Filed On 7/14/05 9:48pm ET · SEC File 333-124832 · Accession Number 950123-5-8510
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
7/15/05 WebMD Health Corp S-1/A 10:348 950123
Pre-Effective Amendment to Registration Statement (General Form) · Form S-1
Filing Table of Contents
Document/Exhibit Description Pages Size
1: S-1/A Amendment No. 1 to Form S-1 HTML 1,660K
2: EX-10.35 Ex-10.35: Interactive Services Agreement HTML 222K
3: EX-10.36 Ex-10.36: First Amendment to Interactive Services HTML 14K
Agreement
4: EX-10.37 Ex-10.37: Second Amendment to Interactive Services HTML 23K
Agreement
5: EX-10.38 Ex-10.38: Third Amendment to Interactive Services HTML 20K
Agreement
6: EX-10.39 Ex-10.39: Fourth Amendment to Interactive Services HTML 27K
Agreement
7: EX-10.40 Ex-10.40: Agreement of Lease HTML 482K
8: EX-10.41 Ex-10.41: First Amendment to Lease Agreement HTML 33K
9: EX-23.1 Ex-23.1: Consent of Ernst & Young Llp HTML 7K
10: EX-23.2 Ex-23.2: Consent of J.H. Cohn Llp HTML 7K
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- Alternative Formats (RTF, XML, et al.)
- Balance Sheets as of June 30, 2004 and December 31, 2004 (Unaudited)
- Balance Sheets as of March 31, 2004 and September 30, 2004 (Unaudited)
- Business
- Capitalization
- Certain Relationships and Related Party Transactions
- Certain U.S. Federal Income and Estate Tax Considerations for Non-U.S. Holders
- Combined Consolidated Balance Sheets as of December 31, 2003 and 2004 and March 31, 2005 (unaudited)
- Combined Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2003 and 2004 and for the Three Months Ended March 31, 2004 and 2005 (unaudited)
- Combined Consolidated Statements of Operations for the Years Ended December 31, 2002, 2003 and 2004 and for the Three Months Ended March 31, 2004 and 2005 (unaudited)
- Combined Consolidated Statements of Owner s Net Investment for the Years Ended December 31, 2002, 2003 and 2004 and for the Three Months Ended March 31, 2005 (unaudited)
- Description of Capital Stock
- Dilution
- Dividend Policy
- Experts
- Forward-Looking Statements
- Government Regulation
- Index to Combined Consolidated Financial Statements
- Legal Matters
- Management
- Management s Discussion and Analysis of Financial Condition and Results of Operations
- Notes to Combined Consolidated Financial Statements
- Notes to Financial Statements
- Notes to the Unaudited Pro Forma Condensed Combined Consolidated Financial Statements
- Our Use of Certain Measures of Usage of The WebMD Health Network
- Our Use of Market and Industry Data
- Principal Shareholders
- Report of Independent Registered Public Accounting Firm
- Risk Factors
- Schedule II Valuation and Qualifying Accounts
- Selected Financial Information
- Shares Eligible For Future Sale
- Statements of Cash Flows for the Year Ended June 30, 2004 and for the Six Months Ended December 31, 2003 and 2004 (Unaudited)
- Statements of Cash Flows for the Year Ended March 31, 2004 and for the Six Months Ended September 30, 2003 and 2004 (Unaudited)
- Statements of Operations for the Year Ended June 30, 2004 and for the Six Months Ended December 31, 2003 and 2004 (Unaudited)
- Statements of Operations for the Year Ended March 31, 2004 and for the Six Months Ended September 30, 2003 and 2004 (Unaudited)
- Statements of Redeemable Convertible Preferred Stock and Stockholders Deficit for the Year Ended June 30, 2004 and for the Six Months Ended December 31, 2004 (Unaudited)
- Statements of Shareholders Equity for the Year Ended March 31, 2004 and for the Six Months Ended September 30, 2004 (Unaudited)
- Summary
- Table of Contents
- Unaudited Pro Forma Condensed Combined Consolidated Statement of Operations for the Three Months Ended March 31, 2005
- Unaudited Pro Forma Condensed Combined Consolidated Statement of Operations for the Year Ended December 31, 2004
- Underwriting
- Use of Proceeds
- Where You Can Find Additional Information
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| 1 | 1st Page
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| " | Table of Contents
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| " | Summary
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| " | Risk Factors
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| " | Forward-Looking Statements
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| " | Our Use of Market and Industry Data
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| " | Our Use of Certain Measures of Usage of The WebMD Health Network
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| " | Use of Proceeds
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| " | Dividend Policy
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| " | Capitalization
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| " | Dilution
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| " | Selected Financial Information
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| " | Management s Discussion and Analysis of Financial Condition and Results of Operations
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| " | Business
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| " | Government Regulation
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| " | Management
