products and services. In addition, physicians and their office managers can, for additional transaction or monthly fees, access our Internet-based administrative transaction services through WebMD Office, as well as clinical lab and information services and dictation and transcription services. We are preparing to roll out remote access capabilities that will allow physicians whose offices use The Medical Manager practice management system to remotely access, via the Internet, information contained in their office's practice management system through our physician portal. This feature will enable physicians to view in a secure manner information residing on their office-based computer system from any personal computer or other device with a connection to the Internet. We intend to enable this capability for other practice management systems in the future. 14 17 WebMD Practice provides online access to multiple areas, including:
- ------------------------------------------------------------------------------------------------------------------- CONTENT OR SERVICE FEATURES - ------------------------------------------------------------------------------------------------------------------- Medical news - Provides original, daily medical news stories written by our staff of journalists and reviewed by our staff of physicians, as well as reports on business aspects of practice management and summaries of current consumer health issues of interest to patients - Allows physicians to access news and information relevant to their specialty area Continuing medical education, or CME - Provides access to accredited CME courses, free of charge and fee-based, in a variety of specialty areas and allows physicians to track their CME credits against state and association requirements Medical community - Provides access to information from over 50 medical, educational and government associations and organizations and links to other useful Web sites - Provides information on the latest medical meetings Medical library - Provides searchable access to comprehensive medical journals and newsletters from well-recognized sources, including: -- over 9 million abstracts from medical journals available in the National Library of Medicine's MEDLINE database -- Clinical Pharmacology drug database -- a medical dictionary - Provides access to current disease-specific information about diagnoses and treatment - Offers access to articles from medical experts in question and answer format For your patients - Provides access to patient education databases and interactive, illustrated patient presentations that explain common health conditions and diseases Office tools - Allows practices to create their own customized Web site, including practice information such as office hours and location, telephone number, medical specialty, types of health plans accepted, hospital affiliations and a link to WebMD Health patient education information Purchasing - Provides online access to ordering of medical and surgical supplies - Provides convenient access to technology services and other e-commerce options Secure mail - Allows physicians to send and receive e-mail, including sending encrypted messages to other WebMD Practice subscribers - Supports other optional WebMD Practice services, including clinical information services
15 18 Based on the revisions to our relationship with Microsoft contemplated in the March 22, 2001 non-binding letter of intent, which will not include funding for sponsorship of subscriptions to WebMD Practice, as well as the earlier termination of DuPont's funding for physician subscriptions, we expect that we will no longer seek to charge a subscription fee for use of our physician portal. Instead, we plan to allow physicians access, through our portal, without charge to our content and to a group of basic services, while charging for usage of optional or premium services. Other features of WebMD.com. WebMD.com allows physicians and consumers to personalize their home page to deliver content and services relevant to them. It also provides physicians and consumers with access to content provided by some of our strategic partners and sponsors. This content is identified as sponsored content so our users will not confuse it with our other content. Our editorial, design and production team, currently consisting of approximately 50 individuals, includes board-certified physicians, Masters and Ph.D. level medical editors, award-winning journalists, medical illustrators and community moderators who produce our original, daily medical news. Our national news center in Atlanta, Georgia, with a bureau located in the National Press Building in Washington, D.C., is a press-credentialed news organization. We have assembled a health advisory board, which consists of expert representatives from different specialties, who advise us on current news and content topics. Revenue opportunities. Our Web site provides opportunities to generate revenue from multiple sources, including: - Advertising fees. We generally sell advertising based on the number of impressions received by the advertisement and its position on our Web site. We may also exchange advertising space on our Web site for advertising space or other products and services from business partners. - Sponsorship fees. Companies can sponsor specific pages or sections of our Web site, all of which are clearly labeled as sourced from or sponsored by the specific sponsor. Sponsorship arrangements are designed to support broad marketing objectives, such as brand awareness and product introductions. Sponsorships are generally sold for a longer term than online advertising placements and are sold based on duration, portion of the Web site sponsored and number of impressions delivered. - Content syndication and distribution. We develop, host and provide a majority of the content for health channels of our general consumer portal partners, including MSN, Excite@Home and Terra Lycos. We generally share advertising, sponsorship and e-commerce fees generated on these co- branded sites with our strategic partners. In addition, our portal partners generally agree to provide a joint credit promoting our content on the health channels. We also license our proprietary content and interactive tools to a variety of third party Web sites. - E-commerce transactions. We facilitate e-commerce transactions through our Web site and, for doing so, typically receive a portion of the revenues that are generated. Visitors to our Web site can access products and services provided by our strategic partners and other vendors in numerous locations throughout the site. - Carriage fees. We distribute content and services of our strategic partners within our Web site and within the consumer portal Web sites that we have the right to program. In some cases, we receive carriage fees for doing so, generally as advances against our share of the advertising and/or e-commerce revenues generated by the specific content or services. We believe that our advertising, sponsorship and syndication relationships with participants in the healthcare industry also foster our ability to develop broader relationships that can assist us in our efforts to develop, deploy and increase utilization levels of our other products and services. 16 19 SALES AND MARKETING We market our products and services through direct sales contacts, participation in trade shows, articles in industry publications and advertisement, both online and offline. Our national sales force targets potential customers in each market segment by region. We support our sales force with technical and sales support personnel. As of December 31, 2000, excluding Porex employees, we employed approximately 2,900 people in sales and marketing, including technical and sales support personnel. Our Medical Manager products and services are sold nationally both by our direct sales force and by a network of approximately 110 independent dealers of The Medical Manager system. DEVELOPMENT AND ENGINEERING We have developed internally and acquired through acquisitions our applications and services. As of December 31, 2000, we employed approximately 700 people in development and engineering. Our development and engineering expense totaled $58.8 million in 2000, $29.7 million in 1999 and $19.0 million in 1998. The markets for our products and services are characterized by rapid change and technological advances. Our future success will depend, in part, upon our ability to enhance our existing products and services, to respond effectively to technological changes, and to introduce new and newly integrated applications and technologies that address the changing needs of our customers. Accordingly, we intend to continue to make investments in development and engineering and to recruit and hire experienced development personnel. However, we cannot provide assurance that we will be able to successfully complete the development of new products or services, enhancements to existing products or services or the migration of products and services to new platforms. Further, there can be no assurance that products or technologies developed by others will not adversely affect our competitive position or render our products, services or technologies noncompetitive or obsolete. COMPETITION The markets in which we operate are intensely competitive, continually evolving and subject to rapid technological change. We have many competitors, including: - healthcare information system vendors, including physician practice management system vendors - transaction processing companies, including those providing EDI and/or Internet-based services and those providing services through other means, such as paper and fax - large information technology consulting service providers - online services, portals or Web sites targeted to the healthcare industry, healthcare consumers and/or physicians generally - consortiums of health insurance companies and of pharmacy benefit managers that have announced that they are developing Web-based transaction services for use by their members and other potential customers - publishers and distributors of traditional offline media, including those targeted to healthcare professionals, many of which have established or may establish Web sites - general purpose consumer online services and portals and other high-traffic Web sites which provide access to healthcare-related content and services - public sector and non-profit Web sites that provide healthcare information without advertising or commercial sponsorships - vendors of healthcare information, products and services distributed through other means, including direct sales, mail and fax messaging. 17 20 We also compete, in some cases, with alliances formed by the above competitors, including alliances that are intended to allow the participants to pursue a strategy similar to our strategy of integrating transaction processing capabilities and portal services with physician practice management systems. Major software and information systems companies, both with and without healthcare companies as their partners, offer or have announced their intention to offer products or services that are competitive with some of our solutions, including wireless handheld solutions that will compete with ULTIA. In addition, some of our existing payer and provider customers and some of our strategic partners may also compete with us or plan to do so or belong to alliances that compete with us or plan to do so. For example, some payers currently offer electronic data transmission services to healthcare providers that establish a direct link between the provider and payer, bypassing third party EDI service providers. Any significant increase in the utilization of direct links between healthcare providers and payers could have a material adverse effect on our business and results of operations. Many of our competitors have greater financial, technical, product development, marketing and other resources than we do. These organizations may be better known than we are and have more customers than we do. We cannot provide assurance that we will be able to compete successfully against these organizations or any alliances they have formed or may form. GOVERNMENT REGULATION The healthcare industry is highly regulated and is subject to changing political, regulatory and other influences. These factors affect the purchasing practices and operation of healthcare organizations. Federal and state legislatures and agencies periodically consider programs to reform or revise the U.S. healthcare system. These programs may contain proposals to increase governmental involvement in healthcare, lower reimbursement rates or otherwise change the environment in which healthcare industry participants operate. Healthcare industry participants may respond by reducing their investments or postponing investment decisions, including investments in our applications and services. We are unable to predict future proposals with any certainty or to predict the effect they would have on our business. HIPAA administrative simplification Under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, Congress mandated a package of interlocking administrative simplification rules to establish standards and requirements for the electronic transmission of certain health information. Five of these rules were published in proposed form in 1998, with two of the five recently published in final form. The two rules published in final form are Standards for Electronic Transactions, published August 17, 2000, and Standards for Privacy of Individually Identifiable Health Information, published December 28, 2000. The HIPAA rules provide that each is effective 60 days following publication in final form, with compliance required for healthcare providers, healthcare clearinghouses and large health plans two years following the effective date. Small health plans are given an additional year to comply. These rules apply to certain of our operations as well as the operations of many of our customers. Compliance with these final rules will be costly and could require complex changes in our systems. The Bush administration has established an additional period for public comment on the privacy regulation, and may revise the requirements and/or delay their effective date. HIPAA transaction standards The HIPAA Standards for Electronic Transactions rule is commonly referred to as the transaction standards rule. This rule establishes format standards for eight of the most common healthcare transactions, using technical standards promulgated by recognized standards publishing organizations. These transactions include health claims, enrollment, payment and eligibility. Under the new standards, any party transmitting or receiving any of these eight health transactions electronically will send and receive data in a single format, rather than the large number of different data formats currently used. 18 21 The transaction standards are applicable to that portion of our business involving the processing of healthcare transactions among physicians, payers, patients and other healthcare industry participants. The transaction standards also are applicable to many of our customers and to our relationships with those customers. We intend to comply with the transaction standards by their compliance date. This compliance may require costly modifications to some of our systems, products and services. We believe that we are well-positioned to effectuate these changes and to facilitate compliance efforts of our customers and strategic partners. However, there can be no assurance that we or our customers or strategic partners will be able to do so or that we will be able to take advantage of any business opportunities that implementation of the transaction standards may provide to us. Other regulation of transaction services Other state and federal statutes and regulations governing transmission of healthcare information may affect our operations. For example, Medicaid rules require some processing services and eligibility verification to be maintained as separate and distinct operations. We carefully review our practices with regulatory experts in an effort to ensure that we are in compliance with all applicable state and federal laws. These laws, though, are complex and changing, and the courts and other governmental authorities may take positions that are inconsistent with our practices. HIPAA privacy standards The HIPAA Standards for Privacy of Individually Identifiable Health Information rule is commonly referred to as the privacy standards rule. This rule establishes a set of basic national privacy standards and fair information practices for the protection by health plans, healthcare clearinghouses, healthcare providers and their business associates of individually identifiable health information. Due to a technical error in the delivery of the privacy standards rule to Congress, the effective date has been delayed until April 14, 2001, which also extends the compliance date for most entities to April 14, 2003. Also, on February 28, 2001, the final privacy standards rule was converted to a final rule with request for comments to permit public comment for a limited period before the rule becomes effective. This comment period could result in changes to the final rule, including further changes to its effective date or compliance date. The privacy standards rule applies to the portions of our business that process healthcare transactions and provide technical services to other participants in the healthcare industry. This rule provides for civil and criminal liability for its breach and requires us, our customers and our partners to use health information in a highly restricted manner, to establish policies and procedures to safeguard the information, to obtain individual consents in some cases, and to provide certain access rights to individuals. This rule may require us to incur significant costs to change our platform and services, may restrict the manner in which we transmit and use the information, and may adversely affect our ability to generate revenues from the provision of de-identified information to third parties. Other regulation regarding confidentiality and privacy of patient information Numerous state and federal laws other than HIPAA govern the collection, dissemination, use, access to and confidentiality of patient health information. Many states are considering new laws and regulations that further protect the confidentiality of medical records or medical information. These state laws are not in all cases preempted by the HIPAA privacy standard and may be subject to interpretation by various courts and other governmental authorities, thus creating potentially complex compliance issues for us and our customers and strategic partners. The definitions in the various state and federal laws concerning what constitutes individually identifiable data sometimes differs and sometimes is not provided, creating further complexity. In addition, determining whether data has been sufficiently de-identified may require complex factual and statistical analyses. The HIPAA privacy standards rule contains a restrictive definition of de-identified information, which is information that is not individually identifiable, that could create a new standard of care for the industry. These other privacy laws at a state or federal level, or new interpretations of these laws, could create liability for us, could impose additional operational requirements on our 19 22 business, could affect the manner in which we use and transmit patient information and could increase our cost of doing business. International data regulation Other countries also have, or are developing, their own laws governing the collection, use, storage and dissemination of personal information or patient data. These laws could create liability for our international operations, impose additional operations requirements or restrictions on our business, affect the manner in which we use or transmit data and increase our cost of doing business. Consumer protection regulation The Federal Trade Commission, or FTC, and many state attorneys general are applying federal and state consumer protection laws to require that the online collection, use and dissemination of data, and the presentation of Web site content, comply with certain standards for notice, choice, security and access. Courts may also adopt these developing standards. In many cases, the specific limitations regarding these standards are subject to interpretation by courts and other governmental authorities. We believe that we are in compliance with these consumer protection standards, but a determination by a state or federal agency or court that any of our practices do not meet these standards could result in liability and adversely affect our business. New interpretations of these standards could also require us to incur additional costs and restrict our business operations. Regulation of healthcare relationships There are federal and state laws that govern patient referrals, physician financial relationships and inducements to beneficiaries of federal healthcare programs. The federal anti-kickback law prohibits any person or entity from offering, paying, soliciting or receiving anything of value, directly or indirectly, for the referral of patients covered by Medicare, Medicaid and other federal healthcare programs or the leasing, purchasing, ordering or arranging for or recommending the lease, purchase or order of any item, good, facility or service covered by these programs. The anti-kickback law is broad and may apply to some of our activities or our relationships with our customers, advertisers or strategic partners. Penalties for violating the anti-kickback law include imprisonment, fines and exclusion from participating, directly or indirectly, in Medicare, Medicaid and other federal healthcare programs. Many states also have similar anti-kickback laws that are not necessarily limited to items or services for which payment is made by a federal healthcare program. We carefully review our practices with regulatory experts in an effort to ensure that we comply with all applicable laws. However, the laws in this area are both broad and vague and it is often difficult or impossible to determine precisely how the laws will be applied, particularly to new services similar to ours. Any determination by a state or federal regulatory agency that any of our practices violate any of these laws could subject us to civil or criminal penalties and require us to change or terminate some portions of our business. We currently provide billing services and intend to provide repricing services to providers and, therefore, may be subject to state and federal laws that govern the submission of claims for medical expense reimbursement. These laws generally prohibit an individual or entity from knowingly presenting or causing to be presented a claim for payment from Medicare, Medicaid or other third party payers that is false or fraudulent, or is for an item or service that was not provided as claimed. These laws also provide civil and criminal penalties for noncompliance. We have designed our current transaction services and will design any future services to place the responsibility for compliance with these laws on provider customers. However, we cannot guarantee that state and federal agencies will regard billing errors processed by us as inadvertent and not in violation of these laws. In addition, changes in current healthcare financing and reimbursement systems could cause us to make unplanned modifications of applications or services, or result in delays or cancellations of orders or in the revocation of endorsement of our applications and services by healthcare participants. 20 23 Regulation by the U.S. Food and Drug Administration The Food and Drug Administration, or the FDA, has jurisdiction under the 1976 Medical Device Amendments to the Federal Food, Drug and Cosmetic Act, or the FDA Act, to regulate computer products and software as medical devices if they are intended for use in the diagnosis, cure, mitigation, treatment or prevention of disease in humans. The FDA has issued a final rule under which manufacturers of medical image storage devices and related software are required to submit to the FDA premarket notification applications, which are each referred to in this document as a 510(k) application, and otherwise comply with the requirements of the FDA Act applicable to medical devices. We have attempted to design our services so that our computer applications and software are not considered to be medical devices. However, the FDA may take the position that our services are subject to FDA regulation. In addition, we may expand our services in the future to areas that subject us to FDA regulation. For example, Medical Manager Health Systems is distributing in the U.S. a medical image management device, referred to herein as the "image device," which was granted clearance by the FDA on August 25, 2000, and is manufactured by Medical Manager Health Systems in accordance with specifications set forth in the cleared 510(k) application. Medical Manager Health Systems has created an interface between The Medical Manager practice management system and the image device and is marketing the interface and the image device as the DIMDX System. We believe that the addition of our practice management system to the image device does not change the image device's intended use or significantly change the safety or efficacy of the product to the extent that a new 510(k) application is required. The FDA is currently reviewing its policy for the regulation of computer software, and there is a risk that The Medical Manager software or other of our software or hardware components could in the future become subject to some or all of the above requirements. Except with respect to Medical Manager Health Systems and Porex, we have no experience in complying with FDA regulations. We believe that complying with FDA regulations may be time consuming, burdensome and expensive and could delay our introduction of new applications or services. The FDA also regulates pharmaceuticals, including the regulation of pharmaceutical advertisements or descriptions posted on a Web site or delivered electronically to physicians or consumers. Many of our advertisers are pharmaceutical companies and the content of their ads is subject to FDA scrutiny and regulation. We have attempted to disclaim responsibility for the content of these ads and to keep the FDA compliance burden squarely on our advertisers. We cannot guarantee that the FDA will not hold us also responsible in some way for this compliance, which could adversely affect or restrict our relationships with our advertisers. Medical professional regulation The practice of most healthcare professions requires licensing under applicable state law. In addition, the laws in some states prohibit business entities from practicing medicine, which is referred to as the prohibition against the corporate practice of medicine. We do not believe we engage in the practice of medicine and we have attempted to structure our Web site, strategic relationships and other operations to avoid violating these state licensing and professional practice laws. A state, however, may determine that some portion of our business violates these laws and may seek to have us discontinue those portions or subject us to penalties or licensure requirements. We provide Web site capabilities for our physician customers. Many states regulate the ability of medical professionals to advertise or maintain referral services. We do not represent that a physician's use of our Web site will comply with these or other state laws regulating professional practice and we do not monitor or control the content that physicians post on their individual practice Web sites using our Web site application. It is possible a state or a court may determine we are responsible for any non-compliance with these laws, which could affect our ability to offer this service to our customers. We employ and contract with physicians who provide only medical information to consumers, and we have no intention to provide medical care or advice. We do not maintain professional liability insurance because we believe we are not a healthcare provider. Any determination that we are a healthcare provider and acted improperly as a healthcare provider may result in liability for which we are not insured. 21 24 INTELLECTUAL PROPERTY We rely upon a combination of patent, trade secret, copyright and trademark laws, license agreements, confidentiality procedures, employee and client nondisclosure agreements and technical measures to protect our intellectual property. We use several trademarks in the U.S. and internationally, including "WebMD," "Web-MD," "The Medical Manager," "Digital Office Manager," "MMClient" and "MMWin." We use numerous other registered and unregistered trademarks and service marks for our various products and services in the U.S. and internationally. We have applied for federal registration of several of our service marks, including "Health has a Home Page," "WebMD Practice," "WebMD Health," "Healtheon," "WebMD OnCall," "OmniDoc," "OmniChart," "OmniPresence," "ULTIA" and "Intergy," among others, and logos for our Intergy product. We have also applied for registration of several of our trademarks and service marks, including "WebMD" and "Health has a Home Page," among others, in numerous foreign jurisdictions. We cannot guarantee that any of those applications will mature into registrations. In jurisdictions where trademark rights are acquired by the first to register the mark with the relevant governmental authority or where common law rights are acquired by being the first entity to adopt, use and continue to use a particular mark in connection with particular goods or services, we may be unable to obtain superior trademark rights. In addition to our trademark registrations and applications, we have registered the domain name "webmd.com" and numerous other domain names that either are or may be relevant to conducting our business. Our inability to protect our marks and domain names adequately would hurt us in establishing and maintaining our brand. We also rely on a variety of intellectual property rights that we license from third parties, including our Internet server software and healthcare content used on our WebMD.com Web site, as well as various products incorporated into our physician practice management systems. These third party licenses may not continue to be available to us on commercially reasonable terms. Our loss of or inability to maintain or obtain upgrades to any of these licenses could significantly harm us. In addition, because we license a majority of our content from third parties, we may be exposed to copyright infringement actions if these parties are subject to claims regarding the origin and ownership of licensed content. The steps we have taken to protect our proprietary rights may not be adequate, and we may not be able to secure trademark or service mark registrations for marks in the U.S. or in foreign countries. Third parties may infringe upon or misappropriate our copyrights, trademarks, service marks and similar proprietary rights. In addition, effective copyright and trademark protection may be unavailable or limited in many foreign countries, and the global nature of the Internet makes it impossible to control the ultimate destination of our services. It is possible that competitors or others will adopt product or service names similar to our names, which could impede our efforts to build brand identity and possibly lead to customer confusion. Moreover, because domain names derive value from the individual's ability to remember such names, our domain name will lose its value if, for example, users begin to rely on mechanisms other than domain names to access online resources. Our inability to protect our marks and domain names adequately would hurt our ability to establish our brand. In the future, litigation may be necessary to enforce and protect our trade secrets, copyrights and other intellectual property rights. Litigation would divert management resources and be expensive and may not effectively protect our intellectual property. Substantial litigation regarding intellectual property rights exists in the software industry, and we expect that software products may be increasingly subject to third party infringement claims as the number of competitors in our industry grows and the functionality of products overlaps. Although we believe that our products do not infringe on the intellectual property rights of others, we cannot provide assurance that such a claim will not be asserted against us in the future, or that a license or similar agreement will be available on reasonable terms in the event of an unfavorable ruling on any such claim. We have several patents covering our software technology. Due to the nature of our application software, we believe that patent protection is less significant than our ability to further develop, enhance and modify our current services and products. However, any infringement or misappropriation of our proprietary software and databases could disadvantage us in our efforts to attract and retain customers in a 22 25 highly competitive market and could cause us to lose revenue or incur substantial litigation expense. Moreover, in recent years, there have been a large number of patents issued in general and numerous patents issued related to Internet business methods. While we are unaware of any that would impact our ability to conduct our business, defense of a patent infringement claim against us could divert management and monetary resources, and an adverse judgment in any such matter may negatively impact our ability to conduct our business in the manner we desire. EMPLOYEES As of December 31, 2000, we had approximately 4,700 employees, excluding Porex employees. We also employed, as of December 31, 2000, approximately 180 independent contractors. In connection with our restructuring and integration efforts, approximately 1,100 employees were identified and notified of termination during 2000, principally as a result of eliminating duplicate functions resulting from acquisitions. ITEM 2. PROPERTIES Our corporate headquarters relocated from Atlanta, Georgia to Elmwood Park, New Jersey in January 2001. We lease our Elmwood Park offices, which consist of approximately 40,000 square feet of space, under a lease that expires in March 2006. We own or lease additional facilities in Nashville, Tennessee for our primary data and call centers, in Santa Clara, California and Alachua, Florida for our development and engineering operations and in New York, New York, Atlanta, Georgia and Mountain View, California for sales, marketing and customer support. We currently lease 159 additional locations throughout the U.S. and own 14 facilities. In connection with our restructuring and integration efforts, we intend to further consolidate facilities, including consolidating 13 data centers into two, nine call centers into one and various sales offices nationwide. For additional information on costs associated with our facilities integration, see note 4 to the consolidated financial statements contained in this annual report. We believe that our existing facilities and offices are adequate for our current operations. ITEM 3. LEGAL PROCEEDINGS Porex Mammary Implant Litigation Since March 1991, Porex has been named as one of many co-defendants in a number of actions brought by recipients of silicone gel mammary implants. Porex distributed implants manufactured by Koken, a Japanese company. These actions were brought in various federal and state courts around the country. One action, Donna L. Turner v. Porex Technologies Corporation, et al., was originally filed as a class action, but the class claims were dismissed in 1999 and the remainder of the case was settled. The typical case or claim alleges that the individual's implants caused one or more of a wide range of ailments. These implant cases and claims generally raise difficult and complex factual and legal issues and are subject to many uncertainties and complexities, including, but not limited to, the facts and circumstances of each particular case or claim, the jurisdiction in which each suit is brought, and differences in applicable law. We do not have sufficient information to evaluate each case and claim. Some of the actions against Porex have been dismissed where it was determined that the implant in question was not distributed by Porex. In addition, a number of claims have been settled by the manufacturer of the implants or by the insurance carriers of Porex without material cost to Porex. As of March 21, 2001, 20 actions and 37 out-of-court claims were pending against Porex. During calendar year 2000, there were two implant-related claims made against Porex by individuals as compared with 39 claims during calendar year 1999 and nine claims during calendar year 1998. We believe that Porex's existing insurance coverage should provide adequate coverage against the amount of liabilities that could reasonably be expected to result from actions or claims arising out of 23 26 Porex's distribution of implants. However, we cannot provide assurance that particular cases and claims will not lead to liability that is greater than expected based on Porex's prior experience. If so, Porex's liability could exceed the amount of its insurance coverage. Furthermore, Porex's insurance coverage may not provide coverage, in whole or in part, to the extent that certain of such actions and claims seek punitive or compensatory damages arising out of alleged intentional torts. Envoy Securities Litigation Envoy and some of its officers were named as defendants in three identical lawsuits filed in the United States District Court for the Middle District of Tennessee, Nashville Division. The plaintiff in each of these lawsuits purported to represent a class of persons who purchased the securities of Envoy during the class period from February 12, 1997 through August 18, 1998. In these three original complaints, the plaintiffs sued the defendants for violations of the federal securities laws. The District Court ordered the three cases consolidated under the caption In re Envoy Corporation Securities Litigation, and on December 28, 1998, the plaintiffs, pursuant to the district court's consolidation orders, filed a consolidated class action complaint. The consolidated complaint reasserted the federal securities law claims and also asserted additional claims under Tennessee common law for fraud and negligent misrepresentation. Plaintiffs allege that the defendants made material misrepresentations and omissions in Envoy's public filings and public statements concerning Envoy's financial statements and Envoy's accounting for some charges taken in connection with acquisitions. Plaintiffs allege that, as a result of defendants' alleged actions, Envoy's reported earnings during the class period were overstated and the price for Envoy's common stock was artificially inflated. Plaintiffs seek recovery of an unspecified sum in damages on behalf of persons who allegedly purchased Envoy's stock at allegedly inflated prices. On March 1, 1999, the defendants filed a motion to dismiss all of plaintiffs' claims. Plaintiffs then voluntarily dismissed their state law claims. On September 17, 1999, the court dismissed the consolidated complaint without prejudice. On November 23, 1999, the plaintiffs filed an amended consolidated complaint. On May 31, 2000, defendants filed a motion to dismiss the amended consolidated complaint. The court on February 2, 2001 entered an order denying in part and granting in part defendants' motion to dismiss the amended consolidated complaint. Specifically, the court denied the motion to dismiss as to defendants Envoy and one of the individual defendants and granted the motion to dismiss as to two of the individual defendants. The Agreement and Plan of Merger among Healtheon/WebMD, Pine Merger Corp., Envoy, Quintiles, and QFinance, Inc. dated as of January 22, 2000 provides that Quintiles will indemnify us with respect to this litigation. Ehlert v. Singer, et al. This lawsuit was filed against Medical Manager Health Systems, which became our subsidiary upon Medical Manager's merger with us in September 2000, and some of its officers and directors, among other parties, on October 23, 1998 in the United States District Court for the Middle District of Florida. The lawsuit purports to bring an action on behalf of the plaintiffs and others similarly situated to recover damages for alleged violations of the federal securities laws and Florida laws arising out of Medical Manager Health Systems' issuance of allegedly materially false and misleading statements concerning its business operations, including the development and sale of its principal product, during the class period. An amended complaint was served on March 2, 1999. Medical Manager Health Systems moved to dismiss the amended complaint and the court ruled in favor of that motion. Plaintiffs have appealed this dismissal to the Court of Appeals for the 11th Circuit. The oral argument for the appeal was held in November 2000, but no decision has been issued by the court of appeals. The lawsuit seeks, among other things, compensatory damages in favor of the plaintiffs and the other purported class members and reasonable costs and expenses. Quintiles v. WebMD Quintiles and WebMD entered into a Data Rights Agreement in connection with the acquisition of Envoy by WebMD from Quintiles in May 2000. Under the Data Rights Agreement, WebMD provided 24 27 certain data to Quintiles through Envoy, which Quintiles used to provide market research and related products and services to third parties. On February 23, 2001, WebMD provided notice to Quintiles that WebMD's subsidiary Envoy, which provides electronic transaction services for the healthcare industry, would be temporarily suspending the provision of data under the Data Rights Agreement between the parties. The suspension was in accordance with provisions of the Data Rights Agreement that permit such suspension if WebMD reasonably believes that providing the data would violate applicable law. In accordance with procedures set forth in the Data Rights Agreement between the parties, WebMD intended to suspend sending such data to Quintiles until such time as Quintiles performed its obligations under the Data Rights Agreement. On Sunday, February 25, 2001, Quintiles filed an action for breach of contract seeking temporary and permanent injunctive relief and unspecified damages, and obtained an ex parte Temporary Restraining Order from the Superior Court of Wake County, North Carolina, requiring WebMD to continue to provide data to Quintiles. WebMD removed the action to the United States District Court for the Eastern District of North Carolina. On March 13, 2001, the District Court entered an order continuing the state court temporary restraining order. In the course of this litigation, WebMD presented opinions of counsel that the transmission of data pursuant to the Data Rights Agreement violated certain state privacy laws. Quintiles disputed these legal interpretations. Thereafter, the access specifications pursuant to which data is transmitted to Quintiles were modified to further de-identify patient information. In addition, Quintiles provided to WebMD opinions of counsel that applicable state privacy laws would not be violated by transmission of data pursuant to the modified access specifications, together with a proposed undertaking of indemnification by Quintiles in favor of WebMD, and certifications that the patient information contained in its existing databases had been de-identified consistent with the recently modified access specifications. Because determinations whether data has been sufficiently de-identified depend on complex factual and statistical analyses, the opinions presented by Quintiles relied on fact-intensive analyses prepared by statisticians and others. A further hearing was conducted by the District Court on March 15, 2001, and on March 16, 2001, the District Court ordered WebMD to continue to provide data to Quintiles in the form represented to the court during the March 15, 2001 hearing. That form reflected the recently modified access specifications. On March 21, 2001, the District Court entered an order continuing in effect the injunction. Currently, WebMD is providing data to Quintiles pursuant to this order. We are currently engaged in settlement discussions with Quintiles. However, we cannot provide assurances that a settlement will be reached. If a settlement is not reached, we expect to seek appellate review, by the Fourth Circuit Court of Appeals, of the District Court's order. InfoCure Corporation v. WebMD and Envoy On March 8, 2001, InfoCure Corporation filed a complaint against WebMD and Envoy in the Superior Court of the County of Fulton in the State of Georgia. The complaint asserts, among other things, that WebMD has breached its marketing agreement with InfoCure by withholding certain rebates owed to InfoCure, by failing to perform certain services and by soliciting InfoCure's customers. The complaint seeks damages in excess of $46.5 million. WebMD believes that InfoCure's positions are without merit and intends to vigorously defend against the complaint. Other legal proceedings In the normal course of business, we are involved in various other claims and legal proceedings. While the ultimate resolution of these matters, and those discussed above, has yet to be determined, we do not believe that their outcome will have a material adverse effect on our financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 25 28 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS We completed the initial public offering of our common stock on February 10, 1999. Our common stock has been traded on the Nasdaq National Market under the symbol "HLTH" since February 11, 1999. The high and low closing prices for each quarterly period during the last two fiscal years are as follows:
HIGH LOW ------- ------ 1999 First quarter (beginning February 11, 1999) $ 49.38 $21.75 Second quarter............................................ 105.00 39.94 Third quarter............................................. 77.63 30.06 Fourth quarter............................................ 51.50 31.50 2000 First quarter............................................. $ 71.06 $23.00 Second quarter............................................ 29.19 12.56 Third quarter............................................. 18.25 11.25 Fourth quarter............................................ 14.94 5.50
On March 14, 2001, there were 5,344 holders of record of our common stock. Because many of these shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. The market price of our common stock has fluctuated since the date of our initial public offering and is likely to fluctuate in the future. Changes in the market price of our common stock may result from, among other things: - quarter-to-quarter variations in operating results - operating results being less than analysts' estimates - changes in analysts' earnings estimates - announcements of new technologies, products and services or pricing policies by us or our competitors - announcements of acquisitions or strategic partnerships by us or our competitors - developments in existing customer or strategic relationships - actual or perceived changes in our business strategy - developments in pending litigation and claims - sales of large amounts of our common stock - changes in market conditions in the Internet and healthcare industries - changes in prospects for healthcare reform - changes in general economic conditions - fluctuations in the securities markets in general. In addition, the market prices of Internet and healthcare information technology stocks in general, and of our common stock in particular, have experienced large fluctuations, sometimes quite rapidly. These fluctuations often may be unrelated or disproportionate to the operating performance of these companies. 26 29 Any negative change in the public's perception of the prospects of these companies, as well as other broad market and industry factors, may result in decreases in the price of our common stock. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted. If this were to happen to us, litigation would be expensive and would divert management's attention. We have never declared or paid any cash dividends on our common stock, and we do not anticipate paying cash dividends in the foreseeable future. We intend to retain earnings to finance the expansion of our operations. Our Series B convertible redeemable preferred stock pays no annual dividend and shares in any dividends paid on the common stock on an as if converted into common stock basis. 27 30 ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and with the consolidated financial statements and notes thereto, which are included elsewhere in this annual report. Our financial information presented reflects our combined financial position and results of operations with ActaMed Corporation for all dates and periods presented, reflects the results of operations for WebMD, Inc., MedE America and Medcast from the closing date of these mergers, November 12, 1999 forward, for Kinetra from the closing date of January 31, 2000 forward, for Envoy from the closing date of May 26, 2000 forward, and for Medical Manager, CareInsite and OnHeath from the closing date of September 12, 2000 forward. All of these acquisitions were accounted for as purchases, except for ActaMed, which was accounted for as a pooling of interests. The consolidated statements of operations data for the three-year period ended December 31, 2000 and the consolidated balance sheet data at December 31, 2000 and 1999 are derived from, and are qualified by reference to, the audited consolidated financial statements included elsewhere in this annual report. The consolidated statements of operations data for the two-year period ended December 31, 1997 and the consolidated balance sheet data at December 31, 1998, 1997 and 1996 are derived from, and are qualified by reference to, audited consolidated financial statements that are not included in this report.