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| " | Certain Relationships and Related Party Transactions
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| " | Principal Shareholders
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| " | Description of Capital Stock
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| " | Shares Eligible For Future Sale
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| " | Certain U.S. Federal Income and Estate Tax Considerations for Non-U.S. Holders
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| " | Underwriting
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| " | Legal Matters
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| " | Experts
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| " | Where You Can Find Additional Information
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| " | Index to Combined Consolidated Financial Statements
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| " | Report of Independent Registered Public Accounting Firm
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| " | Combined Consolidated Balance Sheets as of December 31, 2003 and 2004 and March 31, 2005 (unaudited)
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| " | Combined Consolidated Statements of Operations for the Years Ended December 31, 2002, 2003 and 2004 and for the Three Months Ended March 31, 2004 and 2005 (unaudited)
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| " | Combined Consolidated Statements of Owner s Net Investment for the Years Ended December 31, 2002, 2003 and 2004 and for the Three Months Ended March 31, 2005 (unaudited)
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| " | Combined Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2003 and 2004 and for the Three Months Ended March 31, 2004 and 2005 (unaudited)
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| " | Notes to Combined Consolidated Financial Statements
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| " | Balance Sheets as of March 31, 2004 and September 30, 2004 (Unaudited)
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| " | Statements of Operations for the Year Ended March 31, 2004 and for the Six Months Ended September 30, 2003 and 2004 (Unaudited)
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| " | Statements of Shareholders Equity for the Year Ended March 31, 2004 and for the Six Months Ended September 30, 2004 (Unaudited)
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| " | Statements of Cash Flows for the Year Ended March 31, 2004 and for the Six Months Ended September 30, 2003 and 2004 (Unaudited)
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| " | Notes to Financial Statements
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| " | Balance Sheets as of June 30, 2004 and December 31, 2004 (Unaudited)
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| " | Statements of Operations for the Year Ended June 30, 2004 and for the Six Months Ended December 31, 2003 and 2004 (Unaudited)
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| " | Statements of Redeemable Convertible Preferred Stock and Stockholders Deficit for the Year Ended June 30, 2004 and for the Six Months Ended December 31, 2004 (Unaudited)
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| " | Statements of Cash Flows for the Year Ended June 30, 2004 and for the Six Months Ended December 31, 2003 and 2004 (Unaudited)
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| " | Unaudited Pro Forma Condensed Combined Consolidated Statement of Operations for the Three Months Ended March 31, 2005
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| " | Unaudited Pro Forma Condensed Combined Consolidated Statement of Operations for the Year Ended December 31, 2004
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| " | Notes to the Unaudited Pro Forma Condensed Combined Consolidated Financial Statements
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| " | Schedule II Valuation and Qualifying Accounts
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This is an EDGAR HTML document rendered as filed. [ Alternative Formats ]
| WEBMD HEALTH HOLDINGS INC. |
As filed with the Securities and Exchange Commission on
July 14, 2005
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
to
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
WEBMD HEALTH HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
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Delaware |
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7375 |
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20-2783228 |
(State or other jurisdiction of
incorporation or organization) |
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(Primary Standard Industrial
Classification Code Number) |
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(IRS Employer
Identification Number) |
111 Eighth Avenue
(Address, including zip code, and telephone number, including
area code, of
registrant’s principal executive offices)
Executive Vice President,
General Counsel and Secretary
111 Eighth Avenue
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
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Stephen T. Giove, Esq.
Shearman & Sterling LLP
599 Lexington Avenue
New York, New York 10022
Telephone: (212) 848-4000
Facsimile: (212) 848-7179 |
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Marc S. Rosenberg, Esq.
Andrew J. Pitts, Esq.
Cravath, Swaine & Moore LLP
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019
Telephone: (212) 474-1000
Facsimile: (212) 474-3700 |
Approximate date of commencement of proposed sale of the
securities to the public: As soon as practicable after this
Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. o
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following
box. o
CALCULATION OF REGISTRATION FEE
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Proposed Maximum |
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Amount of |
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Aggregate Offering |
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Registration |
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Price(1)(2) |
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Fee(3) |
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Class A Common Stock, $.01 par value per share
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$100,000,000 |
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$11,770 |
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Estimated solely for the purpose of calculating the registration
fee pursuant to Rule 457(o). |
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Including shares of common stock that may be purchased by the
underwriters to cover overallotments, if any. |
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$5,885 of this amount was previously paid in connection with the
initial filing of this Registration Statement. |
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The registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act or until the Registration Statement shall
become effective on such date as the Securities and Exchange
Commission, acting pursuant to such Section 8(a), may
determine.
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The information in
this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any state
where the offer or sale is not permitted.
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PROSPECTUS
Shares
WEBMD HEALTH HOLDINGS, INC.
Class A Common Stock
This is our initial public offering of our Class A common
stock. We are selling all of the Class A common stock in
this offering.
We are a wholly owned subsidiary of WebMD Corporation, which we
refer to in this prospectus as our Parent. We intend to change
our corporate name, prior to completion of this offering, to a
new name that has not yet been chosen, but will include
“WebMD,” which will also continue to be the primary
brand name for our products and services. Our Parent will take
the steps needed to change its corporate name to one that does
not include “WebMD” and to cease using
“WebMD” as a brand name for the products and services
of its other business segments.
We have two classes of authorized common stock —
Class A common stock, which is offered hereby, and
Class B common stock, all of which will be owned by our
Parent. Holders of our Class A common stock generally will
have identical rights to holders of our Class B common
stock, except that holders of our Class A common stock will
be entitled to one vote per share on all matters to be voted on
by stockholders, while holders of our Class B common stock
will be entitled to ten votes per share on all matters to be
voted on by stockholders. The holders of our Class A common
stock and Class B common stock generally will vote together
as a single class. Upon the completion of this offering, without
giving effect to any exercise of the underwriters’ option
to purchase additional shares, our Parent will own all of our
outstanding Class B common stock, which will represent
approximately %
of our outstanding common stock, and
approximately %
of the combined voting power of our outstanding common stock. As
a result, after this offering, our Parent will continue to
control us.
We expect the public offering price of our Class A common
stock to be between
$ and
$ per
share. Currently, no public market exists for our shares. We
intend to apply to have our Class A common stock quoted on
The Nasdaq National Market under the symbol “WBMD.”
Investing in our Class A common stock involves risks
that are described in the “Risk Factors” section
beginning on page 10.
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The underwriters may also purchase up to an
additional shares
of our Class A common stock from us, at the public offering
price, less the underwriting discount, within 30 days from
the date of this prospectus to cover overallotments.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The shares of Class A common stock will be ready for
delivery on or
about ,
2005.
Goldman, Sachs & Co.
The date of this prospectus
is ,
2005.
You should rely only on the information contained in this
prospectus. We have not, and the underwriters have not,
authorized any other person to provide you with different
information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not,
and the underwriters are not, making an offer to sell these
securities in any jurisdiction where the offer or sale is not
permitted. You should assume that the information appearing in
this prospectus is accurate only as of the date on the front
cover of this prospectus. Our business, financial condition,
results of operations and prospects may have changed since that
date.