YEARS ENDED DECEMBER 31, -------------------------------------------------------- 2000 1999 1998 1997 1996 ----------- --------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENTS OF OPERATION DATA: Revenue............................................ $ 517,153 $ 102,149 $ 48,838 $ 13,390 $ 11,013 Costs and expenses: Cost of operations............................... 383,565 88,576 43,014 10,446 6,669 Development and engineering...................... 58,788 29,669 19,002 12,267 8,332 Sales, marketing, general and administrative..... 530,927 82,315 25,605 12,966 10,948 Depreciation, amortization and other............. 2,186,986 193,067 16,055 6,004 4,153 Restructuring and integration charge............. 452,919 -- -- -- -- Loss on investments.............................. 39,602 -- -- -- -- Interest income, net............................. 50,026 3,486 790 288 483 ----------- --------- -------- -------- -------- Net loss........................................... $(3,085,608) $(287,992) $(54,048) $(28,005) $(18,606) =========== ========= ======== ======== ======== Basic and diluted net loss per common share........ $ (12.61) $ (3.58) $ (1.54) $ (3.88) $ (2.83) =========== ========= ======== ======== ======== Weighted-average shares outstanding used in computing basic and diluted net loss per common share............................................ 244,688 80,367 34,987 7,223 6,583 =========== ========= ======== ======== ========
AS OF DECEMBER 31, -------------------------------------------------------- 2000 1999 1998 1997 1996 ----------- --------- -------- -------- -------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments...................................... $ 490,797 $ 291,286 $ 36,817 $ 21,804 $ 7,539 Working capital.................................... 606,247 216,304 27,934 14,790 2,505 Total assets....................................... 8,455,631 4,123,668 79,940 53,747 34,407 Long-term obligations, net of current portion...... 15,260 2,695 2,984 932 1,210 Convertible redeemable preferred stock............. 10,000 -- -- 50,948 39,578 Convertible preferred stock........................ 710,746 -- -- -- -- Stockholders' equity (net capital deficiency)...... 8,091,985 3,973,672 59,413 (9,930) (14,553)
28 31 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW WebMD Corporation is a Delaware corporation that was incorporated in December 1995 and commenced operations in January 1996 as Healtheon Corporation. Our common stock has traded on the Nasdaq National Market under the symbol "HLTH" since February 11, 1999. In November 1999, Healtheon completed mergers with WebMD, Inc., MedE America and Medcast. Following these mergers, Healtheon changed its name to Healtheon/WebMD Corporation. Healtheon/WebMD completed acquisitions of Kinetra and Envoy in January 2000 and May 2000, respectively. On September 12, 2000, Healtheon/WebMD completed mergers with Medical Manager, CareInsite and OnHealth and changed its name to WebMD Corporation. As a result of the completion of these transactions, our core business encompasses the following products and services: - Transaction services. We offer value-added solutions designed to increase productivity for both providers and payers, to speed healthcare reimbursements and to improve communications among healthcare participants. From simple point-of-service devices to fully integrated transaction processing applications and Internet solutions, we offer a full suite of products and services to automate key business and clinical functions. - Physician services. We develop and market integrated physician practice management systems, including administrative, financial and clinical applications, under The Medical Manager(R) brand. - Portal services. We offer a variety of online services for consumers, physicians and physician office managers through our Web site, WebMD.com. After the mergers with Medical Manager, CareInsite and OnHealth, our board of directors approved a restructuring and integration plan, with the objective of eliminating duplication and redundancies as a result of all the acquisitions made by us since November 1999 and consolidating our operational infrastructure into a common platform to more efficiently serve our customers. Additionally, as part of our restructuring and integration efforts, we also undertook a review of our existing strategic relationships in light of several criteria, including strategic relevance to both us and our partners, potential conflicts with other agreements as a result of the numerous acquisitions made by us, profitability, and impact on future revenue streams. As a result of this process, we are in discussions with several of our partners in an effort to redefine the relationships in a manner that better serves the needs of each party. These discussions have already resulted in revisions to some of our strategic relationships. It is possible that, as a result of continuing discussions, additional relationships may be revised or terminated, which may result in additional restructuring charges. In connection with our restructuring and integration efforts, we recorded restructuring and integration charges of $452.9 million, of which $380.0 million were non-cash charges, in the year ended December 31, 2000. As we continue our consolidation and integration efforts, we are likely to incur additional costs relating to asset impairments and write-offs, severance, employee retention arrangements related to exit activities, moving and relocations that will be expensed according to the applicable accounting guidelines. We expect our restructuring and integration efforts will continue during 2001. For additional information regarding our restructuring and integration efforts, see "Business -- Restructuring and integration" beginning on page 3 and note 4 to the consolidated financial statements in this annual report. As we announced on September 28, 2000, our board of directors approved management's plan to dispose of Porex, which we acquired in our merger with Medical Manager on September 12, 2000. Porex designs, manufactures and distributes porous and solid plastic components and products used in life sciences, healthcare, industrial and consumer applications. We expect to complete the disposition later this year. Accordingly, our consolidated statements of operation and consolidated statement of cash flows exclude the results of Porex. 29 32 We have rapidly and significantly expanded our operations through acquisitions. We have completed the following acquisitions as of December 31, 2000:
SHARES OF OUR SHARES OF OUR OPTIONS AND COMPANY ACQUIRED DATE ACQUIRED PREFERRED STOCK ISSUED COMMON STOCK ISSUED WARRANTS ASSUMED - ---------------- -------------- ---------------------- ------------------- ---------------- Medical Manager/CareInsite...... September 2000 100 134,370,010 81,084,865 OnHealth.................. September 2000 -- 4,678,609 1,384,113 Envoy..................... May 2000 -- 35,000,000 -- Kinetra................... January 2000 -- 7,437,248 -- WebMD, Inc................ November 1999 -- 63,932,659 49,012,168 MedE America.............. November 1999 -- 10,404,454 468,584 Medcast................... November 1999 -- 2,528,465 164,036 ActaMed................... May 1998 -- 23,271,355 3,383,011
All of these acquisitions were accounted for as purchases except for ActaMed, which was accounted for as a pooling of interests. Our financial information presented reflects our combined financial position and results of operations with ActaMed for all dates and periods presented and reflects the results of operations for WebMD, Inc., MedE America and Medcast from the closing date of November 12, 1999 forward, Kinetra from the closing date of January 31, 2000 forward, Envoy from the closing date of May 26, 2000 forward, and Medical Manager, CareInsite and OnHealth from the closing date of September 12, 2000 forward. As a result of our purchases of WebMD, Inc., MedE America and Medcast, we recorded total intangible assets of $3.7 billion, consisting primarily of $116.9 million of trademarks, $84.1 million of customer lists, $40.8 million of acquired technology and $3.4 billion of goodwill. The identifiable intangibles are being amortized over their estimated useful lives of one to five years. Goodwill is being amortized over three to four years. As a result of our purchase of Kinetra, we recorded total intangible assets of $284.0 million, consisting primarily of $35.1 million of customer lists, $5.7 million of acquired technology, $4.3 million of covenants not-to-compete, $2.3 million of workforce, $1.6 million of trademarks and $235.0 million of goodwill. The identifiable intangibles are being amortized over their estimated useful lives of one to three years. Goodwill is being amortized over three years. As a result of our purchase of Envoy, we recorded total intangible assets of $2.4 billion, consisting primarily of $159.2 million of customer lists, trademarks and acquired technology and $2.2 billion of goodwill. The identifiable intangibles are being amortized over their estimated useful lives of one to three years. Goodwill is being amortized over three years. As a result of our purchases of Medical Manager and CareInsite, we recorded total intangible assets of $2.3 billion, consisting primarily of $24.5 million of physician relationships, $16.8 million of trademarks, $12.7 million of workforce and $2.3 billion of goodwill. The identifiable intangibles are being amortized over their estimated useful lives of three to fifteen years. Goodwill is being amortized over three years. As a result of our purchase of OnHealth, we recorded total goodwill of $374.6 million which will be amortized over its estimated useful life of three years. Because we have only recently completed the 2000 acquisitions, it is difficult to evaluate our business and prospects. Our revenue and income potential is unproven and our business model is still emerging. As a result, we believe that our historical financial information may not be an indicator of our future operating results. We have incurred significant operating and net losses since we began operations and, as of December 31, 2000, we had an accumulated deficit of $3.5 billion. We plan to continue to invest heavily in the integration of our acquisitions, strategic relationships and infrastructure and applications development. As a result, we expect that we will continue to incur losses before restructuring and integration charges, depreciation, amortization and other non-cash items, until the end of 2001. 30 33 Revenue is derived from our transaction services, physician services and portal services. Our transaction services include administrative services, such as transaction processing for medical, dental and pharmacy claims, and clinical lab and reporting services, such as lab test orders and results. Healthcare payers pay us fees for these services, generally on a per transaction basis. Our transaction fees for payers vary according to the type of transaction and other factors, such as volume level commitments. Healthcare providers pay us transaction fees for these services, either on a per transaction basis or as a flat rate per month. Our transaction fees for providers vary according to the type of transaction and customer. We may also charge one-time implementation fees to providers and payers. Our physician services include sales of The Medical Manager practice management system, which addresses the administrative, financial, clinical and practice management needs of physician practices, and subscription fees to our physician portal, WebMD Practice. Portal services include advertising, sponsorship, content syndication and distribution and e-commerce transactions related to our Web site or a co-branded Web site with one of our online partners. Cost of operations consists of costs related to services 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, amortization of certain intangible assets, a portion of facilities expenses and leased personnel and facilities costs. Additionally, cost of operations includes rebates paid to certain customers related to transaction services. Development and engineering expense consists primarily of salaries and related expenses associated with the development of applications and services. Expenses include compensation paid to engineering personnel, fees to outside contractors and consultants, a portion of facilities expenses 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, human resources and executive personnel. These expenses also 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. RESULTS OF OPERATIONS The following table sets forth certain data expressed as a percentage of total revenue for the periods indicated:
YEARS ENDED DECEMBER 31, ---------------------------- 2000 1999 1998 ------ ------ ------ Revenue..................................................... 100.0% 100.0% 100.0% Cost of expenses: Cost of operations........................................ 74.2 86.7 88.1 Development and engineering............................... 11.4 29.0 38.9 Sales, marketing, general and administrative.............. 102.7 80.6 52.4 Depreciation, amortization and other...................... 422.9 189.0 32.9 Restructuring and integration charge...................... 87.6 0.0 0.0 Loss on investments....................................... 7.7 0.0 0.0 Interest income, net...................................... 9.6 3.4 1.6 ------ ------ ------ Net loss.................................................... (596.7%) (281.9%) (110.7%) ------ ------ ------ ------ ------ ------
Years ended December 31, 2000 and 1999 Revenue. Our total revenue increased to $517.2 million in the year ended December 31, 2000 from $102.1 million in the year ended December 31, 1999. The increase is due primarily to the revenue sources that were acquired in our 1999 and 2000 business combinations. Transaction services revenue 31 34 comprised 52.0% of total revenue in the year ended December 31, 2000 compared to 45.3% in the year ended December 31, 1999. This increase is primarily related to the additional revenue from our acquisition of Envoy in May 2000 and CareInsite in September 2000. Physician services revenue comprised 23.2% of total revenue in the year ended December 31, 2000 compared to 2.6% in the year ended December 31, 1999. This increase is primarily related to the additional revenue from our acquisition of Medical Manager in September 2000 and the full-year impact of WebMD Practice subscription revenue from our November 1999 WebMD, Inc. merger. Portal services revenue comprised 19.6% of total revenue in the year ended December 31, 2000 as compared to 4.0% in the year ended December 31, 1999. This increase is primarily related to the full-year impact of our November 1999 WebMD, Inc. merger as well as the acquisition of OnHealth in September 2000. Other products and services revenue comprised 5.2% of total revenue in the year ended December 31, 2000 as compared to 48.1% in the year ended December 31, 1999. This decrease reflects the phasing out of some of our non-core product offerings. We expect that revenue will increase in 2001, primarily as a result of the companies acquired in 2000, as our 2000 results reflect the operation of these companies for only the portion of the year from their respective acquisition dates. This increase will be partially offset by the impact of the revised agreements with News Corporation and DuPont and the revised relationship contemplated by the non-binding letter of intent with Microsoft, each of which is described in "Business -- Restructuring and integration" on page 3, and the revision of other relationships and the phase out of non-core products in connection with our restructuring and integration efforts. Revenue from related parties, which consists primarily of services provided to Microsoft and News Corporation in 2000 and of services provided to Microsoft, UnitedHealth Group and SmithKline Labs in 1999, increased to $45.3 million in the year ended December 31, 2000 from $37.2 million in the year ended December 31, 1999. The increase was primarily due to increases in subscription and third party advertising revenue through our Microsoft strategic alliance and from health-related content licensed to News Corporation. Revenue from SmithKline Labs ceased being related party revenue in August 1999 when SmithKline Labs was sold to Quest Diagnostics, which is not a significant stockholder, and revenue from UnitedHealth Group ceased being related party revenue in January 2000, when the Chairman and Chief Executive Officer of UnitedHealth Group resigned from our board of directors. In addition, revenue from News Corporation ceased being related party revenue in December 2000, when we revised our strategic relationship and News Corporation surrendered its shares of our Series A preferred stock. Three of our customers, SmithKline Labs, which was acquired by Quest Diagnostics Incorporated, Beech Street Corporation and UnitedHealth Group, each accounted for more than 10% of our revenue in 1999, and together accounted for approximately 40.7% of our revenue for the same period. None of our customers individually accounted for more than 10% of our revenue in 2000. Cost of operations. Cost of operations increased to $383.6 million in the year ended December 31, 2000 from $88.6 million in the year ended December 31, 1999. The increase is attributable to expenses related to the companies acquired in 2000 and 1999, which contributed $141.5 million of the increase, and increased personnel and network operation costs, the cost to acquire exclusive arrangements to provide consumer healthcare-related content to other Web sites and other costs required to support increased service revenue. We expect the cost of operations to increase in 2001 primarily as a result of the companies acquired in 2000, as our 2000 results reflect the operations of these companies for only the portion of the year from their respective acquisition dates. Development and engineering. Development and engineering expense was $58.8 million in the year ended December 31, 2000 and $29.7 million in the year ended December 31, 1999. The increase was the result of a significant increase in the number of engineers engaged in the development of our applications and services. Of the increase in development and engineering, $5.1 million was a result of expenses incurred by the companies acquired in 2000. We expect that development and engineering costs will decrease in 2001 primarily as a result of the cost reductions related to our restructuring and integration efforts. We expect this decrease to be partially offset by the impact of companies acquired in 2000, as our 2000 results reflect the operations of these companies for only the portion of the year from their respective acquisition dates. 32 35 Sales, marketing, general and administrative. Sales, marketing, general and administrative expense increased to $530.9 million in the year ended December 31, 2000 from $82.3 million in the year ended December 31, 1999. Sales, marketing, general and administrative expense includes non-cash media and branding expenses primarily associated with Microsoft and News Corporation of $87.5 million and $7.9 million for the year ended December 31, 2000 and 1999, respectively. Additional increases resulted from salaries and related costs of added sales and marketing personnel and advertising and promotion costs to increase awareness of the WebMD brand, as well as non-cash amortization of deferred stock compensation, which increased to $72.5 million in the year ended December 31, 2000 as compared to $7.6 million in 1999. Of the increase in sales, marketing, general and administrative expense, $120.4 million is a result of expenses incurred by the companies acquired in 2000. We expect that sales, marketing, general and administrative costs will decrease in 2001 primarily as a result of cost reductions related to our restructuring and integration efforts. We expect this decrease to be partially offset by the impact of the companies acquired in 2000, as our 2000 results reflect the operations of these companies for only the portion of the year from their respective acquisition dates. Amortization of deferred stock compensation, included in general and administrative expenses, represents the amortization of the difference between the purchase or exercise price of certain stock option and restricted stock grants and the deemed fair value of our common stock at the time of those grants issued by us or assumed in the 1999 and 2000 business combinations. We recorded amortization of deferred stock compensation of $72.5 million in 2000, $7.6 million in 1999 and $3.4 million in 1998. The deferred stock compensation balance at December 31, 2000 was $144.5 million. The deferred stock compensation balance is being amortized based on a graded vesting method over the vesting period, generally four years, of the option or restricted stock grants. Depreciation, amortization and other. Depreciation, amortization and other was $2,187.0 million in the year ended December 31, 2000 and $193.1 million in the year ended December 31, 1999. Property and equipment is being depreciated over the estimated useful life of the related assets, generally three to seven years for equipment and up to 39 years for buildings. All of the intangible assets are being amortized over expected lives of one to fifteen years. The increase is due primarily to the amortization of intangible assets associated with the companies acquired in 2000 and 1999. Included in depreciation, amortization and other are dividends and accretion of discount related to the Series A convertible preferred stock in the amount of $108.2 million in 2000. There was no comparable amount in 1999. Restructuring and integration charges. In connection with our restructuring and integration efforts, we recorded a total charge in the year ended December 31, 2000 of $452.9 million, which consists of: - $320.9 million relating to the restructuring of contracts primarily associated with News Corporation and DuPont, of which $312.8 million represented non-cash charges - personnel-related restructuring costs of $70.2 million, of which $53.1 million represented non-cash stock option compensation charges primarily related to the resignation of certain executives, pursuant to the applicable employment and separation arrangements. The balance relates to severance and outplacement services for approximately 1,100 employees that we identified and notified of termination, principally as a result of eliminating duplicate functions within the combined company - facilities charges of $51.3 million, comprised of $37.2 million of future lease obligations and lease cancellation penalties and $14.1 million of non-cash fixed asset write-offs related to vacating duplicate facilities - $10.6 million of integration costs, which consist primarily of employee retention arrangements related to exit activities, moving and relocation expenses, as well as outside professional fees related to the integration of our business. 33 36 Loss on investments. During 2000, we recorded a loss on equity investments in certain Internet-related companies of $39.6 million. We assessed various factors related to these investments, including the decline in the market prices where available, the review of each of the companies' financial statements, including their cash positions and negative cash flow, as well as the change in market conditions with respect to the ability of companies such as these Internet start-up companies to raise additional capital. Based on this assessment, we determined that a permanent impairment existed in these investments. Interest income and expense. Interest income has been derived primarily from cash investments. Interest expense results primarily from our borrowings and from capitalized lease obligations for equipment purchases. Net interest income was $50.0 million in the year ended December 31, 2000 and $3.5 million in the year ended December 31, 1999. The increase for the 2000 period was due to higher average cash balances resulting from the proceeds of Janus Capital Corporation's $930 million investment in us through its managed mutual funds and $100 million from our strategic alliance with News Corporation, offset by the net cash paid for the companies acquired in 2000. Years ended December 31, 1999 and 1998 Revenue. Our total revenue increased to $102.1 million in the year ended December 31, 1999 from $48.8 million in the year ended December 31, 1998. Revenue from services increased to $57.4 million in the year ended December 31, 1999 from $27.1 million in the year ended December 31, 1998. This increase results primarily from the growth of our transaction services and network-based services. Of this increase, $9.8 million relates to revenue generated by acquired companies from the merger date, November 12, 1999, through the end of the year. Revenue from services to related parties consists primarily of services we provided to SmithKline Labs, UnitedHealth Group and Microsoft. Revenue from these related parties increased to $37.2 million in the year ended December 31, 1999, compared to $21.0 million in the year ended December 31, 1998. Increased transaction-based services to UnitedHealth Group and SmithKline Labs, which was phased in during the first quarter of 1999, and revenues from subscriptions and third party advertising from Microsoft contributed to the significant increases in revenue. The SmithKline Labs revenue ceased being related party revenue in August 1999, when SmithKline Labs was sold to Quest Diagnostics. Cost of operations. Cost of operations increased to $88.6 million in the year ended December 31, 1999 from $43.0 million in the year ended December 31, 1998. These increases resulted mainly from higher personnel and network operation costs, the cost to acquire exclusive arrangements to provide consumer healthcare-related content to other Web sites and other costs required to support these increased service revenues. Of the increase in cost of operations, $12.0 million is a result of expenses incurred by the acquired companies from the merger date, November 12, 1999, through the end of the year. Development and engineering. Development and engineering expense was $29.7 million in the year ended December 31, 1999 and $19.0 million in the year ended December 31, 1998. The increase was the result of a significant increase in the number of engineers engaged in the development of our applications and services. Sales, marketing, general and administrative. Sales, marketing, general and administrative expense increased to $82.3 million in the year ended December 31, 1999 from $25.6 million in the year ended December 31, 1998. The primary reason for the increase resulted from salaries and related costs of added sales and marketing personnel and advertising and promotion costs to increase awareness of the WebMD brand. The amortization of deferred stock compensation expense was $7.6 million in the year ended December 31, 1999, compared to $3.4 million in the prior year. The remainder of the increase resulted from salaries and related costs of office space and facilities as we added administrative personnel and executive management. Of the increase in sales, marketing, general and administrative expense, $33.8 million is a result of expenses incurred by the acquired companies from the merger date, November 12, 1999, through the end of the year. 34 37 Deferred stock compensation represents the difference between the purchase or exercise price of some stock option and restricted stock grants and the deemed fair value of our common stock at the time of those grants. We recorded deferred stock compensation of $7.6 million in 1999 and $8.2 million in 1998. The deferred stock compensation balance at December 31, 1999 was $5.1 million. The deferred stock compensation balance is being amortized based on a graded vesting method over the vesting period, generally four years, of the option or restricted stock grants. Depreciation, amortization and other. Depreciation, amortization and other was $193.1 million in the year ended December 31, 1999 and $16.1 million in the year ended December 31, 1998. Property and equipment is being depreciated over the estimated useful life of the related assets, generally three to seven years for equipment and 20 to 25 years for buildings. All of the intangible assets are being amortized over expected lives of one to four years. The increase is due primarily to the completion of the 1999 business combinations. Interest income and expense. Interest income has been derived primarily from cash investments. Interest expense results primarily from our borrowings and from capitalized lease obligations for equipment purchases. Net interest income was $3.5 million in the year ended December 31, 1999 and $0.8 million in the year ended December 31, 1998. The increase for the 1999 period was due to higher average cash balances resulting from the proceeds of our $46.1 million preferred stock financing in October 1998, the net proceeds of $41.4 million from our initial public offering in February 1999 and cash balances that were acquired in the acquisitions in November 1999. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2000, we had approximately $710.5 million in cash and cash equivalents and marketable securities. As of December 31, 2000, our working capital was $606.2 million. After the mergers with Medical Manager, CareInsite and OnHealth, our board of directors approved a restructuring and integration plan, with the objective of eliminating duplication and redundancies as a result of all the acquisitions made by us since November 1999 and consolidating our operational infrastructure into a common platform to more efficiently serve our customers. Additionally, as part of our restructuring and integration efforts, we also undertook a review of our existing strategic relationships in light of several criteria, including strategic relevance to both us and our partners, potential conflicts with other agreements as a result of the numerous acquisitions made by us, profitability and impact on future revenue streams. As a result of this process, we are in discussions with several of our partners in an effort to redefine the relationships in a manner that better serves the needs of each party. These discussions have already resulted in revisions to some of our strategic relationships, as discussed below. It is possible that, as a result of continuing discussions, additional relationships may be revised or terminated, which may result in additional restructuring and integration charges. As we announced on September 28, 2000, our board of directors approved management's plan to dispose of Porex, which we acquired in our acquisition of Medical Manager on September 12, 2000. Porex designs, manufactures and distributes porous and solid plastic components and products used in life sciences, healthcare, industrial and consumer applications. We expect to complete the disposition later this year. The expected net proceeds and the cash flows of Porex until sold were allocated to assets held for sale in the allocation of the Medical Manager purchase price and is included in the line item "assets held for sale" on our balance sheet. Any difference between the actual and expected amounts will result in an adjustment to goodwill unless there is a difference caused by a post-acquisition event. Cash used in operating activities was $461.6 million in 2000 compared to $76.0 million in 1999 and $26.6 million in 1998. The cash used during these periods was primarily attributable to net operating losses of $3,085.6 million in 2000, $288.0 million in 1999 and $54.0 million in 1998, offset in part by non-cash charges of $2,766.5 million, $200.7 million and $19.4 million in 2000, 1999 and 1998, respectively, which consist of depreciation and amortization, deferred stock compensation, non-cash content, services and 35 38 distribution amortization, loss on investments and the non-cash portion of the restructuring and integration charge. Cash used in investing activities was $361.0 million in 2000, compared to cash provided by investing activities of $281.2 million in 1999 and $19.1 million of cash used in 1998. Cash used in 2000 primarily related to $286.9 million in net cash paid when we acquired Medical Manager, CareInsite, Envoy and OnHealth. Cash provided in 1999 primarily related to $296.5 million in net cash acquired when we merged with WebMD, Inc., MedE America and Medcast. Investments in property and equipment, excluding equipment acquired under capital leases, and internally developed software were $30.2 million in 2000, $27.0 million in 1999 and $6.3 million in 1998. We invest our excess cash in short-term investments and expect to do so in the future. Cash provided by financing activities was $1,027.8 million in 2000, primarily related to the net proceeds of the sale of our common stock to Janus and News Corporation and its affiliates, partially offset by repurchases of our common stock. Cash provided by financing activities was $61.1 million in 1999, primarily from the net proceeds of our initial public offering of $41.4 million, as well as proceeds from exercises of employee stock options, partially offset by repayments totaling $1.4 million of line of credit borrowings and bridge notes. Financing activities provided $48.6 million of cash in 1998, resulting primarily from proceeds from the issuance of our preferred and common stock, offset in part by payments on capital lease obligations. As of December 31, 2000, we did not have any material commitments for capital expenditures. Our principal commitments at December 31, 2000 consisted of obligations under operating and capital leases and guaranteed payments under our strategic agreements. At December 31, 2000, we had entered into agreements that provided for us to make aggregate guaranteed payments in the following estimated amounts, net of sublease income, under operating and capital leases and our strategic relationships:
YEAR ENDED DECEMBER 31, AMOUNT - ----------------------- -------- 2001...................................................... $104,793 2002...................................................... 96,981 2003...................................................... 68,014 2004...................................................... 31,936 2005...................................................... 15,630 Thereafter................................................ 71,532
As of December 31, 2000, we had also entered into agreements that provided for us to share some of our transaction processing, advertising, carriage fee and e-commerce revenue, net of specified costs applicable to the particular revenue category, with Microsoft for its sponsorship of physician subscriptions to WebMD Practice and with several physician practice management system vendors who have agreed to promote our services to their physician customers. This revenue sharing applies only to the extent the revenue is derived from Microsoft-sponsored physicians or from physicians subscribing to the particular vendor's practice management system. The percentage of revenue shared varies from contract to contract and based on the type of revenue generated. On March 22, 2001, Microsoft and WebMD entered into a non-binding letter of intent with respect to revisions to our relationship. See "Restructuring and integration -- Microsoft" on page 5. We believe that we will have sufficient cash resources to meet our presently anticipated working capital and capital expenditure requirements, including the capital requirements related to the roll-out of our handheld solution in 2001, for at least the next 12 months. However, we expect to incur losses before restructuring and integration charges, depreciation, amortization and other non-cash items, until the end of 2001. Our future liquidity and capital requirements will depend upon numerous factors, including the success of the integration of our businesses, our existing and new application and service offerings, competing technological 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 36 39 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. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board, or FASB, issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." We are required to adopt SFAS No. 133 for the year ending December 31, 2001. SFAS No. 133 establishes methods of accounting for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities. Derivatives that are not designated as part of a hedging relationship must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, the effective portion of the hedge's change in fair value is either offset against the change in fair value of the hedged asset, liability or firm commitment through income, or held in equity until the hedged item is recognized in income. The ineffective portion of a hedge's change in fair value is immediately recognized in income. Adoption of SFAS No. 133 is not expected to have a material impact on our financial condition or results of operations. In March 2000, the FASB issued Interpretation No. 44 (FIN No. 44), "Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB Opinion No. 25." FIN No. 44 became effective July 1, 2000 and provides guidance for applying APB Opinion No. 25, "Accounting for Stock Issued to Employees." We adopted FIN No. 44 on July 1, 2000 and applied its guidance to the September 12, 2000 acquisitions of Medical Manager, CareInsite and OnHealth, resulting in deferred compensation of approximately $117.4 million, which is reflected in stockholders' equity. In January 2000, the Emerging Issues Task Force of the FASB reached consensus on Issue 99-17, "Accounting for Advertising Barter Transactions," or EITF 99-17. EITF 99-17 establishes accounting and reporting standards for barter transactions which involve nonmonetary exchanges of advertising. It requires that an entity recognize revenue and expenses from advertising barter transactions at the fair value of the advertising surrendered only when an entity has a historical practice of receiving cash for similar transactions. We believe that our current revenue recognition principles comply with EITF 99-17. In March 2000, the Emerging Issues Task Force of the FASB reached consensus on Issue 00-2, "Accounting for Website Development Costs," or EITF 00-2. EITF 00-2 establishes how an entity should account for costs incurred to develop a Web site. It requires that an entity capitalize costs during the Web application and infrastructure and graphics development stages of development. The consensus is effective for all costs incurred beginning after June 30, 2000, although earlier adoption is encouraged. The adoption of EITF 00-2 did not have a material impact on our financial condition or results of operations. FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS Our business will suffer if we fail to successfully integrate acquired businesses and technologies We have in the past acquired, and may in the future acquire, businesses, technologies, services, product lines or content databases. For example, we completed our mergers with WebMD, Inc., MedE America and Medcast in November 1999, our mergers with Kinetra in January 2000 and Envoy in May 2000 and our mergers with Medical Manager, CareInsite and OnHealth in September 2000. In September 2000, our board of directors approved a restructuring and integration plan, with the objective of eliminating duplication and redundancies as a result of the acquisitions made by us since November 1999 and of consolidating our operational infrastructure. We are in the process of integrating and consolidating the operations, products and services, technologies and personnel of these companies. In connection with our restructuring and integration efforts, we recorded restructuring and integration charges of $452.9 million, of which $380.0 million were non-cash charges, in the year ended December 31, 2000. As we continue our consolidation and integration efforts, we are likely to incur additional costs relating to asset impairments and write-offs, severance, stay bonuses, moving and relocations that will be expensed according to the 37 40 applicable accounting guidelines. We expect our restructuring and integration efforts will continue during 2001. For additional information regarding our restructuring and integration efforts, see "Business -- Restructuring and integration" beginning on page 3 and note 4 to the consolidated financial statements in this annual report. The successful integration of the acquired businesses into our operations is critical to our future performance. The amount and timing of the benefits of our restructuring and integration efforts and the success of the contemplated integration and rationalization of our businesses are subject to significant risks and uncertainties. These risks and uncertainties include, but are not limited to, those relating to: - ability to cross-sell products and services to payers and providers with which we have established relationships and those with which the acquired companies have established relationships - the loss of key personnel - diversion of management's attention from other ongoing business concerns - potential conflicts in payer, provider, strategic partner, sponsor or advertising relationships - coordination of organizations that are geographically diverse and have different business cultures - compliance with regulatory requirements. We cannot guarantee that any acquired businesses will be successfully integrated with our operations in a timely manner, or at all. Failure to successfully integrate acquired businesses or to achieve operating synergies, revenue enhancements or cost savings could have a material adverse effect on our business, financial condition and results of operations. Integrating any additional acquired organizations and technologies in the future could also be expensive and time consuming and may strain our resources and would be subject to the same challenges, risks and uncertainties as our current integration efforts, as described above. We are dependent on strategic relationships to generate some of our revenue Our ability to generate revenue will suffer if we cannot establish and maintain successful strategic relationships. We have entered into strategic relationships with leading online and media distribution and healthcare partners. Successful strategic relationships are an important means to increase the number of transactions processed over our network, generate traffic on our Web site and capitalize on additional distribution and revenue opportunities. As previously announced, we have been renegotiating some of the strategic relationships we currently have in place and some of these relationships have been modified or terminated. It is possible that additional relationships may be modified or terminated, as discussed in "Business -- Restructuring and integration" on page 3 and note 4 to the consolidated financial statements in this annual report. We expect that we will face intensified competition for strategic relationships. Disputes with strategic partners and customers may be resolved unfavorably to us and may harm our relationships. Some of our strategic partners have initiated or threatened to initiate litigation or other dispute resolution mechanisms regarding alleged breaches of our agreements and other claims. Similarly, in some cases, we have initiated or threatened to initiate litigation or other dispute resolution mechanisms when we believed our partner or customer is in breach of its obligations, if we have been unable to resolve the dispute through negotiations. We cannot provide assurance that these disputes will be resolved in our favor or, even if resolved in our favor, that we will be able to preserve the benefits we expected to achieve from our relationships with those partners, which could adversely affect our financial position and results of operations. We share revenue with our strategic partners and will incur significant expense in connection with our strategic relationships, and this expense may exceed the net revenue these relationships generate. We have agreed to share some of our transaction processing, advertising, carriage fee and e-commerce revenue with some of our strategic partners and, in some cases, to make guaranteed payments to our strategic partners. We may enter into additional arrangements with current or future strategic partners that require us to 38 41 share revenue, make guaranteed payments or incur other significant expenses. We cannot give assurances that we will generate sufficient revenue from our arrangements with strategic partners to offset all required payments and expenses. Failure to do so could have a material adverse effect on our financial condition or results of operations. We have invested in some of our strategic partners, many of which are in early stages of development. We have made equity investments in some of our strategic partners. In many instances, these investments are in the form of illiquid securities of private companies engaged in e-Health and were made in conjunction with the parties entering into a strategic agreement. Typically, these strategic partners entered into agreements that obligate them to purchase advertising or other services from us. These companies are typically in an early stage of development and may be expected to incur substantial losses and may not generate sufficient revenue to pay the advertising and e-commerce fees due us. In addition, due to recent market volatility, some of these companies have altered their plans to go public, and others that have gone public have experienced or may experience significant decreases in the trading prices of their common stock, adversely affecting the value of our investments. Some of these companies may go out of business before we are able to sell our investments. We have granted exclusive rights to strategic partners. We have agreed that some of our strategic partners will be our exclusive providers of some of our applications and content. For example, we have entered into strategic agreements with e-commerce companies to be our exclusive partners supplying online pharmacy services and medical supplies and to be our exclusive providers of various categories of content and services. These agreements may limit our access to other applications and content we might otherwise be able to make available to subscribers and consumers or to payer and provider customers. Our inability to offer other applications and content could cause our business to suffer. In addition, we have granted exclusive rights to strategic partners which restrict our ability to pursue some business opportunities. For example, in connection with our acquisition of Envoy from Quintiles, we granted to Quintiles the exclusive license to use some of the de-identified data available to us by virtue of our transaction services and some exclusive rights in the pharmaceutical market. Relationships with customers and strategic partners may conflict We have developed and rely upon important relationships with payers, providers, practice management system vendors and strategic partners, some of which may involve conflicting contractual rights, including conflicts which may result from our recent acquisitions. As a result of conflicts or perceived conflicts resulting from our acquisitions or our business plans and strategic initiatives, we may lose relationships with, or be subject to litigation by, some other customers and strategic partners, who may then establish relationships with our competitors. For example, InfoCure, a practice management system vendor whose products compete with The Medical Manager products, has initiated litigation against us, alleging breach of contract, tortious interference with business relations and other claims. We are currently in the process of negotiating new arrangements with Medic, another practice management system vendor, that would replace prior arrangements and better serve the needs of each party. However, we cannot provide assurance that these negotiations will be successful. If these negotiations are not successful, there could be litigation or other proceedings that arise out of the relationship or its termination. Some of our other customers and strategic partners have initiated or threatened to initiate litigation or other dispute resolution mechanisms to enforce rights they purport to have as a result of conflicts with our other relationships or with our business plans or strategic initiatives, or their belief that these conflicts exist. We cannot provide assurance that these disputes will be resolved in our favor or, even if resolved in our favor, that we will be able to preserve the benefits we expected to receive from our relationships with those partners. In addition, we may not be able to maintain or establish relationships with key participants in the healthcare and Internet industries if any of the companies we acquired had already established relationships with competitors of these key participants. If contractual or relationship conflicts or other issues cannot be resolved, we could lose the benefits of some of our relationships with payers, providers or strategic partners. Losses of any significant relationships could harm our business or results of operations. 39 42 Our ability to generate revenue could suffer if we do not expand our suite of applications and service offerings Healthcare information exchange and transaction processing is a relatively new and evolving market. The pace of change in our markets is rapid and there are frequent new product introductions and evolving industry standards. We may be unsuccessful in responding to technological developments and changing customer needs. In addition, our applications and services offerings may become obsolete due to the adoption of new technologies or standards. We currently offer a limited number of applications on our Internet-based platform and some of our service offerings, including our handheld solution, are not fully developed or launched. We must introduce new applications and services and improve the functionality of our existing services in a timely manner in order to attract and retain customers. We rely on a combination of internal development, strategic relationships, licensing and acquisitions to develop these applications and services. Each of our applications, regardless of how it was developed, must be integrated and customized to operate with the existing legacy computer systems of payer and provider customers and our platform. We are currently in the process of integrating acquired applications and products and services. Developing, integrating and customizing these applications and services will be time consuming, and these applications and services may never achieve market acceptance, which could also cause our business to suffer. New or newly integrated products and services will not become profitable unless they achieve sufficient levels of physician penetration and market acceptance There can be no assurance that physicians will accept new or newly integrated products and services from us, including the products and services we are developing to integrate our transaction services and portal services into their office workflow, such as our handheld solution. Even physicians who are already our customers may not purchase new or newly integrated products or services, especially when they are initially offered. Physicians using our existing products and services may refuse to adopt new or newly integrated products and services when they have made extensive investments in hardware, software and training relating to those existing products and services. Similarly, other healthcare participants may not accept new or newly integrated products and services from us developed for their use. In addition, there can be no assurance that any pricing strategy that we implement for any such products and services will be economically viable or acceptable to the target markets. Failure to achieve broad penetration in target markets with respect to new or newly integrated products and services could have a material adverse effect on our business prospects. Achieving market acceptance for new or newly integrated products and services is likely to require substantial marketing efforts and expenditure of significant funds to create awareness and demand by participants in the healthcare industry. In addition, deployment of new or newly integrated products may require the use of additional resources for training our existing sales force and customer service personnel and for hiring and training additional salespersons and customer service personnel. There can be no assurance that the revenue opportunities from new or newly integrated products and services will justify amounts spent for their development, marketing and roll-out. Our business model for providing Internet-based services is unproven, and we may not achieve profits from this business Our business model for providing Internet-based services is evolving, and our revenue and profit potential from these services is unproven. We intend to: - offer provider and payer customers our Internet-based transaction services, to the extent that is appropriate to their needs - integrate these transaction services with our Medical Manager practice management systems and similar systems provided by others 40 43 - build usage of our portal services by consumers, physicians and physician officer managers - generate e-commerce revenue from the sale of healthcare products or services of our strategic partners and other suppliers over the Internet. However, the provision of services over the Internet to the healthcare industry is a developing business that is inherently riskier than businesses in industries where companies have established operating histories and there can be no assurance that our initiatives in this area will be profitable. We may not be able to generate significant advertising revenue from our portal services We derive a portion of our revenue from advertising activities. Advertising revenue is generally derived from short-term advertising contracts in which we typically guarantee a minimum number of impressions or pages to be delivered over a specified period of time for a fixed fee. Advertising revenue may also include barter transactions, which are exchanges by us of advertising space on our Web site for goods and services from strategic partners and which might not generate any cash receipts. The Internet advertising market is new and rapidly evolving, and no standards have been widely accepted to measure its effectiveness as compared to traditional media advertising. If no standards develop, existing advertisers may not continue their current level of Internet advertising, and advertisers that have traditionally relied on other advertising media may be reluctant to advertise on the Internet. Moreover, filter software programs that limit or prevent advertising from being delivered to a Web user's computer are available. Widespread adoption of this software could adversely affect the commercial viability of Internet advertising. Demand for Internet advertising in general has, during the first quarter of 2001, been weaker than in recent quarters and there can be no assurance that such demand will return to the levels seen previously. Our business would be adversely affected if the market for Internet advertising fails to develop or develops more slowly than expected. Various pricing models are used to sell advertising on the Internet. It is difficult to predict which, if any, will emerge as the industry standard, thereby making it difficult to project our future advertising rates and revenue. The level of traffic on our Web site is likely to be a factor in determining advertising rates. Lengthy sales and implementation cycles for our applications could adversely affect our ability to generate revenue A key element of our strategy is to market our solutions directly to large healthcare organizations. We will be unable to control many of the factors that will influence the buying decisions of these organizations. We expect that the sales and implementation processes will be lengthy and will involve a significant technical evaluation and commitment of capital and other resources by our customers. The sale and implementation of our solutions are subject to delays due to our payer and provider customers' internal budgets and procedures for approving large capital expenditures and deploying new technologies within their networks. Failure to continue to expand and adapt our platform to accommodate increased usage could make it difficult to successfully implement our Internet-based services To successfully implement our Internet-based services, we must continue to expand and adapt our platform and transaction networks to accommodate additional users, increased transaction volumes and changing customer requirements. Our infrastructure may not accommodate increased use while maintaining acceptable overall performance. To date, we have processed a limited number and variety of Internet-based transactions. In addition, our Internet-based products and services have only been used by a limited number of physicians and healthcare consumers. An unexpectedly large increase in the volume of traffic on our Web site or transactions processed over our networks may require us to expand and further upgrade our platform. This expansion could be expensive and could divert our attention from other activities. 41 44 Performance problems with our systems could damage our business Our payer and provider customer satisfaction and our business could be harmed if we or our customers experience system delays, failures or loss of data. We currently process our payer and provider transactions and data at our facilities and rely on a data center operated by a third party to perform EDI transaction processing, other than real-time EDI transaction processing. This data center is located in Tampa, Florida and is operated by Verizon Data Services, with whom we have contracted for these processing services. We rely primarily on this facility to process batch claims and other batch medical EDI transaction sets. Our contract with Verizon requires Verizon to maintain processing capability and a "hot site" disaster recovery system. We have a contingency plan for emergencies with our systems; however, we have limited backup facilities to process information if these facilities are not functioning. The occurrence of a major catastrophic event or other system failure at any of our facilities or at the Verizon facility could interrupt data processing or result in the loss of stored data, which could have an adverse impact on our business. If our systems or the Internet experience security breaches or are otherwise perceived to be insecure, our business could suffer A material security breach could damage our reputation or result in liability. We retain confidential information, including patient health information, in our processing centers. It is critical that these facilities and infrastructure remain secure and be perceived by the marketplace as secure. We may be required to expend significant capital and other resources to protect against security breaches or to alleviate problems caused by breaches. Despite the implementation of security measures, this infrastructure may be vulnerable to physical break-ins, computer viruses, programming errors, attacks by third parties or similar disruptive problems. In addition, any well-publicized compromise of Internet security, whether or not related to our own operations, could damage our Internet-based businesses. Performance problems with the systems of our service and content providers could disrupt our Web site We depend on service and content providers to provide information and data feeds on a timely basis. Our Web site could experience disruptions or interruptions in service due to the failure or delay in the transmission or receipt of this information. Our Internet-based services are dependent on the development and maintenance of the Internet infrastructure and the adoption of broadband connections by physician offices Our ability to deliver our Internet-based services is dependent on the development and maintenance of the infrastructure of the Internet by third parties. This includes maintenance of a reliable network backbone with the necessary speed, data capacity and security, as well as timely development of complimentary products such as high-speed modems, for providing reliable Internet access and services. The Internet has experienced, and is likely to continue to experience, significant growth in the number of users and the amount of traffic. If the Internet continues to experience increased numbers of users, increased frequency of use or more complex requirements, the Internet infrastructure may be unable to support the demands placed on it. In addition, the performance of the Internet may be harmed by increased users or more complex requirements. The Internet has experienced a variety of outages and other delays as a result of damages to portions of its infrastructure, and it could face outages and delays in the future. These outages and delays could reduce the level of Internet usage as well as the availability of the Internet to us for delivery of our Internet-based services. In addition, the Internet could lose its viability due to delays in the development or adoption of new standards and protocols to handle increased levels of activity or due to increased governmental regulation. The infrastructure and complimentary products or services necessary to make the Internet a viable commercial marketplace for the long-term may not be developed successfully or in a timely manner. Our financial condition could be materially harmed if the Internet is not available to us for the delivery of our services and products. 42 45 In addition, our customers who utilize our Web-based services depend on Internet service providers, online service providers and other Web site operators for access to our Web site. All of these providers have experienced significant outages in the past and could experience outages, delays and other difficulties in the future due to system failures unrelated to our systems. Any significant interruptions in our services or increases in response time could result in a loss of potential or existing users of and advertisers and sponsors on our Web site and, if sustained or repeated, could reduce the attractiveness of our services. Some of our services require a continuous broadband connection between the physician's office and our data center and/or the Internet. The availability of broadband connectivity varies widely from location to location and even within a single geographic area, due to factors such as the distance of a site from the central switching office. The future availability of broadband connections is unpredictable and is not within our control. While we expect that many physician office locations will remain without ready access to broadband connectivity for some period of time, we cannot predict how long that will be. Accordingly, the lack of these broadband connections will continue to place limitations on the number of sites that are able to utilize our Internet-based services and the revenue we can expect to generate from those services. Our Internet platform infrastructure and scalability are not proven, and we may not be able to adequately accommodate increased functionality or usage To date, we have processed a limited number and variety of Internet transactions over our platforms. Similarly, a limited number of healthcare participants use these Internet platforms. Our systems may not accommodate increased use while maintaining acceptable overall performance. We must continue to expand and adapt our network infrastructure to accommodate additional users, increased transaction volumes and changing payer and provider customer requirements. Our business could be adversely affected if we cannot attract and retain key personnel Our future operating results substantially depend on the ability of our officers and key employees to manage changing business conditions and to implement and improve our technical, administrative, financial control and reporting systems. We need to attract, integrate, motivate and retain highly skilled technical people. In particular, we need to attract and retain experienced computer, engineering, marketing, management and other professionals capable of developing, selling and installing complex healthcare information systems. We face intense competition for these people. We face significant competition for our products and services The market for our services is intensely competitive, rapidly evolving and subject to rapid technological change. Many of our competitors have greater financial, technical, product development, marketing and other resources than we do. These organizations may be better known than we are and have more customers than we do. Many of our competitors have also announced or introduced Internet strategies that will compete with our applications and services. We may be unable to compete successfully against these organizations. For more information about our competitors, see "Business -- Competition" beginning on page 17. Our business may be subject to litigation Our business and operations may subject us to claims, litigation and other proceedings brought by private parties and governmental authorities. For information regarding certain proceedings to which we are currently a party, see "Legal Proceedings" beginning on page 23. Healthcare regulation could adversely affect our business The healthcare industry is highly regulated and is subject to changing political, regulatory and other influences. These factors affect the purchasing practices and operations of healthcare organizations. Federal and state legislatures and agencies periodically consider programs to reform or revise the U.S. healthcare system at both the federal and state levels. These programs may contain proposals to increase governmental involvement in healthcare, lower reimbursement rates or otherwise change the environment in which healthcare industry participants operate. Healthcare industry participants may respond by 43 46 reducing their investments or postponing investment decisions, including investments in our applications and services. We are unable to predict future proposals with any certainty or to predict the effect they would have on our business. Existing laws and regulations also could create liability, cause us to incur additional cost and restrict our operations. Many healthcare laws are complex, applied broadly and subject to interpretation by courts and other governmental authorities. In addition, many existing healthcare laws and regulations, when enacted, did not anticipate the methods of healthcare e-commence and other products and services that we provide. However, these laws and regulations may nonetheless be applied to our products and services. Our failure, or the failure of our business partners, to accurately anticipate the application of these healthcare laws, or other failure to comply, could create liability for us, result in adverse publicity and negatively affect our business. For more information regarding healthcare regulation to which we are or may be subject, see "Business -- Government regulation" beginning on page 18. We face potential liability related to the privacy and security of the patient health information we receive and transmit We receive, store and transmit individually identifiable patient information, which is or may be subject to various complex state and federal privacy laws, when we provide practice management services to physicians and when we process healthcare transactions. We have attempted to design our systems and structure our business relationships to comply with these laws. However, this area of the law is complex and these state and federal privacy laws are subject to interpretation by courts and other governmental authorities. In addition, determining whether we are in compliance with these laws can require complex factual analyses. For example, see "Legal Proceedings -- Quintiles v. WebMD" beginning on page 24. Moreover, this area of the law is constantly evolving and we may be held to new standards that our systems may not immediately meet or we may be subject to third party claims for privacy breaches that are inadvertent or the result of these evolving standards. New standards could require expensive new technologies and could affect our business operations and relationships. Claims of privacy breaches, even if we are not found liable, could be expensive and time-consuming to defend and could result in adverse publicity that could harm our business. For more information regarding regulation of patient information to which we may be subject, see "Business--Government regulation" beginning on page 18. Regulation of the Internet could adversely affect our business The Internet and its associated technologies are subject to government regulation. Our failure, or the failure of our business partners, to accurately anticipate the application of applicable laws and regulations, or any other failure to comply, could create liability for us, result in adverse publicity, or negatively affect our business. In addition, new laws and regulations, or new interpretations of existing laws and regulations, may be adopted with respect to the Internet or other online services covering user privacy, patient confidentiality, consumer protection and other issues, including: - pricing - content - copyrights and patents - distribution - characteristics and quality of products and services. We cannot predict whether laws or regulations will change or how such changes will affect our business. Government regulation of the Internet could limit the effectiveness of the Internet for the methods of healthcare e-commerce that we are providing or developing or even prohibit the sale of particular products and services. 44 47 For more information regarding government regulation of the Internet to which we are or may be subject, see "Business -- Government regulation" beginning on page 18. We face potential liability related to the privacy and security of personal information we collect on our Web sites Internet user privacy has become a controversial issue both in the U.S. and abroad. We have privacy policies posted on our consumer portal and our professional portal that we believe comply with applicable laws requiring notice to users about our information collection, use and disclosure practices. However, whether and how existing privacy and consumer protection laws in various jurisdictions apply to the Internet still is uncertain and may take years to resolve. Any legislation or regulation in the area of privacy of personal information could affect the way we operate our Web sites and could harm our business. Further, we can give no assurance that the statements on our portals, or our practices, will be found sufficient to protect us from liability or adverse publicity in this area. For more information regarding regulation of the collection, use and disclosure of personal information to which we may be subject, see "Business--Government regulation" beginning on page 18. Third parties may challenge the enforceability of our online agreements The law governing the validity and enforceability of online agreements and other electronic transactions is evolving. We could be subject to claims by third parties that our online agreements with consumers and physicians that provide the terms and conditions for use of our portal services and physician services are unenforceable. A finding by a court that these agreements are invalid could harm our business and require costly changes to our portals. Third parties may bring claims as a result of the activities of our strategic partners We could be subject to claims by third parties, and to liability, as a result of the activities, products or services of our strategic partners. We state on our portals that we do not control or endorse the products or services of our strategic partners. However, there can be no assurance that the statements made in our portal will be found to be sufficient to ensure that we are not held responsible for such activities, products or services. Furthermore, even if these claims do not result in liability to us, investigating and defending these claims could be expensive, time-consuming and result in adverse publicity that could harm our business. Third parties may bring claims against us as a result of content provided on our Web site, which may be expensive and time consuming to defend We could be subject to third party claims based on the nature and content of information supplied on our Web site by us or third parties, including content providers, medical advisors or users. We could also be subject to liability for content that may be accessible through our Web site or third party Web sites linked from our Web site or through content and information that may be posted by users in chat rooms, bulletin boards or on Web sites created by professionals using our Web site application. Even if these claims do not result in liability to us, investigating and defending against these claims could be expensive and time consuming and could divert management's attention away from operating the business. Our intellectual property may be subject to infringement claims or may be infringed upon Our intellectual property is important to our business. We could be subject to intellectual property infringement claims as the number of our competitors grows and the functionality of our applications overlaps with competitive offerings. These claims, even if not meritorious, could be expensive and divert management's attention from our operations. If we become liable to third parties for infringing their intellectual property rights, we could be required to pay a substantial damage award and to develop noninfringing technology, obtain a license or cease selling the applications that contain the infringing intellectual property. We may be unable to develop noninfringing technology or obtain a license on commercially reasonable terms, or at all. In addition, we may not be able to protect against 45 48 misappropriation of our intellectual property. Third parties may infringe upon our intellectual property rights. If we do not detect any unauthorized use, we may be unable to enforce our rights. The proposed disposition of our plastics and filtration technologies business may not be completed in the manner expected or at all If our proposed disposition of Porex fails to be completed, is not completed in a timely manner or does not provide us with the proceeds anticipated, we may not be able to execute strategies that are important to our business. We cannot guarantee that the disposition of Porex will be successfully completed in the manner planned, or at all. Failure to successfully complete this proposed disposition as anticipated or to complete it in a timely manner could have a material adverse effect on our business, financial condition and results of operations. Until we dispose of our plastics and filtration technologies business, we will be subject to risks associated with that business Until the proposed disposition of our plastic and filtration technologies business is completed, we will continue to operate that business and to be subject to additional risks associated with that business, which include: We face significant competition for the products and services of our plastic and filtration technologies business. Competition in our plastics and filtration technology business is characterized by the introduction of competitive products at lower prices. We believe that Porex's principal competitive strengths are its manufacturing processes, quality control, relationships with its customers and distribution of its proprietary healthcare products. In the porous plastics area, Porex's competitors include other producers of porous plastic materials as well as companies that manufacture and sell products made from materials other than porous plastics which can be used for the same purposes as Porex's products. In this area, Porex has several direct competitors in the U.S., Europe and Asia. Porex's porous plastic pen nibs compete with felt and fiber tips manufactured by a variety of suppliers worldwide. Other Porex industrial products made of porous plastic compete, depending on the industrial application, with porous metals, metal screens, fiberglass tubes, pleated paper, resin-impregnated felt, ceramics and other substances and devices. The market for Porex's injection molded solid plastic components and products, including its medical products, is highly competitive and highly fragmented. Porex's pipette tips and racks also compete with similar products manufactured by domestic and foreign manufacturers. Porex's injection molding and mold making services compete with services offered by several foreign and domestic companies. The MEDPOR(R) Biomaterial products compete for surgical use against autogenous and allograph materials and alloplastic biomaterials. Porex's surgical drains and markers compete against a variety of products from several manufacturers. Healthcare regulation could adversely affect our plastics and filtration technologies business. Porex manufactures and distributes medical/surgical devices, such as plastic and reconstructive surgical implants and tissue expanders, which are subject to government regulations, under the FDA Act and additional regulations promulgated by the FDA. Future healthcare products may also be subject to these regulations and approval processes. Compliance with these regulations and the process of obtaining approvals can be costly, complicated and time-consuming, and we cannot assure you that these approvals will be granted on a timely basis, if ever. The nature of Porex's products exposes it to product liability claims and may make it difficult to get adequate insurance coverage. The products sold by Porex expose it to potential risk for product liability claims, particularly with respect to Porex's life sciences, clinical, surgical and medical products. We believe that Porex carries adequate insurance coverage against product liability claims and other risks. We cannot assure you, however, that claims in excess of Porex's insurance coverage will not arise. In addition, Porex's insurance policies must be renewed annually. Although Porex has been able to obtain adequate insurance 46 49 coverage at an acceptable cost in the past and believes that it is adequately indemnified for products manufactured by others and distributed by it, we cannot assure you that in the future Porex will be able to obtain this insurance at an acceptable cost or be adequately protected by this indemnification. Since March 1991, Porex has been named as one of many co-defendants in a number of actions brought by recipients of silicone gel mammary implants. For more information regarding these actions, see "Legal Proceedings -- Porex Mammary Implant Litigation" on page 23. Our stock price has been volatile in the past and may continue to be volatile The market prices of Internet and healthcare information technology stocks in general, and of our common stock in particular, have experienced large fluctuations, sometimes quite rapidly. Changes in the market price of our common stock may result from numerous factors, including the factors discussed in "Market for Registrant's Common Equity and Related Stockholder Matters" on page 26. In addition, any change in investors' perceptions of the performance and prospects of Internet or healthcare information technology stocks may result in a decrease in the market price of our common stock, whether or not related to or indicative of our performance or prospects. Sales of large amounts of our shares and the lapse of transfer restrictions could adversely affect prevailing stock prices Sales of substantial amounts of our common stock in the public market, or the perception that these sales may occur, could materially and adversely affect the prevailing market prices for our common stock and make it more difficult for us to raise capital through the sale of equity or equity-related securities in the future. Substantial amounts of our outstanding common stock will become freely transferable from time to time until the second quarter of 2002, as contractual restrictions on transfer lapse. Additional amounts of our common stock will also become available for sale, from time to time, as holding periods under applicable securities regulations are met. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE SENSITIVITY The primary objective of our investment activities is to preserve principal, and maintain adequate liquidity, while at the same time maximizing the yield we receive from our investment portfolio. This 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 principle amount of the investment to fluctuate. To minimize this risk, we maintain our portfolio of cash equivalents, short-term investments and marketable securities in commercial paper, non-government debt securities, money market funds and highly liquid U.S. Treasury notes and federal agency notes. We view these high grade securities within our portfolio as having similar market risk characteristics. As a result, we have changed our presentation of market risk from the tabular disclosure in prior years. The weighted-average interest rate of the portfolio was 6.24% at December 31, 2000. Principal amounts expected to mature are $0 million, $129.8 million, $38.8 million, $51.0 million and $0 million for 2001, 2002, 2003, 2004 and 2005, respectively. We had investments totaling $119.0 million in U.S. Treasury Notes and federal agency notes that were callable subjecting us to reinvestment risk on these securities. We have not utilized derivative financial instruments in our investment portfolio. EXCHANGE RATE SENSITIVITY Currently the majority of our sales and expenses are denominated in U.S. dollars and, as a result, we have experienced no significant foreign exchange gains and losses to date. We conduct only limited 47 50 transactions in foreign currencies, and we do not anticipate that foreign exchange gains or losses will be significant in the foreseeable future. We have not engaged in foreign currency hedging activities to date. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FINANCIAL STATEMENTS Our financial statements required by this item are submitted as a separate section of this Form 10-K. See Item 14(a)(1) for a listing of financial statements provided. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 48 51 PART III Information required by Items 10, 11, 12 and 13 of Part III is omitted from this annual report and will be filed in a definitive proxy statement or by an amendment to this annual report not later than 120 days after the end of the fiscal year covered by this annual report. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT We will provide information that is responsive to this Item 10 regarding our directors and executive officers in our definitive proxy statement or in an amendment to this annual report not later than 120 days after the end of the fiscal year covered by this annual report, in either case under the caption "Directors and Executive Officers," and possibly elsewhere therein. That information is incorporated in this Item 10 by reference. ITEM 11. EXECUTIVE COMPENSATION We will provide information that is responsive to this Item 11 regarding compensation paid to our executive officers in our definitive proxy statement or in an amendment to this annual report not later than 120 days after the end of the fiscal year covered by this annual report, in either case under the caption "Executive Compensation," and possibly elsewhere therein. That information is incorporated in this Item 11 by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT We will provide information that is responsive to this Item 12 regarding ownership of our securities by some beneficial owners and our directors and executive officers in our definitive proxy statement or in an amendment to this annual report not later than 120 days after the end of the fiscal year covered by this annual report, in either case under the caption "Security Ownership of Certain Beneficial Owners and Management," and possibly elsewhere therein. That information is incorporated in this Item 12 by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS We will provide information that is responsive to this Item 13 regarding transactions with related parties in our definitive proxy statement or in an amendment to this annual report not later than 120 days after the end of the fiscal year covered by this annual report, in either case under the caption "Related Party Transactions," and possibly elsewhere therein. That information is incorporated in this Item 13 by reference. 49 52 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) FINANCIAL STATEMENTS, FILED AS PART OF THIS REPORT - Report of Independent Auditors - Consolidated Balance Sheets as of December 31, 2000 and 1999 - Consolidated Statements of Operations for the Years Ended December 31, 2000, 1999 and 1998 - Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2000, 1999 and 1998 - Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998 - Notes to Consolidated Financial Statements (a)(2) FINANCIAL STATEMENT SCHEDULES Financial statement schedules are omitted because the information called for is not required or is shown either in the consolidated financial statements or the notes thereto. (a)(3) EXHIBITS See "Index to Exhibits" beginning on page E-1, which is incorporated by reference herein. (b) REPORTS ON FORM 8-K During the last quarter of the fiscal year ended December 31, 2000, the Registrant filed the following reports on Form 8-K: - Report on Form 8-K filed on October 13, 2000 pursuant to which the Registrant reported the resignation of Jeffrey T. Arnold as Co-Chief Executive Officer and the resignations of Mr. Arnold and James H. Clark from its Board of Directors - Report on Form 8-K filed on October 31, 2000 pursuant to which the Registrant sought to provide guidance to any persons seeking to locate documents filed by the Registrant with the Securities and Exchange Commission - Report on Form 8-K filed on November 8, 2000 pursuant to which the Registrant sought to provide guidance to any persons seeking to locate documents filed by the Registrant with the Securities and Exchange Commission - Report on Form 8-K/A filed on November 27, 2000 pursuant to which the Registrant provided financial statements and pro forma information regarding its acquisitions of Medical Manager and CareInsite 50 53 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereto duly authorized, on the 30th day of March, 2001. WEBMD CORPORATION By: /s/ Anthony Vuolo ----------------------------------- Anthony Vuolo Executive Vice President and Chief Financial Officer POWER OF ATTORNEY KNOW BY ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints jointly and severally, Anthony Vuolo and Charles A. Mele, and each one of them, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ Martin J. Wygod Chairman of the Board of Directors March 30, 2001 - ------------------------------------ and Chief Executive Officer Martin J. Wygod (principal executive officer) /s/ Anthony Vuolo Executive Vice President and Chief March 30, 2001 - ------------------------------------ Financial Officer (principal Anthony Vuolo financial and accounting officer) /s/ Mark J. Adler, M.D. Director March 30, 2001 - ------------------------------------ Mark J. Adler, M.D. /s/ Paul A. Brooke Director March 30, 2001 - ------------------------------------ Paul A. Brooke /s/ Dennis B. Gillings Director March 30, 2001 - ------------------------------------ Dennis B. Gillings /s/ James V. Manning Director March 30, 2001 - ------------------------------------ James V. Manning /s/ Marvin P. Rich Director March 30, 2001 - ------------------------------------ Marvin P. Rich
51 54
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ Herman Sarkowsky Director March 30, 2001 - ------------------------------------ Herman Sarkowsky /s/ Michael A. Singer Director March 30, 2001 - ------------------------------------ Michael A. Singer /s/ Joseph E. Smith Director March 30, 2001 - ------------------------------------ Joseph E. Smith
52 55 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders WebMD Corporation We have audited the accompanying consolidated balance sheets of WebMD Corporation (formerly Healtheon/WebMD Corporation) as of December 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity (net capital deficiency), and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of WebMD Corporation at December 31, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Atlanta, Georgia March 21, 2001 F-1 56 WEBMD CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ------------------------ 2000 1999 ---------- ---------- ASSETS Current assets: Cash and cash equivalents................................. $ 490,797 $ 285,619 Short-term investments.................................... -- 5,667 Accounts receivable, net of allowance for doubtful accounts of $26,205 in 2000 and $2,681 in 1999.......... 195,071 51,511 Current portion prepaid content, services and distribution............................................ 5,268 5,436 Assets held for sale...................................... 214,556 -- Other current assets...................................... 38,941 15,372 ---------- ---------- Total current assets............................... 944,633 363,605 Marketable securities....................................... 219,686 -- Property and equipment, net................................. 90,356 48,384 Prepaid content, services and distribution.................. 229,081 273,038 Goodwill, net............................................... 6,329,739 3,111,618 Other intangible assets, net................................ 439,455 317,147 Other assets................................................ 202,681 9,876 ---------- ---------- $8,455,631 $4,123,668 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable............................................. $ 1,838 $ -- Accounts payable.......................................... 17,725 34,514 Accrued expenses.......................................... 270,194 105,615 Deferred revenue.......................................... 45,891 4,891 Current portion of capital lease obligations.............. 2,738 2,281 ---------- ---------- Total current liabilities.......................... 338,386 147,301 Other long-term liabilities................................. 15,260 2,695 Series B convertible redeemable preferred stock, $.0001 par value; 200 shares authorized; 100 shares issued at December 31, 2000......................................... 10,000 -- Commitments and contingencies Stockholders' equity: Preferred stock, $.0001 par value; 5,000,000 shares authorized: Series A convertible preferred stock; 213,000 shares authorized; 155,951 shares issued at December 31, 2000.................................................... 710,746 -- Common stock, $.0001 par value; 2000: 600,000,000 shares authorized; 361,233,643 shares issued; 1999: 600,000,000 shares authorized; 153,569,296 shares issued............ 36 16 Additional paid-in capital................................ 11,028,461 4,370,165 Treasury stock, 5,163,509 shares at cost at December 31, 2000.................................................... (30,759) -- Unrealized gain on marketable securities.................. 4,996 -- Deferred stock compensation............................... (144,467) (5,089) Accumulated deficit....................................... (3,477,028) (391,420) ---------- ---------- 8,091,985 3,973,672 ---------- ---------- $8,455,631 $4,123,668 ========== ==========
See accompanying notes. F-2 57 WEBMD CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEARS ENDED DECEMBER 31, --------------------------------------- 2000 1999 1998 ----------- ----------- ----------- Revenue(1).............................................. $ 517,153 $ 102,149 $ 48,838 Costs and expenses: Cost of operations................................. 383,565 88,576 43,014 Development and engineering........................ 58,788 29,669 19,002 Sales, marketing, general and administrative....... 530,927 82,315 25,605 Depreciation, amortization and other............... 2,186,986 193,067 16,055 Restructuring and integration charge............... 452,919 -- -- Loss on investments................................ 39,602 -- -- Interest income, net............................... 50,026 3,486 790 ----------- ----------- ----------- Net loss................................................ $(3,085,608) $ (287,992) $ (54,048) =========== =========== =========== Basic and diluted net loss per common share............. $ (12.61) $ (3.58) $ (1.54) =========== =========== =========== Weighted-average shares outstanding used in computing basic and diluted net loss per common share........... 244,688,375 80,366,695 34,986,660 =========== =========== ===========
- --------------- (1) Includes revenue from related parties of $45,277, $37,210 and $20,956 for the years ended December 31, 2000, 1999 and 1998, respectively. See accompanying notes. F-3 58 WEBMD CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
STOCKHOLDERS' EQUITY ---------------------------------------------- CONVERTIBLE REDEEMABLE CONVERTIBLE PREFERRED STOCK PREFERRED STOCK COMMON STOCK --------------------- ---------------------- --------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ----------- ------- ----------- -------- ----------- ------- Balance at December 31, 1997...................... 16,488,860 $50,948 21,002,692 $ 43,756 9,436,724 $ 1 Net loss and comprehensive loss................... -- -- -- -- -- -- Issuance of common stock for option and restricted stock exercises.................................. -- -- -- -- 3,532,731 -- Repurchase of employee common stock............... -- -- -- -- (714,896) -- Issuance of Series B convertible preferred stock for warrant exercise............................. -- -- 1,017,229 2,034 -- -- Issuance of Series D convertible redeemable preferred stock for asset purchase............... 763,548 2,800 -- -- -- -- Dividends accrued on convertible redeemable preferred stock.................................. -- 890 -- -- -- -- Conversion of redeemable preferred and preferred stock to common stock............................ (17,252,408) (54,638) (22,019,921) (45,790) 39,272,329 4 Issuance of Series A convertible preferred stock............................................ -- -- 7,683,341 46,101 -- -- Issuance of common stock for asset purchases...... -- -- -- -- 2,936,209 -- Repayment of note receivable from officer......... -- -- -- -- -- -- Deferred stock compensation....................... -- -- -- -- -- -- Amortization of deferred stock compensation....... -- -- -- -- -- -- ----------- ------- ----------- -------- ----------- ------- Balance at December 31, 1998...................... -- -- 7,683,341 46,101 54,463,097 5 Net loss and comprehensive loss................... -- -- -- -- -- -- Issuance of common stock for option exercises, warrant exercises and ESPP issuances............. -- -- -- -- 7,113,128 1 Repurchase of employee common stock............... -- -- -- -- (147,201) -- Issuance of common stock in connection with initial public offering, net of issuance costs of $4,602........................................... -- -- -- -- 5,750,000 1 Conversion of preferred stock to common stock in connection with initial public offering.......... -- -- (7,683,341) (46,101) 7,683,341 1 Issuance of common stock for services............. -- -- -- -- 8,020 -- Issuance of common stock for asset purchase....... -- -- -- -- 1,833,333 -- Issuance of common stock and assumption of options and warrants in connection with the 1999 mergers.......................................... -- -- -- -- 76,865,578 8 Deferred stock compensation....................... -- -- -- -- -- -- Adjustment to deferred stock compensation for terminations..................................... -- -- -- -- -- -- Amortization of deferred stock compensation....... -- -- -- -- -- -- ----------- ------- ----------- -------- ----------- ------- Balances at December 31, 1999..................... -- -- -- -- 153,569,296 16 Net loss.......................................... -- -- -- -- -- -- Unrealized gains on securities.................... -- -- -- -- -- -- Comprehensive loss................................ -- -- -- -- -- -- Issuance of common stock for option exercises, warrant exercises, ESPP and 401(K) issuances..... -- -- -- -- 9,106,550 1 Issuance of stock in connection with private placements, strategic alliances and services..... -- -- 155,951 602,550 17,071,930 2 Reacquisition of warrants in connection with termination of a strategic alliance.............. -- -- -- -- -- -- Accretion of preferred stock...................... -- -- -- 108,196 -- -- Issuance of common stock and assumption of options and warrants in connection with the 2000 mergers.......................................... 100 10,000 -- -- 181,485,867 17 Deferred stock compensation....................... -- -- -- -- -- -- Amortization of deferred stock compensation....... -- -- -- -- -- -- Purchase of treasury stock........................ -- -- -- -- -- -- Stock compensation for terminations............... -- -- -- -- -- -- ----------- ------- ----------- -------- ----------- ------- Balances at December 31, 2000..................... 100 $10,000 155,951 $710,746 361,233,643 $ 36 =========== ======= =========== ======== =========== ======= STOCKHOLDERS' EQUITY ---------------------------------------------------------------- NOTE ADDITIONAL RECEIVABLE DEFERRED PAID-IN FROM STOCK TREASURY ACCUMULATED CAPITAL OFFICER COMPENSATION STOCK DEFICIT ----------- ---------- ------------ -------- ----------- Balance at December 31, 1997...................... $ 4,502 $(349) $ (2,151) $ -- $ (55,689) Net loss and comprehensive loss................... -- -- -- -- (54,048) Issuance of common stock for option and restricted stock exercises.................................. 5,849 -- -- -- -- Repurchase of employee common stock............... (2,176) -- -- -- -- Issuance of Series B convertible preferred stock for warrant exercise............................. -- -- -- -- -- Issuance of Series D convertible redeemable preferred stock for asset purchase............... -- -- -- -- -- Dividends accrued on convertible redeemable preferred stock.................................. -- -- -- -- -- Conversion of redeemable preferred and preferred stock to common stock............................ 94,115 -- -- -- 6,309 Issuance of Series A convertible preferred stock............................................ -- -- -- -- -- Issuance of common stock for asset purchases...... 13,220 -- -- -- -- Repayment of note receivable from officer......... -- 349 -- -- -- Deferred stock compensation....................... 8,160 -- (8,160) -- -- Amortization of deferred stock compensation....... -- -- 3,376 -- -- ----------- ----- --------- -------- ----------- Balance at December 31, 1998...................... 123,670 -- (6,935) -- (103,428) Net loss and comprehensive loss................... -- -- -- -- (287,992) Issuance of common stock for option exercises, warrant exercises and ESPP issuances............. 21,919 -- -- -- -- Repurchase of employee common stock............... (608) -- -- -- -- Issuance of common stock in connection with initial public offering, net of issuance costs of $4,602........................................... 41,398 -- -- -- -- Conversion of preferred stock to common stock in connection with initial public offering.......... 46,100 -- -- -- -- Issuance of common stock for services............. 48 -- -- -- -- Issuance of common stock for asset purchase....... 11,000 -- -- -- -- Issuance of common stock and assumption of options and warrants in connection with the 1999 mergers.......................................... 4,120,851 -- -- -- -- Deferred stock compensation....................... 6,261 -- (6,261) -- -- Adjustment to deferred stock compensation for terminations..................................... (474) -- 474 -- -- Amortization of deferred stock compensation....... -- -- 7,633 -- -- ----------- ----- --------- -------- ----------- Balances at December 31, 1999..................... 4,370,165 -- (5,089) -- (391,420) Net loss.......................................... -- -- -- -- (3,085,608) Unrealized gains on securities.................... -- -- -- -- -- Comprehensive loss................................ -- -- -- -- -- Issuance of common stock for option exercises, warrant exercises, ESPP and 401(K) issuances..... 35,581 -- -- -- -- Issuance of stock in connection with private placements, strategic alliances and services..... 1,019,183 -- -- -- -- Reacquisition of warrants in connection with termination of a strategic alliance.............. (33,199) -- -- -- -- Accretion of preferred stock...................... -- -- -- -- -- Issuance of common stock and assumption of options and warrants in connection with the 2000 mergers.......................................... 5,499,835 -- (117,402) -- -- Deferred stock compensation....................... 83,752 -- (94,435) -- -- Amortization of deferred stock compensation....... -- -- 72,459 -- -- Purchase of treasury stock........................ -- -- -- (30,759) -- Stock compensation for terminations............... 53,144 -- -- -- -- ----------- ----- --------- -------- ----------- Balances at December 31, 2000..................... $11,028,461 $ -- $(144,467) $(30,759) $(3,477,028) =========== ===== ========= ======== =========== STOCKHOLDERS' EQUITY ----------------------------- TOTAL ACCUMULATED STOCKHOLDERS' OTHER EQUITY COMPREHENSIVE (NET CAPITAL INCOME DEFICIENCY) ------------- ------------- Balance at December 31, 1997...................... $ -- $ (9,930) Net loss and comprehensive loss................... -- (54,048) Issuance of common stock for option and restricted stock exercises.................................. -- 5,849 Repurchase of employee common stock............... -- (2,176) Issuance of Series B convertible preferred stock for warrant exercise............................. -- 2,034 Issuance of Series D convertible redeemable preferred stock for asset purchase............... -- -- Dividends accrued on convertible redeemable preferred stock.................................. -- -- Conversion of redeemable preferred and preferred stock to common stock............................ -- 54,638 Issuance of Series A convertible preferred stock............................................ -- 46,101 Issuance of common stock for asset purchases...... -- 13,220 Repayment of note receivable from officer......... -- 349 Deferred stock compensation....................... -- -- Amortization of deferred stock compensation....... -- 3,376 ------ ----------- Balance at December 31, 1998...................... -- 59,413 Net loss and comprehensive loss................... -- (287,992) Issuance of common stock for option exercises, warrant exercises and ESPP issuances............. -- 21,920 Repurchase of employee common stock............... -- (608) Issuance of common stock in connection with initial public offering, net of issuance costs of $4,602........................................... -- 41,399 Conversion of preferred stock to common stock in connection with initial public offering.......... -- -- Issuance of common stock for services............. -- 48 Issuance of common stock for asset purchase....... -- 11,000 Issuance of common stock and assumption of options and warrants in connection with the 1999 mergers.......................................... -- 4,120,859 Deferred stock compensation....................... -- -- Adjustment to deferred stock compensation for terminations..................................... -- -- Amortization of deferred stock compensation....... -- 7,633 ------ ----------- Balances at December 31, 1999..................... -- 3,973,672 Net loss.......................................... -- (3,085,608) Unrealized gains on securities.................... 4,996 4,996 ----------- Comprehensive loss................................ -- (3,080,612) Issuance of common stock for option exercises, warrant exercises, ESPP and 401(K) issuances..... -- 35,582 Issuance of stock in connection with private placements, strategic alliances and services..... -- 1,621,735 Reacquisition of warrants in connection with termination of a strategic alliance.............. -- (33,199) Accretion of preferred stock...................... -- 108,196 Issuance of common stock and assumption of options and warrants in connection with the 2000 mergers.......................................... -- 5,382,450 Deferred stock compensation....................... -- (10,683) Amortization of deferred stock compensation....... -- 72,459 Purchase of treasury stock........................ -- (30,759) Stock compensation for terminations............... -- 53,144 ------ ----------- Balances at December 31, 2000..................... $4,996 $ 8,091,985 ====== ===========
See accompanying notes. F-4 59 WEBMD CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------------- 2000 1999 1998 ----------- ---------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $(3,085,608) $ (287,992) $(54,048) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation, amortization and other.................... 2,186,986 193,067 16,055 Amortization of non-cash prepaid content, services and distribution........................................... 87,473 -- -- Amortization of non-cash deferred stock compensation.... 72,459 7,633 3,376 Non-cash portion of restructuring charge................ 380,013 -- -- Loss on investments..................................... 39,602 -- -- Changes in operating assets and liabilities: Accounts receivable................................... (31,419) (20,653) (3,510) Other assets.......................................... 16,342 (9,051) 5,184 Accounts payable...................................... (45,441) (29,356) 2,857 Accrued expenses...................................... (90,372) 61,283 4,996 Prepaid content, services and distribution............ 5,171 6,066 -- Deferred revenue...................................... 3,223 3,017 (1,522) ----------- ---------- -------- Net cash used in operating activities..................... (461,571) (75,986) (26,612) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of short-term investments........................ -- (23,954) (22,529) Maturities of short-term investments...................... 5,667 35,715 10,401 Purchases of long-term investments........................ (49,600) -- -- Purchases of property and equipment....................... (30,221) (27,045) (6,340) Cash paid in business combination, net of cash acquired... (286,851) 296,450 (652) ----------- ---------- -------- Net cash (used in) provided by investing activities....... (361,005) 281,166 (19,120) CASH FLOWS FROM FINANCING ACTIVITIES: Payment of notes payable and line of credit borrowings.... -- (1,428) (2,212) Proceeds from issuance of preferred stock................. -- -- 48,135 Proceeds from issuance of common stock.................... 1,065,848 62,711 3,673 Purchase of treasury shares............................... (30,759) -- -- Principal payments of capital lease obligations........... (7,335) (233) (979) ----------- ---------- -------- Net cash provided by financing activities................. 1,027,754 61,050 48,617 ----------- ---------- -------- Net increase in cash and cash equivalents................... 205,178 266,230 2,885 Cash and cash equivalents at beginning of year.............. 285,619 19,389 16,504 ----------- ---------- -------- Cash and cash equivalents at end of year.................... $ 490,797 $ 285,619 $ 19,389 =========== ========== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid............................................. $ 651 $ 527 $ 350 =========== ========== ======== SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Issuance of equity securities in connection with business combinations, strategic alliances and services, and asset purchases......................................... $ 7,014,185 $4,131,907 $ 16,020 =========== ========== ======== Value of warrant issued in connection with service agreement............................................... $ -- $ -- $ 830 =========== ========== ======== Equipment acquired under capital lease obligations........ $ 215 $ 9,374 $ 6,481 =========== ========== ======== Deferred stock compensation related to acquisitions and options granted......................................... $ 211,837 $ 6,261 $ 8,160 =========== ========== ======== Conversion of convertible redeemable preferred and convertible preferred stock to common stock............. $ -- $ 46,101 $ 94,119 =========== ========== ========
See accompanying notes. F-5 60 WEBMD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS WebMD Corporation (the "Company") was incorporated in December 1995 and commenced operations in January 1996, as Healtheon Corporation. In May 1998, the Company merged with ActaMed Corporation ("ActaMed") in a transaction accounted for as a pooling of interests. In November 1999, the Company completed the acquisitions of WebMD, Inc., MedE America Corporation ("MedE America") and Greenberg News Networks, Inc. ("Medcast") and changed its name from Healtheon Corporation to Healtheon/WebMD Corporation. In January 2000, the Company completed its acquisition of Kinetra LLC ("Kinetra"). In May 2000, the Company completed its acquisition of Envoy Corporation ("Envoy"). In September 2000, the Company completed its acquisitions of Medical Manager Corporation ("Medical Manager"), CareInsite, Inc. ("CareInsite") and OnHealth Network Company ("OnHealth") and changed its name from Healtheon/WebMD Corporation to WebMD Corporation. All financial information has been presented to reflect the combined operations of the Company and ActaMed for all years presented and for the WebMD, Inc., MedE America, Medcast, Envoy, Medical Manager, CareInsite and OnHealth acquisitions for the period subsequent to each respective acquisition date. The Company provides a range of transaction and information services and technology solutions for participants across the entire continuum of healthcare, including physicians and other healthcare providers, payers, patients and suppliers. The Company's products and services promote administrative efficiency and assist in reducing the cost of healthcare and creating better patient outcomes. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries after elimination of all material intercompany accounts and transactions. ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from these estimates. CASH AND CASH EQUIVALENTS All highly liquid investments with an original maturity from the date of purchase of three months or less are considered to be cash equivalents. These short-term investments are stated at cost, which approximates market. The Company's cash and cash equivalents are invested in various investment-grade commercial paper, money market accounts and certificates of deposit. MARKETABLE SECURITIES Management determines the appropriate classification of its investments in debt securities at the time of purchase and re-evaluates such determinations at each balance sheet date. Debt securities are classified as held to maturity when the Company has the positive intent and ability to hold the securities to maturity. Debt securities which the Company does not have the intent or ability to hold to maturity are classified as available-for-sale. Available-for-sale securities are carried at fair value as of the balance sheet date. At December 31, 2000, the Company's investments consisted principally of U.S. Treasury Notes and Federal Agency Notes. These investments had an aggregate market value of $219,686 at December 31, 2000. Of the investments at December 31, 2000, debt securities with a cost of $214,690 were classified as F-6 61 WEBMD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) available-for-sale. Unrealized gains on these securities were $4,996 at December 31, 2000. There were no marketable securities held as of December 31, 1999. PROPERTY AND EQUIPMENT Property and equipment are stated at cost, net of accumulated amortization and depreciation. Depreciation is computed using the straight-line method over the estimated useful life of the related asset, generally three to seven years for equipment and up to thirty-nine years for buildings. Leasehold improvements and equipment acquired under capital leases are amortized over the shorter of the lease term or the estimated useful life of the related asset. Expenditures for maintenance, repair and renewals of minor items are charged to expense as incurred. Major betterments are capitalized. GOODWILL AND INTANGIBLE ASSETS Goodwill and intangible assets result from acquisitions accounted for under the purchase method. Amortization of intangible assets is computed on the straight-line basis over the respective estimated useful lives of the assets. Goodwill is being amortized over estimated useful lives of three to four years. Intangible assets related to acquired technology, customer lists, trademarks and other intangibles are being amortized on a straight-line basis over the estimated useful life of the related asset, generally one to fifteen years. The Company periodically evaluates whether changes have occurred that would require revision of the remaining estimated useful life of the assigned goodwill or intangible assets or render the goodwill or intangible assets not recoverable. If such circumstances arise, the Company would use an estimate of the undiscounted value of expected operating cash flows to determine whether the goodwill or intangibles are impaired. To date, no impairment indicators have been identified. SOFTWARE DEVELOPMENT COSTS Software to be Sold, Leased or Otherwise Marketed Statement of Financial Accounting Standards ("SFAS") No. 86 "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," requires the capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based upon the Company's product development process, technological feasibility is established upon the completion of a working model. There were no software costs capitalized in 2000, 1999 or 1998. Internal Use Software The Company accounts for internal use software development costs in accordance with Statement of Position No. 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Software development costs that are incurred in the preliminary project stage are expensed as incurred. Once the specified criteria of SOP 98-1 have been met, internal and external direct costs incurred in developing or obtaining computer software are capitalized. Training and data conversion costs are expensed as incurred. As of December 31, 2000, net capitalized software costs totaled $11,184. Capitalized software costs are amortized over a three-year period. In 2000, the Company capitalized $3,422 of internal direct costs in connection with the implementation of certain software projects. There were no such costs capitalized in 1999 or 1998. REVENUE RECOGNITION Revenue is derived from the Company's transaction services, physician services and portal services. The Company's transaction services include administrative services, such as transaction processing for medical, dental and pharmacy claims, and clinical lab and reporting services, such as lab test orders and F-7 62 WEBMD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) results. Transaction fees for providers vary according to the type of transaction and customer and market segments. Healthcare payers also pay fees to the Company for these services, generally on a per transaction basis. Transaction fees for payers vary according to the type of transaction and other factors, such as volume level commitments. The Company may also charge one-time implementation fees to providers and payers. Healthcare providers also pay the Company transaction fees for these services, either on a per transaction basis or as a flat rate per month. The Company's physician services include sales of The Medical Manager practice management system, which addresses the administrative, financial, clinical and practice management needs of physician practices, and subscription fees to the Company's physician portal, WebMD Practice. Portal services include advertising, sponsorship, content syndication and distribution and e-commerce transactions related to our Web site or a co-branded Web site with one of our online partners. Revenue from transaction fees is recognized as the services are provided. The Company follows Statement of Position No. 97-2, "Revenue Recognition," ("SOP 97-2"), as amended by SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions," for its software licenses. Revenue related to software license fees is recognized when a customer enters into a noncancelable 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. Additionally, SOP 97-2 requires the total contract revenue to be allocated to the various elements of the contract based upon objective evidence of the fair values of such elements and allows for only the allocated revenue to be recognized upon completion of those elements. Amounts billed in advance of recognized revenue are deferred. Revenue from support and maintenance contracts is recognized ratably over the contract period, which typically does not exceed one year. Revenue from transaction services, which are generally priced on a per transaction or monthly basis, is recognized when the services are performed. Revenue from advertising is recognized as advertisements are run on the Company's Web site or on co-branded Web sites. Subscription revenue, including subscription revenue from sponsorship arrangements, is recognized as subscriptions are placed with physicians. Revenue from fixed fee content license or carriage fees is recognized ratably over the term of the applicable agreement. E-commerce revenue is recognized when a subscriber or consumer utilizes the Company's Internet-based services or purchases goods or services through the Company's Web site or co-branded Web site with one of its strategic partners. Certain agreements entered into by the Company included the issuance of equity securities by the Company. The Company recognizes revenue related to the nonmonetary exchange of advertising for advertising when such exchanges are objectively determinable based on the criteria set forth in Accounting Principles Board Opinion No. 29, "Accounting for Nonmonetary Transactions." Revenue recognized from arrangements deemed to be nonmonetary exchanges of the Company's products and services for customer products and services totaled approximately $21,743 and $6,000 in 2000 and 1999, respectively. Revenues from these exchanges are recorded at the fair value of the products and services provided or received, whichever is more clearly evident. The costs in 2000 and 1999, respectively, related to these transactions were $21,743 and $6,000. CONCENTRATION OF CREDIT RISK Three of the Company's customers, SmithKline Beecham Clinical Laboratories, Inc. ("SmithKline Labs"), which was acquired by Quest Diagnostics Incorporated, Beech Street Corporation and UnitedHealth Group, each accounted for more than 10% of its revenue in 1999, and together accounted F-8 63 WEBMD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) for approximately 40.7% of its revenue for the same period. None of the Company's customers individually accounted for more than 10% of the Company's revenue in 2000. ADVERTISING COSTS Advertising production costs are recorded as expense the first time an advertisement appears. The costs of communicating advertising are incurred and expensed as the advertisement is broadcast in accordance with Statement of Position No. 93-7, "Reporting on Advertising Costs." All other advertising costs are expensed as incurred. Advertising expense totaled approximately $52,779 and $9,132 in 2000 and 1999, respectively, and was not material in 1998. INCOME TAXES Income taxes have been provided using the liability method in accordance with SFAS No. 109, "Accounting for Income Taxes." ACCOUNTING FOR STOCK-BASED COMPENSATION As permitted under SFAS No. 123, "Accounting for Stock-Based Compensation," the Company accounts for stock option grants to employees and directors in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." NET LOSS PER COMMON SHARE Basic net loss per common share and diluted net loss per common share are presented in conformity with SFAS No. 128, "Earnings Per Share," for all periods presented. In accordance with SFAS No. 128, basic net loss per common share has been computed using the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. On May 19, 1998, in connection with the Company's merger with ActaMed, all outstanding shares of the Company's convertible preferred stock and ActaMed's convertible redeemable preferred stock were converted into an aggregate of 39,272,329 shares of common stock. The following table presents the calculation of basic and diluted net loss per common share:
YEARS ENDED DECEMBER 31, ---------------------------------------- 2000 1999 1998 ------------ ----------- ----------- Net loss............................................... $ (3,085,608) $ (287,992) $ (54,048) ============ =========== =========== Basic and diluted: Weighted-average shares of common stock outstanding....................................... 244,688,375 81,330,212 36,417,963 Less: Weighted-average shares subject to repurchase........................................ -- (963,517) (1,431,303) ------------ ----------- ----------- Weighted-average shares used in computing basic and diluted net loss per common share................. 244,688,375 80,366,695 34,986,660 ============ =========== =========== Basic and diluted net loss per common share............ $ (12.61) $ (3.58) $ (1.54) ============ =========== ===========
The Company has excluded all convertible redeemable preferred stock, convertible preferred stock, warrants, outstanding stock options and shares subject to repurchase by the Company from the calculation of diluted loss per common share because all such securities are anti-dilutive for all periods presented. The total number of shares excluded from the calculation of diluted loss per share was 169,664,930 in 2000, 63,898,198 in 1999, and 23,020,426 in 1998. F-9 64 WEBMD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SEGMENT INFORMATION SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" establishes standards for reporting information about operating segments in annual financial statements of public business enterprises and requires that those enterprises report selected information about operating segments in interim financial reports issued to stockholders. The Company is principally engaged in providing connectivity among the healthcare industry and considers itself to be in a single segment. During 2000, the Company completed its acquisitions of Envoy, Medical Manager, CareInsite, Kinetra and OnHealth. The integration of these acquired businesses into one company, which provides a range of transaction and information services and technology solutions for participants across the entire continuum of healthcare, including physicians and other healthcare providers, payers, patients and suppliers, has been the focus of management during the past six months. See note 4. The revenue associated with these solutions provided by the Company are aggregated into four primary product groupings, as follows:
2000 1999 1998 -------- -------- ------- Transaction services................................ $268,835 $ 46,300 $33,777 Physician services.................................. 120,071 2,704 -- Portal services..................................... 101,576 4,135 -- Other............................................... 26,671 49,010 15,061 -------- -------- ------- $517,153 $102,149 $48,838 ======== ======== =======