WebMD®, WebMD Health®, Medscape®, CME
Circle®, Medpulse®, The Little Blue Book™,
MedicineNet®, RxList® and Select Quality Care®
are among our trademarks.
i
SUMMARY
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This summary highlights information contained elsewhere in
this prospectus. This summary sets forth the material terms of
this offering, but does not contain all of the information that
you should consider before investing in our Class A common
stock. You should read the entire prospectus carefully before
making an investment decision, especially the risks of investing
in our Class A common stock discussed under “Risk
Factors.” Unless the context otherwise requires, the terms
“we,” “us,” “our,” “our
company” and “WebMD” refer to WebMD Health
Holdings, Inc. and its consolidated subsidiaries following the
contribution and transfer to us of the subsidiaries and certain
related assets and liabilities that comprise our Parent’s
WebMD Health business segment. Unless the context otherwise
requires, the term “Parent” refers to our parent
company, currently known as WebMD Corporation, and its other
consolidated subsidiaries. References in this prospectus to
“common stock” include both our Class A common
stock, par value $.01 per share, and our Class B
common stock, par value $.01 per share. Unless we
specifically state otherwise, all information in this prospectus
assumes the conversion of all outstanding shares of our common
stock into shares of Class B common stock immediately prior
to the completion of this offering. Unless otherwise indicated,
industry data are derived from publicly available sources, which
we have not independently verified. The terms “unique
user,” “page view” and “aggregate page
views” are used in this prospectus as described in the
section captioned “Our Use of Certain Measures of Usage of
The WebMD Health Network.” |
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Our Business
Introduction
We are a leading provider of health information services to
consumers, physicians and healthcare professionals through our
public and private online portals. The online healthcare
information, decision-support applications and communications
services that we provide:
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enable consumers to obtain detailed information on a particular
disease or condition, analyze symptoms, locate physicians, store
individual healthcare information, receive periodic
e-newsletters on topics of individual interest, enroll in
interactive courses and participate in online communities with
peers and experts; |
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make it easier for physicians and healthcare professionals to
access clinical reference sources, stay abreast of the latest
clinical information, learn about new treatment options, earn
continuing medical education credits and communicate with
peers; and |
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enable employers and health plans to provide their employees and
plan members with access to personalized health and benefit
information and decision-support technology that helps them make
more informed benefit, provider and treatment choices. |
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WebMD Health, our primary public portal for consumers,
and our other consumer portals, help consumers take an active
role in managing their health by providing objective and trusted
healthcare and lifestyle information. WebMD Health’s
content offerings include access to high quality health and
wellness news articles and features, and decision-support
services that help consumers make better informed decisions
about treatment options, health risks and healthcare providers.
Medscape from WebMD, our primary public portal for
physicians and healthcare professionals, helps physicians and
healthcare professionals improve their clinical knowledge and
practice of medicine. Its original content, including daily
medical news, commentary, conference coverage, expert columns
and continuing medical education, or CME, activities are written
by authors from widely respected academic institutions and
edited and managed by our in-house editorial staff.
The WebMD Health Network consists of the public portals
that we own, such as
www.WebMD.com and
www.Medscape.com, as well as third party sites through
which we provide our branded health and wellness content, tools
and services, such as the America Online service.
The WebMD
Health Network had an average of approximately
23 million aggregate unique users per month and generated
approximately
1
588 million aggregate page views in the first quarter of
2005. The WebMD Health Network does not include our
private portals for employers and health plans, which are
described below. We believe our focus on creating and organizing
high quality content and offering innovative interactive
services has made The WebMD Health Network the leading
online health destination and has made the WebMD brand among the
most recognized and trusted in healthcare. According to recent
studies conducted by Manhattan Research, a leading Internet
market research firm, WebMD is the information source most
frequently recommended by physicians to their patients for
healthcare information and Medscape from WebMD is the
information source most recommended by physicians to their peers.
Our public portals generate revenue primarily through the sale
of advertising and sponsorship products, including CME services.
We do not charge user fees for access to our public portals.
The WebMD Health Network provides an efficient and
effective means for sponsors to reach, educate and inform target
audiences of health-involved consumers and clinically-active
physicians within the trusted environment of WebMD. We work
closely with our sponsors to develop programs to reach specific
groups of consumers, physicians and healthcare professionals and
give them placement on the most relevant areas on our portals.
Our advertisers and sponsors consist primarily of
pharmaceutical, biotechnology and medical device companies and
consumer products companies whose products relate to health,
wellness, diet, fitness, lifestyle, safety and illness
prevention.
Our private portals enable employees and health plan members to
make more informed benefit, treatment and provider decisions. We
provide a personalized user experience by integrating individual
user data (including personal health information), plan-specific
data from our employer or health plan clients and much of the
content, decision-support technology and personal communication
services that we make available through our public portals. We
generate revenue from private portals through the licensing of
our content and technology to employers, such as American
Airlines, Inc., Microsoft Corporation and PepsiCo, Inc., and to
health plans, such as Cigna and Empire Blue Cross and Blue
Shield. Our private portals do not generate revenue from
advertising or sponsorship and, accordingly, we do not include
users or page views from these portals in The WebMD Health
Network.
In addition to our online presence, we also have a Publishing
Services segment that provides complementary offline health
content. Our offline publications also increase awareness of our
brand among consumers, physicians and healthcare professionals.
These publications include The Little Blue Book, a
physician directory, ACP Medicine and ACS Surgery:
Principles of Practice, our medical reference textbooks, and
WebMD the Magazine, a consumer publication launched in
early 2005 that we distribute free of charge to physician office
waiting rooms.
Industry Background
The Internet. The Internet has emerged as a major
communications medium and has already fundamentally changed many
sectors of the economy, including the marketing and sales of
financial services, travel and entertainment, among others. The
Internet is also changing the healthcare industry and has
transformed how consumers and physicians find and utilize
healthcare information. WebMD has been a leader in enabling this
transition.
Advertising and sponsorship trends. Internet advertising
continues to grow rapidly. Total online advertising spending in
the United States was projected by eMarketer to increase
approximately 21.0% in 2005 to $11.5 billion and rise to
about $17.6 billion in 2008. We believe that this market
growth is driven by several factors, including consumers
shifting their buying and media preferences to online services
and the benefits of online advertising relative to traditional
media, which include interactivity, rapid and measurable user
feedback and the ability to target consumers more efficiently.
Based upon industry estimates, we believe that, in the United
States in 2004, pharmaceutical, biotechnology and medical device
companies spent approximately $12 billion on marketing,
promotion and education activities, excluding costs of product
samples, and consumer products companies spent in excess of
$10 billion on media to advertise products that relate to
health, wellness, diet, fitness, safety and illness prevention.
We estimate that pharmaceutical, biotechnology and medical
device companies currently spend
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less than 5% of their marketing and educational budgets on
online media, but are becoming increasingly aware of the
benefits of using online media, including the ability to reach
targeted audiences cost-effectively. We believe that we are well
positioned to benefit from the expected trend toward increased
online spending by these companies because of our track record
in providing a more efficient use of advertising expenditures
than traditional media and our good working relationships with a
significant number of the major health-related advertisers and
sponsors.