RECLASSIFICATIONS Certain reclassifications have been made to the financial statements to conform with the current year presentation. These reclassifications had no effect on previously reported financial position or results of operations. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Company is required to adopt SFAS No. 133 for the year ending December 31, 2001. SFAS No. 133 establishes methods of accounting for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities. Derivatives that are not designated as part of a hedging relationship must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, the effective portion of the hedge's change in fair value is either (i) offset against the change in fair value of the hedged asset, liability of firm commitment through income or (ii) held in equity until the hedged item is recognized in income. The ineffective portion of a hedge's change in fair value is immediately recognized in income. Adoption of SFAS No. 133 is not expected to have a material impact on the Company's financial condition or results of operations. In March 2000, the FASB issued FASB Interpretation No. 44 (FIN No. 44), "Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB Opinion No. 25." FIN No. 44 became effective July 1, 2000 and provides guidance for applying APB Opinion No. 25 "Accounting for Stock Issued to Employees." The Company adopted FIN No. 44 on July 1, 2000. In January 2000, the Emerging Issues Task Force of the FASB reached consensus on Issue No. 99-17 "Accounting for Advertising Barter Transactions" ("EITF 99-17"). EITF 99-17 establishes F-10 65 WEBMD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) accounting and reporting standards for barter transactions which involve nonmonetary exchanges of advertising. It requires that an entity recognize revenue and expenses from advertising barter transactions at the fair value of the advertising surrendered only when an entity has a historical practice of receiving cash for similar transactions. The Company's revenue recognition principles comply with EITF 99-17. In March 2000, the Emerging Issues Task Force of the FASB reached consensus on Issue No. 00-2 "Accounting for Website Development Cost." ("EITF 00-2"). EITF 00-2 establishes how an entity should account for costs incurred to develop a Web site. It requires that an entity capitalize costs during the Web application and infrastructure and graphics development stages of development. The consensus is effective for all costs incurred beginning after June 30, 2000, although earlier adoption is encouraged. The adoption of EITF 00-2 did not have a material impact on the Company's financial condition or its results of operations. 2. BUSINESS COMBINATIONS 2000 MERGERS MEDICAL MANAGER AND CAREINSITE On September 12, 2000, the Company completed its acquisition of Medical Manager, a provider of physician practice management systems in the U.S., and its publicly traded subsidiary CareInsite, a developer of an Internet-based healthcare e-commerce network that links physicians, suppliers and patients. The Company exchanged 2.5 shares of its common stock for each share of Medical Manager common stock, 1.3 shares of its common stock for each share of CareInsite common stock and one share of its newly created Series B preferred stock for each share of CareInsite preferred stock. The total purchase consideration for Medical Manager and CareInsite was approximately $2,906,856, comprised of the issuance of 134,370,010 shares of the Company's common stock having an aggregate value of $2,145,722, the issuance of 100 shares of the Company's Series B convertible redeemable preferred stock with a value of $10,000, the assumption of options and warrants to purchase 81,084,865 shares of common stock with an aggregate fair value of $710,475 and estimated acquisition costs of $40,389, consisting principally of investment banking fees, professional service fees, including attorneys, accountants and printers, filing and registration costs. Both acquisitions were accounted for using the purchase method of accounting and, accordingly, the purchase prices are 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 purchase price, the Company recorded $54,000 for identifiable intangibles (primarily customer lists, trademarks and workforce) and $2,266,496 in goodwill. The identifiable intangibles are being amortized over their estimated useful lives of three to fifteen years. Goodwill is being amortized over three years. Medical Manager's and CareInsite's results of operations have been included in the Company's consolidated financial statements from September 12, 2000, the closing date of the acquisition. In connection with the acquisition of Medical Manager and the related integration and consolidation, the Company's board of directors approved management's plan to dispose of Porex. See note 5. ONHEALTH On September 12, 2000, the Company completed its acquisition of OnHealth, a source of consumer-oriented health and wellness information, products and services on the Web. The Company exchanged 0.189435 shares of its common stock for each share of OnHealth common stock. The total purchase consideration was approximately $363,010, comprised of $25,000 in loans to OnHealth, approximately 4,678,609 shares of common stock having an aggregate fair value of $287,267, the assumption of options and warrants to purchase 1,384,113 shares of common stock with an aggregate fair value of $46,893 and estimated acquisition costs of $3,850 consisting principally of investment banking fees, professional service F-11 66 WEBMD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) fees, including attorneys, accountants and printers, filing and registration costs. The acquisition was accounted for using the purchase method of accounting and, accordingly, the purchase price is 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 purchase price, total goodwill recorded in connection with the purchase was $374,634 and is being amortized over three years. OnHealth's results of operations have been included in the consolidated financial statements from September 12, 2000, the closing date of the acquisition. ENVOY On May 26, 2000, the Company completed its acquisition of Envoy, a provider of electronic data interchange and transaction processing services to participants in the healthcare market, from Envoy's parent, Quintiles Transnational Corp. ("Quintiles"). The total purchase consideration was approximately $2,440,240, comprised of a $400,000 cash payment, 35,000,000 shares of common stock having an aggregate fair value of $2,022,781 and an estimated $17,459 in acquisition costs (consisting principally of investment banking fees, professional service fees, including attorneys, accountants and printers, filing and registration costs). In connection with the acquisition, Quintiles issued the Company a warrant to purchase up to 10,000,000 shares of Quintiles common stock at $40.00 per share, which is exercisable for four years. Stock received by Quintiles in the transaction is subject to restrictions on sale for one to two years from the date of issuance. The acquisition was accounted for using the purchase method of accounting and accordingly, the purchase price is allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their respective fair values. In connection with the preliminary allocation of purchase price, the Company recorded $159,200 for identifiable intangibles (primarily customer lists and trademarks) and goodwill of $2,211,565. The identifiable intangibles are being amortized over their estimated useful lives of one to three years. Goodwill is being amortized over three years. Envoy's results of operations have been included in the Company's consolidated financial statements from May 26, 2000, the closing date of the acquisition. KINETRA On January 31, 2000, the Company completed its acquisition of Kinetra, a joint venture between Electronic Data Systems Corporation and Eli Lilly and Company. Kinetra is a provider of health information networks and healthcare e-commerce services that enhance decision-critical information flow within the healthcare field. The total purchase consideration for Kinetra was approximately $291,538, comprised of 7,437,248 shares of common stock having an aggregate value of $286,288, $5,250 of acquisition costs and a nominal amount of cash. The acquisition was accounted for using the purchase method of accounting and, accordingly, the purchase price is allocated to the tangible and intangible assets acquired and the liabilities assumed on the basis of their respective fair values. In connection with the allocation of purchase price, the Company recorded $49,000 for identifiable intangibles (primarily customer lists, trademarks and acquired technology) and goodwill of $235,000. The identifiable intangibles are being amortized over their estimated useful lives of one to three years. Goodwill is being amortized over three years. Kinetra's results of operations have been included in the Company's consolidated financial statements from January 31, 2000, the closing date of the acquisition. 1999 MERGERS WEBMD, INC. On November 12, 1999, the Company completed its acquisition of WebMD, Inc., a provider of Web-based solutions for the administrative, communications and information needs of healthcare professionals and the healthcare informational needs of consumers. The Company exchanged 1.796 shares of its F-12 67 WEBMD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) common stock for each share of WebMD, Inc. common stock. The total purchase consideration was approximately $3,659,921, comprised of the issuance of 63,932,659 shares of common stock with an aggregate fair value of $2,204,478, the assumption of options and warrants to purchase 49,012,168 shares of common stock with an aggregate fair value of approximately $1,409,746, and $45,697 of acquisition costs (consisting principally of investment banking fees, professional service fees, including attorneys, accountants and printers, filing and registration costs) and approximately $2,530 of merger-related restructuring costs. The acquisition has been accounted for using the purchase method and, accordingly, the purchase price has been allocated to the tangible and intangible assets acquired and the liabilities assumed on the basis of their respective fair values on the acquisition date. The total goodwill recorded in connection with the purchase was $2,944,804 and is being amortized over three years. Identifiable intangible assets of approximately $196,307, primarily related to acquired technology, customer lists, and trademarks are being amortized over one to five years. WebMD, Inc.'s results of operations have been included in the consolidated financial statements from November 12, 1999, the closing date of the acquisition. MEDE AMERICA On November 12, 1999, the Company completed its acquisition of MedE America, a provider of healthcare transaction services for hospitals, pharmacies, physicians, dentists, payers and pharmacy benefit managers. The Company exchanged 0.7494 shares of its common stock for each share of MedE America stock. The total purchase consideration was approximately $417,292, comprised of the issuance of 10,404,454 shares of the Company's common stock with an aggregate fair value of $388,221, the assumption of options to purchase 468,584 shares of the Company's common stock with an aggregate fair value of approximately $13,644, and $15,427 of acquisition costs. Acquisition costs consisted principally of investment banking fees, professional service fees, including attorneys, accountants and printers, filing and registration costs and approximately $4,756 of merger-related restructuring costs. The acquisition has been accounted for using the purchase method and, accordingly, the purchase price has been allocated to the tangible and intangible assets acquired and the liabilities assumed on the basis of their respective fair values on the acquisition date. The total goodwill recorded in connection with the purchase was $324,983 and is being amortized over four years. Identifiable intangible assets of approximately $105,545, primarily related to customer lists, trademarks and acquired technology, are being amortized over three to four years. MedE America's results of operations have been included in the consolidated financial statements from November 12, 1999, the closing date of the acquisition. MEDCAST On November 12, 1999, the Company completed its acquisition of Medcast, an Internet-based medical news and information service. The total purchase consideration was approximately $112,953, comprised of the issuance of 2,528,465 shares of the Company's common stock with an aggregate fair value of $101,391, the assumption of options to purchase 164,036 shares of the Company's common stock with an aggregate fair value of approximately $3,378, $2,336 in cash and $5,848 of acquisition costs. The acquisition has been accounted for using the purchase method and, accordingly, the purchase price is allocated to the tangible and intangible assets acquired and the liabilities assumed on the basis of their respective fair values on the acquisition date. The total goodwill recorded in connection with the purchase was approximately $109,755 and is being amortized over three years. Identifiable intangible assets of $17,700, primarily related to customer lists, trademarks and acquired technology are being amortized over two to three years. Medcast's results of operations have been included in the consolidated financial statements from November 12, 1999, the closing date of the acquisition. F-13 68 WEBMD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SMITHKLINE LABS AGREEMENT In January 1999, the Company entered into a services agreement with SmithKline Labs under which the Company will provide certain electronic laboratory results delivery services to various provider sites. In addition, in January 1999, the two companies completed an asset purchase agreement under which the Company purchased certain assets from SmithKline Beecham Corporation, used by its subsidiary SmithKline Labs, to provide these laboratory results delivery services in exchange for $2,000 in cash and 1,833,333 shares of the Company's common stock with a value of $11,000. On August 16, 1999, SmithKline Labs was sold by SmithKline Beecham to Quest Diagnostics Incorporated. ACTAMED On May 19, 1998, the Company completed its merger with ActaMed, a developer and provider of an integrated healthcare network, in a transaction that has been accounted for as a pooling of interests. Accordingly, the financial information presented reflects the combined financial position and operations of the Company and ActaMed for all dates and periods presented. The Company issued 23,271,355 shares of its common stock in exchange for all of the outstanding shares of common and convertible redeemable preferred stock of ActaMed. The Company also assumed all outstanding stock options and warrants to acquire 3,383,011 shares of common stock, after giving effect to the exchange ratio. Separate results of the combined entities for the four months ended April 30, 1998 (period ended immediately prior to the merger) were as follows (unaudited):
FOUR MONTHS ENDED APRIL 30, 1998 -------------- Revenue: WebMD..................................................... $ 6,405 ActaMed................................................... 6,690 -------- $ 13,095 ======== Net loss: WebMD..................................................... $ (6,664) ActaMed................................................... (6,186) -------- $(12,850) ========
There were no intercompany transactions between the two companies or significant conforming accounting adjustments. UNAUDITED PRO FORMA INFORMATION The following unaudited pro forma financial information gives effect to the acquisitions of WebMD, Inc., MedE America, Medcast, Kinetra, Envoy, Medical Manager, CareInsite and OnHealth including the amortization of goodwill and other intangible assets as if they had occurred as of the beginning of each period presented. The information is provided for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred if the transactions had been consummated at the dates F-14 69 WEBMD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) indicated, nor is it necessarily indicative of future operating results of the combined companies, and should not be construed as representative of these amounts for any future periods:
YEARS ENDED DECEMBER 31, -------------------------- 2000 1999 ----------- ----------- Net revenue............................................... $ 794,272 $ 631,857 =========== =========== Net loss.................................................. $(4,157,317) $(3,589,792) =========== =========== Basic and diluted net loss per share...................... $ (11.63) $ (10.87) =========== ===========
3. SIGNIFICANT TRANSACTIONS NEWS CORPORATION STRATEGIC RELATIONSHIP Pursuant to an agreement signed and publicly announced in December 1999 and closed in January 2000, the Company entered into a strategic alliance with The News Corporation Limited, Fox Entertainment Group and certain of their affiliates (collectively, "News Corporation"). The Company issued to News Corporation 2,000,000 shares of common stock and 155,951 shares of Series A Preferred Stock, convertible into 21,282,645 shares of common stock. The Company received from News Corporation cash in the amount of $100,000, domestic and international advertising and promotion on News Corporation's various properties with a fair value of $207,000 and $155,000, respectively, to be used over 10 years, and a 50% interest in The Health Network LLC, a health-focused cable network and in Health & Fitness, which operated a companion Web site, "thehealthnetwork.com" with a fair value of $231,999. The Company and News Corporation also entered into a 5-year agreement for the Company to provide syndicated daily broadcast content for use across various News Corporation properties for cash payments totaling $12,000 annually. In addition to the above, WebMD International LLC, a newly formed entity, was created. The Company obtained a 50% interest in WebMD International LLC. No value was assigned to this interest. On December 29, 2000, the Company revised its strategic alliance with News Corporation. As a result, the Company retains the right to receive $205,000 in domestic media services from News Corporation over ten years and will continue to provide content for use across News Corporation's media properties for the next four years. News Corporation transferred its 50% interest in the international joint venture to the Company and was relieved of its commitment to provide any future capital to the international joint venture and its commitment to provide any international media services. The Company transferred its interest in The Health Network to News Corporation. The Company was also relieved of all future capital commitments to The Health Network. During 2000, the Company recognized $21,324 in advertising expense related to the domestic media services provided by News Corporation. No accounts receivable were outstanding as of December 31, 2000. In connection with the revisions to the relationship, News Corporation surrendered 155,951 shares of WebMD's Series A Convertible Preferred Stock, which would have converted into 21,282,645 shares of the Company's common stock. The Company granted to News Corporation a warrant to acquire 3,000,000 shares of its common stock at an exercise price of $15 per share. Included in the restructuring and integration charge is a non-cash charge of approximately $279,000 in the year ended December 31, 2000 as a result of this transaction. MICROSOFT STRATEGIC RELATIONSHIP Prior to its acquisition by the Company, WebMD, Inc. entered into a five-year strategic alliance with Microsoft Corporation ("Microsoft") under which the Company will develop, host and maintain on its F-15 70 WEBMD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) servers a health channel for MSN, MSNBC and WebTV. Microsoft has committed to provide a minimum of 125 million impressions to the Company's health channel per year for the term of the agreement. Over the term of the agreement, the Company will pay Microsoft an aggregate of $162,000 for the distribution of the Company's consumer health content and services, or carriage fees. In addition, Microsoft and the Company have each committed co-marketing funds of $50,000 over the first two years of the agreement. As of December 31, 2000 and 1999, the Company had recognized $30,562 and $3,950 as sales and marketing expense related to the carriage fees. Microsoft remits to the Company 100% of net revenue over the term of the agreement from banner and other advertising and e-commerce transactions generated on the health channel or advertising that Microsoft places on the Company's Web site each year during the term until the Company has received that portion of the $162,000 carriage fees that was payable during that year, and then will share revenue equally thereafter. The amount equal to the portion of the $162,000 carriage fees that is payable during each year is a guaranteed minimum amount. Microsoft is entitled to satisfy its guaranteed minimums by purchasing or placing advertising on the Company's Web site. The Company has agreed to make sufficient advertising space available to Microsoft for this purpose. The Company does not recognize any revenue based on the guaranteed minimum payment amounts, but recognizes only the actual revenue derived from third party advertising. The Company recognizes revenue derived from advertising on the Microsoft health channels, net of commissions, on notification from Microsoft that the advertisements have been placed on the health channels and billed by Microsoft. Payments by Microsoft that are made to satisfy the guaranteed minimums are recorded as a reduction of the carrying value of prepaid content and services-related parties. During 2000 and 1999, the Company recognized $5,996 and $1,590 related to health channel advertising revenue and no revenue related to advertising placed by Microsoft on the Company's Web site. Microsoft agreed to sponsor up to 5.0 million subscriber months of subscriptions to the Company's physician Web site over the term of the agreement. The Company records revenue as subscriptions are placed with physicians. The Company pays a commission on all subscriptions placed by Microsoft. During 2000 and 1999, $16,114 and $1,845 was recorded as revenue related to subscriptions sponsored by Microsoft. This amount has been recorded net of commissions. The Company shares with Microsoft 50% of net revenue from banner and other advertising on its physician Web site generated by sponsored subscriptions until Microsoft has received the amount it has incurred for its sponsored subscriptions. Thereafter, the Company will share 25% of this revenue with Microsoft. In addition, the Company will share with Microsoft 15% of its net revenue from e-commerce transactions and additional services not included in the basic subscription to the Company's physician Web site generated by these sponsored subscriptions. There were no obligations to Microsoft as of December 31, 2000 or 1999 relating to this provision. The value assigned to the Microsoft strategic agreement was $180,000 upon the acquisition of WebMD, Inc. by the Company. As of December 31, 2000 and 1999, the Company had recognized $36,000 and $4,500 as sales and marketing expense for amortization of this asset. As of December 31, 2000 and 1999, the accounts receivable from Microsoft was $17,333 and $9,030. Microsoft has a warrant to purchase 13,676,389 shares of the Company's common stock at a price of $30.16. The warrant is fully vested and expires on May 12, 2004. Additionally, Microsoft owns 11,933,342 shares of the Company's common stock. As of December 31, 2000, an executive of Microsoft was a board member of the Company. Subsequent to year end, Microsoft and the Company entered into a non-binding letter of intent with respect to revisions to their relationship. See note 18. F-16 71 WEBMD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) TERMINATION OF DUPONT STRATEGIC RELATIONSHIP Prior to its merger with the Company, WebMD, Inc. entered into a strategic relationship under which E.I. du Pont de Nemours and Company ("DuPont") agreed to be the exclusive provider of life science content. DuPont also agreed to certain co-promotion, marketing and banner rights on the Company's Web site. DuPont agreed to pay carriage fees totaling $26,000 over three years. In addition, DuPont agreed to sponsor approximately 6 million subscriber months during the five-year term of the agreement. The Company and DuPont agreed to share in the revenue generated by the Web site for advertising, third party carriage fees and e-commerce. In connection with the agreement, the Company issued a warrant to DuPont to purchase 9,946,966 shares of common stock at $8.00 per share. The warrant vested immediately upon issuance and expires five years from the issuance date. In December 2000, in connection with its restructuring and integration efforts, the Company and DuPont agreed to terminate their strategic alliance. In connection with the termination of the existing agreement, DuPont surrendered a portion of its warrant to purchase common stock of the Company, and retained a right to purchase 3,000,000 shares of the Company's common stock at an exercise price of $8.00 per share. The Company recorded $33,199 in paid in capital related to the reacquisition of a portion of the warrant, and a non-cash charge of $33,785 related to prepaid content and services, which is included in the restructuring and integration charge for the year ended December 31, 2000. 4. RESTRUCTURING AND INTEGRATION CHARGES In the third quarter of 2000, the Company's Board of Directors approved a restructuring and integration plan, with the objective of eliminating duplication and redundancies as a result of all the acquisitions made by the Company since November 1999 and consolidating the Company's operational infrastructure into a common platform to more efficiently service its customers. Additionally, as part of the Company's restructuring and integration efforts, the Company also undertook a review of its existing strategic relationships in light of several criteria, including strategic relevance to both the Company and its partners, potential conflicts with other agreements as a result of the numerous acquisitions made by the Company, profitability and impact on future revenue streams. As a result of this process, the Company is in discussions with several of its partners in an effort to redefine the relationships in a manner that better serves the needs of each party. These discussions have already resulted in revisions to some of the Company's strategic relationships. It is possible that, as a result of continuing discussions, additional relationships may be revised or terminated, which may result in additional restructuring charges. In connection with the Company's restructuring and integration efforts, the Company recorded a total charge in the year ended December 31, 2000 of $452,919, which consists of: (i) $320,879 relating to the restructuring of contracts primarily associated with News Corporation and DuPont, of which $312,791 represented non-cash charges, (ii) personnel-related restructuring costs of $70,173, of which $53,144 represented non-cash stock option compensation charges primarily related to the resignation of certain executives, pursuant to the applicable employment and separation arrangements, with the remaining personnel-related charge relating to severance and outplacement services for approximately 1,100 employees that the Company identified and notified of termination, principally as a result of eliminating duplicate functions within the combined company, (iii) facilities charges of $51,262, comprised of 37,184 of future lease obligations and lease cancellation penalties and $14,078 of non-cash fixed asset write-offs related to vacating duplicate facilities, and (iv) $10,605 of integration costs, consisting primarily of employee retention arrangements related to exit activities, moving and relocation expenses, as well as outside professional fees related to the integration of the Company's business. Integration costs are recorded as expense in the period in which they arise. F-17 72 WEBMD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table presents cash activity in the restructuring and integration related accrual during the year ended 2000:
SEVERANCE FACILITIES OTHER TOTAL --------- ---------- -------- -------- Initial Accrual......................... $17,029 $37,184 $ 18,693 $ 72,906 Cash Payments........................... (8,430) (1,341) (10,010) (19,781) ------- ------- -------- -------- Balance at December 31, 2000............ $ 8,599 $35,843 $ 8,683 $ 53,125 ======= ======= ======== ========
5. ASSETS HELD FOR SALE In connection with the acquisition of Medical Manager and the related integration and consolidation of the Company's acquired businesses, the Company's Board of Directors approved management's plan to dispose of Porex Corporation and the Company's other plastics and filtration technologies subsidiaries (collectively, "Porex"). Porex Corporation was a wholly owned subsidiary of Medical Manager prior to the completion of the acquisition of Medical Manager on September 12, 2000. Porex designs, manufactures and distributes porous and solid plastic components and products used in life sciences, healthcare, industrial and consumer applications. The Company is exploring various divestiture alternatives in consultation with its financial advisors. The disposition is expected to be completed in 2001. The expected net proceeds and the cash flows of Porex until sold were allocated to net assets held for sale in the allocation of the Medical Manager purchase price and is included in other current assets. Any difference between the actual and expected net proceeds will result in an adjustment of goodwill unless there is a difference caused by a post-acquisition event. Activity in net assets held for sale from the acquisition date to December 31, 2000 is as follows: Allocation of purchase price................................ $204,356 Estimated net income through disposition.................... 10,200 -------- Balance at December 31, 2000................................ $214,556 ========
Porex had net income of $2,756 from the acquisition date to December 31, 2000. Porex's results of operations and cash flows have been excluded from the consolidated statement of operations for the year ended December 31, 2000. F-18 73 WEBMD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. PREPAID CONTENT, SERVICES AND DISTRIBUTION In connection with obtaining Web site content and distribution services, the Company paid cash or issued equity instruments to certain service providers, including related parties. The amount of payments made or the fair value of equity instruments issued has been capitalized and is being amortized over the agreement term. Prepaid costs by category are summarized as follows:
DECEMBER 31, -------------------- 2000 1999 -------- -------- CURRENT PORTION Content..................................................... $ 4,589 $ 1,478 Distribution................................................ 679 3,958 -------- -------- $ 5,268 $ 5,436 ======== ======== LONG-TERM PORTION Content..................................................... $ 417 $ -- Services.................................................... 87,386 2,215 Distribution................................................ 141,278 270,823 -------- -------- $229,081 $273,038 ======== ========
Total prepaid content, services and distribution includes $223,163 and $175,596 as of December 31, 2000 and 1999, respectively, from related parties. 7. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, -------------------- 2000 1999 -------- -------- Computer equipment.......................................... $ 88,832 $ 44,219 Land........................................................ 548 150 Buildings................................................... 5,453 1,664 Office equipment, furniture and fixtures.................... 19,975 8,985 Purchased software for internal use......................... 20,197 9,725 Leasehold improvements...................................... 19,095 3,092 -------- -------- 154,100 67,835 Less accumulated depreciation............................... (63,744) (19,451) -------- -------- Property and equipment, net................................. $ 90,356 $ 48,384 ======== ========
Property and equipment included assets acquired under capital lease obligations with a cost of approximately $11,036 and $9,374 at December 31, 2000 and 1999, respectively. Accumulated depreciation related to the assets acquired under capital leases totaled $8,557 and $6,040 at December 31, 2000 and 1999, respectively. F-19 74 WEBMD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. GOODWILL AND OTHER INTANGIBLE ASSETS Intangible assets consist of the following:
DECEMBER 31, AMORTIZATION ------------------------- PERIOD 2000 1999 ------------ ----------- ---------- Goodwill...................................... 3-4 years $ 8,407,226 $3,276,091 Customer lists................................ 4-10 years 232,730 84,130 Acquired technology........................... 3 years 70,447 64,747 Trademarks.................................... 3-15 years 138,869 116,869 Other......................................... 1-3 years 163,193 80,325 ----------- ---------- 9,012,465 3,622,162 Less accumulated amortization................. (2,243,271) (193,397) ----------- ---------- $ 6,769,194 $3,428,765 =========== ==========
9. ACCRUED EXPENSES Accrued expenses consist of the following:
DECEMBER 31, -------------------- 2000 1999 -------- -------- Accrued professional fees................................... $ 26,302 $ -- Accrued merger costs........................................ 37,722 51,020 Accrued restructuring costs................................. 53,125 -- Accrued compensation........................................ 29,288 10,994 Other accrued liabilities................................... 123,757 43,601 -------- -------- Total accrued expenses............................ $270,194 $105,615 ======== ========
10. COMMITMENTS AND CONTINGENCIES LEGAL MATTERS Envoy (which became a subsidiary of the Company upon its acquisition in May 2000) and certain of its officers were named as defendants in three identical lawsuits filed in the United States District Court for the Middle District of Tennessee, Nashville Division. The plaintiff in each of these lawsuits purported to represent a class of persons who purchased the securities of Envoy during the class period from February 12, 1997 through August 18, 1998. In these three original complaints, the plaintiffs sued the defendants for violations of the federal securities laws. The District Court ordered the three cases consolidated under the caption In re Envoy Corporation Securities Litigation, and on December 28, 1998, the plaintiffs, pursuant to the District Court's consolidation orders, filed a consolidated class action complaint. The consolidated complaint reasserted the federal securities law claims and also asserted additional claims under Tennessee common law for fraud and negligent misrepresentation. Plaintiffs allege that the defendants made material misrepresentations and omissions in Envoy's public filings and public statements concerning Envoy's financial statements and Envoy's accounting for certain charges taken in connection with acquisitions. Plaintiffs allege that, as a result of defendants' alleged actions, Envoy's reported earnings during the class period were overstated and the price for Envoy's common stock was artificially inflated. Plaintiffs seek recovery of an unspecified sum in damages on behalf of persons who allegedly purchased Envoy's stock at such allegedly inflated prices. On March 1, 1999, the defendants filed a motion to dismiss all of plaintiffs' claims. Plaintiffs then voluntarily dismissed their state law claims. On September 17, 1999, the Court dismissed the consolidated F-20 75 WEBMD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) complaint without prejudice. On November 23, 1999, the plaintiffs filed an amended consolidated complaint. On May 31, 2000, defendants filed a motion to dismiss the amended consolidated complaint. The Court on February 2, 2001 entered an order denying in part and granting in part defendants' motion to dismiss the amended consolidated complaint. Specifically, the Court denied the motion to dismiss as to defendants Envoy and one of the individual defendants and granted the motion to dismiss as to two of the individual defendants. The Agreement and Plan of Merger among the Company, Pine Merger Corp., Envoy, Quintiles and QFinance, Inc. dated as of January 22, 2000 provides that Quintiles will indemnify us with respect to this litigation. A lawsuit was filed against Medical Manager Health Systems, Inc. (which became a subsidiary of the Company upon Medical Manager's merger with the Company in September 2000) and certain of its officers and directors, among other parties, on October 23, 1998 in the United States District Court for the Middle District of Florida. The lawsuit purports to bring an action on behalf of the plaintiffs and others similarly situated to recover damages for alleged violations of the federal securities laws and Florida laws arising out of Medical Manager Health Systems' issuance of allegedly materially false and misleading statements concerning its business operations, including the development and sale of its principal product, during the class period. An amended complaint was served on March 2, 1999. Medical Manager Health Systems moved to dismiss the amended complaint and the court ruled in favor of that motion. Plaintiffs have appealed this dismissal to the Court of Appeals for the 11th Circuit. The oral argument for the appeal was held in November 2000, but no decision has been issued by the Court of Appeals. The lawsuit seeks, among other things, compensatory damages in favor of the plaintiffs and the other purported class members and reasonable costs and expenses. Quintiles and the Company entered into a Data Rights Agreement in connection with the acquisition of Envoy by the Company from Quintiles in May 2000. Under the Data Rights Agreement, the Company provided certain data to Quintiles through Envoy, which Quintiles used to provide market research and related products and services to third parties. On February 23, 2001, the Company provided notice to Quintiles that the Company's subsidiary Envoy, which provides electronic transaction services for the healthcare industry, would be temporarily suspending the provision of data under the Data Rights Agreement between the parties. The suspension was in accordance with provisions of the Data Rights Agreement that permit such suspension if the Company reasonably believes that providing the data would violate applicable law. In accordance with procedures set forth in the Data Rights Agreement between the parties, the Company intended to suspend sending such data to Quintiles until such time as Quintiles performed its obligations under the Data Rights Agreement. On Sunday, February 25, 2001, Quintiles filed an action for breach of contract seeking temporary and permanent injunctive relief and unspecified damages, and obtained an ex parte Temporary Restraining Order from the Superior Court of Wake County, North Carolina, requiring the Company to continue to provide data to Quintiles. The Company removed the action to the United States District Court for the Eastern District of North Carolina. On March 13, 2001, the District Court entered an order continuing the state court temporary restraining order. In the course of this litigation, the Company presented opinions of counsel that the transmission of data pursuant to the Data Rights Agreement violated certain state privacy laws. Quintiles disputed these legal interpretations. Thereafter, the access specifications pursuant to which data is transmitted to Quintiles were modified to further de-identify patient information. In addition, Quintiles provided to the Company opinions of counsel that applicable state privacy laws would not be violated by transmission of data pursuant to the modified access specifications, together with a proposed undertaking of indemnification by Quintiles in favor of the Company, and certifications that the patient information contained in its existing databases had been de-identified consistent with the recently modified access specifications. Because determinations whether data has been sufficiently de-identified depend on complex factual and statistical analyses, the opinions presented by Quintiles relied on fact-intensive analyses prepared by statisticians and others. F-21 76 WEBMD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A further hearing was conducted by the District Court on March 15, 2001, and on March 16, 2001, the District Court ordered the Company to continue to provide data to Quintiles in the form represented to the court during the March 15, 2001 hearing. That form reflected the recently modified access specifications. On March 21, 2001, the District Court entered an order continuing in effect the injunction. Currently, the Company is providing data to Quintiles pursuant to this order. The Company is currently engaged in settlement discussions with Quintiles. However, the Company cannot provide assurances that a settlement will be reached. If a settlement is not reached, the Company expects to seek appellate review, by the Fourth Circuit Court of Appeals, of the District Court's order. On March 8, 2001, InfoCure Corporation filed a complaint against the Company and Envoy in the Superior Court of the County of Fulton in the State of Georgia. The complaint asserts, among other things, that the Company has breached its marketing agreement with InfoCure by withholding certain rebates owed to InfoCure, by failing to perform certain services and by soliciting InfoCure's customers. The complaint seeks damages in excess of $46.5 million. The Company believes that InfoCure's positions are without merit and intends to vigorously defend against the complaint. Porex has been named as one of many co-defendants in a number of actions brought by recipients of silicone mammary implants. One of the pending claims is styled as a purported class action. Certain of the actions against Porex have been dismissed or settled by the manufacturer or insurance carriers of Porex without material cost to Porex. The Company believes its insurance coverage provides adequate coverage against liabilities that could arise from actions or claims arising out of Porex's distribution of implants. 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, and those discussed above, has yet to be determined, the Company does not believe that their outcome will have a material adverse effect on its financial position. STRATEGIC RELATIONSHIPS The Company has agreements with various content providers and strategic partners whereby the Company is committed to pay certain amounts in connection with content, services and distribution obtained for use on its Web site and certain distribution arrangements. The Company has recorded $66,194 and $15,861 as costs related to these agreements during 2000 and 1999, respectively. The Company's non-cancelable future commitments under these agreements, a portion of which are with related parties, are as follows:
UNRELATED RELATED PARTIES PARTIES TOTAL --------- -------- -------- 2001............................................... $ 45,559 $ 33,375 $ 78,934 2002............................................... 45,277 32,875 78,152 2003............................................... 17,644 34,375 52,019 2004............................................... 10,072 8,750 18,822 2005............................................... 6,286 -- 6,286 Thereafter......................................... -- -- -- -------- -------- -------- $124,838 $109,375 $234,213 ======== ======== ========
F-22 77 WEBMD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) LEASES The Company leases its office and other facilities under operating lease agreements that expire at various dates through April 2019. Total rent expense for all operating leases was approximately $18,358, $4,106 and $2,386 in 2000, 1999, and 1998, respectively. Future minimum lease commitments under non-cancelable lease agreements (including leases identified as part of the integration effort) at December 31, 2000 were as follows:
GROSS NET OPERATING SUBLEASE OPERATING CAPITAL LEASES INCOME LEASE LEASES --------- -------- --------- ------- Year ended December 31, 2001.............. $ 24,196 $ (1,075) $ 23,121 $2,738 2002...................................... 19,523 (1,075) 18,448 381 2003...................................... 16,992 (1,075) 15,917 78 2004...................................... 14,169 (1,075) 13,094 20 2005...................................... 10,419 (1,075) 9,344 -- Thereafter................................ 77,911 (6,379) 71,532 -- -------- -------- -------- ------ Total minimum lease payments.............. $163,210 $(11,754) $151,456 3,217 ======== ======== ======== Amount representing interest.............. (193) ------ Present value of minimum lease payments under capital lease obligations......... 3,024 Less current portion...................... 2,738 ------ Non-current portion....................... $ 286 ======
11. RETIREMENT PLAN The Company maintains a defined contribution 401(k) plan covering substantially all of its employees. Participants must be 21 years of age or older and may contribute up to $10.5 from their earnings annually. There is no service requirement. The plan also provides for discretionary Company profit sharing contributions. The Company has not made any such contributions to the plan through December 31, 2000. In connection with the acquisitions made by the Company during the fiscal year ended December 31, 2000, the Company assumed existing 401(k) plans, including plans covering Medical Manager and CareInsite employees. Such plans were frozen and will be merged into the Company's plan or will be terminated during the current fiscal year. Medical Manager Health Systems maintains for its employees a 401(k) plan in which it matches a portion of the participant's contribution in cash. Porex maintains for its employees the Porex Technologies 401(k) Savings Plan, pursuant to which the Company matches a portion of a participant's contribution in the form of the Company's common stock. OnHealth employees became eligible for the Company's 401(k) plan as of November 1, 2000, Envoy employees became eligible on July 1, 2000 and Medical Manager employees, other than employees of Medical Manager Health Systems and Porex, and CareInsite employees became eligible on January 1, 2001. 12. STOCKHOLDERS' EQUITY COMMON STOCK On February 10, 1999, the Company completed its initial public offering and sold 5,750,000 shares of common stock realizing net proceeds of $41,399. On January 27, 2000, Janus Capital Corporation, through its managed mutual funds, invested $930,000 in exchange for 15,000,000 shares of common stock at $62.00 per share in a private transaction. F-23 78 WEBMD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) During December 2000, the Company repurchased 5,163,509 shares of common stock for an aggregate price of $30,759. These shares are reflected as treasury shares in the accompanying consolidated balance sheet. SERIES A CONVERTIBLE PREFERRED STOCK 1998 Series A In November 1998, the Company issued 7,683,341 shares of Series A Convertible Preferred Stock ("1998 Series A Preferred") for $46,101 of cash proceeds. Upon the closing of the initial public offering in February 1999, all of the outstanding shares of 1998 Series A Preferred were converted into shares of common stock. 2000 Series A In January 2000, the Board of Directors authorized 213,000 shares of Series A Convertible Preferred Stock ("2000 Series A Preferred") with a par value of $0.0001 per share and a face value of $5,000 per share. The 2000 Series A Preferred is entitled to quarterly dividends at a per annum rate of 10.5% of the face amount plus any accrued and unpaid dividends, payable in additional shares of 2000 Series A Preferred. With respect to dividend rights, other than the right to receive additional shares of 2000 Series A Preferred, rights on liquidation, winding up or dissolution, whether voluntary or involuntary, the Series A Preferred ranks on a parity with the Company's common stock and junior to the Series B Preferred. The 2000 Series A Preferred converts into common stock automatically on the third anniversary of the date of issuance. The 2000 Series A Preferred holders are entitled to vote with common stockholders on an as converted basis. At December 31, 2000, there were 155,951 shares of 2000 Series A Preferred outstanding. In connection with the revised strategic alliance with News Corporation, the 155,951 shares of 2000 Series A Preferred were surrendered to the Company subsequent to year end. The 2000 Series A Preferred would have converted into an aggregate of 21,282,645 shares of the Company's common stock. Included in depreciation, amortization and other in the accompanying statement of operations for the year ended December 31, 2000 is $108,196 representing dividends/accretion related to the 2000 Series A Preferred Stock. SERIES B CONVERTIBLE REDEEMABLE PREFERRED STOCK In September 2000, the Board of Directors authorized 200 shares of Series B Convertible Redeemable Preferred Stock ("Series B Preferred"). In connection with the acquisition of CareInsite, the Company issued 100 shares of Series B Preferred in exchange for all the outstanding shares of CareInsite's preferred stock. The Series B Preferred ranks, with respect to the payment of dividends and to distribution of assets upon liquidation, dissolution or winding up, whether voluntary or involuntary, senior to all of the Company's common stock and to the 2000 Series A Preferred. The Series B Preferred pays no annual dividend and shares in any dividends paid on the common stock on an as converted basis. The Series B Preferred is convertible in March 2002 into an aggregate of 263,957 shares of common stock (conversion price of $37.885) plus a warrant to acquire an equal number of shares at $37.885 per share. Additionally, the Series B Preferred is redeemable for an aggregate of $10,000 by the Company or the holder in March 2002 or by the holder following the notice of a change of control of the Company. F-24 79 WEBMD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Series B Preferred holder generally has no voting rights. However, as long as Series B Preferred are outstanding, the Company may not, without the affirmative vote or consent of the holder of a majority of the Series B Preferred voting separately as a class, directly or indirectly or through merger or consolidation: - amend, alter or repeal any provision of the certificate of incorporation or corporate bylaws so as to adversely affect the rights, preferences, privileges or powers of the Series B Preferred - authorize or issue any new class of shares of capital stock having a preference with respect to dividends, redemption and/or liquidation over the Series B Preferred - reclassify any capital stock into shares having a preference with respect to the dividends, redemption and/or liquidation over the Series B Preferred. WARRANTS The Company has warrants outstanding to purchase 36,993,352 shares of common stock at prices ranging from $.01 to $74.22 per share, with a weighted average exercise price of $23.16 per share. Substantially all of the outstanding warrants are currently vested and exercisable. In January 2000, in connection with a marketing and services agreement entered into with Medic Computer Systems, Inc., the Company issued Medic a warrant to purchase 4,376,445 shares of the Company's common stock at $1.00 per share. The warrant vests over a four-year period, subject to Medic achieving certain performance thresholds. The agreement also provides for additional warrants to be issued to Medic upon the achievement of certain additional performance thresholds. As of December 31, 2000, the performance thresholds have not been achieved. No value has been assigned to the warrants. The Company has other agreements which provide for the issuance of up to 250,000 warrants at the then current prevailing market price, should certain performance thresholds be met. At December 31, 2000, such performance thresholds have not been achieved and no value has been assigned to the warrants. In addition, the Company has agreed to issue warrants to a customer each year for a five year period ending in January of 2005, with the number of warrant shares being determined based on certain revenue recognized by the Company from that customer. The number of warrant shares to be issued is based on the revenue from that customer, divided by the exercise price of the warrant. The exercise price of the warrant is determined based on the greater of $30 per share or the then current market price. The agreement provides that the number of warrant shares to be issued at the end of the first year is reduced by 100,000, representing the number of warrant shares issued upon closing of the agreement. There were no additional warrants earned in 2000. 13. STOCK-BASED COMPENSATION STOCK OPTION PLANS The Company has various stock option plans (collectively, the "Plans") for directors, officers and key employees that provide for non-qualified and incentive stock options and restricted stock grants. Generally, options become exercisable ratably over a three to five year period based on their individual grant dates. Options are generally granted at prices not less than the fair market value on the date of grant. Options granted under the Plans expire within four to fifteen years from the date of grant. An aggregate of 6,486,945 shares of common stock remain reserved for issuance under the Plans. In addition to the Plans, the Company has granted options to certain directors, consultants and key employees. At December 31, 2000, there were options to purchase 6,857,500 shares of common stock F-25 80 WEBMD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) outstanding to these individuals. The terms of these grants are similar to the terms of the options granted under the Plans. On October 20, 1998, the Company offered employees who were granted options from July 1998 through October 1998 the ability to cancel their original option grant in exchange for a new option agreement with a new vesting start date and an option price of $3.55 per share; the deemed fair value of the Company common stock on that date was $4.80. A total of 3,380,200 option shares with exercise prices of $4.50, $6.30, $7.00 and $8.00 were eligible to be repriced. A total of 2,057,950 option shares were canceled and reissued. In connection with the mergers with Medical Manager, CareInsite and OnHealth, the Company assumed all the outstanding options issued under the respective stock option plans and arrangements, after the application of the exchange ratio, and reserved 76,640,029 shares for Medical Manager and CareInsite and 1,354,482 shares for OnHealth of common stock for issuance upon exercise of the assumed options. No further options can be granted under these plans. At the time of these acquisitions, options for 21,265,330 and 1,067,796 shares, respectively were fully vested. The remainder of the shares vest based upon the terms of the original plans ranging from three to five years. In connection with the 1999 mergers with ActaMed, WebMD, Inc., MedE America and Medcast, the Company assumed all the outstanding options issued under the respective stock option plans and arrangements, after the application of the exchange ratio, and reserved 3,100,489; 14,734,986; 468,584 and 164,036 shares of common stock for issuance upon exercise of the assumed options. No further options can be granted under these plans. At the time of these acquisitions, options for 2,717,269; 8,637,406; 60,136 and 83,626 shares, respectively, were fully vested. The remainder of the shares vest based upon the terms of the original plans, generally four years. Shares issued subject to restricted stock purchase agreements totaled 1,098,732 in 1998. All of these shares were issued to employees for cash. The common stock is subject to repurchase at the original exercise price until vested, at the Company's option. The shares vest over a period of time as determined by the Board of Directors for each individual purchase agreement, generally four years. During 1999, 375,000 shares were repurchased from terminated employees. No shares were repurchased during 2000. In addition, on December 14, 1998, 455,000 shares of common stock issued in July 1998 subject to restricted stock purchase agreements were rescinded as part of the repricing program. Shares subject to repurchase totaled approximately 651,000 and 1,247,000 at December 31, 1999 and 1998, respectively. The Company recorded deferred stock compensation of approximately $211,837, $6,261 and $8,160 in 2000, 1999 and 1998, respectively. These amounts represented the difference between the exercise price and the deemed fair value of common stock on the date the stock options were granted. The Company recorded amortization of deferred stock compensation of approximately $72,459, $7,633 and $3,376 in 2000, 1999 and 1998, respectively, based on a graded vesting method. At December 31, 2000, the Company had a total of approximately $144,467 remaining to be amortized on a graded vesting method over the corresponding vesting period of each respective option, generally four years. The components of the $211,837 of deferred stock compensation recorded in 2000 are: (i) $117,402 related to 54,538,222 unvested options assumed in the Medical Manager, CareInsite and OnHealth mergers, (ii) $79,577 related to 7,943,761 options granted to Envoy employees at $4.23 per share on June 20, 2000 and (iii) $14,858 related to 1,365,416 options granted to certain Company executives in May and June of 2000 with exercise prices ranging from $2.00 to $9.06. F-26 81 WEBMD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company also recorded stock compensation expense of $53,144 in 2000 primarily related to the resignation of certain executives, pursuant to the applicable employment and separation agreements. The agreements cover options to acquire an aggregate of 11,907,251 shares of common stock. A summary of the status of the Company's stock option plans for the three year period ended December 31, 2000 is presented below:
YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------------------------- 2000 1999 1998 ---------------------------- --------------------------- ---------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE NUMBER OF EXERCISE PRICE NUMBER OF EXERCISE PRICE NUMBER OF EXERCISE PRICE SHARES PER SHARE SHARES PER SHARE SHARES PER SHARE ----------- -------------- ---------- -------------- ----------- -------------- Outstanding beginning of year............ 27,644,846 $ 9.98 11,512,800 $ 2.06 9,200,251 $0.72 Granted............ 41,419,515 15.85 7,407,738 20.41 7,743,881 4.32 Assumed............ 77,994,511 17.18 15,367,606 7.95 -- -- Exercised.......... (7,769,440) 3.49 (5,501,438) 2.71 (2,433,999) 0.59 Cancelled.......... (11,244,299) 19.85 (1,141,860) 7.54 (2,997,333) 4.95 ----------- ------ ---------- ------ ----------- ----- Outstanding at end of year............... 128,045,133 $15.79 27,644,846 $ 9.97 11,512,800 $2.07 =========== ========== =========== Exercisable at the end of the year.... 43,800,961 $13.54 9,207,424 $ 3.91 3,535,687 $1.18 =========== ========== ===========
The following table summarizes information with respect to options outstanding and options exercisable at December 31, 2000:
WEIGHTED AVERAGE REMAINING WEIGHTED CONTRACTUAL WEIGHTED NUMBER AVERAGE LIFE NUMBER AVERAGE EXERCISE PRICES OUTSTANDING EXERCISE PRICE (IN YEARS) EXERCISABLE EXERCISE PRICE - --------------- ------------------ -------------- ----------- ----------- -------------- $ 0.0500-$ 6.0000............ 21,094,104 $ 3.8754 6.29 10,093,049 $ 3.2878 $ 6.0312-$ 11.5500............ 26,196,444 10.0539 8.54 7,231,248 7.2132 $11.5625-$ 13.8462............ 21,803,810 13.1278 8.35 6,860,765 13.2774 $13.8750-$ 16.6827............ 18,409,124 15.3921 8.00 8,728,229 15.2063 $16.6875-$ 22.8500............ 19,545,292 20.2209 7.94 5,456,262 19.2573 $22.9000-$ 53.3800............ 19,353,607 31.5243 8.03 5,253,045 31.8750 $53.4500-$105.0000............ 1,642,752 61.7713 8.72 178,363 63.9648 ----------- ---- ---------- $ 0.0500-$105.0000............ 128,045,133 $15.7876 7.89 43,800,961 $13.5404 =========== ==========
PRO FORMA INFORMATION The Company has elected to follow APB No. 25 and related interpretations in accounting for employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123 requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB No. 25, no compensation expense is recognized when the exercise price of stock options granted to employees equals the market price of the underlying stock on the date of grant. F-27 82 WEBMD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Pro forma information regarding net loss is required by SFAS No. 123 and 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 these options was estimated at the date of grant using the minimum value method in 1998 and using a Black-Scholes option pricing model in 1999 and 2000 with the following weighted-average assumptions:
2000 1999 1998 -------- ----- ----- Expected dividend yield..................................... 0% 0% 0% Expected volatility......................................... 1.0 1.0 -- Risk free interest rate..................................... 5.29% 5.60% 4.90% Expected option lives (years)............................... 0.5-3.5 3.3 3.5 Weighted fair value of options granted at prices equal to market price during the year.............................. $ 11.79 $8.08 $0.67 Weighted fair value of options granted at prices below market price during the year.............................. $ 11.19 $ -- $ --
The pro forma information is as follows:
YEARS ENDED DECEMBER 31, ---------------------------------- 2000 1999 1998 ----------- --------- -------- Net loss: As reported....................................... $(3,085,608) $(287,992) $(54,048) =========== ========= ======== Pro forma......................................... $(3,280,942) $(322,999) $(55,414) =========== ========= ======== Basic and diluted net loss per common share: As reported....................................... $ (12.61) $ (3.58) $ (1.54) =========== ========= ======== Pro forma......................................... $ (13.41) $ (4.02) $ (1.58) =========== ========= ========
The pro forma results indicated above are not intended to be indicative of or a projection of future results. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimates, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company's employee stock options. EMPLOYEE STOCK PURCHASE PLAN The Company's 1998 Employee Stock Purchase Plan (the "1998 Purchase Plan") became effective on the completion of the initial public offering, February 10, 1999. The 1998 Purchase Plan allows eligible employees the opportunity to purchase shares of the Company's common stock through payroll deductions, up to 15% of a participant's annual compensation with a maximum of 5,000 shares available per participant during each purchase period. The purchase price of the stock is 85% of the lesser of the fair market value on the first and last day of each purchase period. A total of 1,358,154 shares of common stock remain reserved for issuance under the 1998 Purchase Plan. The 1998 Purchase Plan, as amended in connection with the 2000 mergers, provides for annual increases equal to the lesser of 1,500,000 shares, 0.5% of the outstanding common shares, or a lesser amount determined by the Board of Directors. A total of 1,006,645 and 635,201 shares were issued under this plan during 2000 and 1999, respectively. F-28 83 WEBMD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 14. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets (liabilities) were as follows:
DECEMBER 31, --------------------- 2000 1999 --------- --------- Deferred tax assets: Net operating loss carryforwards.......................... $ 429,736 $ 224,570 Restructuring costs....................................... 14,188 -- Research and development tax credit....................... 2,353 2,353 Other accrued expenses.................................... 10,107 6,155 Fair value of investments................................. 15,094 -- Allowance for doubtful accounts........................... 9,958 -- Depreciation.............................................. 3,963 47 Other..................................................... 946 3,208 --------- --------- Total deferred tax assets................................... 486,345 236,333 --------- --------- Valuation allowance......................................... (277,152) (117,492) --------- --------- Net deferred tax assets..................................... 209,193 118,841 --------- --------- Deferred tax liabilities: Intangible assets......................................... (189,484) (118,841) Other..................................................... (19,709) -- --------- --------- Total deferred tax liabilities.............................. (209,193) (118,841) --------- --------- Net deferred tax assets and liabilities..................... $ -- $ -- ========= =========
A valuation allowance equal to 100% of the deferred tax assets and liabilities has been established because of the uncertainty of realization of the deferred tax assets due to the lack of earnings history. The valuation allowance for deferred tax assets increased by $159,660, $76,962, and $21,599 in 2000, 1999, and 1998, respectively. At December 31, 2000, the Company had net operating loss carryforwards for federal income tax purposes of approximately $1,020,709, which expire in 2010 through 2020, and federal tax credits of approximately $6,192, which expire in 2010 through 2015. Because of the "change of ownership" provisions of the Internal Revenue Code and similar state provisions, a portion of net operating loss carryforwards and tax credit carryforwards may be subject to an annual limitation regarding their utilization against taxable income in future periods. A portion of these carryforwards may expire before becoming available to reduce future income tax liabilities. 15. RELATED PARTY TRANSACTIONS Revenue from related parties consists of revenue attributable to Microsoft, News Corporation, UnitedHealth Group and SmithKline Labs (from January 1, 1998 to August 16, 1999, the date SmithKline Labs was sold to a company which is not a significant stockholder of the Company). In connection with the acquisition of Envoy, on May 26, 2000 the Company and Quintiles entered into a Data Rights Agreement which provides Quintiles with an exclusive, perpetual license to certain de-identified transaction and transaction related data. Under this agreement, Quintiles pays a royalty based on F-29 84 WEBMD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) gross product revenues and operating income, as defined. No revenue has been recorded under this agreement. Additionally, the Company and Quintiles entered into an Internet Product Development and Marketing Agreement that provides for the Company and Quintiles to design, implement and sell services based on a portfolio of tools to be made available through a prominent co-branded location hosted by the Company. The service offerings relate to drug development, physician detailing and direct-to-consumer. Quintiles has agreed to pay $100,000 for the development of the Initial Toolkit. During 2000, the Company received $929 under this agreement, which is classified as other revenue. Disputes have arisen between Quintiles and the Company with respect to the obligations of the parties under the Internet Product Development and Marketing Agreement. The parties have commenced the dispute resolution procedures provided for in the Internet Product Development and Marketing Agreement. We cannot provide assurances regarding whether this dispute will be resolved in our favor or regarding whether we will be able to preserve the benefits we expected to achieve from the Internet Product Development and Marketing Agreement. As of December 31, 2000, an executive of Quintiles was a board member. 16. FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments." The Company using available market information has determined the estimated fair value amounts. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
DECEMBER 31, ------------------- 2000 1999 -------- -------- Cash and cash equivalents: Corporate securities, U.S. Treasury notes and federal agency notes........................................... $180,047 $ 37,254 Money market funds........................................ 310,750 248,365 -------- -------- 490,797 285,619 Short-term investments...................................... -- 5,667 Marketable Securities: Corporate securities, U.S. Treasury notes and federal agency notes........................................... 219,686 -- -------- -------- $710,483 $291,286 ======== ========
The carrying amounts of cash, cash equivalents and short-term investments are reasonable estimates of fair value. The fair value for marketable securities is based on quoted market prices. F-30 85 WEBMD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The amortized cost and estimated fair value of investments in debt securities at December 31, 2000, by contractual maturity, were as follows:
ESTIMATED COST FAIR VALUE -------- ---------- Due in 1 year or less....................................... $ -- $ -- Due in 1-2 years............................................ 128,528 130,626 Due in 2-5 years............................................ 86,160 89,060 Due after 5 years........................................... -- -- -------- -------- Total investments in debt securities........................ $214,688 $219,686 ======== ========
During 2000, the Company recorded a loss on equity investments in certain Internet-related companies of $39,600. The Company assessed various factors related to these investments including the decline in the market price where available, the review of each of the companies' financial statements including their cash positions and negative cash flow, as well as the change in market conditions with respect to the ability of companies such as these Internet start-up companies to raise additional capital without a proven business model. Based on this assessment, the Company determined that a permanent impairment existed in these investments. 17. QUARTERLY FINANCIAL DATA (UNAUDITED) The following table summarizes the quarterly financial data for the years ended December 31, 2000 and 1999. Net loss per share calculations for each of the quarters are based on the weighted average number of shares for each period; therefore, the sum of the quarters may not necessarily be equal to the full year per share amount.
NET LOSS PER SHARE (BASIC AND REVENUES NET LOSS DILUTED) -------- ----------- ------------ 2000 March 31, 2000........................................... $ 65,881 $ (431,465) $ (2.47) June 30, 2000............................................ 101,074 (518,304) (2.64) September 30, 2000....................................... 151,247 (786,925) (3.17) December 31, 2000........................................ 198,951 (1,348,914) (3.75) Year Ended December 31, 2000............................... $517,153 $(3,085,608) $(12.61) 1999 March 31, 1999........................................... $ 17,555 $ (18,569) $ (0.30) June 30, 1999............................................ 22,698 (17,565) (0.25) September 30, 1999....................................... 28,653 (17,109) (0.24) December 31, 1999........................................ 33,243 (234,749) (2.79) Year Ended December 31, 1999............................... $102,149 $ (287,992) $ (3.58)
18. SUBSEQUENT EVENTS (UNAUDITED) On March 22, 2001, the Company executed a non-binding letter of intent with Microsoft to revise their strategic relationship, which was originally entered into in May 1999. Under the terms of the revised relationship, (i) Microsoft will provide performance-based funding tied to the roll-out of the Company's new wireless and portal services for physicians, which are integrated with The Medical Manager physician F-31 86 WEBMD CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) office management information systems, (ii) the Company will adopt the PocketPC and other Microsoft technologies as its portal and wireless development platform, (iii) the Company will make Intergy available to run on Windows 2000 and SQL Server 2000, (iv) the Company will transition its WebMD.com portal to certain Microsoft technologies, (v) Microsoft has agreed to provide consulting services, support and other resources in connection with these undertakings, (vi) the Company will program the majority of the MSN health channel, and will have a majority share of revenue derived from advertising, sponsorship and e-commerce on the MSN health channel site and will no longer pay carriage fees to Microsoft, (vii) Microsoft will no longer be responsible for funding the sponsorship of subscriptions to the Company's physician portal, and (viii) the Company will not be required to share with Microsoft revenue generated by physician usage of its healthcare portals. The revisions to the relationship between the Company and Microsoft are subject to execution of definitive documentation. No assurances can be given that definitive agreements will be executed. F-32 87 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION - ----------- ----------- 2.1 Agreement and Plan of Reorganization dated as of February 24, 1998 among Registrant, MedNet Acquisition Corp. and ActaMed Corporation (incorporated by reference to Exhibit 2.0 to Registrant's Registration Statement on Form S-1 (No. 333-70553) filed January 14, 1999) 2.2 Agreement and Plan of Reorganization dated as of April 20, 1999, as amended, among Registrant, Merc Acquisition Corp. and MedE America Corporation (incorporated by reference to Exhibit 2.2 to Registrant's Registration Statement on Form S-4 (No. 333-86685) filed September 17, 1999) 2.3 Agreement and Plan of Reorganization dated as of May 20, 1999, as amended, among Registrant, WebMD, Inc. and Water Acquisition Corp. (incorporated by reference to Exhibit 2.1 to Registrant's Registration Statement on Form S-4 (No. 333-86685) filed September 17, 1999) 2.4 Agreement and Plan of Merger dated as of June 30, 1999, as amended, among Registrant, WebMD, Inc., Healtheon/WebMD Corporation, GNN Merger Corp. and Greenberg News Networks, Inc. (incorporated by reference to Exhibit 2.3 to Registrant's Registration Statement on Form S-4 (No. 333-86685) filed September 17, 1999) 2.5 Purchase Agreement dated as of December 20, 1999 among Electronic Data Systems Corporation, Eli Lilly and Company, Integrated Medical Systems, Inc., Kinetra LLC and Registrant (incorporated by reference to Exhibit 2.1 to Registrant's Report on Form 8-K filed February 10, 2000) 2.6 Agreement and Plan of Merger dated as of January 22, 2000 among Registrant, Envoy Corporation, Quintiles Transnational Corp. and QFinance, Inc. (incorporated by reference to Exhibit 2.1 to Registrant's Report on Form 8-K filed January 27, 2000) 2.7 Agreement and Plan of Merger dated as of February 13, 2000 between Registrant and Medical Manager Corporation (incorporated by reference to Exhibit 2.1 to Registrant's Report on Form 8-K/A filed February 24, 2000), as amended by Amendment No. 1 dated as of June 18, 2000 (incorporated by reference to Exhibit 2.1 to Registrant's Report on Form 8-K filed July 24, 2000) 2.8 Agreement and Plan of Merger dated as of February 13, 2000 among Registrant, Avicenna Systems Corporation and CareInsite, Inc. (incorporated by reference to Exhibit 2.2 to Registrant's Report on Form 8-K/A filed February 24, 2000), as amended by Amendment No. 1 dated as of June 18, 2000 (incorporated by reference to Exhibit 2.2 to Registrant's Report on Form 8-K filed July 24, 2000) 2.9 Agreement and Plan of Merger dated as of February 15, 2000 among Registrant, Tech Acquisition Corporation and OnHealth Network Company (incorporated by reference to Exhibit 2.1 to Registrant's Report on Form 8-K/A filed February 22, 2000) 3.1 Tenth Amended and Restated Certificate of Incorporation of Registrant, as currently in effect (incorporated by reference to Exhibit 3.1 to Registrant's Report on Form 8-K filed September 13, 2000) 3.2 Amended and Restated Bylaws of Registrant, as currently in effect (incorporated by reference to Exhibit 3.2 to Registrant's Report on Form 8-K filed September 13, 2000) 4.1 Specimen Common Stock certificate 10.1 Form of Indemnification Agreement to be entered into by Registrant with each of its directors and officers (incorporated by reference to Exhibit 10.1 to Registrant's Registration Statement on Form S-1 (No. 333-70553) filed January 14, 1999) 10.2 Form of Series B Preferred Stock Purchase Warrant between Registrant and certain of Registrant's Investors (incorporated by reference to Exhibit 10.22 to Registrant's Registration Statement on Form S-1 (No. 333-70553) filed January 14, 1999) 10.3 Amended and Restated Investors' Rights Agreement dated as of January 28, 1998 among Registrant and certain of Registrant's Security Holders (incorporated by reference to Exhibit 10.10 to Registrant's Registration Statement on Form S-1 (No. 333-70553) filed January 14, 1999)
E-1 88
EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.4 Services Agreement dated January 27, 1999 between WebMD, Inc. and Gleacher NatWest, Inc., currently known as Gleacher & Co. LLC (incorporated by reference to Exhibit 10.37 to Amendment No. 1 to Registrant's Registration Statement on Form S-4 (No. 333-86685) filed September 30, 1999) 10.5 Warrant to purchase shares of common stock of Registrant dated December 29, 2000 issued to Gleacher & Co. LLC (incorporated by reference to Exhibit 10.43 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1999) 10.6 Warrant to purchase shares of common stock of Registrant dated March 9, 2000 issued to Eric J. Gleacher (incorporated by reference to Exhibit 10.44 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1999) 10.7* Distribution and Cross Promotion Agreement dated May 6, 1999 among Microsoft Corporation, WebTV Networks, Inc., MSNBC Interactive News, L.L.C. and WebMD, Inc. (incorporated by reference to Exhibit 10.33 to Amendment No. 1 to Registrant's Registration Statement on Form S-4 (No. 333-86685) filed September 30, 1999) 10.8 Investment Agreement dated May 12, 1999 among WebMD, Inc., Microsoft Corporation and each of the other persons listed on Schedule I thereto (incorporated by reference to Exhibit 10.36 to Amendment No. 1 to Registrant's Registration Statement on Form S-4 (No. 333-86685) filed September 30, 1999) 10.9 Warrant to Purchase Shares of Common Stock of WebMD, Inc. dated May 12, 1999 issued to Microsoft Corporation 10.10* Agreement dated May 19, 1999 among Registrant, WebMD, Inc. and Microsoft Corporation (incorporated by reference to Exhibit 10.34 to Amendment No. 1 to Registrant's Registration Statement on Form S-4 (No. 333-86685) filed September 30, 1999) 10.11 Letter Agreement dated March 27, 2000 between Registrant and Microsoft Corporation (incorporated by reference to Exhibit 10.29 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1999) 10.12 Stock Purchase Agreement dated January 26, 2000 between Registrant and Janus Capital Corporation (incorporated by reference to Exhibit 10.10 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000) 10.13 Healtheon/WebMD Corporation Registration Rights Agreement dated January 26, 2000 between Registrant and Janus Capital Corporation (incorporated by reference to Exhibit 10.11 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000) 10.14 Healtheon/WebMD Corporation Registration Rights Agreement dated January 26, 2000 among Registrant, Eastrise Profits Limited, AHN/FIT Cable, LLC, AHN/FIT Internet, LLC, News America Incorporated and Fox Broadcasting Company (incorporated by reference to Exhibit 10.4 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000) 10.15 Healtheon/WebMD Media Services Agreement dated January 26, 2000 among Registrant, Eastrise Profits Limited and Fox Entertainment Group, Inc. (incorporated by reference to Exhibit 10.5 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000) 10.16 Content License Agreement dated January 26, 2000 between The News Corporation Limited and Registrant (incorporated by reference to Exhibit 10.6 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000) 10.17 Letter Agreement dated December 29, 2000 between Registrant and The News Corporation Limited 10.18 Data Rights Agreement dated as of May 26, 2000, as amended, between Registrant and Quintiles Transnational Corp. 10.19 Internet Product Development and Marketing Agreement dated as of May 26, 2000 between Registrant and Quintiles Transnational Corp. 10.20 W. Michael Long Employment Agreement (incorporated by reference to Exhibit 10.27 to Registrant's Registration Statement on Form S-1 (No. 333-70553) filed January 14, 1999)
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EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.21 Full Recourse Promissory Note dated as of July 11, 1997 between Registrant and W. Michael Long (incorporated by reference to Exhibit 10.25 to Registrant's Registration Statement on Form S-1 (No. 333-70553) filed January 14, 1999) 10.22 Series B Preferred Stock Purchase Warrant dated as of July 11, 1997, as amended, between Registrant and W. Michael Long (incorporated by reference to Exhibit 99.25 to Registrant's Registration Statement on Form S-8 (No. 333-47250) filed October 4, 2000) 10.23 Letter Agreement dated September 12, 2000 between Registrant and W. Michael Long (incorporated by reference to Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000) 10.24 Employment Agreement dated as of September 30, 1998 between WebMD, Inc. and Jeffrey T. Arnold (incorporated by reference to Exhibit 10.41 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1999) 10.25 Letter Agreement dated May 20, 1999 between Registrant and Jeffrey T. Arnold (incorporated by reference to Exhibit 10.42 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1999) 10.26 Employment Agreement dated September 8, 2000 between Registrant and John L. Westermann III (incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000) 10.27 Healtheon Corporation 1996 Stock Plan and Form of Stock Option Agreement (incorporated by reference to Exhibit 10.2 to Amendment No. 2 to Registrant's Registration Statement on Form S-1 (No. 333-70553) filed February 10, 1999) 10.28 WebMD Corporation Amended and Restated 1998 Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.27 to Registrant's Registration Statement on Form S-8 (No. 333-47250) filed October 4, 2000) 10.29 WebMD Corporation 2000 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to Amendment No. 1 to Registrant's Registration Statement on Form S-4 (No. 333-39592) filed August 1, 2000) 10.30 WebMD, Inc. Amended and Restated 1997 Stock Incentive Plan, as amended (incorporated by reference to Exhibit 10.2 to Registrant's Registration Statement on Form S-8 (No. 33-90795) filed November 12, 1999) 10.31 Envoy Stock Plan (incorporated by reference to Exhibit 99.1 to Registrant's Registration Statement on Form S-8 (No. 333-42616) filed July 31, 2000) 10.32 Amended and Restated 1989 Class A Non-Qualified Stock Option Plan of Medical Manager Corporation (incorporated by reference to Exhibit 10.1 to Medical Manager Corporation's Registration Statement on Form S-1 (No. 333-28654) filed May 18, 1989) 10.33 Amended and Restated 1989 Class B Non-Qualified Stock Option Plan of Medical Manager Corporation (incorporated by reference to Exhibit 10.2 to Medical Manager Corporation's Registration Statement on Form S-1 (No. 333-28654) filed May 18, 1989) 10.34 1991 Director Stock Option Plan of Medical Manager Corporation (incorporated by reference to Exhibit 4.2 to Medical Manager Corporation's Registration Statement on Form S-8 (No. 333-46640) filed March 24, 1992) 10.35 Amended and Restated 1991 Special Non-Qualified Stock Option Plan of Medical Manager Corporation (incorporated by reference to Exhibit 4.3 to Medical Manager Corporation's Registration Statement on Form S-8 (No. 333-36041) filed September 19, 1997) 10.36 Form of Stock Option Agreement made as of December 7, 1994 between Medical Manager Corporation and certain individuals (incorporated by reference to Exhibit 4.5 to Medical Manager Corporation's Registration Statement on Form S-8 (No. 333-21555) filed February 11, 1997) 10.37 Medical Manager Corporation's 1996 Amended and Restated Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to Medical Manager Corporation's (Commission File No. 0-29090) Quarterly Report on Form 10-Q for the quarter ended September 30, 1998)
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EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.38 Medical Manager Corporation's 1996 Amended and Restated Non-Employee Director's Stock Plan (incorporated by reference to Exhibit 10.2 to Medical Manager Corporation's (Commission File No. 0-29090) Annual Report on Form 10-K for the fiscal year ended December 31, 1997) 10.39 1996 Class C Stock Option Plan of Medical Manager Corporation (incorporated by reference to Exhibit 4.1 to Medical Manager Corporation's Registration Statement on Form S-8 (No. 333-36041) filed September 19, 1997) 10.40 1997 Class D Stock Option Plan of Medical Manager Corporation (incorporated by reference to Exhibit 4.2 to Medical Manager Corporation's Registration Statement on Form S-8 (No. 333-36041) filed September 19, 1997) 10.41 1998 Class E Stock Option Plan of Medical Manager Corporation (incorporated by reference to Exhibit 4.1 to Medical Manager Corporation's Registration Statement on Form S-8 (No. 333-72517) filed March 15, 1999) 10.42 The 1999 Medical Manager Corporation Stock Option Plan for Employees of Medical Manager Systems, Inc. (incorporated by reference to Exhibit 10.28 to Medical Manager Corporation's Annual Report on Form 10-K for the year ended June 30, 1999) 10.43 Form of Stock Option Agreement between the Corporation and each of John H. Kang and Michael A. Singer (incorporated by reference to Exhibit 99.5 to Amendment No. 1 to Medical Manager Corporation's Registration Statement on Form S-4 (No. 333-81123) filed June 24, 1999) 10.44 1995 Avicenna NQ Stock Option Plan, as amended (incorporated by reference to Exhibits 4.1 and 4.2 to Medical Manager Corporation's Registration Statement on Form S-8 (No. 333-19043) filed December 31, 1996) 10.45 1998 Porex Technologies Corp. Stock Option Plan of Medical Manager Corporation (incorporated by reference to Exhibit 4.2 to Medical Manager Corporation's Registration Statement on Form S-8 (No. 333-72517) filed March 15, 1999) 10.46 CareInsite, Inc. 1999 Officer Stock Option Plan (incorporated by reference to Exhibit 10.18 to Amendment No. 6 to CareInsite, Inc.'s Registration Statement on Form S-1 (No. 333-75071) filed June 11, 1999) 10.47 CareInsite, Inc. 1999 Employee Stock Option Plan. (incorporated by reference to Exhibit 10.17 to Amendment No. 6 to CareInsite, Inc.'s Registration Statement on Form S-1 (No. 333-75071) filed June 11, 1999) 10.48 CareInsite, Inc. 1999 Director Stock Option Plan (incorporated by reference to Annex H to Registrant's Registration Statement on Form S-4 (No. 333-39592) filed June 19, 2000) 10.49 Amendment to the Company Stock Option Plans of Medical Manager Corporation and CareInsite, Inc. (incorporated by reference to Exhibit 99.28 to Registrant's Registration Statement on Form S-8 (No. 333-47250) filed October 4, 2000) 21 Subsidiaries of Registrant 23.1 Consent of Ernst & Young LLP, Independent Auditors 24.1 Power of Attorney (see pages 51 and 52)
- --------------- * Confidential treatment was received with respect to certain portions of this document. E-4 EX-4.1 2 g68042ex4-1.txt SPECIMEN COMMON STOCK CERTIFICATE 1 EXHIBIT 4.1 Specimen Common Stock certificate 2 COMMON STOCK COMMON STOCK NUMBER SHARES WMD WEBMD SEE REVERSE FOR CERTAIN DEFINITIONS AND A STATEMENT AS TO THE RIGHTS, INCORPORATED UNDER THE LAWS OF PREFERENCES, PRIVILEGES AND THE STATE OF DELAWARE RESTRICTIONS ON SHARES CUSIP 94769M 10 5 THIS CERTIFIES THAT IS THE RECORD HOLDER OF FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, $0.0001 PAR VALUE, OF WEBMD CORPORATION transferable on the books of the Corporation in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar. CERTIFICATE OF STOCK WITNESS, the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: [WEBMD CORPORATE - --------------------- SEAL] -------------------------- SECRETARY CHAIRMAN OF THE BOARD COUNTERSIGNED AND REGISTERED: AMERICAN STOCK TRANSFER & TRUST COMPANY TRANSFER AGENT AND REGISTRAR BY AUTHORIZED SIGNATURE 3 A statement of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights as established, from time to time, by the Certificate of Incorporation of the Corporation and by any certificate of designation, and the number of shares constituting each class and series and the designations thereof, may be obtained by the holder hereof upon request and without charge from the Corporation at its principal office. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT -- __________________________ Custodian ____________________ (Cust) (Minor) under Uniform Gifts to Minors Act _____________________________________________________ (State) UNIF TRF MIN ACT -- __________________________ Custodian (until age _________) (Cust) __________________________________ under Uniform Transfers (Minor) to Minors Act____________________________________________ (State) Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, ______________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - --------------------------------------- - --------------------------------------- - -------------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Shares - ------------------------------------------------------------------------ of the common stock represented by the within Certificate, and do hereby irrevocable constitute and appoint Attorney - ----------------------------------------------------------------- to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated -------------------------- ---------------------------------------- NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. Signature(s) Guaranteed By ------------------------------------------------------------------- THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. EX-10.9 3 g68042ex10-9.txt WARRANT TO PURCHASE SHARES OF COMMON STOCK 1 EXHIBIT 10.9 Warrant to Purchase Shares of Common Stock of WebMD, Inc. dated May 12, 1999 issued to Microsoft Corporation 2 THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE FEDERAL SECURITIES ACT OF 1933, AS AMENDED, THE GEORGIA SECURITIES ACT OF 1973, AS AMENDED, OR THE SECURITIES LAWS OF ANY OTHER STATE. THIS WARRANT AND ANY OF SUCH SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED IN THE ABSENCE OF REGISTRATION UNDER SAID ACTS AND ALL OTHER APPLICABLE SECURITIES LAWS UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE. THIS WARRANT IS SUBJECT TO THE RESTRICTIONS ON EXERCISE AND TRANSFER CONTAINED IN ARTICLE IV HEREOF. WARRANT TO PURCHASE SHARES OF COMMON STOCK OF WEBMD, INC. Date of Issuance: May 12, 1999 THIS CERTIFIES that, for value received, WebMD, Inc., a Georgia corporation (the "Company"), hereby grants to Microsoft Corporation, a Washington corporation, or its registered assigns (the "Holder"), the right to purchase, at any time and from time to time prior to the Expiration Date, up to 7,614,916 shares in the aggregate of Common Stock Series D, no par value per share (the "Common Stock"), subject to the terms and conditions set forth herein. This warrant is hereinafter referred to as the "Warrant". ARTICLE I CERTAIN DEFINITIONS For all purposes of this Warrant, unless the context otherwise requires, the following terms shall have the following respective meanings: "Act": the federal Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder, all as the same shall be in effect at the time. "Additional Shares of Common Stock": all shares of common stock, regardless of series, issued by the Company after the Date of Issuance, other than the Warrant Shares. "Change of Control": any transaction or series of related transactions which result in (i) the acquisition of the Company by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation) that results in the Company's shareholders immediately prior to such transaction not holding (by virtue of such shares or securities issued solely with respect thereto) at least 60% of the voting 1 3 power of the surviving or continuing entity, or (ii) a sale, conveyance or disposition of all or substantially all of the assets of the Company unless the Company's shareholders immediately prior to such transaction will, as a result of such sale, conveyance or disposition hold (by virtue of securities issued as consideration for such sale, conveyance or disposition) at least 60% of the voting power of the purchasing entity, or (iii) the effectuation by the Company or its shareholders of a transaction or series of related transactions that results in the Company's shareholders immediately prior to such transaction not holding (by virtue of such shares or securities issued solely with respect thereto) at least 60% of the voting power of the Company. "Common Stock": as defined on the first page hereof. "Commission": the Securities and Exchange Commission or any other federal agency then administering the Act. "Company": WebMD, Inc., a Georgia corporation, located at 400 The Lenox Building, 3399 Peachtree Road, Atlanta, Georgia, 30326, and any other corporation assuming or required to assume the Warrant pursuant to Article V. "Convertible Securities": evidence of indebtedness, shares of stock or other securities that are convertible or exchangeable for Additional Shares of Common Stock. "Date of Issuance": the issue date of this Warrant, as set forth on the first page hereof. "Exercise Price": $54.17 per Stock Unit. "Expiration Date": as defined in Article VII hereof "Holder": as defined on the first page hereof. "Initial Public Offering": as defined in the Company's Articles of Incorporation. "Person": any individual, corporation, partnership, limited liability company, trust, unincorporated organization and any government, and any political subdivision, instrumentality or agency thereof. "Registration Rights Agreement": Registration Rights Agreement for Series E Preferred Stock and the Series F Preferred Stock dated as of even date herewith between the Company and the Holder. "Stock Unit": one share of Common Stock, as such stock is constituted on the Date of Issuance and thereafter the number of shares of Common Stock as shall result from the adjustments specified in Article V. "Warrant": as defined on the first page hereof. "Warrant Office": as defined in Section 3.1. 2 4 "Warrant Shares": the shares of Common Stock underlying the Stock Units purchasable by the Holder upon the exercise of this Warrant. Following the occurrence of an Initial Public Offering, all references in this Warrant to "Common Stock" shall be deemed to refer to the Company's authorized Common Stock, no par value per share, without designation as to series, by virtue of the automatic conversion of the Common Stock Series D into Common Stock that will occur pursuant to the Company's Articles of Incorporation. ARTICLE II EXERCISE OF WARRANT 2.1 Method of Exercise. To exercise this Warrant, the Holder shall deliver to the Company at the Warrant Office designated pursuant to Section 3.1, (a) a Notice of Exercise substantially in the form attached hereto as Exhibit A duly executed by the Holder specifying the number of Warrant Shares to be purchased, (b) payment of an amount equal to the aggregate Exercise Price for all such Warrant Shares, which shall be made (i) in cash or by certified or bank cashier's check payable to the order of the Company or by wire transfer of immediately available funds, or (ii) by delivery to the Company of that number of shares of capital stock of the Company (other than Warrant Shares purchasable or purchased upon the exercise of this Warrant) having a value computed based upon the then-current fair market value as determined in good faith by the Company's Board of Directors equal to the then applicable Exercise Price multiplied by the number of Warrant Shares being purchased, and (c) this Warrant. The number of Warrant Shares to be purchased in any exercise hereunder shall be no fewer than 500,000 or the total number of Warrant Shares available for purchase at the date of exercise, whichever is less. The Company shall, as promptly as practicable, and in any event within five (5) days thereafter, cause to be issued and delivered to the Holder (or its nominee) or the transferee designated in the Notice of Exercise a certificate or certificates representing the number of Warrant Shares specified in the Notice of Exercise. The stock certificate or certificates so delivered shall be in denominations of shares as may be specified in said notice and shall be issued in the name of the Holder or such other name as shall be designated in said notice. At the time of delivery of the certificate or certificates, appropriate notation shall be made on the Warrant Shares Purchase Schedule attached to this Warrant designating the number of shares purchased, and this Warrant shall then be returned to the Holder if this Warrant has been exercised only in part. The Holder or transferee so designated in the Notice of Exercise shall be deemed to have become the Holder of record of such Warrant Shares for all purposes as of the close of business on the date on which the Notice of Exercise is delivered to the Warrant Office, provided that an amount equal to the aggregate Exercise Price and this Warrant shall have also been delivered to the Company. The Company shall pay all expenses, taxes (excluding capital gains and income taxes) and other charges payable in connection with the preparation, issuance and delivery of stock certificates, except that, in case stock certificates shall be registered in a name or names other than the name of the Holder, funds sufficient to pay all stock transfer taxes payable upon the issuance of stock certificates shall be paid by the Holder promptly upon receipt of a written request of the Company therefor. 3 5 2.2 Shares to be Fully Paid and Non-Assessable. All Warrant Shares issued upon the exercise of this Warrant and the payment therefor shall be validly issued, fully paid, non-assessable and free from preemptive rights. 2.3 No Fractional Shares to be Issued. The Company shall not be required upon any exercise of this Warrant to issue a certificate representing any fraction of a share of Common Stock. 2.4 Legend on Warrant Shares. Each certificate for Warrant Shares issued upon exercise of this Warrant, unless at the time of exercise such shares are registered under the Act, shall bear substantially the following legend (and any additional legend required by any national securities exchanges upon which such shares may, at the time of such exercise, be listed or under applicable securities laws): The securities represented by this certificate have not been registered under the federal Securities Act of 1933, as amended, or the Georgia Securities Act of 1973, as amended ("the Acts"), or the securities laws of any state. They may not be sold, transferred, assigned, pledged, hypothecated, encumbered, or otherwise disposed of unless, in the opinion of counsel reasonably acceptable to the issuer, such transfer would be pursuant to an effective registration statement under said Acts or pursuant to an exemption from such registration. Any certificate issued at any time in exchange or substitution for any certificate bearing such legend (except a new certificate issued upon completion of a public distribution pursuant to a registration statement under the Act of the securities represented thereby) shall also bear the above legend unless, in the opinion of counsel to the Company, the securities represented thereby need no longer be subject to the restrictions on transferability. In addition, the provisions of Article IV shall be binding upon all subsequent holders of this Warrant. 2.5 Acknowledgment of Continuing Obligation. The Company shall, at the time of any exercise of this Warrant in whole or in part, upon request of the Holder, acknowledge in writing its continuing obligation to such holder in respect of any rights to which the Holder shall continue to be entitled after exercise in accordance with this Warrant; provided, however, that the failure of the Holder to make any such request shall not affect the continuing obligation of the Company to the Holder in respect of such rights. ARTICLE III WARRANT OFFICE; TRANSFER, DIVISION OR COMBINATION OF WARRANTS 3.1 Warrant Office. The Company shall maintain an office for certain purposes specified herein (the "Warrant Office"), which office shall initially be the Company's location set forth in Article I hereof, and may subsequently be such other office of the Company or of any 4 6 transfer agent of the Common Stock in the continental United States as to which written notice has previously been given to all of the Holders of the Warrants. 3.2 Ownership of Warrant. The Company may deem and treat the Person in whose name this Warrant is registered as the Holder and owner hereof (notwithstanding any notations of ownership or writing hereon made by anyone other than the Company) for all purposes and shall not be affected by any notice to the contrary, until presentation of this Warrant for registration of transfer as provided in this Article III. 3.3 Transfer of Warrant. The Company agrees to maintain at the Warrant Office books for the registration of permitted transfers of this Warrant. Subject to the provisions of Article IV, this Warrant and all rights hereunder are transferable, in whole or in part, on the books at that office, upon surrender of this Warrant at that office, together with a written assignment of this Warrant duly executed by the Holder or his, her or its duly authorized agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of the transfer. Subject to Article IV, upon surrender and payment, the Company shall execute and deliver a new Warrant in the name of the assignee, noting thereon the number of Warrant Shares theretofore purchased under this Warrant, and this Warrant shall promptly be canceled. To the extent this Warrant is transferred in part, the Company shall execute and deliver a new Warrant in the name of the Holder for the balance of the Warrant Shares not transferred to the assignee. A Warrant may be exercised by a new Holder for the purchase of shares of Common Stock without having a new warrant issued. 3.4 Division or Combination of Warrants. Except as provided in Section 3.3 above, this Warrant may not be divided or combined with any other warrant. 3.5 Expenses of Delivery of Warrants. The Company shall pay all expenses, taxes (other than transfer taxes), and other charges payable in connection with the preparation, issuance and delivery of new Warrants hereunder. ARTICLE IV RESTRICTIONS ON EXERCISE AND TRANSFER 4.1 Restrictions on Exercise and Transfer. Notwithstanding any provisions contained in this Warrant to the contrary, this Warrant shall not be exercisable or transferable except upon the conditions specified in this Article IV, which conditions are intended, among other things, to insure compliance with the provisions of the Act in respect of the exercise or transfer of the Warrant. The Holder, by acceptance hereof, agrees that he, she or it will not exercise or transfer this Warrant prior to delivery to the Company of any required opinion of the Holder's counsel (as the opinion and counsel are described in Section 4.2 hereof). 4.2 Opinion of Counsel. In connection with any exercise or transfer of this Warrant, the following provisions shall apply: 5 7 (a) If, in the written opinion of counsel to the Holder (which opinion and counsel must be acceptable to the Company), the proposed exercise or transfer of this Warrant may be effected without registration of this Warrant or the Common Stock issuable hereunder under the Act, the Holder shall be entitled to exercise or transfer this Warrant as proposed. In no event shall the Company be obligated (i) to effect a registration under the Act or any state securities law so as to permit the proposed exercise or transfer of this Warrant, (ii) to qualify to do business or to file a general consent to service of process in any state or other jurisdiction where the Company has not already done so, or (iii) to effect a transfer to a limited number of transferees; provided such transferees are qualified institutional buyers or institutional accredited investors; provided, however, that the Company shall have the obligation to register the shares of Common Stock issued upon exercise of this Warrant on the terms set forth in the Registration Rights Agreement. (b) If in the opinion of such counsel, the proposed exercise or transfer of this Warrant may not be effected without registration of this Warrant under the Act, the Holder shall not be entitled to exercise or transfer this Warrant until registration is effective or until exercise or transfer may be effected without registration, in the opinion of such counsel as set forth in Section 4.2(a) above. ARTICLE V ADJUSTMENTS 5.1 Adjustments to Number of Stock Units. The number of shares of Common Stock comprising a Stock Unit shall be subject to adjustment from time to time as set forth in this Section 5.1. (a) Stock Dividends, Subdivision and Combination. In case at any time or from time to time the Company shall: (i) take a record of the holders of its common stock of any series for the purpose of entitling them to receive a dividend payable in, or other distribution of, common stock of any series, (ii) subdivide its outstanding shares of common stock of any series into a larger number of shares of common stock of any series, or (iii) combine its outstanding shares of common stock of any series into a smaller number of shares of common stock of any series; then the number of shares of Common Stock comprising a Stock Unit immediately after the happening of any such event shall be adjusted so as to consist of the number of shares of Common Stock that a record holder of the number of shares of Common Stock comprising a Stock Unit immediately prior to the happening of such event would own or be entitled to receive after the happening of such event. The adjustments required by this subsection shall be made whenever and as often as any specified event requiring an adjustment shall occur. 6 8 (b) Certain Other Dividends and Distributions. In case at any time or from time to time the Company shall take a record of the holders of its common stock of any series for the purpose of entitling them to receive any dividend or other distribution of (i) cash (other than a cash distribution made as a dividend payable out of the net earnings or net profits of the Company realized during the year of such distribution or the last preceding year and accumulated net earnings or net profits of the Company from the date hereof to the time of such distribution, computed in accordance with generally accepted accounting principles employed by the Board of Directors of the Company for purposes of financial reports to shareholders of the Company), or (ii) any evidences of its indebtedness, any shares of its stock or any other securities or property of any nature whatsoever (other than cash); then at least five (5) business days prior to the record date to determine shareholders entitled to receive such dividend or distribution, the Company shall give notice of such proposed dividend or distribution to the Holder for the purpose of enabling the Holder to exercise the same, and thereby participate in such dividend or distribution. (c) Issuance of Additional Shares of Common Stock. In case at any time prior to the date of the occurrence of the Initial Public Offering or the consummation of a Change of Control in which the equity securities into which this Warrant is exercisable (or equity securities into which such securities are convertible upon the expiration of all waiting periods under the HSR Act) are listed for trading on any national securities exchange or through the Nasdaq National Market System, the Company shall (except as hereinafter provided) issue or sell any Additional Shares of Common Stock for a consideration per share less than the Exercise Price, then the number of shares of Common Stock thereafter comprising a Stock Unit shall be adjusted to that number determined by multiplying the number of shares of Common Stock comprising a Stock Unit immediately prior to such adjustment by a fraction (i) the numerator of which shall be the number of shares of Common Stock issued and outstanding plus the number of Additional Shares of Common Stock deemed to be outstanding pursuant to Subsection 5.1(d) immediately prior to the issuance of such Additional Shares of Common Stock plus the number of such Additional Shares of Common Stock so issued, and (ii) the denominator of which shall be the number of shares of Common Stock issued and outstanding plus the number of Additional Shares of Common Stock deemed to be outstanding pursuant to Subsection 5.1(d) immediately prior to the issuance of such Additional Shares of Common Stock plus the number of shares of Common Stock that the aggregate consideration for the total number of such Additional Shares of Common Stock so issued would purchase at the Exercise Price. The provisions of this Subsection 5.1(c) shall not apply to any issuance of Additional Shares of Common Stock for which an adjustment is provided under Subsection 5.1(a). No adjustment of the number of shares of Common Stock comprising a Stock Unit shall be made under this subsection upon the issuance of any Additional Shares of Common Stock that are issued pursuant to the exercise of any warrants or other subscription or purchase rights or pursuant to the exercise of any conversion or exchange rights in any Convertible Securities, if any such adjustment shall previously have been made upon the issuance of such warrants or other rights or upon the 7 9 issuance of such Convertible Securities (or upon the issuance of any warrant or other rights therefor) pursuant to Subsection 5.1(d). (d) Issuance of Warrants, Convertible Securities or Other Rights. In case at any time prior to the date of the occurrence of the Initial Public Offering or the consummation of a Change of Control in which the equity securities into which this Warrant is exercisable (or equity securities into which such securities are convertible upon the expiration of all waiting periods under the HSR Act) are listed for trading on any national securities exchange or through the Nasdaq National Market System, the Company shall issue or sell any warrants or other rights to subscribe for or purchase any Additional Shares of Common Stock or any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the consideration per share for which Additional Shares of Common Stock may at any time thereafter be issuable pursuant to such warrants or other rights or pursuant to the terms of such Convertible Securities shall be lower than the Exercise Price, then the number of shares of Common Stock thereafter comprising a Stock Unit shall be adjusted as provided in Subsection 5.1(c) and the aggregate consideration for such maximum number of Additional Shares of Common Stock shall be deemed to be the minimum consideration received and receivable by the Company for the issuance of such Additional Shares of Common Stock pursuant to such warrants or other rights or pursuant to the terms of such Convertible Securities. No adjustment of the number of shares of Common Stock comprising a Stock Unit shall be made under this Subsection 5.1(d) upon the issuance of any Convertible Securities that are issued pursuant to the exercise of any warrants or other subscription or purchase rights therefor, if any such adjustment shall previously been made upon the issuance of such warrants or other rights pursuant to this Subsection 5.1.(d). (e) Superseding Adjustment of Stock Unit. Upon the expiration of any options, warrants or rights to purchase any Additional Shares of Common Stock, the termination of any rights to convert or exchange for any Additional Shares of Common Stock, the expiration of any options related to such Convertible Securities, or any increase in the consideration per share for any Additional Shares of Common Stock are issuable on account of which any adjustment of the number of shares of Common Stock comprising a Stock Unit shall have been made pursuant to the foregoing Subsection 5.1(d) or any new adjustments of the number of shares of Common Stock comprising a Stock Unit shall have been made pursuant to this Section 5.1(d), then such previous adjustment shall be rescinded and annulled and the Additional Shares of Common Stock that were deemed to have been issued by virtue of the computation made in connection with the adjustment so rescinded and annulled shall no longer be deemed to have been issued by virtue of such computation. Thereupon, a recomputation shall be made of the effect of such rights or options or other Convertible Securities on the basis of the issuance of only the number of Additional Shares of Common Stock actually issued upon the exercise of such options, warrants or other Convertible Securities or upon the conversion or exchange of such Convertible Securities or upon the rights related to such Convertible Securities for the consideration actually paid. (f) Other Provisions Applicable to Adjustment Under This Section. The following provisions shall be applicable to the making of adjustments of the number of shares of Common Stock comprising a Stock Unit hereinbefore provided for in this Section 5.1; 8 10 (i) Treasury Stock. The sale or other disposition of any issued shares of common stock owned or held by or for the account of the Company shall be deemed an issuance thereof for the purposes of this Section 5.1. (ii) Computation of Consideration. To the extent that any Additional Shares of Common Stock or any Convertible Securities or any warrants or other rights to subscribe for or purchase any Additional Shares of Common Stock or any Convertible Securities shall be issued for a cash consideration, the consideration received by the Company therefor, or, if such Additional Shares of Common Stock or Convertible Securities are offered by the Company for subscription, the subscription price, or, if such Additional Shares of Common Stock or Convertible Securities are sold to underwriters or dealers for public offering without a subscription offering, the initial public offering price, in any such case excluding any amounts paid or receivable for accrued interest or accrued dividends (but without deduction of any compensation, discounts or expenses paid or incurred by the Company for and in the underwriting of, or otherwise in connection with, the issuance thereof). To the extent that such issuance shall be for a consideration other than cash, then, except as herein otherwise expressly provided, the amount of such consideration shall be deemed to be the fair value of such consideration at the time of such issuance as determined in good faith by the Board of Directors of the Company (but without deduction of any compensation, discounts or expenses paid or incurred by the Company for and in the underwriting of, or otherwise in connection with, the issuance thereof). In case any Additional Shares of Common Stock or Convertible Securities or any warrants or other rights to subscribe for or purchase such Additional Shares of Common Stock or Convertible Securities shall be issued in connection with any merger in which the Company issues any securities, the amount of consideration therefor shall be deemed to be the fair value, as determined in good faith by the Board of Directors of the Company, or such portion of the assets and business of the nonsurviving corporation as such Board in good faith shall determine to be attributable to such Additional Shares of Common Stock, Convertible Securities, warrants or other rights, as the case may be. In the event of any consolidation or merger of the Company in which the Company is not the surviving corporation or in the event of any sale of all or substantially all of the assets of the Company for stock or other securities of any corporation, the Company shall be deemed to have issued a number of Additional Shares of Common Stock or Convertible Securities of the other corporation computed on the basis of the actual exchange ratio on which the transaction was predicated, and the consideration received for such issuance shall be equal to the fair market value, as determined in good faith by the Board of Directors of the Company, on the date of such transaction, of such stock or securities of the other corporation, and if any such calculation results in adjustment of the number of shares of Common Stock comprising a Stock Unit immediately prior to such merger, conversion or sale for purposes of this Subsection 5.1(f), such merger, conversion or sale shall be deemed to have been made after giving effect to such adjustment. The consideration for any Additional Shares of Common Stock issuable pursuant to any warrants or other rights to subscribe for or purchase the same shall be the consideration received by the Company for issuing such warrants or other rights, plus the additional consideration payable to the Company upon the exercise of such warrants or other rights. The consideration for any Additional Shares of Common Stock issuable pursuant to the terms of any Convertible Securities shall be the consideration received by the Company for issuing any warrants or other rights to subscribe for or purchase such Convertible Securities, plus 9 11 the consideration paid or payable to the Company in respect of the subscription for or purchase of such Convertible Securities, plus the additional consideration, if any, payable to the Company upon the exercise of the right of conversion or exchange in such Convertible Securities. In case of the issuance at any time of any Additional Shares of Common Stock or Convertible Securities in payment or satisfaction of any dividends upon any class of stock other than the Common Stock, the Company shall be deemed to have received for such Additional Shares of Common Stock or Convertible Securities a consideration equal to the amount of such dividend so paid or satisfied. (iii) When Adjustments to be Made. The adjustments required by the preceding subsections of this Section 5.1 shall be made whenever and as often as any specified event requiring an adjustment shall occur, except that no adjustment of the number of shares of Common Stock comprising a Stock Unit that would otherwise be required shall be made (except in the case of a subdivision or combination of shares of the common stock, as provided for in Subsection 5.1(a)) unless and until such adjustment, either by itself or with other adjustments not previously made, adds or subtracts at least 1/20th of a share to or from the number of shares of Common Stock comprising a Stock Unit immediately prior to the making of such adjustment. Any adjustment representing a change of less than such minimum amount (except as aforesaid) shall be carried forward and made as soon as such adjustment, together with other adjustments required by this section and not previously made, would result in a minimum adjustment. For the purpose of any adjustment, any specified event shall be deemed to have occurred at the close of business on the date of this occurrence. (iv) Fractional Interests. In computing adjustments under this section, fractional interests in Common Stock shall be taken into account to the nearest one-thousandth of a share. (g) When Adjustment Not Required -- Abandonment of Plan for Dividend and the Like. If the Company shall take a record of the holders of its common stock of any series for the purpose of entitling them to receive a dividend or distribution or subscription or purchase rights and shall, thereafter and before the distribution to shareholders thereof, legally abandon its plan to pay or deliver such dividend, distribution, subscription or purchase rights, then thereafter no adjustment shall be required by reason of the taking of such record and any such adjustment previously made in respect thereof shall be rescinded and annulled. (h) Reorganization, Reclassification, Merger, Consolidation or Disposition of Assets. In case the Company shall reorganize its capital, reclassify its capital stock, merge or consolidate into another corporation, then the number of shares of stock purchasable upon exercise of this Warrant shall be adjusted to consist of the number of shares of stock or other securities that a record holder of the number of shares of Common Stock purchasable upon exercise of this Warrant immediately prior to such event would own or be entitled to receive immediately after such event. (i) No Adjustment. Notwithstanding the foregoing, an adjustment as provided in this Section 5.1 shall not be made if (a) the Company offers securities to the public pursuant to a registration statement under the Securities Act, (b) the Company issues securities 10 12 pursuant to the acquisition by the Company of any product, technology, know how or another corporation by merger, purchase of all or substantially all of the assets, or any other reorganization whereby the Company owns over fifty percent (50%) of the voting power of such corporation, (c) the Company issues any shares of common stock of the Company pursuant to options, warrants or rights granted either before or after the Date of Issuance to purchase shares of such common stock, in favor of employees, directors, officers or consultants of the Company of any subsidiary thereof pursuant to a stock option plan or agreement approved by the Company's Board of Directors; provided that such stock options thereunder, if granted after the Date of Issuance, are granted at a conversion or exercise price that the Company's Board of Directors determines in good faith is not less than the fair market value of the securities into which they are exercisable as of the date of grant, or (d) the conversion of any securities of the Company into common stock pursuant to the Company's Articles of Incorporation, as amended. 5.2 Notice to Holder. Whenever the Company takes any action that causes the composition of a Stock Unit to change under Sections 5.1, the Company shall provide the Holder with written notice of such change and the number of Warrant Shares for which this Warrant is or will become exercisable. Such notice will be provided not more than ten (10) days after any such action has occurred. ARTICLE VI ADDITIONAL NOTICES TO WARRANT HOLDER In addition to any other notice required hereunder, the Company shall provide the Holder with a copy of any notice that the Company is required to provide those Persons holding shares of Common Stock on the same date such Persons receive such notice. ARTICLE VII EXPIRATION This Warrant shall continue in effect until the earlier of (the "Expiration Date"): (i) the date on which the Warrant has been exercised or cancelled pursuant to the terms hereof with respect to all of the Warrant Shares, and (ii) the fifth (5th) anniversary of the Date of Issuance. ARTICLE VIII CERTAIN COVENANTS 8.1 Covenants of the Company. The Company has taken all action necessary to authorize the issuance of this Warrant and the issuance of shares of Common Stock upon exercise hereof. The Company covenants and agrees that it will reserve and set apart and have at all times, free from preemptive rights, a number of shares of authorized but unissued Common Stock or other securities deliverable upon the exercise of this Warrant from time to time sufficient to enable it at any time to fulfill all its obligations hereunder. 11 13 8.2 Covenants of the Holder. In the event that the exercise of this Warrant for Common Stock would require any filing by the Holder under the Hart Scott Rodino Antitrust Improvements Act of 1976 or any successor law and rules and regulations issued pursuant to that Act or any successor law (the "HSR Act"), then, before such exercise, either (i) the parties shall have been granted early termination of the waiting period under the HSR Act, or (ii) the applicable waiting period shall have expired without any agency having sought injunctive relief with respect to the effectiveness of the voting rights. ARTICLE IX MISCELLANEOUS 9.1 Entire Agreement; Governing Law. This Warrant contains the entire agreement between the Holder and the Company with respect to the purchase of the Warrant Shares and supersedes all prior arrangements or understandings with respect thereto. This Warrant shall be governed by and construed under the laws of the State of Georgia, without regard to its principles of conflicts of laws. 9.2 Waiver and Amendment. Any term or provision of this Warrant may be waived at any time by the party that is entitled to the benefits thereof, and any term or provision of this Warrant may be amended or supplemented at any time by agreement of the holder hereof and the Company, except that any waiver of any term or condition, or any amendment or supplementation, of this Warrant must be in writing. A waiver of any breach or failure to enforce any of the terms or conditions of this Warrant shall not in any way affect, limit or waive a party's rights hereunder at any time to enforce strict compliance thereafter with any term or condition of this Warrant. 9.3 Illegality. In the event that any one or more of the provisions contained in this Warrant shall be determined to be invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in any other respect and the remaining provisions of this Warrant shall not, at the election of the party for whom the benefit of the provision exists, be in any way impaired. 9.4 Filing of Warrant. A copy of this Warrant shall be filed in the records of the Company. 9.5 Notices. Any notice or other document required or permitted to be given or delivered to the Holder shall be delivered personally, or sent by certified or registered mail, to the Holder at the last address shown on the books of the Company maintained at the Warrant Office for the registration of, and the registration of transfer of, the Warrant or at any more recent address of which any Holder shall have notified the Company in writing. Any notice or other document required or permitted to be given or delivered to the Company shall be delivered at, or sent by certified or registered mail to, the Warrant Office, attention: Chief Executive Officer, or such other address within the United States of America as shall have been furnished by the Company to the Holder hereof. 12 14 9.6 Limitation of Liability; Not Shareholders. No provision of this Warrant shall be construed as conferring upon the Holder the right to vote, consent, receive dividends or receive notice other than as herein expressly provided in respect of meetings of shareholders for the election of directors of the Company or any other matter whatsoever as a shareholder of the Company. No provision hereof, in the absence of affirmative action by the Holder to purchase Warrant Shares, and no enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of such Holder for the purchase price of any Warrant Shares or as a shareholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. 9.7 Loss, Destruction, Etc. of Warrant. Upon receipt of evidence satisfactory to the Company of the loss, theft, mutilation or destruction of the Warrant, and in the case of any such loss, theft or destruction, upon delivery of a bond of indemnity in such form and amount as shall be reasonably satisfactory to the Company, or in the event of such mutilation, upon surrender and cancellation of the Warrant, the Company shall make and deliver a new warrant, of like tenor, in lieu of such lost, stolen, destroyed or mutilated Warrant. Any Warrant issued under the provisions of this Section 9.7 in lieu of any Warrant alleged to be lost, destroyed or stolen, or in lieu of any mutilated Warrant, shall constitute an original contractual obligation on the part of the Company. IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in its name by its Chief Executive Officer and its corporate seal to be impressed hereon as of the 12th day of May, 1999. [CORPORATE SEAL] WEBMD, INC. Attest: By: /s/ W. Michael Heekin By: /s/ Jeff Arnold -------------------------------- ---------------------------------- Name: W. Michael Heekin Jeffrey T. Arnold ------------------------------- Its: Chief Executive Officer Title: Executive Vice President and ----------------------------- Secretary ----------------------------- 13 15 WARRANT SHARES PURCHASE SCHEDULE