Healthcare industry trends. Our business is affected by a
number of trends in the healthcare industry, including:
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Healthcare cost-shifting by employers. While overall
healthcare costs are rising at a rapid annual rate,
employers’ costs of providing healthcare benefits to their
employees are increasing at an even faster rate. In response to
these cost increases, employers and health plans have been
changing benefit plan designs to increase consumer out-of-pocket
costs and have been enhancing wellness programs. These changes
include taking steps to provide healthcare information and
education to employees and members, including through the use of
online services. |
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Quality initiatives. We believe that health plans and
employers have begun to recognize that encouraging the good
health of their members and employees not only benefits the
members and employees but also has financial benefits for the
health plans and employers. As part of the initiatives to
promote member and employee wellness and to allow members and
employees to better manage chronic conditions, health plans and
employers are offering their members and employees online access
to health and wellness information and decision-support tools. |
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We believe that we are well positioned to benefit from these
trends because our private portal services provide the tools and
information employees and plan members need in order to take a
more active role in their healthcare, such as helping members
make more informed decisions about benefit, treatment and
healthcare provider options. As employers continue to implement
high deductible and consumer-directed healthcare plans, we
believe we will be able to attract more employers and health
plans to use our private online portals. Additionally, we
believe that as consumers are required to bear increased
financial responsibility for their healthcare, our public
portals will benefit as consumers utilize our decision-support
and personal health information applications to better manage
their health decisions.
Our Strengths
Our public portals provide an efficient and effective means for
advertisers and sponsors to reach, educate and inform
health-involved consumers and clinically-active physicians
within the trusted environment of WebMD. Our private portals
provide a cost-effective way for employers and health plans to
help their members make more informed benefit, treatment and
provider decisions. We believe that we are able to fulfill the
needs of our clients with differentiated offerings based upon
our:
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Recognized and trusted brand. Our brand is widely
recognized and viewed as a trusted source of health and wellness
information. In June 2005, Consumer Health WebWatch, a joint
project of Consumer Reports WebWatch and the Health Improvement
Institute, rated the 20 most-trafficked health Web sites
(listing WebMD Health as the most-trafficked site,
according to Neilsen/NetRatings). Three of the six sites that
were rated “Excellent” (the highest rating) are owned
by us and included in The WebMD Health Network: WebMD Health,
Medscape from WebMD and MedicineNet.com. The ratings were
based on evaluations of credibility and quality across nine
different attributes, including identity, advertising and
sponsorship disclosure, ease of use, corrections and currency,
privacy, coverage, design, accessibility and contents. The
strengths of WebMD Health that were noted included its
large amount of trustworthy information on mainstream health
topics and its coverage of current health news and trends; the
strengths of Medscape from WebMD that were noted included
its breadth and depth of authoritative articles; and the
strengths of MedicineNet.com that were noted included its
easy-to-read health information on a wide range of topics,
written by physicians. |
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Leading online health destination. The WebMD Health
Network is the leading online health destination today.
According to comScore MediaMetrix, a leading Internet audience
measurement service, The WebMD Health Network had more
than twice as many unique visitors (U.S. only) in May 2005 as
any other non-governmental online health destination. In
addition, Medscape from WebMD is the leading online
provider of CME programs, with approximately 67% of online CME
participants taking at least one of their CME courses on
Medscape from WebMD in 2004. |
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Motivated users. The WebMD Health Network enables
health-involved consumers and clinically-active physicians to
readily access healthcare information relevant to their specific
areas of interest. |
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Highly targeted advertising and sponsorship model. We are
able to offer advertisers and sponsors programs that deliver
their message to either our entire audience or to more targeted
audiences of consumers, physicians and other healthcare
professionals based upon the audience members’ specific
interests or specialties. |
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Ability to deliver efficient marketing solutions. We have
good working relationships with our advertising and sponsorship
clients and their advertising agencies as well as a proven track
record of providing them with a more efficient use of their
marketing expenditures compared to traditional media. |
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Comprehensive and personalized private portal solutions.