NO. OF SHARES PURCHASED DATE OF PURCHASE NOTATION BY COMPANY OFFICER - -------------------------------------- -------------------------- ----------------------------------------- - -------------------------------------- -------------------------- ----------------------------------------- - -------------------------------------- -------------------------- ----------------------------------------- - -------------------------------------- -------------------------- ----------------------------------------- - -------------------------------------- -------------------------- ----------------------------------------- - -------------------------------------- -------------------------- -----------------------------------------
14 16 EXHIBIT A NOTICE OF EXERCISE Dated: ----------------------- The undersigned hereby irrevocably elects to exercise its right to purchase _____ shares of the Common Stock, no par value per share, of WebMD, Inc., such right being pursuant to a Warrant dated May 12, 1999, as issued to Microsoft Corporation, for up to 7,614,916 shares of Common Stock (subject to adjustment in accordance with the terms of the Warrant), and remits herewith the sum of $_______ in payment for same in accordance with said Warrant. After giving effect to the foregoing election to exercise, there shall remain unexercised the right to purchase _____ shares of the Common Stock, no par value per share (subject to adjustment) under this Warrant. INSTRUCTIONS FOR REGISTRATION OF COMMON STOCK Name --------------------------------------------------------------------------- (Please typewrite or print in block letters) Address ------------------------------------------------------------------------ Signature: ------------------------------ Shares Heretofore Purchased Under Warrant: - ----------------------------------- 15 EX-10.17 4 g68042ex10-17.txt LETTER AGREEMENT 1 EXHIBIT 10.17 Letter Agreement dated December 29, 2000 between Registrant and The News Corporation Limited 2 [Letterhead of WebMD Corporation] December 29, 2000 The News Corporation Limited c/o News America Incorporated 1211 Avenue of the Americas New York, New York 10036 Attention: David DeVoe, Senior Executive Vice President Dear Mr. DeVoe: The purpose of this letter is to evidence the agreement by and among WebMD Corporation, a Delaware corporation ("WEBMD") formerly known as Healtheon/WebMD Corporation, Healtheon/WebMD Cable Corporation, a Delaware corporation ("WEBMD CABLE") and wholly owned subsidiary of WebMD, Healtheon/WebMD Internet Corporation, a Delaware corporation ("WEBMD INTERNET") and wholly owned subsidiary of WebMD, HW International Holdings, Inc., a Delaware corporation and wholly owned subsidiary of WebMD ("INTERNATIONAL HOLDINGS" and, collectively with WebMD, WebMD Cable and WebMD Internet, the "WEBMD ENTITIES") and The News Corporation Limited, a South Australia, Australia corporation ("NEWS CORP"), Fox Entertainment Group, Inc., a Delaware corporation ("FOX") which is controlled through certain intermediaries by News Corp, Fox Broadcasting Company, a Delaware corporation ("FBC") and a subsidiary of Fox, Eastrise Profits Limited, an international business company incorporated under the laws of the British Virgin Islands ("EASTRISE") which is controlled through certain intermediaries by News Corp, News America Incorporated, a Delaware corporation ("NEWS AMERICA") which is controlled through certain intermediaries by News Corp, AHN/FIT Cable LLC, a Delaware limited liability company ("AHN/FIT CABLE") which is owned through certain intermediaries by Fox, AHN/FIT Internet LLC, a Delaware limited liability company which is owned through certain intermediaries by Fox ("AHN/FIT Internet"), and IJV Holdings Inc., a Delaware corporation and wholly owned subsidiary of Fox ("IJV HOLDINGS," and, collectively with News Corp, Fox, FBC, Eastrise, News America, AHN/FIT Cable and AHN/FIT Internet, the "NEWS CORP ENTITIES"), concerning the modification or termination of various agreements and arrangements concerning the strategic alliance between WebMD and News Corp. BACKGROUND A. As of December 6, 1999, WebMD, News Corp and Fox entered into the Master Strategic Alliance Agreement (the "MASTER STRATEGIC ALLIANCE Agreement") pursuant to which they agreed to enter into certain strategic alliances and deliver certain documents; B. As of January 26, 2000 and as contemplated by the Master Strategic Alliance Agreement, WebMD, WebMD Cable, WebMD Internet, Fox, FBC, Eastrise, AHN/FIT Cable and AHN/FIT Internet entered into the Purchase Agreement (the "PURCHASE AGREEMENT") pursuant to which Fox purchased from WebMD 2,000,000 shares of common stock, par value $0.0001 per share (the "COMMON STOCK"), of WebMD and 155,951 shares of Series A Preferred Stock, par value $0.0001 per share (the "PREFERRED STOCK"), of WebMD for an aggregate consideration consisting of (i) $100 million, (ii) the transfer by AHN/FIT Cable to WebMD Cable of a 50% interest in The Health Network LLC, a Delaware limited liability company ("HEALTH NETWORK"), (iii) the transfer by AHN/FIT Internet to WebMD Internet of a 50% interest in The H/W Health & Fitness LLC, a Delaware limited liability company ("HEALTH & FITNESS"), (iv) $400 million of branding services across the various media owned by News Corp and its affiliates throughout the world pursuant to the Media Services Agreement (as defined below), and (v) 3 content to be provided by News Corp pursuant to the News Corp Content License Agreement (as defined below); C. As contemplated by the Purchase Agreement and at the direction of Fox, WebMD issued 2,000,000 shares of Common Stock to News America, and an aggregate of 155,951 shares of Preferred Stock which are currently held by the following News Corp Entities: 50,433 shares of Preferred Stock are held by News America, 67,244 shares of Preferred Stock are held by FBC, 36,743 shares of Preferred Stock are held by AHN/FIT Cable and 1,531 shares of Preferred Stock are held by AHN/FIT Internet; D. As contemplated by the Purchase Agreement, WebMD, Eastrise, AHN/FIT Cable, AHN/FIT Internet, News America and FBC entered into the Registration Rights Agreement dated as of January 26, 2000 (the "REGISTRATION RIGHTS AGREEMENT"); E. As contemplated by the Purchase Agreement, WebMD Cable and AHN/FIT Cable entered into the Amended and Restated Operating Agreement of Health Network dated as of January 26, 2000, as amended (as amended, the "HEALTH NETWORK OPERATING AGREEMENT"); F. As contemplated by the Purchase Agreement, WebMD Internet and AHN/FIT Internet entered into the Amended and Restated Operating Agreement of Health & Fitness dated as of January 26, 2000 (the "HEALTH & FITNESS OPERATING AGREEMENT"); G. As contemplated by the Master Strategic Alliance Agreement, International Holdings and IJV Holdings entered into the Operating Agreement of WebMD International LLC, a Delaware LLC ("INTERNATIONAL") dated as of January 26, 2000 (the "INTERNATIONAL OPERATING AGREEMENT"); H. Following the execution of the Health Network Operating Agreement, Health Network and WebMD entered into the Trademark License Agreement dated as of January 26, 2000 (the "WEBMD/HEALTH NETWORK TRADEMARK LICENSE AGREEMENT") and the Content License Agreement dated as of January 26, 2000 (the "WEBMD/HEALTH NETWORK CONTENT LICENSE AGREEMENT"); I. Following the execution of the International Operating Agreement, International and News America entered into the Management Services Agreement dated as of January 26, 2000 (the "INTERNATIONAL MANAGEMENT SERVICES AGREEMENT") and International and Eastrise entered into the WebMD International Media Services Agreement dated as of January 26, 2000 (the "INTERNATIONAL MEDIA SERVICES AGREEMENT"); J. Following the execution of the Health Network Operating Agreement and the International Operating Agreement, Health Network and International entered into the Trademark License Agreement dated as of January 26, 2000 (the "INTERNATIONAL/HEALTH NETWORK TRADEMARK LICENSE AGREEMENT") and the Content License Agreement dated as of January 26, 2000 (the "INTERNATIONAL/HEALTH NETWORK CONTENT LICENSE AGREEMENT"); K. Following the execution of the Health & Fitness Operating Agreement and the International Operating Agreement, Health & Fitness and International entered into the Trademark License Agreement dated as of January 26, 2000 (the "INTERNATIONAL/HEALTH & FITNESS TRADEMARK LICENSE AGREEMENT") and the Content License Agreement dated as of January 26, 2000 (the "INTERNATIONAL/HEALTH & FITNESS CONTENT LICENSE AGREEMENT"); L. As contemplated by the Purchase Agreement, WebMD, Eastrise and Fox entered into the Healtheon/WebMD Media Services Agreement dated as of January 26, 2000 (the "DOMESTIC MEDIA SERVICES AGREEMENT"); and -2- 4 M. As contemplated by the Purchase Agreement, WebMD, Fox and News Corp entered into the Content License Agreement dated as of January 26, 2000 pursuant to which Fox licensed Fox content to WebMD (the "FOX CONTENT LICENSE AGREEMENT") and WebMD and News Corp entered into the Content License Agreement dated as of January 26, 2000 pursuant to which WebMD licensed WebMD content to various News Corp Entities (the "WEBMD CONTENT LICENSE Agreement"). The WebMD Entities and the News Corp Entities desire to modify or terminate the agreements to which they are party as specified below: AGREEMENTS REGARDING HEALTH NETWORK 1.1. ASSIGNMENT OF MEMBER INTEREST IN HEALTH NETWORK. Subject to the terms and conditions of this Letter Agreement, WebMD Cable hereby agrees to assign at the Closing (defined below) its entire interest in Health Network (the "WEBMD CABLE INTEREST") free and clear of all liens, claims and encumbrances to AHN/FIT Cable or another entity identified by News Corp which entity, if it is not AHN/FIT Cable, shall be added as a party to this Letter Agreement (the "AHN/FIT HEALTH NETWORK ENTITY"), pursuant to an assignment agreement in a form reasonably satisfactory to the parties hereto (the "CABLE INTEREST ASSIGNMENT AGREEMENT"). Effective upon the Closing, the Put and Call (as such terms are defined in the Health Network Operating Agreement) shall be terminated. Through the date of the Closing, WebMD Cable shall be allocated losses of Health Network equal to the aggregate amount of its funding to Health Network; all other profits, losses and items thereof of Health Network shall be allocated to the AHN/FIT Cable. 1.2. TERMINATION OF CERTAIN AGREEMENTS. The parties to this Letter Agreement include all of the parties to each of the WebMD/Health Network Trademark License Agreement, the WebMD/Health Network Content License Agreement, the International/Health Network Trademark License Agreement and the International/Health Network Content License Agreement (collectively, the "TERMINATED HEALTH NETWORK AGREEMENTS"). Upon the Closing, each of the Terminated Health Network Agreements shall be, without the need for any further action on the part of any party, terminated and shall be of no further force and effect. 1.3. RELEASE BY NEWS CORP ENTITIES. Effective upon the Closing, each of the News Corp Entities shall fully release each of the WebMD Entities and each of their respective directors, officers, agents, employees, stockholders, attorneys, legal representatives, subsidiaries, successors, assigns and other affiliates (the "WEBMD RELEASED PARTIES") from any and all obligations arising out of the ownership or operations of the business of Health Network, including, but not limited to, any obligations under the Health Network Operating Agreement (including obligations to make capital contributions to Health Network) and obligations under the Terminated Health Network Agreements; provided, however, that nothing contained in this Section 1.3 shall limit any rights the parties may have with respect to a breach of any representation, warranty or covenant as set forth in this Letter Agreement. 1.4. INDEMNIFICATION BY NEWS CORP ENTITIES. Each of the News Corp Entities agrees effective as of the Closing jointly and severally to indemnify each of the WebMD Released Parties from any and all claims, losses, liabilities, or damages arising out of the ownership and operations of the business of Health Network other than those arising out of the gross negligence or willful misconduct of any WebMD Released Party; provided, however, that nothing contained in this Section 1.4 shall limit any rights the parties may have with respect to a breach of any representation, warranty or covenant as set forth in this Letter Agreement. -3- 5 1.5. REPRESENTATION AND WARRANTY OF WEBMD. WebMD hereby represents and warrants that, from January 26, 2000 until the date hereof, the WebMD Entities have operated Health Network in the ordinary course of business in accordance with past practices. AGREEMENTS REGARDING INTERNATIONAL 2.1. ASSIGNMENT OF MEMBER INTEREST IN INTERNATIONAL. Subject to the terms and conditions of this Letter Agreement, IJV Holdings hereby agrees to assign at the Closing (defined below) its entire interest in International (the "NEWS CORP INTERNATIONAL INTEREST") free and clear of all liens, claims and encumbrances to an entity identified by WebMD which entity, if it is not a WebMD Entity, shall be added as a party to this Agreement (the "WEBMD INTERNATIONAL ENTITY"), pursuant to an assignment agreement in a form reasonably acceptable to the parties (the "INTERNATIONAL INTEREST ASSIGNMENT AGREEMENT"). Effective upon the Closing, the Put (as such term is defined in the International Operating Agreement) shall be terminated. Through the date of the Closing, IJV Holdings shall be allocated losses of International equal to the aggregate amount of its funding to International; all other profits, losses and items thereof of International shall be allocated to International Holdings. 2.2. TERMINATION OF CERTAIN AGREEMENTS. The parties to this Letter Agreement include all of the parties to each of the International Management Services Agreement and the International Media Services Agreement (collectively, the "TERMINATED INTERNATIONAL AGREEMENTS"). Upon the Closing, each of the Terminated International Agreements shall be, without the need for any further action on the part of any party, terminated and shall be of no further force and effect. 2.3. RETURN OF REMAINING FUNDS. The parties acknowledge that prior to the date hereof IJV Holdings contributed $3 million to the capital of International. To extent that such capital has not been expended prior to the close of business on the date hereof, the remaining amount shall be returned to IJV Holdings in cash at the Closing. 2.4. RELEASE BY WEBMD ENTITIES. Effective upon the Closing each of the WebMD Entities shall fully release each of the News Corp Entities and each of their respective directors, officers, agents, employees, stockholders, attorneys, legal representatives, subsidiaries, successors, assigns and other affiliates (the "NEWS CORP RELEASED PARTIES") from any and all obligations arising out of the ownership and operations of the business of International, including, but not limited to, any obligation under the International Operating Agreement (including any obligation to make capital contributions to International) and obligations under the Terminated International Agreements. 2.5. INDEMNIFICATION BY WEBMD ENTITIES. Each of the WebMD Entities agrees effective as of the Closing to jointly and severally indemnify each of the News Corp Released Parties from any and all claims, losses, liabilities, or damages arising out of the ownership and operations of the business of International other than those arising out of the gross negligence or willful misconduct of any News Corp Released Party. AGREEMENTS REGARDING DOMESTIC MEDIA SERVICES 3.1. AGREEMENTS REGARDING THE MEDIA SERVICES AGREEMENT. The parties to this Agreement include all of the parties to the Domestic Media Services Agreement. At the Closing, the Domestic Media Services Agreement shall be, without the need for any further action on the part of any party, amended as set forth in Exhibit 3.1 of this Letter Agreement. Except as contemplated by this Section 3.1, the terms and conditions of the Media Services Agreement shall remain in full force and effect. -4- 6 AGREEMENTS REGARDING HEALTH & FITNESS 4.1. ASSIGNMENT OF MEMBER INTEREST IN HEALTH & FITNESS. Subject to the terms and conditions of this Agreement, WebMD Internet hereby agrees to assign at the Closing its entire interest in Health & Fitness (the "WEBMD INTERNET INTEREST") free and clear of all liens, claims and encumbrances to AHN/FIT Internet or another entity identified by News Corp which entity, if it is not AHN/FIT Cable, shall be added as a party to this Letter Agreement (the "AHN/FIT HEALTH & FITNESS ENTITY"), pursuant to an assignment agreement in a form reasonably acceptable to the parties (the "INTERNET INTEREST ASSIGNMENT AGREEMENT"). Effective upon the Closing, the Put and Call (as such terms are defined in the Health & Fitness Operating Agreement) shall be terminated. Through the date of the Closing, WebMD Internet shall be allocated losses of Health & Fitness equal to the aggregate amount of its funding to Health & Fitness; all other profits, losses and items thereof of Health & Fitness shall be allocated to the AHN/FIT Internet. 4.2. TERMINATION OF CERTAIN AGREEMENTS. The parties to this Letter Agreement include all of the parties to each of the International/Health & Fitness Trademark License Agreement and the International/Health & Fitness Content License Agreement (collectively, the "TERMINATED HEALTH & FITNESS AGREEMENTS"). Upon the Closing, each of the Terminated Health & Fitness Agreements shall be, without the need for any further action on the part of any party, terminated and shall be of no further force and effect. 4.3. RELEASE BY NEWS CORP ENTITIES. Each of the News Corp Entities does hereby fully release each of the WebMD Released Parties from any and all obligations arising from the ownership and operation of the business of Health & Fitness, including, but not limited to any obligations under the Terminated Health & Fitness Agreements. 4.4. INDEMNIFICATION BY NEWS CORP ENTITIES. Each of the News Corp Entities agrees effective as of the Closing to jointly and severally indemnify each of the WebMD Released Parties from any and all claims, losses, liabilities, or damages arising out of the ownership and operations of the business of Health & Fitness other than those arising out of the gross negligence or willful misconduct of any WebMD Released Party. CERTAIN AGREEMENTS REGARDING MASTER STRATEGIC ALLIANCE AGREEMENT, PURCHASE AGREEMENT AND CONTENT LICENSES 5.1. TERMINATION OF MASTER STRATEGIC ALLIANCE AGREEMENT, THE PURCHASE AGREEMENT AND FOX CONTENT LICENSE; CONTINUATION OF WEBMD CONTENT License. The parties to this Agreement include all of the parties to each of the Master Strategic Alliance Agreement, the Purchase Agreement, the Fox Content License Agreement and the WebMD Content License Agreement. At the Closing the Master Strategic Alliance Agreement, the Purchase Agreement and the Fox Content License Agreement shall be, without the need for any further action on the part of any party, terminated and shall be of no further force and effect and no party to it shall have any further rights or obligations with respect thereto or be required from and after the termination thereof pursuant to this Section 5.1 to take, or refrain from taking, any action whatsoever pursuant to the Master Strategic Alliance Agreement, the Purchase Agreement or the Fox Content License Agreement. It is acknowledged that the WebMD Content License Agreement shall remain in full force and effect. 5.2. REPRESENTATIONS AND WARRANTIES OF WEBMD AS TO COMMON STOCK. WebMD hereby represents and warrants that the 2,000,000 shares of Common Stock delivered to News America pursuant to the Purchase Agreement have been duly authorized, validly issued, fully paid and non-assessable. -5- 7 AGREEMENTS REGARDING THE PREFERRED STOCK 6.1. TRANSFER OF PREFERRED STOCK TO WEBMD. The parties to this Letter Agreement include all of the holders of Preferred Stock (the "PREFERRED STOCKHOLDERS"). Subject to the terms and conditions of this Letter Agreement, and in consideration of the terms and provisions hereof, each of the Preferred Stockholders shall transfer to WebMD all of the shares of Preferred Stock held of record by it free and clear of all liens, claims and encumbrances pursuant to an assignment in a form reasonably satisfactory to the parties (the "PREFERRED STOCK ASSIGNMENT AGREEMENT" and, collectively with the Cable Interest Assignment Agreement, the International Interest Assignment Agreement and the Internet Interest Assignment Agreement, the "TRANSFER AGREEMENTS"). CERTAIN COVENANTS 7.1 HART-SCOTT-RODINO. The WebMD Entities and the News Corp Entities shall file as soon as practicable after the date of this Letter Agreement notifications under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR ACT") and shall respond as promptly as practicable to all inquiries or requests received from the Federal Trade Commission or the Antitrust Division of the Department of Justice for additional information or documentation and shall respond as promptly as practicable to all inquiries and requests received from any State Attorney General or other Governmental Entity in connection with antitrust matters. The parties shall cooperate with each other in connection with the making of all such filings or responses, including providing copies of all such documents to the other party and its advisors prior to filing or responding. The parties further agree that the filing fees with respect to any filing made under the HSR Act shall be shared equally by the parties. 7.2 WARRANT. In consideration of the agreement by New Corp Entities to the provisions of this Letter Agreement, at the Closing WebMD shall issue to such News Corp Entities as News Corp shall designate a warrant to purchase 3,000,000 shares of Common Stock of WebMD for an exercise price payable in cash of $15 per share, which warrant shall be exercisable at any time and from time to time during a term of 6 years from the date of Closing (the "WARRANT"). The shares underlying the Warrant shall be "Registrable Securities" for purposes of the Registration Rights Agreement. The Warrant shall be in substantially the form attached hereto as Exhibit 7.2. 7.3. RELEASES. 7.3.1. RELEASE BY WEBMD ENTITIES. Each of the WebMD Entities shall, effective as of the Closing, fully release each of the News Corp Released Parties from any and all claims, demands, rights, actions or causes of action, liabilities, damages, losses, obligations, judgments, suits, matters and issues of any kind or nature whatsoever, whether known or unknown, contingent or absolute, suspected or unsuspected, disclosed or undisclosed, hidden or concealed, matured or unmatured, that they may have (including, but not limited to, any claims arising under federal or state law relating to alleged fraud, breach of any duty, negligence, violations of the federal securities laws or otherwise), whether individual, class, derivative, representative, legal, equitable or any other type or in any other capacity against the News Corp Released Parties which have arisen or could have arisen, out of, or relate in any manner to the Master Strategic Alliance Agreement, the Purchase Agreement, the Health Network Operating Agreement, the Health & Fitness Operating Agreement, the International Operating Agreement, the Fox Content License Agreement, the Terminated Health Network Agreements, the Terminated International Agreements and the Terminated Health & Fitness Agreements (collectively, the "TERMINATED AGREEMENTS"), including, without limitation, any allegations, facts, events, transactions, acts, occurrences, statements, representations, misrepresentations, omissions or any other matter, thing or cause whatsoever, or any series thereof, embraced, involved, set forth or otherwise related, directly or indirectly, to any of the Terminated Agreements; provided, however, that nothing contained in this Section 7.3.1 shall limit -6- 8 any rights the parties may have with respect to a breach of any representation, warranty or covenant as set forth in this Letter Agreement. 7.3.2. RELEASE BY NEWS CORP ENTITIES. Each of the News Corp Entities shall, effective as of the Closing, fully release each of the WebMD Released Parties from any and all claims, demands, rights, actions or causes of action, liabilities, damages, losses, obligations, judgments, suits, matters and issues of any kind or nature whatsoever, whether known or unknown, contingent or absolute, suspected or unsuspected, disclosed or undisclosed, hidden or concealed, matured or unmatured, that they may have (including, but not limited to, any claims arising under federal or state law relating to alleged fraud, breach of any duty, negligence, violations of the federal securities laws or otherwise), whether individual, class, derivative, representative, legal, equitable or any other type or in any other capacity against the WebMD Released Parties which have arisen or could have arisen, out of, or relate in any manner to the Terminated Agreements, including, without limitation, any allegations, facts, events, transactions, acts, occurrences, statements, representations, misrepresentations, omissions or any other matter, thing or cause whatsoever, or any series thereof, embraced, involved, set forth or otherwise related, directly or indirectly, to any of the Terminated Agreements; provided, however, that nothing contained in this Section 7.3.2 shall limit any rights the parties may have with respect to a breach of any representation, warranty or covenant as set forth in this Letter Agreement. 7.4 OTHER DEFINITIVE AGREEMENTS. The parties agree to use their good faith best efforts to enter into one or more other definitive agreements that may amend, supplement or replace this agreement, which agreements may provide for, among other things, transition of the businesses of Health Network and International (including the preparation of tax returns for such entities) and the tax treatment of the transactions contemplated by this Letter Agreement. The parties agree to use commercially reasonable efforts to structure the definitive agreements in a mutually advantageous way, from a tax and financial reporting perspective. The parties acknowledge that this Letter Agreement contains all of the material terms of their agreement and shall be enforceable in accordance with its terms notwithstanding any failure to agree on further definitive agreements. 7.5 OPERATIONS PENDING CLOSING. The parties agree that they shall continue to operate Health Network and International in the ordinary course of business pending the Closing, provided, however, no party shall have any further obligation to make capital contributions to those entities. Pending the Closing, (i) the capital requirements of Health Network shall be met by one or more of the News Corp Entities, by making unsecured loans, bearing interest at 8% per annum, to Health Network, and (ii) the capital requirements of International shall be met by one or more of the WebMD Entities, by making unsecured loans, bearing interest at 8% per annum, to International. 7.6 FURTHER ACTIONS BY WEBMD ENTITIES. Each WebMD Entity agrees to take any further action reasonably requested by News Corp to facilitate the consummation of the transactions contemplated by this Agreement. Each of WebMD Entities shall use its commercial best efforts to obtain promptly all necessary waivers, consents and approvals from any governmental authority or any other person for any exercise by it or by News Corp of their respective rights under this Agreement and to take such other actions as may reasonably be requested by News Corp to effect the purposes of this Agreement. The period of time provided for any closing of the transactions contemplated by this Agreement may, at the option of News Corp, be extended as necessary in order to obtain any such waivers, consents and approvals. Without limiting the generality of the foregoing, to the extent that the WebMD Entities or any of their affiliates has heretofore acquired any assets (including domain names, URLs and registered trademarks) formerly held by the predecessors of Health Network and Health & Fitness, then such WebMD Entity shall, or shall cause its affiliate, to assign such acquired assets to Health Network. -7- 9 7.7 FURTHER ACTIONS BY NEWS CORP ENTITIES. Each News Corp Entity agrees to take any further action reasonably requested by WebMD to facilitate the consummation of the transactions contemplated by this Agreement. Each of News Corp Entities shall use its commercial best efforts to obtain promptly all necessary waivers, consents and approvals from any governmental authority or any other person for any exercise by it or by WebMD of their respective rights under this Agreement and to take such other actions as may reasonably be requested by WebMD to effect the purposes of this Agreement, including, without limitation, the termination of International's relationship with Alliance Atlantis. The period of time provided for any closing of the transactions contemplated by this Agreement may, at the option of WebMD, be extended as necessary in order to obtain any such waivers, consents and approvals. 7.8 CONTINUATION OF THE REGISTRATION RIGHTS AGREEMENT. The parties acknowledge and agree that the Registration Rights Agreement, as modified hereby, shall remain in full force and effect. MISCELLANEOUS 8.1 CLOSING. The closing shall be held on the third business day following receipt of the required approvals under the HSR Act at 10:00 AM eastern time at the offices of Alston & Bird LLP, 90 Park Avenue, New York, New York (the "CLOSING"). 8.2 GOVERNING LAW. This Letter Agreement shall be governed by and construed under the laws of the State of Delaware, without regard to its principles of conflicts of laws. 8.3 ASSIGNMENT. This Letter Agreement may not be assigned by any party hereto. 8.4 ENTIRE AGREEMENT; AMENDMENT. This Letter Agreement constitutes the full and entire understanding and agreement among the parties hereto with regard to the subjects hereof. Neither this Agreement nor any term hereof may be amended, waived, discharged or terminated except by a written instrument signed by the parties thereto. 8.5 NOTICES. All notices and other communications required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or three (3) business days following deposit with the United States Postal Service, by certified mail, return receipt requested, postage prepaid, or otherwise delivered by hand or by messenger, as follows: If to any WebMD Entity: WebMD Corporation 400 The Lenox Building 3399 Peachtree Road Atlanta, Georgia 30326 Attention: General Counsel With a copy to: Alston & Bird LLP 1211 East Morehead Street P.O. Drawer 34009 Charlotte, NC 28234-4009 Attention: H. Bryan Ives III, Esq. -8- 10 If to any News Corp Entity: The News Corporation Limited c/o News America Incorporated 1211 Avenue of the Americas new York, New York 10036 Facsimile (212) 768-2029 Attention: Arthur M. Siskind, Esq. With a copy to: Squadron, Ellenoff, Plesent & Sheinfield, LLP 551 Fifth Avenue New York, New York 10176 Facsimile (212) 697-6686 Attention: Ira Sheinfeld, Esq. or at such other address as any party shall have furnished to the other parties in writing. 8.6 AGENT'S FEES. Each party (i) represents and warrants that it has retained no finder or broker in connection with the transactions contemplated by this Agreement, and (ii) hereby agrees to indemnify and to hold the other party harmless of and from any liability for commissions or compensation in the nature of an agent's, finder's or broker's fee to any broker or other person or firm (and the cost and expenses of defending against such liability or asserted liability) for which said party is responsible. 8.7 EXPENSES. Each party shall bear its own expenses and legal fees (and expenses and disbursements of its legal counsel) incurred on its behalf with respect to this Agreement and the transactions contemplated hereby. 8.8 CONSTRUCTION OF CERTAIN TERMS. The titles of the articles, sections, and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 8.9 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 8.10 ENFORCEMENT. 8.10.1. REMEDIES AT LAW OR IN EQUITY. If any WebMD Entity or any News Corp Entity shall default in any of its obligations under this Agreement, News Corp or WebMD, respectively, may proceed to protect and enforce its rights by suit in equity or action at law, whether for the specific performance of any term contained in this Agreement, injunction against the breach of any such term or in furtherance of the exercise of any power granted in this Agreement, or to enforce any other legal or equitable right of such party or to take any one of more of such actions. 8.10.2. REMEDIES CUMULATIVE; WAIVER. No remedy referred to herein is intended to be exclusive, but each shall be cumulative and in addition to any other remedy referred to above or otherwise available to a party at law or in equity. No express or implied waiver by any party of any default shall be a waiver of any future or subsequent default. The failure or delay of any party in exercising any rights granted it hereunder shall not constitute a waiver of any such right and any single or partial exercise of any particular right by such party shall not exhaust the same or constitute a waiver of any other right provided herein. -9- 11 8.11 PRESS RELEASES. WebMD and News Corp shall consult with each other as to the form and substance of any press release or other public disclosure related to this Letter Agreement or any transaction contemplated hereby. No WebMD Entity or News Corp Entity shall issue any press release or make any other public disclosure without the prior approval of News Corp (in the case of a WebMD Entity) or WebMD (in the case of a News Corp Entity), which approval shall not be unreasonably withheld or delayed; provided, however, that nothing in this Section 8.11 shall be deemed to prohibit any WebMD Entity or News Corp Entity from making any disclosure which its counsel deems necessary or advisable in order to satisfy disclosure obligations imposed upon such entity by any law, ordinance, regulation, reporting or licensing requirement, rule, or statute applicable to such entity. 8.12 SEVERABILITY. In the event any one or more of the provisions contained in this Agreement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. The parties shall endeavor in good faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. **************************** -10- 12 If the foregoing accurately represents our agreement, please execute below. Sincerely yours, WEBMD CORPORATION, for itself and the other WebMD Entities By: /s/ K. Robert Draughon -------------------------------------------------- Name: K. Robert Draughon Title: Executive Vice President, Business Development AGREED: THE NEWS CORPORATION LIMITED, for itself and the other News Corp Entities By: /s/ John P. Nallen ------------------------------- Title: Senior Vice President, Finance Name: John P. Nallen Date: 12/29/00 ------------------------------- -11- 13 EXHIBIT 3.1 The Domestic Media Services Agreement shall be amended at the Closing as follows: 1. For the purposes of the amendment to the Domestic Media Services Agreement, the "Effective Period" shall commence on January 1, 2001 and expire on August 31, 2010; 2. Section 2.1 shall be amended as follows: (a) The first sentence shall be amended by deleting the number "$240 million" and by substituting "$190 million" in lieu thereof; (b) Schedule 1 to Section 2.1 shall be amended by deleting it in its entirety and replacing it with the new Schedule 1 attached hereto; (c) The following shall be added at the end of Section 2.1: "Anything herein to the contrary notwithstanding: (a) to the extent that the Company does not utilize the dollar amount of Advertising Services to be provided to the Company during any television broadcast season as set forth on Schedule 1 (as amended), the Company shall have the right to carry over, and the News Parties and their Controlled Affiliates shall be obligated to provide, an aggregate amount of up to 25% of such Advertising Services to be provided to and in the next broadcast season, provided that such carryover right shall be limited to the next broadcast season only (in other words, the carry over shall not continue to accumulate beyond the next broadcast season), and provided, further that there shall be no carryover past the end of the term, August 31, 2010; (b) the News Parties acknowledge that the Company intends to use the Advertising Services to co-promote its products and services along with the products and services of the Company's client base, and the Advertising Services may be used for such co-promotion in a manner which features the products and services of the Company's client base so long as the advertisements are designed in a manner that also promotes the Company's products and services and identifies the Company." 3. Section 3.1 shall be amended as follows: (a) by deleting the number "$160 million" and by substituting the number "$15 million" in lieu thereof; (b) by deleting the last sentence of Section 3.1 and by deleting Schedule 3; (c) by inserting the following sentences at the end of Section 3.1: "The Promotional Services shall be provided to the Company during the period from January 1, 2001 through August 31, 2004 with the amount of such services to be provided during each television broadcast season to be determined by the Company (which shall have no obligation to spread its request for such services over such period). 4. The first sentence of Section 3.5 shall be deleted with the following substituted in lieu thereof: "The News Parties agree that they will provide at least the Inherent Market Value of Promotional Services to the Company set forth in Section 3.1 at the times and in the amounts reasonably requested by the Company hereunder." 5. All references to Schedule 4 shall be amended to be references to Schedule 3. 6. Section 9.11 shall be deleted in its entirety. EX-10.18 5 g68042ex10-18.txt DATA RIGHTS AGREEMENT 1 EXHIBIT 10.18 Data Rights Agreement dated as of May 26, 2000, as amended, between Registrant and Quintiles Transnational Corp. 2 DATA RIGHTS AGREEMENT THIS DATA RIGHTS AGREEMENT (the "AGREEMENT") is made and entered into as of May 26, 2000 by and between HEALTHEON/WEBMD CORPORATION, a Delaware corporation ("HEALTHEON"), and QUINTILES TRANSNATIONAL CORP., a North Carolina corporation ("QUINTILES"). References in this Agreement to "schedules" refer to the documents attached as schedules to this Agreement, all of which form part of this Agreement; and unless otherwise indicated, references to "articles" or "sections" refer to the corresponding numbered articles and sections of this Agreement. As used in the body of this Agreement, the term "Healtheon" shall be deemed to include Healtheon and all of its Affiliates (as defined in Article I below). BACKGROUND (a) Quintiles provides product development and commercialization solutions, healthcare informatics services, and healthcare policy consulting to the healthcare industry worldwide. (b) Healtheon is applying advanced Internet technology to enable healthcare providers and consumers to interact with each other and the institutions of healthcare online. (c) Healtheon and Quintiles are parties to an Agreement and Plan of Merger dated as of January 22, 2000 (the "MERGER AGREEMENT") pursuant to which they have agreed, among other things, for Quintiles' wholly owned subsidiary Envoy Corporation ("Envoy") to become a wholly owned subsidiary of Healtheon by merger (the "ENVOY MERGER"). (d) As a principal component of the transactions surrounding the Merger Agreement, Quintiles desires to secure the right and license from Healtheon, effective upon consummation of the Envoy Merger, to develop and commercialize Data Products based on data available to Healtheon by virtue of Healtheon's Transaction Business (including without limitation that acquired through Envoy) and other healthcare businesses, all as provided below. NOW, THEREFORE, in consideration of their respective agreements set forth in this Agreement and of other good and valuable consideration, the receipt and legal sufficiency of which they acknowledge, and intending to be legally bound, Healtheon and Quintiles agree as follows: ARTICLE I DEFINITIONS As used in this Agreement, the following capitalized terms shall have the respective meanings set forth below: 3 (a) "ACCESS SPECIFICATIONS" means the schedule, method, medium, format, structure, organization, archival, mapping, and other logistical, technical, legal, and other parameters by which Healtheon will provide Quintiles electronic access to and copies of the Licensed Data. The Access Specifications will be determined by the parties and may be modified from time to time pursuant to Section 2.2(a). (b) "AFFILIATE" of a Person means a Person controlling, controlled by or under common control with such Person at any time as of or after the date of this Agreement and, with respect to Healtheon, shall include WebMD International, LLC, Healtheon's international joint venture with an affiliate of The News Corporation Limited. (c) "CONFIDENTIAL INFORMATION" means and includes all information disclosed under this Agreement by either party to the other (subject to the exceptions defined below), including without limitation all business and product plans, marketing information, and other business information so disclosed; provided, however, that the Licensed Data shall constitute Confidential Information of Healtheon except as and to the extent reflected in Data Products commercialized by Quintiles under authority of this Agreement. Notwithstanding the foregoing, the following shall not constitute Confidential Information: information which (1) is known by the receiving party prior to disclosure by the disclosing party; (2) is or becomes available publicly other than as a result of a breach of this Agreement; (3) is developed independently by the receiving party without the use of or reliance on the disclosing party's Confidential Information; or (4) is provided to the receiving party by a third party under no duty of confidentiality to the disclosing party. (d) "DATA PRODUCT" means any product created for the purpose of sale or licensing to one or more third Persons which is based on the selective or strategic extraction, compilation, assimilation, manipulation, analysis, and/or presentation of aggregate De-Identified Data of the type that comprises the Licensed Data, with a view toward creation of a derivative compilation of data (or analytical conclusions thereon) having commercial utility. The term Data Product also shall include the sale or licensing of Licensed Data in a raw format data feed or any other form. (e) "DE-IDENTIFICATION" means the process of removing, coding, encrypting or otherwise eliminating or concealing the data elements that makes Licensed Data individually identifiable to a particular patient or consumer, and includes the removal or concealing of any data elements specifically required by Law or contractual obligation to be removed or concealed to make Licensed Data not individually identifiable as to the patient or consumer or other elements of the Licensed Data that are required by law to be de-identified. (f) "DE-IDENTIFIED DATA" means Licensed Data that has been through the De-Identification process. For the avoidance of doubt, De-Identified Data only de-identifies data elements that make the Licensed Data individually identifiable to a particular patient or consumer (unless other elements of the Licensed Data are required by Law to be de-identified), and those data elements (other than patient or consumer identifying data) of the Licensed Data that are not required to be de-identified constitute De-Identified Data notwithstanding their identifiable format. By way of example, and without limitation, specific identifiable data such as the names of specific pharmacies, physicians, hospitals and payors constitute De-Identified Data once the corresponding Licensed Data has been through the De-Identification process, provided that such items are not 2 4 required by Law to be de-identified. Licensed Data will also be considered De-Identified Data for purposes of this Agreement if the particular data set does not contain patient or consumer identifying data or any data elements that require de-identification pursuant to applicable Law and, accordingly, such data set does not go through the De-Identification process. (g) "EFFECTIVE TIME" means the effective time of the Envoy Merger, determined according to the Merger Agreement. (h) "FIELD OF USE" means on a worldwide basis the development of Data Products based on or including Licensed Data and commercialization or delivery of such Data Products to (1) the pharmaceutical industry, including without limitation pharmaceutical, biotechnology, genomics, and other companies in the business of research, development, production, manufacturing, marketing, sale, distribution, or other commercialization of pharmaceutical products or medical devices, as well as to foundations, government agencies, universities, private individuals, or others engaged in research regarding drug efficacy, epidemiology, disease control, diagnostic patterns, and similar areas of inquiry that in each case are related to pharmaceutical use and medical outcomes, and (2) physicians, patients, hospitals, health maintenance organizations, governmental entities, and other healthcare consumers, providers, pharmacies, and payors. (i) "LAW" means any United States federal, state, local or foreign law, statute, regulation, ordinance, order, judgment, decree, rule or other applicable governmental or judicial restriction or requirement, and any judicial or administrative interpretation or determination with respect thereto. (j) "LICENSED DATA" means all of the following transmitted to, from, or through or otherwise received, possessed or controlled from time to time by or for the benefit of Healtheon to the extent Healtheon is not prohibited by applicable Law or contractual arrangement from providing such data to Quintiles under this Agreement, regardless of the medium of or circumstances giving rise to transmission: (1) Transaction Data and (2) other data concerning (A) the health, medical condition, or treatment of actual, specific people, (B) the behavior of actual, specific people intended to treat, maintain, or otherwise influence their health or medical conditions, or (C) the providing of health care or reimbursement or payment therefor with respect to actual, specific physicians, hospitals, health maintenance organizations, governmental entities, and other providers, pharmacies, and payors. (k) "PERSON" means any person or entity. (l) "STEERING COMMITTEE" means the oversight committee formed pursuant to Section 7.1. (m) "TRANSACTION BUSINESS" refers to the business of processing or facilitating the processing of transactions, of the following type: reimbursement, indemnity, or payment or other related claims or encounters by and among physicians, hospitals, health maintenance organizations, governmental entities, and other providers, pharmacies, and payors, as well as eligibility, adjudication, referrals, formulary checks, and similar transactions, irrespective of the manner, mode, communications method or platform through which such business is conducted from time to time, and giving effect to evolutionary or other developments in the scope of and manner in which such 3 5 business generally is conducted going forward. Without limiting the foregoing, the term "Transaction Business" includes the business conducted as of the date of this Agreement (and evolutions thereof) by Envoy and by Healtheon's Affiliate MedeAmerica, Inc. (n) "TRANSACTION BUSINESS SERVICE AGREEMENT" means an agreement to render Transaction Business services for a customer. (o) "TRANSACTION DATA" means all data transmitted to, from, or through or otherwise received or possessed by or for the benefit of Healtheon from transactions processed or facilitated in the conduct of its Transaction Business. ARTICLE II DATA PRODUCTS 2.1 LICENSE. (a) Grant. Subject to the terms and conditions of this Agreement, Healtheon hereby grants Quintiles, effective as of the Effective Time, an irrevocable, perpetual, worldwide right and license to use the Licensed Data (after its De-Identification according to Section 2.2(a)(2)) to develop, license, sell, and otherwise commercialize Data Products, and in connection therewith to receive, collect, possess, process, combine, analyze, and transfer the Licensed Data to third parties. This license includes the right to sublicense, subject to Section 7.9 below. (b) Exclusivity. Subject to Section 2.1(d) below, Healtheon shall not (i) grant any right or license, whether exclusive or non-exclusive, to any Person to use the Licensed Data in the Field of Use, or (ii) engage directly or indirectly in the development or commercialization of Data Products in the Field of Use based on or including as a component thereof the Licensed Data. Nothing in this Agreement shall preclude Healtheon from using or analyzing Licensed Data solely for its internal purposes or for the development or marketing of products or services that do not themselves constitute Data Products. Nothing in this Agreement shall preclude Healtheon from providing to those Persons from whom Healtheon has acquired Licensed Data (or the Persons in the same transaction chain) the same Licensed Data that was acquired from such Persons, which may be processed, compiled or analyzed, but which shall not be aggregated with the Licensed Data acquired from any other Person. (c) Exclusivity and Royalty Dispute; Future Use of Licensed Data. The parties acknowledge and agree that there will be ambiguities concerning whether certain activities constitute Data Products or produce Gross Product Revenue or Operating Income from the sale or licensing of Data Products. Such ambiguities shall be resolved in good faith pursuant to the dispute resolution process set forth in Article V. If trends in the data product industry move toward a more significant use of patient or consumer identifiable data in informatics and other data products, Quintiles may request the Steering Committee to expand the definition of Data Products to include such patient or consumer identifiable data products. (d) Healtheon Affiliates. Healtheon and Quintiles acknowledge that Healtheon's Affiliates have or will have access to Licensed Data, and that Healtheon and Quintiles intend for all such Affiliates of Healtheon to be subject to and bound by this Agreement. In that regard, Healtheon 4 6 agrees (1) that Healtheon's representations, warranties, and covenants made under this Agreement shall be deemed also to include Healtheon Affiliates; and (2) to cause each Affiliate to comply with Healtheon's obligations under this Agreement as if parties hereto with obligations coextensive with Healtheon's. (e) Limited Exceptions to Restrictive Covenant. At its election, at any time three years after the Effective Date and from time to time thereafter, Healtheon may propose Data Products for development by Quintiles based on the Licensed Data for internal use or commercialization by Healtheon. If Healtheon makes any such proposal in writing to Quintiles, including certification by Healtheon that Healtheon intends to develop the proposed product immediately if Quintiles elects not to do so, and Quintiles fails within the Notice Period (defined below) to confirm for Healtheon in writing that Quintiles has developed, is developing, or intends to develop a Data Product substantially functionally comparable to that proposed by Healtheon, or if Quintiles does not in fact so develop such a Data Product within one year from the date of Quintiles' confirmation, then in either case Healtheon may develop and commercialize such proposed Data Product (but no other) itself or with a party other than Quintiles, and Quintiles' restrictive covenant in subsection 2.1(b) above shall be deemed thereafter to except such development and commercialization for so long as (but no longer than) Healtheon's development, internal use, or commercialization effort for such Data Product continues. Healtheon agrees and acknowledges that its rights arising in this subsection are not intended to enable broad commercial participation by Healtheon in the Data Products market, but rather to enable Healtheon to pursue its discrete, isolated Data Product needs. When used herein, the term Notice Period shall mean (i) twenty (20) days after actual receipt of Healtheon's written proposal, followed by (ii) to the extent Quintiles does not respond to such notice in writing within the twenty-day period, ten (10) days after a follow-up written notice indicating that Healtheon has not received a response to the initial written proposal. 2.2 ACCESS TO LICENSED DATA. (a) Determination of Access Specifications; Costs. (1) Promptly after execution of this Agreement, the parties will determine the Access Specifications. Each of the parties will cooperate in good faith with the other to modify the Access Specifications thereafter upon request. If the parties are unable to promptly agree on the Access Specifications, or changes thereto from time to time, the matter shall be promptly submitted to the Steering Committee and if it is unable to agree, Quintiles shall have the right to establish or modify the Access Specifications in Quintiles' reasonable discretion, provided that the Access Specifications or changes thereto address Healtheon's reasonable business concerns and delivery of Licensed Data in accordance therewith does not violate applicable Law or contractual obligations, and Quintiles agrees to bear any incremental out-of-pocket expenses related to such changes. (2) The parties acknowledge and agree that the Licensed Data provided to Quintiles will be delivered as De-Identified Data. In this regard, Quintiles and its Affiliates have developed certain computer software useful for De-Identification of data (such software, as it may be modified or replaced through internal or third party development, the "Quintiles De-Identification Software"). Quintiles may require Healtheon to use the Quintiles De-Identification Software during the De-Identification process, provided that the use of such software causes the data as delivered 5 7 hereunder to comply with applicable Law and contractual obligations. Quintiles will arrange for Healtheon to receive this software and a corresponding license at no charge, along with reasonable related technical support, solely for the purpose of fulfilling Healtheon's obligations under this Agreement. If the Access Specifications require De-Identification through other means, Quintiles shall pay Healtheon's related costs as provided in subsection (3) below. (3) Quintiles and Healtheon acknowledge that Healtheon is not primarily engaged in the business of collecting, preparing, selling or delivering data as contemplated in this Agreement. Accordingly, Quintiles shall pay to Healtheon all reasonable out-of-pocket expenses incurred by Healtheon in conforming the Licensed Data to the Access Specifications and delivering the Licensed Data under this Agreement to the extent such costs would not have been incurred by Healtheon but for this Agreement, including all such costs of satisfying the quality, accuracy and delivery criteria established in this Agreement and the Access Specifications. All such amounts shall be paid within thirty (30) days after invoicing by Healtheon, and all such amounts paid by Quintiles shall be deemed data acquisition costs for purposes of determining Quintiles' royalty obligations in Section 2.3. (b) Access to Licensed Data. (1) Healtheon will provide Quintiles access to and copies of the Licensed Data in compliance and conformity with the Access Specifications at all times as of and after the Effective Time; provided, however, that Healtheon will not be required to provide Licensed Data solely to the extent Healtheon is specifically prohibited from doing so by: (A) any Transaction Business Service Agreement in effect as of the Effective Time (including without limitation any acquired by Healtheon by virtue of the Envoy Merger), provided Healtheon complies with the procedures required by Section 2.4 with respect to securing data use rights in current service agreements; (B) any future Transaction Business Service Agreement (or any amendment to any existing Transaction Business Service Agreement) or any future request by any existing or future Transaction Business client to discontinue use of such client's data, provided Healtheon has complied with the procedures required by Section 2.4 with respect to securing data use rights in future service agreements; or (C) any applicable Law, provided Healtheon has complied with the procedures required by subsection (c) below concerning applicable Laws. For the avoidance of doubt, Healtheon shall not be entitled to withhold Licensed Data except as and to the extent specifically provided in subsections (1)(A) - (C) above or in subsection (d) below concerning defaults in Quintiles' payment obligations. (2) Quintiles and Healtheon agree to interpret the data rights provisions in all Envoy Transaction Business Service Agreements in effect as of the Effective Time in a manner consistent with Envoy's historical interpretation practices absent a breach of the warranty by Quintiles in Section 2.5(b)(2), developments in applicable Law or specific requests or challenges by clients, in which cases Section 2.2(c) or (d) shall apply, respectively. (c) Interruptions to Data Stream Due to Applicable Law. In the event Healtheon reasonably believes that developments to applicable Laws after the date of this Agreement prohibit or limit Healtheon from providing a material amount of data that would otherwise be Licensed Data but for the fact that provision of such data under this Agreement is prohibited by applicable Law, or that Quintiles breached its representation in Section 2.5(b)(2) below with respect to current Law such 6 8 that provision of data hereunder violates current Law, Healtheon will notify Quintiles immediately in writing of the specific prohibition under applicable Law and the nature of the corresponding prohibition or limitation and cooperate in good faith with Quintiles to develop modifications to the Access Specifications (if appropriate) or take other actions to fulfill the intent of this Agreement without violating any such Law. Immediately upon such notice (or on the date such Law takes effect, if later), Healtheon shall be entitled to suspend providing the Licensed Data to Quintiles under this Agreement solely to the extent that Healtheon believes in good faith that doing so would violate such Law. Healtheon shall resume provision of the suspended Licensed Data within five (5) business days after receiving a reasoned opinion of counsel reasonably satisfactory to Healtheon, addressed to Quintiles and Healtheon, that providing such Licensed Data (in the same or in a modified format) would not be prohibited under applicable Law identified by Healtheon as the basis for suspension, along with a specific undertaking by Quintiles to indemnify Healtheon from and against any and all losses, claims, actions, damages, liabilities, costs, and expenses (including attorneys' fees and expenses) arising from providing such data. In the event the opinion of counsel provides that the Licensed Data must or should be provided in modified form, Healtheon shall, at Quintiles' cost, use its commercially reasonable efforts expeditiously to modify the data accordingly, and the time period by which Healtheon shall resume providing the data shall be extended until such modifications can be made. (d) Limited Remedy for Payment Default. Healtheon shall be excused from providing Licensed Data under this Agreement for any period during which Quintiles is in material default of Quintiles' payment obligations to Healtheon under this Agreement (including obligations to pay costs), provided that Healtheon will not effect any such interruption (1) without giving Quintiles at least thirty (30) days' prior written notice of Healtheon's intent to do so, and (2) if and for so long as Quintiles disputes the alleged default in good faith (as evidenced by written notice to that effect to Healtheon), pays any undisputed amounts to Healtheon, and pays any disputed amounts into escrow. Healtheon will resume providing Licensed Data immediately upon such cure of any such default and the payment of any reasonable related out-of-pocket expenses incurred by Healtheon in connection therewith. Healtheon agrees and acknowledges that the suspension of provision of Covered Data described in this subsection and recovery of amounts due and costs incurred in connection therewith is Healtheon's sole and exclusive remedy for any such payment default by Quintiles, and that no other type of default by Quintiles will entitle Healtheon to withhold Licensed Data (except with respect to Section 2.2(c) as it relates to Quintiles' breach of warranty under Section 2.5(b)(2)) or to terminate this Agreement. 2.3 ROYALTIES. (a) Definitions. As used in this Section 2.3, the following capitalized terms shall have the respective meanings set forth below: (1) "GROSS PRODUCT REVENUES" means Quintiles' gross recognized revenues through Quintiles' sale and licensing of Data Products that incorporate Licensed Data during the specified period, determined in accordance with generally accepted accounting principles consistently applied ("GAAP"), and includes (without limitation) revenues received by Quintiles from sublicenses. The use by Quintiles of Data Products solely for its internal purposes or for the development or marketing of products or services that do not themselves constitute Data Products shall not give rise to Gross Profit Revenue or Operating Income. 7 9 (2) "OPERATING INCOME" means the operating income (before taxes and interest) generated through Quintiles' sale and licensing of Data Products that incorporate Licensed Data, determined in accordance with GAAP consistently applied. As soon as practicable after the Effective Time, the Steering Committee will determine the specific manner in which to calculate Operating Income. (b) Payments. (1) Quintiles will pay Healtheon a royalty in the range of 20% - 33% of Operating Income. The specific royalty amount shall be based upon Quintiles' Operating Income as a percentage of Gross Product Revenue, as set forth on Schedule 2.3(b). (2) Quintiles will make the payments required by subsection (1) above on a quarterly (calendar year) basis and accompany each payment with a statement of Quintiles' corresponding Gross Product Revenues and Operating Income for the applicable quarter, together with an explanation of Quintiles' calculation of the corresponding royalties due Healtheon. Quintiles will make such payments within forty-five (45) days after the end of each corresponding calendar quarter. (c) Audits. Quintiles will maintain records reasonably sufficient to document and record its Gross Product Revenues and Operating Income; and Healtheon shall have the right to audit Quintiles' books and records at Healtheon's expense on a confidential and otherwise commercially reasonable basis to confirm the accuracy of all of the foregoing. Quintiles and Healtheon will address any apparent payment discrepancy promptly and in good faith, and the affected party promptly will correct any confirmed mispayment. (d) Equitable Adjustments. In the event Quintiles pays Healtheon any royalty in respect of Licensed Data the parties later determine to have been provided by Healtheon to Quintiles improperly (such as in violation of applicable Law or any applicable Healtheon service agreement) and as a result Quintiles has not received or has refunded the related Gross Product Revenue, Quintiles and Healtheon will determine in good faith an appropriate corresponding royalty adjustment to be given effect as an offset against future royalties to or a refund from Healtheon. (e) Use of Licensed Data. Quintiles will use its commercially reasonable efforts to incorporate the Licensed Data in all Data Products that it develops that require the use of data of the type obtained from the conduct of a Transaction Business, or other data of the type constituting the Licensed Data. 2.4 DATA USE RIGHTS. (a) General. Healtheon will undertake or permit Quintiles to undertake, as the case may be, the procedures described in this Section relative to avoiding prohibitions or limitations on the provision of Licensed Data. (b) Current Service Agreements. Promptly after execution of this Agreement, Healtheon will identify for Quintiles in writing each of Healtheon's Transaction Business Service 8 10 Agreements (other than any obtained by Healtheon as a result of the Envoy Merger) which prohibit or limit Healtheon's right to provide data of the type which otherwise would be Licensed Data to Quintiles in the manner and for the purposes contemplated by this Agreement. Healtheon further agrees to undertake the access procedures described in subsection (d) below with respect to all such Transaction Business Service Agreements requested by Quintiles (including any originating from Envoy), to the end of eliminating or mitigating the corresponding prohibitions or limitations. Healtheon also will undertake the procedures described in this subsection with respect to Transaction Business Service Agreements acquired by Healtheon by virtue of future transactions in which Persons become Affiliates of Quintiles. (c) Future Service Agreements. Going forward, Healtheon will endeavor to avoid including in its Transaction Business Service Agreements (including both new agreements and any renewals, extensions, or amendments of any in effect as of the date of this Agreement) any provisions which prohibit or limit Healtheon from providing data of the type which otherwise would be Licensed Data to Quintiles in the manner and for the purposes contemplated by this Agreement provided that doing so does not adversely affect Healtheon's Transaction Business or other business. Without limiting the foregoing, Healtheon will notify Quintiles of any Transaction Business Service Agreement (or related amendment) with an anticipated annual transaction volume in excess of 500,000 transactions entered into by Healtheon which includes any such prohibition or limitation and consult with Quintiles (if requested by Quintiles) to evaluate strategies for eliminating or minimizing the effect of any such provision. Healtheon will undertake the access procedures described in subsection (d) below with respect to any such agreement if so requested by Quintiles. Healtheon will consult with Quintiles concerning the format of Healtheon's customer proposals and proposed forms of agreement concerning data use and other strategic matters designed to enable Healtheon to obtain data suitable for use as Licensed Data without impairing Healtheon's Transaction Business. (d) Access Procedure. Whenever requested by Quintiles under subsection (b) or (c) above after the Effective Time, Healtheon will cooperate in good faith with Quintiles to enable Quintiles, at its cost and expense, to negotiate financial or other terms upon which the corresponding customer will agree not to include in its Transaction Business Service Agreement provisions prohibiting or limiting Healtheon's right to provide data to Quintiles in the manner or for the purposes contemplated by this Agreement; provided, however, that Healtheon shall not be obligated to take any such action prior to execution of any such agreement, nor to delay execution of any such agreement to accommodate negotiations by Quintiles with Healtheon's corresponding customer. Healtheon will provide Quintiles (in confidence) all relevant information to the extent Healtheon is permitted to do so under applicable Law and contractual obligations and permit Quintiles to correspond with the customer party to any such restrictive Transaction Business Service Agreement. 2.5 WARRANTIES. (a) Healtheon warrants and covenants to Quintiles that: (1) Healtheon is duly authorized to enter into and perform its obligations under this Agreement, and, other than with respect to any Law or contract which may prohibit or limit Healtheon's right to provide Licensed Data to Quintiles as contemplated by this Agreement, is free of any obligation or restriction that would prevent Healtheon from or impair or limit its right or ability to do so. 9 11 (2) The collection and accumulation of the Licensed Data by Healtheon to the date of this Agreement has not violated applicable Law or any agreement to which Healtheon is a party or by which it is bound as of the date of this Agreement. (3) Subject to the effects of being conformed to the Access Specifications pursuant to Section 2.2(b)(1), the provision of the Licensed Data by Healtheon to Quintiles pursuant to this Agreement will not violate the corresponding agreement or arrangement pursuant to which Healtheon rendered the services giving rise to such item of Licensed Data. All Licensed Data shall be provided "as is" in the form resulting after Healtheon's Transaction Business processing, De-Identification, and application of the Access Specifications. (4) To Healtheon's actual knowledge, after general consultation with its legal advisors, but without conducting a comprehensive investigation, Quintiles' current practices regarding the collection and accumulation of data of the type comprising the Licensed Data and its use of such data in Data Products would not violate applicable Law. (b) Quintiles warrants and covenants to Healtheon that: (1) Quintiles is duly authorized to enter into and perform its obligations under this Agreement, and is free of any obligation or restriction that would prevent Quintiles from or impair or limit its right or ability to do so. (2) There is no applicable Law as of the date of this Agreement, or any material agreement to which Envoy or Quintiles is a party or by which either is bound as of the date of this Agreement, that will prohibit the collection and accumulation of data of the type that is Licensed Data under this Agreement or its use by Quintiles in Data Products,. (3) Provided that Healtheon's collection and accumulation of the Licensed Data does not violate applicable Law, the use of the Licensed Data by Quintiles after the date hereof will not violate applicable Law as in effect from time to time; and the use of the Licensed Data by Quintiles after the date hereof will not violate any agreement to which Quintiles is a party or by which it is bound. 2.6 PRIVACY RELATED ACTIVITIES. (a) Technical Consultation. Healtheon will cooperate in good faith with Quintiles, through modifications to the Access Specifications or otherwise (and subject to Quintiles' expense reimbursement obligations to Healtheon described in Section 2.2(a)(3)), to develop "best practices" through which to achieve availability of the Licensed Data to Quintiles, with a view toward (1) achieving efficient technical processes for the parties and (2) complying in all respects with applicable Laws concerning the privacy of healthcare data. Such efforts may include periodic privacy compliance audits upon the request of either party made no more frequently than once every thirty-six (36) months. (b) Public Policy and Public Relations Cooperation. Healtheon and Quintiles also will cooperate in good faith to evaluate applicable Laws concerning the privacy or collection of 10 12 healthcare data or otherwise relevant to the transactions contemplated by this Agreement and, where appropriate and mutually beneficial, to influence the legislative process and public policy and perception on a coordinated basis through lawful and appropriate means determined from time to time, including without limitation public relations activities. Healtheon and Quintiles will determine in good faith how to allocate their respective expenses for these activities. (c) Ongoing Adaptation. Healtheon and Quintiles agree to cooperate in good faith on an ongoing basis to adapt the parties' arrangements under this Agreement to accommodate future changes in applicable Laws, relevant technology, or other changes in the Data Products industry or environment. 2.7 Distribution. Quintiles will not distribute Data Products on the Internet other than through Healtheon without mutual agreement, not to be unreasonably withheld. ARTICLE III INDEMNIFICATION 3.1 HEALTHEON. Healtheon shall defend, indemnify and hold Quintiles harmless, to the full extent permitted in law or equity, from and against any and all losses, claims, actions, damages, liabilities, costs and expenses (including reasonable attorneys' fees and expenses), net of any corresponding insurance proceeds received by any indemnified party (collectively, "LOSSES"), proximately caused by or resulting from (i) any misrepresentation or non-fulfillment of any representation, warranty, covenant, obligation or agreement by Healtheon contained in or made pursuant to this Agreement, (ii) the negligence or willful misconduct of Healtheon or any of its employees, agents, or representatives, and (iii) the enforcement by Quintiles of its rights pursuant to this Section 3.1, and any litigation, proceeding or investigation relating to any of the foregoing. 3.2 QUINTILES. Quintiles shall defend, indemnify and hold Healtheon harmless, to the full extent permitted in law or equity, from and against any and all Losses proximately caused by or resulting from (i) Quintiles' use of the Licensed Data, (ii) any misrepresentation or non-fulfillment of any representation, warranty, covenant, obligation or agreement by Quintiles contained in or made pursuant to this Agreement, (iii) the negligence or willful misconduct of Quintiles or any of its employees, agents, or representatives, and (iv) the enforcement by Healtheon of its rights pursuant to this Section 3.2, and any litigation, proceeding or investigation relating to any of the foregoing. 3.3 PROCEDURES. Whenever either party shall become aware that a claim by a third party has been asserted or threatened which, if valid, would subject the other party to an indemnity obligation under this Agreement, the indemnified party promptly shall notify the indemnifying party in writing of such claim in sufficient detail to enable the indemnifying party to evaluate the claim. The indemnifying party or its designee will have the right, but not the obligation, to assume the defense of such claim. If an indemnifying party fails to assume the defense of such claim within fifteen (15) days after receipt of notice of the claim, the indemnified party will (upon delivering written notice to such effect to the indemnifying party) have the right to undertake, at the indemnifying party's cost and expense, the defense, compromise or settlement of such claim, subject to the right of the indemnifying party to assume the defense of such claim at any time prior to settlement, compromise, or final determination thereof, and provided, however, that the indemnified 11 13 party shall not enter into any such compromise or settlement without the written consent of the indemnifying party. In the event the indemnified party assumes the defense of the claim, the indemnified party will keep the indemnifying party reasonably informed of the progress of any such defense, compromise, or settlement. The indemnifying party shall not be liable for any settlement of any claim effected without its consent. ARTICLE IV CONFIDENTIALITY Each of Quintiles and Healtheon will hold the other party's Confidential Information in confidence and refrain from using any such Confidential Information other than for purposes of exercising its respective rights and performing its respective obligations under this Agreement. Notwithstanding the foregoing, each party will be permitted to disclose the other party's Confidential Information as and to the extent required by applicable law, provided the party required to make any such disclosure notifies the party whose Confidential Information is required to be disclosed as far in advance of the required disclosure as is reasonably practicable under the circumstances and cooperates with such party (if reasonably requested to do so, and at the requesting party's expense) to secure confidential treatment for the required disclosure. ARTICLE V RELATIONSHIP MANAGEMENT 5.1 STEERING COMMITTEE. Promptly after execution of this Agreement, the parties will organize a six-member Steering Committee comprised of three designees from each party to provide open lines of communication and facilitate, coordinate, and oversee the performance of the parties' respective obligations under this Agreement. The initial Steering Committee designees shall be Jim Bierman and John Russell and Connie Moreadith from Quintiles and Jack Dennison, Pavin Nigram and Steve Simpson from Healtheon and shall be the same Steering Committee under the Internet Product Development and Marketing Agreement between the parties. Each party shall be entitled to replace its designees to the Steering Committee by written notice to the other party. The Steering Committee shall convene on such schedule (but not less frequently than quarterly) and employ such procedures as it shall determine from time to time in good faith, and, except as otherwise specifically required by this Agreement, shall act by unanimous consent. 5.2 DISPUTE RESOLUTION. (a) Executive Review. Each party shall have the right, at any time after good faith efforts have failed to resolve any dispute, difference or question concerning this Agreement at the Steering Committee level, to request review of the matter by the chief executive officer of each party (an "EXECUTIVE REVIEW"). Either party shall exercise its right to request an Executive Review by delivering written notice to that effect to the other party. The chief executive officers of each party shall meet in person or by telephone within ten (10) days of the date such notice is given and shall engage in good faith efforts to resolve the dispute within ten (10) days after such meeting. 12 14 (b) Mediation. In the event of a dispute which cannot be resolved by Executive Review, either party may commence a non-binding mediation to resolve the dispute by providing written notice to the other party (a "MEDIATION NOTICE") informing the other party of the dispute and the issues to be resolved and containing a list of five (5) recommended individuals to serve as the mediator. Within ten (10) business days after the receipt of a Mediation Notice, the other party shall respond by written notice to the party initiating mediation, providing a list of five (5) recommended individuals to serve as the mediator and which adds additional issues to be resolved. The recommended mediators shall be individuals with experience in the healthcare electronic data interchange industry and shall not be any employee, director, shareholder or agent of either party or an Affiliate of either party, or otherwise involved (whether by contract or otherwise) in the affairs of either party. If, within twenty (20) business days after receipt of the Mediation Notice, the parties shall have been unable to agree upon an individual to serve as mediator, or to the extent the mediator selected by the parties is unable to resolve the dispute, the dispute will be settled by final and binding arbitration conducted in the manner described in subsection (c) below. If, within twenty (20) business days after receipt of the Mediation Notice, the parties shall have agreed upon an individual to serve as mediator, the mediator shall conduct a mediation in an effort to resolve the dispute, employing commercially reasonable procedures selected by the mediator in consultation with the parties, completing such mediation no later than sixty (60) days after engagement. 5.3 REMEDIES. (a) Each of Healtheon and Quintiles acknowledges that its failure to abide by the provisions of this Agreement (and in particular Healtheon's obligations under Article II) would cause immediate and irreparable harm to the other, for which legal remedies would be inadequate. Therefore, in addition to any legal or other relief to which either party may be entitled by virtue of the other party's failure to abide by these provisions, the injured party shall be entitled to equitable relief, including but not limited to preliminary and permanent injunctive relief and specific performance, for the other party's actual or threatened failure to abide by these provisions. (b) Notwithstanding the procedures described in Section 5.2, each party shall be entitled to seek and obtain preliminary injunctive relief in any court of competent jurisdiction for the other party's actual or threatened breach of this Agreement, pending execution thereafter of the dispute resolution procedures described in Section 5.2. ARTICLE VI TERM AND TERMINATION TERM. The term of this Agreement shall be perpetual. This Agreement may not be terminated except by the mutual written agreement of Healtheon and Quintiles. 13 15 ARTICLE VII MISCELLANEOUS 7.1 RELATIONSHIP OF PARTIES. Healtheon and Quintiles agree that their legal relationship to one another under this Agreement is as independent contractors. Nothing in this Agreement shall be deemed to create a joint venture, agency, partnership, or other relationship between Healtheon and Quintiles, and neither shall have any power by virtue of this Agreement to enter into any contract or commitment on behalf of the other or to bind the other in any respect whatsoever. 7.2 AMENDMENT AND MODIFICATION. This Agreement may be amended, modified or supplemented only by a written agreement (referring specifically to this Agreement) of Healtheon and Quintiles. 7.3 SEVERABILITY. In the event one or more of the provisions of this Agreement or the application thereof to any circumstance are found to be invalid or unenforceable to any extent by a court with jurisdiction, the remaining provisions shall continue in full force and effect. If any provision of this Agreement is found to be so broad as to be unenforceable, such provision shall be interpreted to be only as broad as is enforceable. 7.4 NOTICES. All notices and other communications hereunder shall be in writing and shall be delivered personally or by next-day courier or telecopied with confirmation of receipt, to the parties at the addresses specified below (or at such other address for a party as shall be specified by like notice; provided that notices of a change of address shall be effective only upon receipt thereof). Any such notice shall be effective upon receipt, if personally delivered or telecopied, or one day after delivery to a courier for next-day delivery. If to Quintiles, to: Quintiles Transnational Corp. 4709 Creekstone Drive Riverbirch Building, Suite 200 Durham, North Carolina 27703-8411 Telecopy Number: (919) 998-2177 Attention: John S. Russell, Senior Vice President, General Counsel with a copy to: Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P. Post Office Box 2611 Raleigh, North Carolina 27602-2611 Telecopy Number: (919) 821-6800 Attention: Gerald F. Roach 14 16 If to HWMD, to: Healtheon/WebMD Corporation 400 The Lenox Building 3399 Peachtree Road NE Atlanta, Georgia 30326 Telecopy Number: (404) 479-7603 Attention: Jack Dennison, Executive Vice President, General Counsel with a copy to: Alston & Bird, L.L.P. 1211 East Morehead Street P.O. Drawer 34009 Charlotte, North Carolina 28234-4009 Telecopy Number: (704) 334-2014 Attention: H. Bryan Ives III 7.5 DESCRIPTIVE HEADINGS. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 7.6 ENTIRE AGREEMENT. This Agreement (including its various Schedules) constitutes the entire agreement and supersedes all other prior agreements and understandings, both written and oral, among the parties with respect to its subject matter. 7.7 GOVERNING LAW; JURISDICTION. This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina, without giving effect to the provisions thereof relating to conflicts of law. 7.8 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same agreement. 7.9 ASSIGNMENT. This Agreement and the rights, interests and obligations hereunder shall be binding upon, inure to the benefit of and be enforceable by the parties hereto and their respective successors and permitted assigns. Quintiles may not assign, sublicense, or otherwise transfer its rights, interests or obligations under this Agreement without Healtheon's prior written consent (not to be withheld or delayed unreasonably), except (a) as a part of the sale or other disposition of all or a substantial portion of its Data Products business; (b) to make Data Products available to customers in the ordinary course of business; (c) in connection with any joint venture or strategic relationship with one or more pharmaceutical companies for the development or commercialization of Data Products; or (d) to any Affiliate of Quintiles. Healtheon may not assign or otherwise transfer its rights, interests or obligations under this Agreement without Quintiles' prior written consent (not to be withheld or delayed unreasonably), except in connection with the sale, transfer, or other disposition of all or any portion of its business or assets (other than in the ordinary 15 17 course of business) in a transaction in which the transferee or successor to such business or assets assumes Healtheon's corresponding obligations under this Agreement. 7.10 PUBLICITY. Except as otherwise required by applicable law, neither party shall refer to the other party in advertising, promotional activities, or other public disclosures or announcements without such other party's prior written consent, which shall not be withheld unreasonably. 7.11 LIMITATION OF LIABILITY. EXCEPT IN THE CASE THAT REDWOOD WILLFULLY REFUSES TO PROVIDE MAPLE ACCESS TO LICENSED DATA AS CONTEMPLATED HEREIN (UNLESS REDWOOD'S REFUSAL IS BASED ON GOOD FAITH ASSERTION OF ITS RIGHTS UNDER SECTIONS 2.2(C) OR (D)), NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, PUNITIVE, OR SPECIAL DAMAGES ARISING OUT OF OR RELATED TO SUCH ACTION OR OMISSION, INCLUDING WITHOUT LIMITATION DAMAGES FOR LOSS OF BUSINESS PROFITS, BUSINESS INTERRUPTION, LOSS OF BUSINESS INFORMATION, AND THE LIKE, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 7.12 FORCE MAJEURE. Neither party will be responsible for any failure to perform its obligations under this Agreement due to causes beyond its reasonable control, including without limitation acts of God, war, riot, embargoes, acts of civil or military authorities, fire, floods, earthquakes, accidents, strikes, or fuel crises, provided that such party gives prompt written notice of such cause to the other party. The affected party's time for performance will be extended for a period equal to the duration of the force majeure. 7.13 TIME IS OF THE ESSENCE. Time is of the essence in the performance of both parties obligations hereunder. * * * * * * * * * * 16 18 [signature page to Data Rights Agreement] In witness whereof, each of Healtheon and Quintiles has caused this Agreement to be executed on its behalf by its respective officer duly authorized to do so, all as of the date specified above in the preamble. HEALTHEON/WEBMD CORPORATION By: /s/ Jeff Arnold ----------------------------------------- Its: Chief Executive Officer ----------------------------------------- QUINTILES TRANSNATIONAL CORP. By: /s/ John S. Russell ----------------------------------------- John S. Russell Senior Vice President, General Counsel and Corporate Secretary 17 19 SCHEDULE 2.3(B)
Ranges of Operating Income Healtheon as a percentage of Royalty Gross Product Revenue Percentage --------------------------- ---------- 0.00% 20.00% 20.00% 20.00% 21.00% 25.00% 21.00% 22.00% 25.80% 22.00% 23.00% 26.60% 23.00% 24.00% 27.40% 24.00% 25.00% 28.20% 25.00% 26.00% 29.00% 26.00% 27.00% 29.80% 27.00% 28.00% 30.60% 28.00% 29.00% 31.40% 29.00% 30.00% 32.20% 30.00% 100.00% 33.00%
20 TEMPORARY ADDENDUM TO DATA RIGHTS AGREEMENT This Temporary Addendum to Data Rights Agreement (this "Addendum") is an agreement between Quintiles Transnational Corp. ("Quintiles") and Healtheon/WebMD Corporation ("Healtheon"). 1. BACKGROUND Quintiles and Healtheon are parties to an Agreement and Plan of Merger dated January 22, 2000 (the Acquisition Agreement"). The Acquisition Agreement calls for Quintiles' subsidiary known as Envoy Corporation ("Envoy") to be acquired by Healtheon. Envoy's primary business is to act as a clearinghouse for electronic data transmissions between health care providers and the institutions that pay for or manage payment for health care services. The Acquisition Agreement calls for Quintiles and Healtheon to be parties to a Data Rights Agreement to be dated as of the date that Healtheon's acquisition of Envoy is complete (the "Data Rights Agreement"). The Data Rights Agreement calls for Healtheon to provide Quintiles certain De-Identified Data (as defined in the Data Rights Agreement). Envoy's business is intended to be a source of the De-Identified Data. Envoy has, as part of its operations, been providing certain data that has not yet been De-Identified (the "Identifiable Data") to Synergy Healthcare, Inc. ("Synergy"), an affiliate of Envoy that will be retained by Quintiles after Healtheon's acquisition of Envoy. The parties are agreeing to this Addendum for the purpose of De-Identifying the Identifiable Data previously supplied to Synergy. The statements made in this Section 1 are only intended as background for the reader of this Addendum and do not constitute representations of fact, warranties, or contractual promises. 2. PROJECT DESCRIPTION 2.1. PURPOSE The parties will cooperate to De-Identifying the Identifiable Data. The parties will specify, develop, test, and implement software for De-Identifying the data regularly provided by Healtheon and Envoy to Quintiles and Synergy and will use the software to create a De-Identified version of the previously delivered Identifiable Data. 2.2. HASHING PROGRAM Envoy and Synergy have jointly created a computer program, (the "Hashing Program") that creates a unique alphanumeric code to identify individuals (the "Identifier"). The purpose of the Identifier is to enable Quintiles to determine that two pieces of data relate to the same 1 21 individual (for example, two prescriptions for the same patient). The Hashing Program creates each Identifier by encrypting a concatenation of: (a) information about the individual, determined by Synergy to be sufficient to identify the individual uniquely (for example, gender, last name, and date of birth), and (b) a long number, determined by Envoy, that is constant across individuals but is meaningless (the "Initialization Vector"). The Hashing Program encrypts information using a method that cannot be readily decrypted called a one-way hashing algorithm. The Initialization Vector shall be retained in confidence by Envoy until delivered to Quintiles as stated in Section 2.8. 2.3. DATA FEEDS Envoy and Synergy will jointly create a set of documents describing the data elements to be included in separate sets of De-Identified Data from pharmacy, hospital, medical, and dental data (the "Data Specifications"). Individuals will be identified in such De-Identified Data only by the Identifier, and other personally identifiable information will be removed. Using its existing systems, Envoy will produce the required data elements for subsequent De-Identification using the Hashing Program and transmission to Synergy using existing telecommunications processes. As of the Effective Date of this Addendum, Envoy and Synergy have implemented the process described in this Section 2.3 (the "De-Identified Feeds") for pharmacy data. Envoy and Synergy plan to implement these processes for hospital, medical, and dental data no later than May 31, 2000. 2.4. DATA CONVERSION Envoy is developing a suite of programs (the "Bulk Conversion Programs") capable of converting Identifiable Data to De-Identified Data using the Hashing Program. The Bulk Conversion Programs address the conversion of each type of data (such as pharmacy data, medical data, hospital data, and dental data). As of the Effective Date of the Addendum, the parties have arranged for a contractor to use the pharmacy Bulk Conversion Program to convert the pharmacy data that had previously been delivered by Envoy to Synergy as Identifiable Data. As of the Effective Date of this Addendum, Envoy is developing the Bulk Conversion Programs to address hospital, medical, and dental data. When this development is complete, expected to be no later than May 31, 2000, Envoy will deliver the Bulk Conversion Programs to Synergy and Synergy will use the Bulk Conversion Programs to convert the hospital, medical, and dental Identifiable Data in its possession to De-Identified Data. As Synergy confirms that the Bulk Conversion Programs correctly De-Identified Identifiable Data, Synergy shall (a) at Synergy's option, deliver to Envoy the Identifiable Data in Envoy's proprietary format, (b) erase the Identifiable Data from all of its computers in an irretrievable manner, and (c) destroy all other 2 22 copies of the Identifiable Data. The parties anticipate that this conversion will be complete no later than July 17, 2000 (resulting in the purging of Identifiable Data in Synergy's data warehouse), and the purging of all other Identifiable Data will be complete no later than December 31, 2000. Upon completion of the conversion, Synergy shall provide a sworn certificate of one of its officers with personal knowledge that Synergy retains no further copies or methods of re-creating the Identifiable Data. 2.5. INTERIM DATA MAP (a) Between the time that the De-Identified Feeds are implemented as set out in Section 2.3 and the time that the conversion is complete as set out in Section 2.4 (the "Conversion Period"), Synergy will require a method of relating De-Identified Data delivered through the De-Identified Feeds and Identifiable Data to unique individuals. Envoy has delivered to Synergy a program (the "Mapping Program") to create a table (the "Map") that cross-indexes the identifiers with the data used to identify unique individuals (the "Keys") in Synergy's own databases containing Identifiable Data (Synergy's "Data Warehouse"). Synergy has created the Map and is using it to cross-index its data. (b) During the Conversion Period, Synergy shall undertake the heightened precautions set out in this paragraph (b) with respect to the Map, the Mapping Program, and the Bulk Conversion Programs. Synergy shall treat the Map, the Mapping Program, and Bulk Conversion Programs with the highest level of care and security given to any of Synergy's own trade secrets. In particular, Synergy shall ensure that the only persons able to access the Map, the Mapping Program and the Bulk Conversion Programs are its own employees who have a documented need to know information contained in the Map, the Mapping Program, or the Bulk Conversion Programs and who have signed written confidentiality agreements prior to being given access to the Map, the Mapping Program or the Bulk Conversion Programs. No copies of the Map, the Mapping Program or the Bulk Conversion Programs shall be made, except for a single backup copy and except for transitory copies made by the internal operations of databases. Except for Healtheon, Quintiles and its Affiliates, no third parties whatsoever shall be permitted to have access to the Map, the Mapping Program, or the Bulk Conversion Programs in any manner whatsoever. Upon completion of the Conversion Period, Synergy shall (i) erase the Map, the Mapping Program, and the Bulk Conversion Programs from all of its computers in an irretrievable manner, shall destroy all other copies of the Map, the Mapping Program, and the Bulk Conversion Programs and shall provide a sworn certificate of one of its officers with personal knowledge that Synergy retains no further copies or methods of re-creating the Map, the Mapping Program, or the Bulk Conversion Programs, and (i) make no further use of the Identifiable Data during the purging of such data as contemplated in this Addendum. (c) Without prejudice to any other remedies that may be available at law or equity, Synergy agrees that its responsibilities under Section 2.5(b) shall be enforceable by way of injunction and specific performance. In the event that any party to this Addendum seeks an injunction or specific performance in connection with Section 2.5(b), Synergy shall waive the 3 23 requirement of any showing other than its breach or threatened of this section and shall not oppose the entry of an injunction or specific performance if breach or threatened breach is found. 2.6. TESTING Envoy and Synergy will cooperate in testing the De-identified Feeds, Hashing Software, Mapping Program, Bulk Conversion Programs, and all other processes to be used by the parties hereunder. During the tests, Envoy or Synergy may make temporary changes to the Data Specifications. The tests will be handled outside of the normal production process, and all data used for the tests will be destroyed at the end of the test process. Envoy will correct problems discovered during the testing process. The parties will re-test any corrections as they are completed. Because the parties desire to expedite the completion of the implementation of the De-Identified Data Feeds, the parties will not employ a formal acceptance process, but will cooperate to ensure that the processes are adequately tested. 2.7. ACCESS SPECIFICATIONS The Data Specifications and Hashing Program shall constitute a portion of the Access Specifications (as such term is defined in the Data Rights Agreement) until such time as the Access Specifications are formalized by agreement of Quintiles and Healtheon. 2.8. DELIVERY OF SOFTWARE Promptly after completion of the Conversion Period, Envoy shall deliver to Quintiles a copy of the Hashing Program, and the Initialization Vector (the "Software"). The Software shall be delivered in source code and with such documentation as Envoy shall have prepared. Quintiles recognizes that Envoy will not have developed the Software to the level of quality required for commercialization. Quintiles shall accept delivery of the Software "AS IS" and without warranty. Healtheon recognizes that during the term of the Conversion Period, Quintiles may enter into data agreements with third parties pursuant to which Quintiles would receive De-Identified Data, and performance of which would benefit from the third party's use of the Hashing Program and the Initialization Vector. Healtheon agrees to promptly make such items available to such third parties upon Quintiles' request, provided that such third party agrees to keep the Initialization Vector confidential during the term of the Conversion Period to a degree commensurate with the restrictions set out above in Section 2.5. Further, Healtheon agrees, upon Quintiles' request, to enter into a technology escrow agreement (such escrow to be maintained at Quintiles' expense) with Data Securities International, Fort Knox Escrow Services, or such other technology escrow company mutually agreed by the parties which would make the Initialization Vector and the Hashing Program available to such third parties under the terms contemplated in this Section 2.8. 4 24 2.9. EXCLUDED SOURCES Portions of the data previously received by Synergy from Envoy may include data that Envoy agreed to exclude from use in Data Products (as defined in the Data Rights Agreement) ("Excluded Data"). The parties shall co-operate in identifying such data for Synergy to purge, and in connection with such efforts the parties plan to identify and compile a mutually agreed list of Excluded Data sources which shall become the basis for Synergy's efforts to purge Excluded Data hereunder. It is recognized that the Data Feed in Section 2.3, and the De-Identified Data produced by the Bulk Conversion Programs, excludes the Excluded Data to the best of the parties' knowledge. Therefore, at the end of the Conversion Period, Synergy should not have Excluded Data in its primary data warehouse. However, some of the data derivatives previously produced by Synergy from the primary data warehouse may contain such Excluded Data. To the extent possible, Synergy will identify the Excluded Data in all sources, including its data warehouse and data derivatives, and purge it by December 31, 2000. In addition, Envoy shall maintain complete copies of all such data, including such Excluded Data, for a reasonable period of time not to exceed two years from Envoy's receipt of the data, subject to any legal requirements to the contrary. Envoy shall provide extracts from this data to Quintiles in order to provide Excluded Data if Quintiles obtains the agreement of the parties with whom Envoy agreed to exclude the data. 2.10. DATA TO BE PURGED IF PROHIBITED BY PRIVACY RULES As of the date of this Addendum, the Department of Health and Human Services is considering a proposed rule known as Standards for Privacy of Individually Identifiable Health Information (the "HIPAA Rule"). Promptly after the HIPAA Rule is promulgated and no later than the date it becomes effective and requires compliance by Envoy, Quintiles and Synergy shall purge from its computers data received from Envoy or Healtheon that is personally identifiable as defined in the HIPAA Rule. Until such rule is promulgated, Envoy and Healtheon may include in the De-Identified Data certain information, the treatment of which under the final HIPAA Rule is not yet certain (for example, zip code, city, and date of birth). The parties agree that, if this data is delivered, it will be maintained in a manner determined by Synergy so that it can be readily purged if required. 2.11. PURGING OF DATA Where this Addendum requires the purging of data or destruction of copies of data, it is the intent of the parties that such purging or destruction be carried out without regard to where the data resides (such as in Synergy's primary data warehouse, Data Products, data derivatives, data extracts, or interim data). 5 25 3. TERM This Addendum shall become effective upon its signature by both parties (the "Effective Date of this Addendum") and shall continue in force until the obligations of each party under Section 2 have been completed, which in any event shall not extend beyond the later of (a) two (2) years after the Effective Date of this Addendum, or (b) the date at which the HIPAA Rule becomes effective and requires compliance by Envoy. The provisions of Sections 3 through 7.4 shall survive the expiration or termination of this Addendum. 4. AUDITS In addition to the audits permitted by Section 2.6(a) of the Data Rights Agreement, Healtheon may audit the performance of the obligations of Quintiles and its subsidiaries under this Addendum no more than once per calendar quarter (a) during the term of this Addendum, and (b) after the term of this Addendum and for up to two (2) years thereafter, in all events with the conduct and timing of such audit to be commercially reasonable. 5. OWNERSHIP OF WORK PRODUCT Quintiles shall own the Software as described in the Assignment Agreement dated as of the Effective Date of this Addendum. Healtheon shall have a license to use the Software as described in the Software License Agreement dated as of the Effective Date of this Addendum. 6. COSTS For Envoy's efforts hereunder, Quintiles shall pay Envoy at Envoy's "fully-loaded" cost for personnel assigned to the effort (determined as a function of salary and an overhead allotment agreed to by the Steering Committee as defined in the Data Rights Agreement) and actual, reasonable costs and expenses otherwise incurred in supporting or carrying out the project described above ("Costs"). Envoy shall provide to Quintiles monthly invoices for Costs which shall provide all information reasonably necessary for the computation or confirmation of the payments described in the invoices. Any payments for Costs will be paid by Quintiles to Envoy within thirty (30) days after Quintiles' receipt of such invoice. Quintiles will pay interest of 1% per month on amounts not paid within such 30 day period, unless Quintiles delivers, in good faith, notice to Envoy disputing such payment in reasonable detail. Quintiles will be responsible for its own costs incurred hereunder. 7. WARRANTEES 7.1. NO ATTEMPTS TO REVERSE ENGINEER Quintiles warrants that neither it nor its subsidiaries, agents or subcontractors will attempt to (a) re-identify De-Identified Data (including without limitation, the use of the Map to 6 26 re-identify De-Identified Data after the Conversion Period), (b) reverse engineer any process used to De-Identify Data, or (c) determine the value of the Initialization Vector prior to the completion of the Conversion Period. 7.2. IDENTIFIABLE DATA Quintiles warrants that its use of the Identifiable Data shall (a) be treated the same as Licensed Data as set forth in the Data Rights Agreement, (b) not include any dissemination of the Identifiable Data to third parties except in aggregate or summary form, and (c) comply with all limitations on use of which Quintiles or its subsidiary becomes aware and which arise from contracts between Envoy and one of its customers. 7.3. PERFORMANCE BY SUBSIDIARIES The parties warrant that they shall each cause their respective subsidiaries to carry out the responsibilities assigned to them in this Addendum. 7.4. CHAIN OF TRUST Until the HIPAA Rule becomes effective and requires compliance by Envoy, Quintiles warrants that whenever it makes Licensed Data received from Healtheon or its subsidiaries (including the De-Identified Data, compilations of data other than in aggregate or summary form, and data received through the Data Feeds) available to third parties, it shall enter into agreements with such parties that require that the third party (a) not attempt to re-identify such Licensed Data (as applicable), and (b) appropriately safeguard the Licensed Data through applicable use and confidentiality protections, at least to the degree described in the most current draft of the HIPAA Rule published by way of Notice of Rule Making by the Department of Health and Human Services. 8. INTERPRETATION This Addendum shall incorporate and be subject to Articles I, III, IV, V, and VII of the Data Rights Agreement as if such Articles were set out fully herein. In any interpretation of this Addendum, in the event of any inconsistency between the terms of this Addendum and the Data Rights Agreement, the terms of this Addendum shall control. In all events, the parties expressly agree that this Addendum shall not serve to amend or modify the terms of the Data Rights Agreement in any manner. 7 27
Quintiles Transnational Corp. Healtheon/WebMD Corporation By: /s/ John Russell By: /s/ K. Robert Draughon -------------------------------------------- ----------------------------------------- (authorized signature) (authorized signature) Name: John Russell Name: K. Robert Draughon ------------------------------------------ --------------------------------------- (printed) (printed) Title: Senior Vice President, Corporate Counsel ----------------------------------------- Title: Executive Vice President -------------------------------------- Date: 5/22/00 Date: 5/22/00 ------------------------------------------ ---------------------------------------