We offer employers and health plans a platform that provides a
personalized user experience for employees and health plan
members, which includes access to individual user data, specific
health plan benefit data, relevant health-oriented content,
treatment decision- support applications, personal communication
services, and integrated third party applications and data. We
believe that our private portal services have several important
advantages over competitive offerings, including: the fact that
we offer products and services both for selecting healthcare
benefits and for managing overall health status; the
organization of our services around our electronic personal
health record application and the capability of that application
to include both self-reported and imported claims and clinical
data; and the level of personalization, for content and
messaging, that our platform allows us to provide. |
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Proven and experienced management team. Our senior
management’s experience in and understanding of the
healthcare industry allows us to respond quickly to developing
industry trends with new products and services that build on our
existing content, infrastructure and capabilities. |
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Our Strategy
We have positioned our services to benefit from the trends
described above under “Industry Background,” and the
other trends affecting the Internet, online advertising and
healthcare industries described in this prospectus. Our goal is
to be the leading provider of online health information services
in each of the markets in which we participate and to use our
content, technology platform and expertise to continue to enter
additional complementary markets. The strategies we expect to
pursue include:
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• |
Enhancing our current products and services. We intend to
continue to invest in the resources needed to deliver high
quality health and medical information by continuing to build
our repository of in-depth health content, broadening our
interactive services and increasing their functionality. |
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Expanding awareness of the WebMD brand. We plan to
promote the WebMD brand through relationships with other well
known Internet media and healthcare companies, through
advertising and through the breadth of online and offline
products and services that we offer. |
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• |
Deepening our relationships with existing clients and
expanding our sponsorship base. We intend to increase The
WebMD Health Network’s advertising and sponsorship
revenues by continuing to provide an efficient and effective
channel for sponsors to reach, educate and inform large
audiences of health-involved consumers and clinically-active
physicians within the trusted environment of WebMD. We believe
that we are well positioned to benefit from the expected
increases in the portion of their advertising and sponsorship
spending allocated to online media by pharmaceutical,
biotechnology and medical device companies and by consumer
products companies that wish to communicate health- and
lifestyle-related messages for their products. |
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4
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• |
Increasing market penetration of our private portals. We
intend to increase the market penetration of our private health
and benefits portals for employers and health plans, and we
expect demand for these services to increase as more employers
and health plans seek to complement or replace their existing
offline benefit-related services with more efficient Web-based
decision-support tools and related online services. |
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• |
Acquiring complementary online and offline services.
Since 2001, we have a history of acquiring and successfully
integrating complementary companies. We expect to continue to
supplement our internal product development efforts with
strategic acquisitions that add new capabilities or help us
enter additional complementary markets. |
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Capitalizing upon governmental initiatives relating to the
use of information technology in healthcare. There are
currently numerous federal, state and private initiatives
seeking ways to increase the use of information technology in
healthcare, including the creation of portable consumer health
records. We believe that we are well positioned to play a role
in such efforts, as well as efforts to establish the adoption of
electronic medical records among physicians and to provide
channels for the exchange of information among patients,
providers and payers. While we do not expect to realize any
short term benefit as a result of these government initiatives,
we believe that such initiatives will create opportunities for
our company over the long term. |
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Risks and Challenges That We Face
We face a number of competitive challenges and potential risks,
including risks relating to our operations and financial
performance, risks relating to our relationships with clients,
risks relating to our technological infrastructure and risks
relating to the legal and regulatory environment in which we
operate. Some of those risks include:
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• |
if we are unable to attract and retain users of The WebMD
Health Network at a level that is attractive to advertisers
and sponsors, our revenues could be reduced; |
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• |
most of our revenue is derived from the healthcare industry and
could be adversely affected by changes impacting that industry,
including changes in healthcare delivery and spending, changes
in healthcare regulation, changes in the design of health
insurance plans or changes in marketing strategies and budgets
of pharmaceutical, biotechnology or medical device companies; |
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• |
we face significant competition for our products and services
from numerous competitors, some of which have greater financial,
technical, marketing and other resources than we do and some of
which are better known than we are, and since there are no
substantial barriers to entry into the markets in which we
participate, we expect that additional competitors will continue
to enter these markets; |
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• |
acquisitions, business combinations and other transactions may
be difficult to complete and, if completed, may not result in
the benefits anticipated and may have negative consequences for
our business and our securityholders; and |
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| |
• |
implementation of changes to hardware and software platforms
used to deliver our online services may result in performance
problems or an interruption in our ability to operate those
services, which could have an adverse effect on our
relationships with users and clients. |
|
|
In addition, our online businesses are difficult to evaluate
because they have a limited operating history and participate in
relatively new and rapidly evolving markets. We have only earned
income in three of our historical fiscal quarters and, even if
user demand for our online services exists, we cannot assure you
that providing these services will be profitable.