8 EX-10.19 6 g68042ex10-19.txt INTERNET PRODUCT DEVELOPMENT & MARKETING AGREEMENT 1 EXHIBIT 10.19 Internet Product Development and Marketing Agreement dated as of May 26, 2000 between Registrant and Quintiles Transnational Corp. 2 INTERNET PRODUCT DEVELOPMENT AND MARKETING AGREEMENT THIS INTERNET PRODUCT DEVELOPMENT AND MARKETING AGREEMENT (the "AGREEMENT") is made and entered into as of May 26, 2000 by and between HEALTHEON/WEBMD CORP., a Delaware corporation ("HWMD"), and QUINTILES TRANSNATIONAL CORP., a North Carolina corporation ("QUINTILES"). References in this Agreement to "schedules" refer to the documents attached as schedules to this Agreement, all of which form part of this Agreement; and unless otherwise indicated, references to "articles" or "sections" refer to the corresponding numbered articles and sections of this Agreement. BACKGROUND (a) Quintiles provides product development and commercialization solutions, healthcare informatics services, and healthcare policy consulting to the healthcare industry worldwide. (b) HWMD is applying advanced Internet technology to enable healthcare providers and consumers to interact with each other and the institutions of healthcare online. (c) HWMD and Quintiles are parties to an Agreement and Plan of Merger dated as of January 22, 2000 (the "MERGER AGREEMENT") pursuant to which they have agreed, among other things, for Quintiles' wholly owned subsidiary Pine to become a wholly owned subsidiary of HWMD by merger (the "PINE MERGER"). (d) As a principal component of the transactions surrounding the Merger Agreement, HWMD and Quintiles desire to engage in the collaborative development, marketing, and commercialization of a portfolio of Internet-based products and services for the pharmaceutical industry as provided herein. NOW, THEREFORE, in consideration of their respective agreements set forth in this Agreement and of other good and valuable consideration, the receipt and legal sufficiency of which they acknowledge, and intending to be legally bound, HWMD and Quintiles agree as follows: Page 1 of 20 3 ARTICLE I DEFINITIONS As used in this Agreement, the following capitalized terms shall have the respective meanings set forth below: (a) "AFFILIATE" of a Person means a Person controlling, controlled by or under common control with such Person. (b) "ALLIANCE" means and refers to the relationship established between Quintiles and HWMD by this Agreement. (c) "ALLIANCE GUIDELINES" means the alliance-wide guidelines referred to in Section 2.2, which the parties intend to serve as primary guidance for the Steering Committee in its administration of the transactions contemplated by this Agreement. (d) "CO-BRANDED AREA" means that portion of HWMD's primary Internet presence which is devoted to the Alliance. (e) "CONFIDENTIAL INFORMATION" means and includes all information disclosed under this Agreement by either party to the other, provided that the following shall not constitute Confidential Information: information which (1) is known by the receiving party prior to disclosure by the disclosing party; (2) is or becomes available publicly other than as a result of a breach of this Agreement; (3) is developed independently by the receiving party without the use of or reliance on the disclosing party's Confidential Information; or (4) is provided to the receiving party by a third party under no duty of confidentiality to the disclosing party. (f) "DEVELOPMENT PERSONNEL" means HWMD personnel performing development services relating to a Tool under Section 4.2 of this Agreement. (g) "EXECUTIVE SPONSOR" has the meaning set forth in Section 2.4. (h) "INTELLECTUAL PROPERTY RIGHTS" means trade secret, confidentiality, patent, copyright, trademark, know-how, moral, and similar rights of any type under the applicable laws of any governmental authority, domestic or foreign, including without limitation all applications and registrations relating to any of the foregoing. (i) "INVESTIGATION PERIOD" has the meaning set forth in Section 3.1(a). (j) "MARKS" means a party's trademarks, trade names, service marks, service names, logos and trade dress. (k) "PERSON" means any person or entity. (l) "PLATFORM ENHANCEMENTS" has the meaning set forth in Section 7.1(c). Page 2 of 20 4 (m) "HWMD PLATFORM" means that certain technology used by HWMD as of the Effective Date which serves as the basis for HWMD's Internet-based services provided to its customers. (n) "SPECIFICATIONS" means, with respect to any Tool, the functional specifications determined by the Steering Committee for such Tool and reflected in the corresponding Work Plan. (o) "STEERING COMMITTEE" means and refers to the six-member steering committee comprised of three designees from each party established pursuant to Section 2.4 to manage the conduct of the transactions contemplated by this Agreement. (p) "TERM" means the term of this Agreement, as determined according to Section 9.1. (q) "TOOL" means any product or service developed by the parties under this Agreement, each to operate in connection with the HWMD Platform. (r) "TOOL GROUPS" means the three product/service groups referred to in Section 3.1(b) in which the parties intend to develop and commercialize Tools, namely drug development, physician detailing, and direct-to-consumer. (s) "WORK PLAN" means, with respect to any Tool, the development and marketing plan, budget and schedule prepared pursuant to Section 3.1(c) in respect of such Tool. ARTICLE II PURPOSE AND MANAGEMENT OF COLLABORATION 2.1 PURPOSE. Through performance of their respective obligations under this Agreement, HWMD and Quintiles agree to conceive, design, implement, market, distribute, license, and sell services based on a portfolio of Tools to be made available through a prominent co-branded location hosted by HWMD in HWMD's healthcare Internet portal. The Tools the parties develop in the Alliance as a foundation for these service offerings will fall into three broad categories associated with the development, sales, and marketing process for pharmaceutical products, referred to in this Agreement as "drug development," "physician detailing," and "direct-to-consumer," respectively (the "TOOL GROUPS"). The parties intend to commercialize the Tool Groups on a package basis to enable corresponding efficiencies across the pharmaceutical product development and commercialization process. 2.2 ALLIANCE GUIDELINES. The parties intend to conduct the activities contemplated by this Agreement according to the alliance guidelines set forth in Schedule 2.2 concerning overall resource commitments, development and marketing schedules, and revenue sharing (the "ALLIANCE GUIDELINES"). The Steering Committee may depart from the Alliance Guidelines in the Work Plan for any Tool or otherwise in connection with its administration of the Alliance. Subject to any such departure, the Alliance Guidelines will control the parties' relationship with respect to the subject matter covered thereby. Page 3 of 20 5 2.3 IMPLEMENTATION; RESOURCE ALLOCATIONS. The parties intend to implement development of an initial portfolio of Tools (referred to below as the "Initial Toolkit") by conducting the software development activities contemplated by Articles 3 and 4 and by allocating additional resources of the types and amounts determined from time to time by the Steering Committee with reference to the Alliance Guidelines. Quintiles agrees to purchase from HWMD, and HWMD agrees to provide to Quintiles, $100,000,000 of development services for the Initial Toolkit at cost, as set out in Section 6.1(a). 2.4 STEERING COMMITTEE. (a) The parties will organize the Steering Committee promptly after execution of this Agreement. The membership of the Steering Committee shall be composed of the same individuals comprising the Steering Committee under that certain Data Rights Agreement entered into of even date by and between the parties. The Steering Committee shall convene on such schedule (but not less frequently than monthly) and employ such procedures as it shall determine from time to time in good faith, and, except as otherwise specifically required by this Agreement, shall act by unanimous consent. (b) The Steering Committee will provide general oversight and coordination of the parties' collaboration, and will be responsible for identifying Tools, overseeing creation of corresponding Work Plans, and monitoring the parties' conduct of the Work Plan for each Tool. (c) The parties will resolve deadlock among the Steering Committee through the Executive Review procedure described in Section 10.1(a) below. 2.5 EXECUTIVE SPONSORS. Each party shall appoint a member of its senior management as an executive sponsor for the Alliance ("EXECUTIVE Sponsor"). Executive Sponsors will be responsible for monitoring the Alliance relationship, conducting periodic briefings for each other and their management teams, and providing a defined means of communication with other senior executives. Each party may change its Executive Sponsor at any time by written notice to the other party. ARTICLE III TOOL IDENTIFICATION; WORK PLANS 3.1 IDENTIFICATION OF TOOLS. (a) SELECTION BY STEERING COMMITTEE. The Steering Committee will facilitate the initial review of potential Tools for the parties to develop under this Agreement, in accordance with the general timelines contemplated by the parties as described in the Alliance Guidelines. While the parties anticipate that Quintiles personnel will be primarily involved in the identification of Tools with appropriate support from HWMD personnel, either party may propose a Tool concept to the other, and any such proposal agreed upon by the Steering Committee will constitute and be deemed a Tool for purposes of this Agreement. Page 4 of 20 6 (1) The parties will research, evaluate and agree on a base set of Tools (the "INITIAL TOOLKIT") during approximately the first six (6) months after the Execution Date of this Agreement, as contemplated in the Alliance Guidelines (the "INVESTIGATION PERIOD"). (2) The parties acknowledge that after determination of the Initial Toolkit, the parties may desire to develop and commercialize additional Tools under this Agreement, and/or to create enhancements of existing Tools. The Steering Committee will facilitate review of proposals for additional Tools and enhancements of existing Tools from time to time, and any agreed-to projects shall be developed as set forth in this Article III. (3) HWMD will develop each Tool selected by the Steering Committee, as set forth in the corresponding Work Plan, and Quintiles will pay HWMD for development activities for the Initial Toolkit, as further specified in each corresponding Work Plan and at rates determined according to Section 6.1. (b) CREATION OF WORK PLAN. Promptly after identification of any Tool under subsection (a) above, the parties shall collaborate in the preparation of a Work Plan for such Tool. Any Work Plan under this Agreement must be unanimously approved by the Steering Committee. As applicable, each Work Plan shall include, among other things: (1) The Specifications for the Tool; (2) Delivery and acceptance guidelines for the Tool prior to any commercial launch of the Tool; (3) Allocation of responsibility for the actions required for development, implementation and marketing of the Tool; (4) Uptime and related services and hosting requirements; (5) Establishment of the parties' respective corresponding financial, personnel, and other resource commitments for the Tool; (6) Establishment of a budget; and (7) Establishment of a schedule for carrying out the development and marketing activities for such Joint Product. 3.2 RESTRICTIVE COVENANTS. Except with the other party's prior written consent or as otherwise provided in this Agreement, neither party will undertake directly or indirectly, or permit any of its Affiliates to undertake directly or indirectly, its respective conduct as follows: (a) During the term of this Agreement, Quintiles will not promote, distribute or provide access to its products or services related to the CRO Business and CSO Business via the Internet through any Person other than HWMD; provided, however that Quintiles (1) may deploy its internal computer systems for internal purposes, (2) may continue to operate Quintiles.com and services offered through Quintiles.com, (3) may continue to provide services through existing Page 5 of 20 7 contractual arrangements for so long as it is obligated to do so, and (4) may render client services through such client's systems as requested by such client without solicitation by Quintiles. (b) During the term of this Agreement, HWMD will not promote any third party in the CRO Business or CSO Business or develop, distribute or provide access to any such company's services. (c) During the term of this Agreement, HWMD will not participate in the CRO Business (other than pursuant to this Agreement) or develop or host for itself or any Person other than Quintiles any product designed to facilitate any CRO Business or the administration of clinical trials. (d) During the term of this Agreement, Quintiles will not promote or advertise pharmaceutical products directly to consumers via the Internet through any Person other than HWMD. (e) Quintiles will not contribute to the development with or procure development from any Person other than HWMD, of any Internet-based product or service to the extent such product or service is substantially functionally comparable to any Tool selected by the Steering Committee for development in the Alliance (all such products and services, "RESTRICTED PRODUCTS") (1) at any time during the three-year period commencing on the date of this Agreement (the "INITIAL ROLL-OUT PERIOD"); or (2) at any time after the Initial Roll-Out Period unless the Steering Committee has declined to pursue such product after the written suggestion to that effect from Quintiles, including a clear statement by Quintiles of its intent to undertake such activity. (f) HWMD will not develop any Restricted Products for, or provide any Restricted Products to, any Person other than Quintiles (1) at any time during the Initial Roll-Out Period; or (2) at any time after the Initial Roll-Out Period unless the Steering Committee has declined to pursue such product after the written suggestion to that effect from HWMD, including a clear statement by HWMD of its intent to undertake such activity. As used in this Section 3.2, "CRO Business" means generally the business of managing or conducting clinical trials on a contract basis as further defined by reference to Quintiles' contract research business as of the date of this Agreement, giving effect to future developments in the natural evolution of the contract research industry; "CSO Business" means generally the business of providing pharmaceutical sales services on a contract basis as further defined by reference to Quintiles' contract sales business as of the date of this Agreement, giving effect to future developments in the natural evolution of the contract sales industry. The steering committee shall review these restrictive covenants six months after the effective date of this Agreement and annually thereafter at the request of either party. Page 6 of 20 8 ARTICLE IV TOOL DEVELOPMENT AND IMPLEMENTATION 4.1 GENERAL. Upon execution of each Work Plan, the parties will develop, implement and operate the corresponding Tool through the procedures set forth in this Article 4. 4.2 DEVELOPMENT ACTIVITIES. (a) PERFORMANCE. The parties will perform the development work described in this Agreement to develop the Tool in accordance with the Specifications and the time frames set forth in the Work Plan (on a best efforts basis as to schedule and budget), as they may be modified from time to time in accordance with the terms of this Agreement. (b) DEVELOPMENT RESOURCES. In performing development services under this Agreement, HWMD shall allocate Development Personnel of a quality and experience level at least equal to that allocated to any other HWMD customer. Quintiles shall have the right to request individual Development Personnel, and HWMD will consider and shall use its commercially reasonable efforts to use such individuals as Development Personnel. HWMD agrees to use its commercially reasonable efforts to maintain continuity of leadership among the Development Personnel in performing development services hereunder. In any allocation of resources regarding HWMD's development resources, HWMD agrees that the Alliance shall receive preferred treatment in obtaining and retaining Development Personnel, of at least a level of preference afforded to any other HWMD customer. (c) MODIFICATIONS TO SPECIFICATIONS. Either party may request modifications to the Specifications at any time during the development of a Tool. Upon both parties' approval, HWMD will perform the requested modifications, and the Specifications and the Work Plan will be deemed amended accordingly. (d) PROJECT MEETINGS AND REPORTS. During the performance of development services under this Section 4.2, the parties will conduct regular meetings, in accordance with a schedule mutually agreed by the parties, to review performance of the Alliance under this Agreement and to resolve any problems. During the term of this Agreement, HWMD will provide Quintiles with periodic reports describing the progress of the development in the preceding reporting period, in such a form as is agreed by the Steering Committee. (e) REVIEW RIGHTS. Quintiles will have the right, in its reasonable discretion and at its cost, to review the progress of HWMD's performance of the development services at HWMD's facilities. HWMD will provide reasonable cooperation to Quintiles in performing such reviews, including without limitation providing Quintiles with access to all non-privileged work in progress, documents and other materials related thereto, as reasonably requested by Quintiles. Quintiles may perform such reviews during HWMD's normal business hours by providing HWMD with at least five business days advance written notice. In performing such reviews, Quintiles will not unduly interfere with the operation of HWMD's other business activities, and Quintiles will comply with HWMD's reasonable safety and security policies and procedures. Page 7 of 20 9 (f) BETA AND PILOT PROGRAMS. The parties anticipate that during the development of any given Tool, the parties may desire to implement beta or pilot programs prior to commercial launch. To the extent that the parties desire to implement such programs, HWMD agrees to make available wherever practical prototype versions of the Tools for Quintiles' review during the performance of the development services, and Quintiles shall provide feedback regarding any nonconformities to Specifications or other suggestions regarding the prototype for HWMD to incorporate into the development services, all as further described in an applicable Work Plan. (g) TECHNICAL CONTACTS. Quintiles and HWMD will each designate primary and alternate technical contacts (collectively, the "TECHNICAL CONTACTS") as the primary individuals responsible for facilitating communications between Quintiles and HWMD regarding all technical matters and for coordinating the design, development, and testing of the Tool. Each party may change its respective Technical Contacts at any time by providing the other party with no less than five (5) days' advance notice. 4.3 DELIVERY AND ACCEPTANCE. The parties shall determine in the Work Plan the procedures for final testing of each Tool to determine whether the Tool materially conforms to the applicable Specifications in the Work Plan. As set forth in further detail in the Work Plan, Quintiles will provide HWMD with a written acceptance of the Tool or one or more written statements of errors to be corrected (a "STATEMENT OF ERRORS"). If Quintiles fails to provide HWMD with written acceptance or Statement of Errors within the period of time set forth in the Work Plan, then the Tool will be deemed accepted. If Quintiles provides HWMD with a Statement of Errors, then HWMD shall promptly and correct such errors and make the Tool available for re-testing. The foregoing procedure will be repeated until Quintiles accepts or finally rejects each Tool. Upon acceptance of the Tool, HWMD will make the Tool available for use on the Internet as described in the Work Plan, or conduct such other activities to make the Tool available as described in the Work Plan. 4.4 IMPLEMENTATION/COMMERCIALIZATION OF TOOL. Upon launch of the Tool, HWMD shall host and operate the Tool as set forth in the Work Plan. Except as otherwise set forth in the Work Plan, HWMD shall, in accordance with any applicable costs and fees set forth in the Work Plan, comply with the following as to each Tool. (a) HOSTING; CAPACITY. HWMD shall provide (within the context of HWMD's facilities and normal hosting operations) all computer servers, routers, switches and associated hardware in an amount reasonably necessary to meet anticipated traffic demands, adequate power supply (including generator back-up) and HVAC, adequate insurance, adequate service contracts and all necessary space, network cabling and power distribution to support the Tool. HWMD shall not be responsible for any such items beyond its own data center. (b) SECURITY. HWMD shall implement security mechanisms for the Tool with a degree of protection at least as strong as any similar product made available by HWMD on the HWMD Platform, or with such other security mechanisms as are specified in the corresponding Work Plan. (c) UPTIME; SERVICE LEVEL RESPONSE. HWMD will use commercially reasonable efforts to ensure that a server hosting the Tool is accessible to other Internet servers at a level agreed to in the Work Plan ("Uptime"), with the sole exception of scheduled maintenance to be performed during off-peak hours. For Uptime problems or other service failures or failures of any Page 8 of 20 10 Tool to materially conform to the Specifications in the Work Plan, HWMD shall make available its personnel during such hours, and devote priority levels to correct any such problems, at least as strong as those provided by HWMD for any other applications on the HWMD Platform. 4.5 CO-BRANDING. The Tools shall be made available to customers in the Co-Branded Area, or as otherwise agreed in the Work Plan, and shall be branded under both parties' Marks. In all uses of the Tools in which the Marks of either party are displayed other than on HWMD's web sites, Quintiles' Marks shall be displayed with substantially equivalent size, location and prominence to HWMD's Marks, except as otherwise agreed in a Work Plan. HWMD's web site shall feature a prominent link to the Co-Branded Area. which link will display Quintiles' Mark. Within the Co-Branded Area, Quintiles Marks shall be displayed with substantially equivalent size, location and prominence to HWMD's Marks, except as otherwise agreed in a Work Plan. ARTICLE V MARKETING 5.1 MARKETING PRINCIPLES. (a) General. The parties will commercialize the Tools and services provided through use of the Tools solely on a co-branded basis, except as otherwise agreed in a Work Plan. Although each may engage in independent marketing activities for Tools at its own expense, HWMD and Quintiles intend primarily to market the Tools on a coordinated, collaborative basis using sales teams comprised of representatives of each firm, with each party marketing all three Tool Groups on a package basis. (b) Integrated Sales Teams. Each party will provide appropriate sales and marketing personnel to constitute an integrated sales force for the sales of services based on the Tool Groups, and each sales team will include representatives from each party. The Steering Committee will coordinate development of sales teams comprised of representatives from each party, structured generally (unless otherwise determined by the Steering Committee) to include a Project Executive (with coordination authority over sales efforts to multiple targeted customers), a Relationship Executive (corresponding to the specific targeted customer), and a sales/follow-up team. The parties will coordinate all sales team correspondence to each targeted customer through the corresponding Project and Relationship Executives to enable a unified, seamless message from the combined sales team. Project Executives and Relationship Executives will be designated from time to time by the Steering Committee. (c) Joint Bids. The parties agree to coordinate all joint sales bids for services provided through use of the Tools under this Agreement. The sales teams shall, together with the Steering Committee, determine on a bid-by-bid basis, issues relating to (1) the work to be performed by and the compensation to be paid to each party, (2) pricing of the services, (3) which party (based on preexisting relationships with the customer or otherwise) shall take the lead in the bid process, (4) the contractual structure of any transaction with a customer (through a prime and subcontractor arrangement or otherwise), and (5) such other matters as are determined by the parties. Page 9 of 20 11 (d) Customer Targeting. The parties (primarily Quintiles) from time to time will target pharmaceutical companies for sales of services based on the Tool Groups, and in particular will target an initial group of approximately 15 key potential customers in connection with the Alliance's Initial Toolkit roll-out. (e) Primary Sales Force Responsibility. Quintiles will bear primary responsibility for sales force activities for services related to the drug development and physician detailing Tool Groups. HWMD will bear primary responsibility for sales force activities for services relating to the direct-to-consumer Tool Group. (f) Package Orientation. The parties intend to market services based on the Tool Groups primarily as a single package including all three Tool Groups, but recognize that some customers may require the right to purchase services provided through the use of Tools individually or on a Tool Group basis. The Steering Committee will be responsible to establish and adapt price levels and models for custom sales. 5.2 SPECIFIC MARKETING ACTIVITIES. The Work Plan for each Alliance Product will specify the manner (if unique) in which the parties will market such Alliance Product, along with the specific resources (if any) each party will provide for that purpose. Each party will use commercially reasonable efforts to conduct the marketing activities specified in each such Work Plan, in the manner and on the schedule specified therein. 5.3 OTHER MARKETING ACTIVITIES. (a) General. In addition to the marketing activities designated in Work Plans for specific Tools, HWMD and Quintiles will engage in such other marketing activities as the Steering Committee shall determine from time to time, such as in connection with establishing a marketing infrastructure for Alliance activities, preparing periodic marketing plans, developing general marketing collateral, or otherwise. The Steering Committee may develop Work Plans to address all such activities as it determines. Each party will conduct its respective activities designated in each such Work Plan in the manner and on the schedule specified therein. (b) Procedures. The Steering Committee may develop sales procedures from time to time in its discretion for such matters as contact management and enhancement, coordinated bid preparation, and contracting, and such other matters as the Steering Committee determines. Each party will cause its Alliance sales personnel to comply with all such procedures adopted by the Steering Committee as in effect from time to time. ARTICLE VI PAYMENTS; REVENUE SHARING 6.1 PAYMENTS FOR DEVELOPMENT WORK. Quintiles will compensate HWMD for development activities as follows: (a) For development of the Tools in the Initial Toolkit and of any post-release enhancements during the year after any such Tool is first made generally available, Quintiles shall Page 10 of 20 12 pay HWMD at HWMD's "fully-loaded" development cost for Development Personnel (determined as a function of salary and an overhead allotment agreed to by the Steering Committee) and actual costs and expenses otherwise incurred in carrying out a Work Plan approved by the Steering Committee ("Costs"). (b) For development of Tools other than those in the Initial Toolkit, of any post-release enhancements for any such Tool, and of any post-release enhancements of Tools in the Initial Toolkit following the year after any such Tool is first made generally available, Quintiles shall pay HWMD such development fees as are determined by the Steering Committee and set forth in the applicable Work Plan. (c) HWMD shall provide to Quintiles monthly invoices for Costs which shall provide all information reasonably necessary for the computation or conformation of the payments described in the invoices. Any payments for Costs will be paid by Quintiles to HWMD within thirty (30) days after Quintiles' receipt of such invoice. Quintiles will pay interest of 1% per month on amounts not paid within such 30 day period, unless Quintiles delivers, in good faith, notice to HWMD disputing such payment in reasonable detail. 6.2 REVENUE SHARING. The parties will share their respective revenues from the sales of services provided through use of the Tools in the manner determined by the Steering Committee at the time of each bid to a potential customer. The Alliance Guidelines include a model of the parties' revenue sharing expectations by Product Channel as of the date of this Agreement. 6.3 AUDITS. Each party will maintain records reasonably sufficient to document and record its shared revenues for Tools; and each shall have the right to audit the other's books and records on a reasonable basis to confirm the accuracy thereof solely relative to shared revenues. The parties will address any apparent payment discrepancies promptly and in good faith, and the affected party promptly will correct any confirmed over- or under-payment. Each party may perform such audits up to twice per calendar year during the other party's normal business hours by providing the audited party with at least five business days advance written notice. In performing such audits, the auditing party will not unduly interfere with the operation of the audited party's other business activities, and the auditing party will comply with the audited party's reasonable safety and security policies and procedures. 6.4 OTHER COSTS OF PERFORMANCE. Except as otherwise specifically provided in this Agreement, each party will bear the costs and expenses of performing its obligations hereunder. Neither party shall be obligated to pay any taxes of the other or any other expenses for which the other party may be liable based upon or in connection with the transactions contemplated by this Agreement. Page 11 of 20 13 ARTICLE VII INTELLECTUAL PROPERTY OWNERSHIP 7.1 INTELLECTUAL PROPERTY RIGHTS. HWMD and Quintiles agree and acknowledge that as between HWMD and Quintiles, ownership of Intellectual Property Rights in the various intellectual properties associated with this Agreement (whenever developed) is as follows, subject to the various rights granted in this Agreement (and without any duty to account to one another except as specifically provided herein): (a) Each party shall own all right, title, and interest in and to all Intellectual Property Rights in its Confidential Information. (b) Quintiles will own all right, title, and interest in and to all Intellectual Property Rights in the Tools, all computer software implementing Tools, and all documentation for Tools (each of which shall be deemed a "work made for hire" for purposes of the federal Copyright Act); provided that HWMD shall be entitled to use all of the foregoing during the term of, in the manner, to the extent, and for the purposes required by this Agreement. HWMD hereby irrevocably transfers to Quintiles HWMD's entire right, title and interest to all Intellectual Property Rights in such items. (c) HWMD will own all right, title, and interest in and to all Intellectual Property Rights in the HWMD Platform and all Platform Enhancements created by HWMD under this Agreement. For purposes of this Agreement, "PLATFORM ENHANCEMENTS" means a modification to the HWMD Platform which relates to the operating environment in which the Tools and other applications function. 7.2 FURTHER ASSURANCES. Each of HWMD and Quintiles shall, and shall cause its Affiliates to, cooperate with the other (or its designee(s)) and shall execute documents of assignment, oaths, declarations, and other documents reasonably requested by the other to confirm or effect the allocation or facilitate the enforcement of the Intellectual Property Rights described in Section 7.1 above. Each party will provide such cooperation and execution at no charge to the other, other than reimbursement of its reasonable related out-of-pocket expenses. 7.3 LICENSE TO MARKS. Each party will retain all right, title, and interest in and to its Marks worldwide. Subject to the terms and conditions of this Agreement, HWMD hereby grants to Quintiles a royalty-free, non-exclusive, non-transferable, worldwide license to use HWMD's Marks in connection with its marketing activities for the Tools during the term of this Agreement; provided that such use is in accordance with HWMD's then-current trademark usage guidelines. Subject to the terms and conditions of this Agreement, Quintiles hereby grants to HWMD a royalty-free, non-exclusive, non-transferable, worldwide license to use the Quintiles Marks in connection with its marketing activities for the Tools, including its use on the Co-Branded Area, during the term of this Agreement; provided that such use is in accordance with Quintiles' then-current Mark usage guidelines. Neither party shall form any combination marks with the other party's marks. Neither party may modify any of the other party's Marks without the other party's approval. Each party hereby assigns to the other party all right, title and interest in the other party's Marks, together with Page 12 of 20 14 the goodwill attaching thereto, that may inure to it in connection with this Agreement or from its use of the other party's Marks hereunder. 7.4 NO OTHER RIGHTS. Except as specifically provided in this Agreement, neither party nor any of its respective Affiliates shall have any right or license by virtue of this Agreement to use or exploit any Intellectual Property Rights of the other party or any of the other party's Affiliates. ARTICLE VIII CONFIDENTIALITY Each of HWMD and Quintiles will hold and cause its respective Affiliates to hold the other party's Confidential Information in confidence and refrain from using any such Confidential Information other than for purposes of performing its respective obligations under this Agreement. Each party may disclose Confidential Information to its employees, contractors, and agents with a need to know the Confidential Information who are under obligations not to use or disclose the Confidential Information. Notwithstanding the foregoing, each party and its respective Affiliates will be permitted to disclose the other party's Confidential Information as and to the extent required by applicable law, provided the party required to make any such disclosure notifies the party whose Confidential Information is required to be disclosed as far in advance of the required disclosure as is reasonably practicable under the circumstances and cooperates with such party (if reasonably requested to do so, and at the requesting party's expense) to secure confidential treatment for the required disclosure. Nothing in this Agreement shall prohibit HWMD from using or disclosing any information learned by its employees or retained in such employees memory after their last exposure to materials containing Confidential Information, to the extent such information comprises software programming, Internet product development, or hosting techniques applicable generally to HWMD's business and products. ARTICLE IX TERM AND TERMINATION 9.1 INITIAL TERM; RENEWAL TERM. This Agreement shall commence upon the date specified above in the preamble and continue thereafter for ten (10) years. At the end of the initial term, this Agreement shall renew automatically for successive two (2) year periods, unless either HWMD or Quintiles notifies the other in writing of its intention to terminate this Agreement at least one hundred eighty (180) days prior to the beginning of the applicable renewal term. 9.2 TERMINATION (a) Either party may terminate this Agreement if the other party has defaulted in any material obligation under this Agreement and failed to cure such default within sixty (60) days after written notice thereof from the terminating party. (b) Either party may terminate this Agreement by immediate written notice if the other party becomes insolvent or if a court of competent jurisdiction enters an order or decree in Page 13 of 20 15 respect of such party under any bankruptcy or similar law approving a petition for reorganization or appointing a custodian for all or substantially all its assets or ordering the liquidation of such party. 9.3 EFFECT OF TERMINATION. The parties' respective rights and obligations under Section 6.3 (Audits), and Articles VII (Intellectual Property Ownership), VIII (Confidentiality), and X (Miscellaneous) will survive any expiration or termination of this Agreement. In the event of any termination or expiration of this Agreement, each party shall deliver to the other all copies of all Confidential Information of the other party in its possession or control (including, without limitation, HWMD's delivery to Quintiles of all copies of the Tools in object and source code forms and all related documentation). In the event of any termination or expiration of this Agreement, HWMD shall offer to Quintiles a service agreement for a period of up to two years, under which HWMD shall continue to operate the Tools on behalf of Quintiles and facilitate the transition of the Tools to another platform, all on HWMD's then-current standard pricing and other terms and conditions. HWMD shall also include a listing of all third party software contained in the Tools, and will sublicense or assign HWMD's rights in such software to Quintiles where HWMD possesses the right to do so. ARTICLE X DISPUTE RESOLUTION 10.1 DISPUTE RESOLUTION. (a) Internal Review. In the event that a dispute, difference or question arises pertaining to any matters which are the subject of the Alliance ("DISPUTE"), and either party so requests in writing, prior to the initiation of any formal legal action, the following dispute resolution shall apply: (1) The Steering Committee will use its good faith efforts to resolve the Dispute within ten (10) days. If the Steering Committee is unable to resolve the Dispute in such period, the Steering Committee will refer the Dispute to the Executive Sponsors as set forth in subitem (2) below. (2) For all Disputes referred to the Executive Sponsors from the Steering Committee above, the Executive Sponsors shall use their good faith efforts to resolve the Dispute within twenty (20) days after such referral. If the Executive Sponsors are unable to resolve the Dispute in such period, the Executive Sponsors will refer the Dispute to the Chief Executive Officers of HWMD and Quintiles as set forth in subitem (3) below. (3) For all Disputes referred to the Chief Executive Officers from the Executive Sponsors above, the Chief Executive Officers shall use their good faith efforts to resolve the Dispute within twenty (20) days after such referral. (b) Mediation. In the event of a Dispute which cannot be resolved by the Chief Executive Officers, either party may commence a non-binding mediation to resolve the Dispute by providing written notice to the other party (a "MEDIATION NOTICE") informing the other party of the dispute and the issues to be resolved and containing a list of five (5) recommended individuals to Page 14 of 20 16 serve as the mediator. Within ten (10) business days after the receipt of a Mediation Notice, the other party shall respond by written notice to the party initiating mediation, providing a list of five (5) recommended individuals to serve as the mediator and which adds additional issues to be resolved. The recommended mediators shall be individuals with experience in the pharmaceutical and healthcare technology industries and shall not be any employee, director, shareholder or agent of either party or an Affiliate of either party, or otherwise involved (whether by contract or otherwise) in the affairs of either party. If, within twenty (20) business days after receipt of the Mediation Notice, the parties shall have been unable to agree upon an individual to serve as mediator, or to the extent the mediator selected by the parties is unable to resolve the dispute, the dispute will be settled by final and binding arbitration conducted in the manner described in subsection (c) below. If, within twenty (20) business days after receipt of the Mediation Notice, the parties shall have agreed upon an individual to serve as mediator, the mediator shall conduct a mediation in an effort to resolve the dispute, employing commercially reasonable procedures selected by the mediator in consultation with the parties, completing such mediation no later than sixty (60) days after engagement. (c) Arbitration. Binding arbitration, if necessary, shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association, as in effect at the time of the arbitration hearing, such arbitration to be completed in a ninety (90) day period. The arbitration panel will be composed of three arbitrators, one of whom will be chosen by HWMD, one by Quintiles, and the third by the two so chosen. If both or either of HWMD or Quintiles fails to choose an arbitrator or arbitrators within fourteen (14) days after receiving notice of commencement of arbitration, or if the two arbitrators fail to choose a third arbitrator within fourteen (14) days after their appointment, the American Arbitration Association shall, upon the request of both or either of the parties to the arbitration, appoint the arbitrator or arbitrators required to complete the panel. The decision of the arbitrators shall be final and binding on the parties, and specific performance may be ordered by any court of competent jurisdiction. (d) Costs. The parties shall bear their own costs in preparing for and participating in the resolution of any dispute under this Article, and the costs of mediator(s) and arbitrator(s) shall be equally divided between the parties. ARTICLE XI WARRANTIES 11.1 POWER AND AUTHORITY. HWMD represents and warrants to Quintiles that HWMD has full power, right and authority to enter into this Agreement, to carry out its obligations under this Agreement, and to grant and assign the rights granted and assigned to Quintiles under this Agreement. 11.2 PROPRIETARY RIGHTS. HWMD further represents and warrants to Quintiles that: (a) The Tools will be the original work of HWMD or licensed from third party vendors as agreed to by the Steering Committee; Page 15 of 20 17 (b) HWMD has not previously granted or assigned and will not grant or assign any rights in the Tools to any third party which are inconsistent with the rights granted and assigned herein to Quintiles; and (c) Each of HWMD's employees and consultants who has been or will be involved in the development of the Tools, or who will have access to any Confidential Information of Quintiles, will have signed, before beginning such involvement, an agreement with HWMD with respect to proprietary rights and confidentiality which complies with the terms of this Agreement. 11.3 VIRUS WARRANTY. HWMD warrants that HWMD has implemented all measures used in its normal business, including at a minimum commercially reasonable measures, to ensure that the Tools do not contain any virus or any other contaminant, including but not limited to codes, commands or instructions that may be used to access, alter, delete, damage, disable, cause disruption of or otherwise interfere with Quintiles' use of the Tools, other software, or any Quintiles data or information. 11.4 YEAR 2000 WARRANTY. HWMD warrants to Quintiles that it shall take all steps to ensure that the Tools are and will be "Year 2000 Compliant" in a manner commensurate with other applications used by HWMD on the HWMD Platform. For purposes of this Agreement, "Year 2000 Compliant" means that the Tools will, in processing data containing dates in the Year 2000 and any preceding and following years: (a) initiate and operate, (b) correctly store, represent, and process (including sort) dates (including single and multi-century formulas and leap year calculations), and (c) not cause or result in an abnormal termination or ending. 11.5 SERVICES WARRANTY. HWMD warrants that it shall provide services under this agreement in a professional, workmanlike and efficient manner, consistent with the high industry standards. 11.6 WARRANTY DISCLAIMER. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT, HWMD HEREBY DISCLAIMS ALL WARRANTIES, OF ANY KIND, EXPRESS OR IMPLIED INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. ARTICLE XII INFRINGEMENT INDEMNITY 12.1 DUTY TO INDEMNIFY BY HWMD. HWMD will, at its expense, defend, indemnify, hold Quintiles harmless, from and against any damage, liability, cost or expense (including reasonable attorneys' fees and court costs) arising out of or resulting from any claim, suit or other proceeding in which it is alleged that the Tools or Quintiles' exercise of its rights in the Tools, infringes the Intellectual Property Rights of any third party. In the event of any such claim, Quintiles will: (i) promptly notify HWMD, in writing, of the claim, suit or proceeding; (ii) provide HWMD with all reasonable information and assistance, at HWMD's expense, to defend or settle such a claim, suit or proceeding; and (iii) grant HWMD with the authority and control of the defense or settlement of such claim. Such indemnity shall not extend to the extent that any infringement is caused by HWMD's conformance to Quintiles requirements or specifications. Page 16 of 20 18 12.2 INJUNCTION REMEDIES FOR QUINTILES. If Quintiles' use of any Tools is, or in HWMD's opinion is likely to be, enjoined due to the type of claim specified in Section 12.1, then HWMD, at its sole option and expense, will either: (i) procure for Quintiles a license to continue using the Tools in accordance with the terms of this Agreement; or (ii) modify the allegedly infringing item to avoid the infringement, without impairing the compliance of the Tools with the Specifications; or (iii) if such is not reasonably possible, then instruct Quintiles to cease use of the infringing item and the parties will use the dispute resolution process set out in Article X to adjust this Agreement or the Work Plan in question to compensate. 12.3 DUTY TO INDEMNIFY BY QUINTILES. Quintiles will, at its expense, defend, indemnify, hold HWMD harmless, from and against any damage, liability, cost or expense (including reasonable attorneys' fees and court costs) arising out of or resulting from any claim, suit or other proceeding in which it is alleged that the requirements or specifications produced by Quintiles for the Tools or HWMD's exercise of its rights in the requirements or specifications produced by Quintiles, infringes the Intellectual Property Rights of any third party. In the event of any such claim, HWMD will: (i) promptly notify Quintiles, in writing, of the claim, suit or proceeding; (ii) provide Quintiles with all reasonable information and assistance, at Quintiles' expense, to defend or settle such a claim, suit or proceeding; and (iii) grant Quintiles with the authority and control of the defense or settlement of such claim. Such indemnity shall not extend to the extent that any infringement is caused by HWMD's method of conforming to Quintiles requirements or specifications. 12.4 INJUNCTION REMEDIES FOR HWMD. If HWMD's use of any Tools is, or in Quintiles' opinion is likely to be, enjoined due to the type of claim specified in Section 12.3, then Quintiles, at its sole option and expense, will either: (i) procure for HWMD a license to continue using the requirements or specifications in accordance with the terms of this Agreement; or (ii) modify the allegedly infringing item to avoid the infringement, or (iii) if such is not reasonably possible, then instruct HWMD to cease use of the infringing item and the parties will use the dispute resolution process set out in Article X to adjust this Agreement or the Work Plan in question to compensate. ARTICLE XIII MISCELLANEOUS 13.1 RELATIONSHIP OF PARTIES. HWMD and Quintiles agree that their legal relationship to one another under this Agreement is as independent contractors. Nothing in this Agreement shall be deemed to create a joint venture, agency, partnership, or other relationship between HWMD and Quintiles, and neither shall have any power by virtue of this Agreement to enter into any contract or commitment on behalf of the other or to bind the other in any respect whatsoever. 13.2 AMENDMENT AND MODIFICATION. This Agreement may be amended, modified or supplemented only by a written agreement (referring specifically to this Agreement) of HWMD and Quintiles. 13.3 SEVERABILITY. In the event one or more of the provisions of this Agreement or the application thereof to any circumstance are found to be invalid or unenforceable to any extent by a Page 17 of 20 19 court with jurisdiction, the remaining provisions shall continue in full force and effect. If any provision of this Agreement is found to be so broad as to be unenforceable, such provision shall be interpreted to be only as broad as is enforceable. 13.4 NOTICES. All notices and other communications hereunder shall be in writing and shall be delivered personally or by next-day courier or telecopied with confirmation of receipt, to the parties at the addresses specified below (or at such other address for a party as shall be specified by like notice; provided that notices of a change of address shall be effective only upon receipt thereof). Any such notice shall be effective upon receipt, if personally delivered or telecopied, or one day after delivery to a courier for next-day delivery. If to Quintiles, to: Quintiles Transnational Corp. 4709 Creekstone Drive Riverbirch Building, Suite 200 Durham, North Carolina 27703-8411 Telecopy Number: (919) 998-2177 Attention: John S. Russell, Senior Vice President, General Counsel with a copy to: Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P. Post Office Box 2611 Raleigh, North Carolina 27602-2611 Telecopy Number: (919) 821-6800 Attention: Gerald F. Roach If to HWMD, to: Healtheon/WebMD Corporation 400 The Lenox Building 3399 Peachtree Road NE Atlanta, Georgia 30326 Telecopy Number: (404) 479-7603 Attention: Jack Dennison, Executive Vice President, General Counsel with a copy to: Alston & Bird, L.L.P. 1211 East Morehead Street P.O. Drawer 34009 Charlotte, North Carolina 28234-4009 Telecopy Number: (704) 334-2014 Attention: H. Bryan Ives III Page 18 of 20 20 13.5 DESCRIPTIVE HEADINGS. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 13.6 ENTIRE AGREEMENT. This Agreement (including its various Schedules) constitutes the entire agreement and supersedes all other prior agreements and understandings, both written and oral, among the parties with respect to its subject matter. 13.7 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina, without giving effect to the provisions thereof relating to conflicts of law. 13.8 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same agreement. 13.9 ASSIGNMENT. This Agreement and the rights, interests and obligations hereunder shall be binding upon, inure to the benefit of and be enforceable by the parties hereto and their respective successors and permitted assigns. Neither party may assign or otherwise transfer its rights, interests or obligations under this Agreement without the other party's prior written consent (not to be withheld or delayed unreasonably), except in connection with the sale, transfer, or other disposition of all or any portion of its business or assets in a transaction in which the transferee or successor to such business or assets assumes the transferring party's corresponding obligations under this Agreement. 13.10 PUBLICITY. Except as otherwise required by applicable law, neither party shall refer to the other party in advertising, promotional activities, or other public disclosures or announcements without such other party's prior written consent, which shall not be withheld unreasonably. 13.11 LIMITATION OF LIABILITY. EXCEPT IN THE CASE OF FRAUD OR WILLFUL OR INTENTIONAL MISCONDUCT, NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, PUNITIVE, OR SPECIAL DAMAGES ARISING OUT OF OR RELATED TO SUCH ACTION OR OMISSION, INCLUDING WITHOUT LIMITATION DAMAGES FOR LOSS OF BUSINESS PROFITS, BUSINESS INTERRUPTION, LOSS OF BUSINESS INFORMATION, AND THE LIKE, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 13.12 FORCE MAJEURE. Neither party will be responsible for any failure to perform its obligations under this Agreement due to causes beyond its reasonable control, including without limitation acts of God, war, riot, embargoes, acts of civil or military authorities, fire, floods, earthquakes, accidents, strikes, or fuel crises, provided that such party gives prompt written notice of such cause to the other party. The affected party's time for performance will be extended for a period equal to the duration of the force majeure. * * * * * * * * * Page 19 of 20 21 [signature page to Internet Product Development and Marketing Agreement] In witness whereof, each of HWMD and Quintiles has caused this Agreement to be executed on its behalf by its respective officer duly authorized to do so, all as of the date specified above in the preamble. HEALTHEON/WEBMD CORPORATION By: /s/ Jeff Arnold -------------------------------------- Its: Chief Executive Officer ------------------------------------- QUINTILES TRANSNATIONAL CORP. By: /s/ John S. Russell -------------------------------------- John S. Russell Senior Vice President, General Counsel and Corporate Secretary Page 20 of 20 22 SCHEDULE 2.2 TO INTERNET PRODUCT DEVELOPMENT AND MARKETING AGREEMENT ALLIANCE GUIDELINES A. Master Development/Rollout Schedule
Phase Months Action ----------------------------------------------------------------------------------------------------- 1 0-6 Specify functions to be provided by Tools - Parties estimate 200 functions to be specified - Quintiles to be primarily responsible for this activity, with support from HWMD software development and other appropriate personnel ----------------------------------------------------------------------------------------------------- 2 7-18 Develop software to implement functions specified in Phase 1 - Parties estimate will require 200 software development personnel on full-time basis - HWMD to be primarily responsible, with support from Quintiles - Quintiles to pay HWMD for development services at HWMD's cost (see Designated Resource Commitments below) Develop sales materials for pharmaceutical customers and training materials for Alliance sales personnel from HWMD and Quintiles - Quintiles to be primarily responsible, with support from HWMD ----------------------------------------------------------------------------------------------------- 3 19-27 Global joint sales roll-out to targeted large pharmaceutical companies; roll-out to include personal efforts at CEO level of HWMD and Quintiles ----------------------------------------------------------------------------------------------------- 4 28 First sales targeted to occur -----------------------------------------------------------------------------------------------------
B. Revenue Sharing Objectives Parties to share revenues derived from commercialization of Tools as determined by Steering Committee. Current estimated guidelines are as follows:
Estimates Revenue Share Operating Margin --------------------------------------------------------------------------------- HWMD Quintiles HWMD Quintiles - ------------------------------------------------------------------------------------------------------------------ Drug Development 12.5% 87.5% 25 - 30% 20 - 25% - ------------------------------------------------------------------------------------------------------------------ Physician Detailing 12.5% 87.5% 25 - 30% 20 - 25% - ------------------------------------------------------------------------------------------------------------------ Direct-to- Consumer 87.5% 12.5% 30% 30% - ------------------------------------------------------------------------------------------------------------------
23 These estimates and the parties' revenue sharing objectives are further modeled in the attached Schedule 2.2.1. C. Resource Commitment Model 1. In addition to Quintiles' funding HWMD's development of the Initial Toolkit at cost (see Section 6.1), the parties anticipate approximately the following commitment of resources will be necessary to enable commercialization of the Initial Toolkit: Planning $ 5 million ------------------------------------------------------------- Business development $ 15 ------------------------------------------------------------- Management $ 10 ------------------------------------------------------------- Clinical trial training $ 50 ------------------------------------------------------------- Detailing training $ 15 ------------------------------------------------------------- Contingencies $ 10 ------------------------------------------------------------- ------------------------------------------------------------- Total $[105] million -------------------------------------------------------------
2. The parties will commit such resources in the manner determined by the Steering Committee in Work Plans. 24 SCHEDULE 2.1.1 TO INTERNET PRODUCT DEVELOPMENT AND MARKETING AGREEMENT REVENUE SHARING MODEL (DETAIL) Product Development and Commercialization Revenue Sharing Model
Example at $1 billion Quintiles 1,000,000 1,000,000 Revenues Profit - before 325,000 32.50% 178,750 17.88% spend Payment to HWMD 125,000 12.50% 68,750 6.88% -------------------------- ----------------------- Profit - after 200,000 20.00% 110,000 11.00% spend
Example at $1 Billion in revenue Quintiles Profits --------------------------------------------------------------- --------------------- HWMD Profit Payment Profit Profit % Pre-Spend Post-Spend Revenues Revenue Pre-Spend to HWMD Post-Spend Post-Spend --------------------- -------- --------------------------------------------------------------- Quintiles at 32.50% 20.00% 12.50% 1,000,000 325,000 125,000 200,000 20.00% 20% after pmts. 30.88% 19.00% 11.88% 1,000,000 308,750 118,750 190,000 19.00% 29.25% 18.00% 11.25% 1,000,000 292,500 112,500 180,000 18.00% 27.63% 17.00% 10.63% 1,000,000 276,250 106,250 170,000 17.00% 26.00% 16.00% 10.00% 1,000,000 260,000 100,000 160,000 16.00% 24.38% 15.00% 9.38% 1,000,000 243,750 93,750 150,000 15.00% 22.75% 14.00% 8.75% 1,000,000 227,500 87,500 140,000 14.00% 21.13% 13.00% 8.13% 1,000,000 211,250 81,250 130,000 13.00% 19.50% 12.00% 7.50% 1,000,000 195,000 75,000 120,000 12.00% 17.88% 11.00% 6.88% 1,000,000 178,750 68,750 110,000 11.00% - ----------------------------------------------------------------------------------------------------------------------------------- 16.00% 11.00% 5.00% 1,000,000 160,000 50,000 110,000 11.00% 15.00% 11.00% 4.00% 1,000,000 150,000 40,000 110,000 11.00% 14.00% 11.00% 3.00% 1,000,000 140,000 30,000 110,000 11.00% - ----------------------------------------------------------------------------------------------------------------------------------- 13.00% 10.00% 3.00% 1,000,000 130,000 30,000 100,000 10.00% 12.00% 9.00% 3.00% 1,000,000 120,000 30,000 90,000 9.00% 11.00% 8.00% 3.00% 1,000,000 110,000 30,000 80,000 8.00% 10.00% 7.00% 3.00% 1,000,000 100,000 30,000 70,000 7.00% 9.00% 6.00% 3.00% 1,000,000 90,000 30,000 60,000 6.00% 8.00% 5.00% 3.00% 1,000,000 80,000 30,000 50,000 5.00% 7.00% 4.00% 3.00% 1,000,000 70,000 30,000 40,000 4.00% 6.00% 3.00% 3.00% 1,000,000 60,000 30,000 30,000 3.00%
25 Direct-to-Consumer Revenue Sharing Model
Example at $1 billion Total Revenues 1,000,000 Quintiles Revenues 125,000 12.50% HWMD Revenues 875,000 87.50% ---------------------------------------- Total Revenues 1,000,000 100.00% =====================
EX-21 7 g68042ex21.txt SUBSIDIARIES OF REGISTRANT 1 EXHIBIT 21 Subsidiaries of Registrant 2 SUBSIDIARIES OF WEBMD CORPORATION The following are the subsidiaries of WebMD Corporation, excluding subsidiaries the omission of which is permitted under Item 601(b)(21) of Regulation S-K:
NAME STATE OF INCORPORATION ---- ---------------------- CareInsite Corporation Massachusetts Envoy Corporation Delaware Medical Manager Health Systems, Inc. Delaware WebMD, Inc. Georgia
EX-23.1 8 g68042ex23-1.txt CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-49622) and on Form S-8 (No. 333-39592, No. 333-42616, No. 333-47250, No. 333-84825 and No. 333-90795) of WebMD Corporation of our report dated March 21, 2001, with respect to the consolidated financial statements of WebMD Corporation included in this Annual Report (Form 10-K) for the year ended December 31, 2000. /s/ Ernst & Young LLP Atlanta, Georgia March 29, 2001 -----END PRIVACY-ENHANCED MESSAGE-----