For a description of risks and potential conflicts of interest
that may arise out of our relationship with our Parent, please
see the section of this Summary entitled “Our Relationship
with Our Parent” below.
5
Our Corporate Structure
The businesses that comprise
our company include acquisitions
made by our Parent beginning in 1999. Our operations were, until
2001, commingled with other operations of our Parent. In 2000
and 2001, our Parent initiated two restructuring and integration
plans, and in 2001, our businesses were organized as a separate
segment of our Parent, which is currently called WebMD Health.
WebMD Health Holdings, Inc.,
the registrant whose name appears
on the cover of the registration statement of which this
prospectus is a part, was incorporated in Delaware on
May 3, 2005, to be a holding company for our Parent’s
WebMD Health business segment in order to conduct this offering.
Prior to the completion of this offering, our Parent will
contribute and transfer to us the
subsidiaries and certain
related assets and liabilities that comprise our Parent’s
WebMD Health business segment. We intend to change our corporate
name, prior to the completion of this offering, to a new name
that has not yet been chosen, but that will include
“WebMD,” which will also continue to be the primary
brand name for our products and services. Our Parent will take
the steps needed to change its corporate name to one that does
not include
“WebMD” and to cease using
“WebMD” as a brand name for the products and services
of its other segments.
Prior to the completion of this offering, the certificate of
incorporation of WebMD Health Holdings, Inc. will be amended and
restated to, among other things:
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• |
create two classes of common stock — Class A
common stock and Class B common stock; |
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• |
establish the voting rights associated with each such class of
our common stock, pursuant to which holders of our Class A
common stock will be entitled to one vote per share on all
matters to be voted on by stockholders and holders of our
Class B common stock will be entitled to ten votes per
share on all matters to be voted on by stockholders; and |
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| |
• |
provide for the conversion of the Class B common stock into
Class A common stock upon the terms and subject to the
conditions set forth therein. |
Our Relationship with Our Parent
Our Parent’s Business. Our Parent’s business is
comprised of our business and three other segments:
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| |
• |
Our Parent’s WebMD Practice Services segment develops and
markets information technology systems for healthcare providers. |
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• |
Our Parent’s WebMD Business Services segment provides
healthcare reimbursement cycle management services for
healthcare providers and transaction-related administrative
services for healthcare payers, together with related technology
solutions. |
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| |
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• |
Our Parent’s Porex segment develops, manufactures and
distributes proprietary porous plastic products and components
used in healthcare, industrial and consumer applications. |
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|
Background to this Offering. As disclosed in our
Parent’s Quarterly Report on Form 10-Q for the quarter
ended
March 31, 2005, our Parent believes that the benefits
of an initial public offering of
our company include creating a
security that would allow investors to participate directly in
the performance of its WebMD Health segment, enabling us to
motivate our employees through equity compensation plans that
provide for equity participation in
our company and enabling us
to make acquisitions using our own equity as consideration.
Our Parent Will Be Our Controlling Stockholder.
Immediately following this offering, holders of our Class A
common stock will own
approximately %
of our outstanding common stock
and %
of the combined voting power of our outstanding common stock
(approximately %
of our outstanding common stock
and %
of the combined voting power of our outstanding common stock if
the underwriters exercise in full their option to purchase
additional shares).
Immediately following this offering, our Parent, which will hold
100% of our Class B common stock, will own
approximately %
of our outstanding common stock
and %
of the combined voting power of our outstanding common stock
(approximately %
of our outstanding common stock
and %
of
6
the combined voting power of our outstanding common stock if the
underwriters exercise in full their option to purchase
additional shares).
As a result, our Parent will continue to control us following
the completion of this offering, and will be able to exercise
control over all matters requiring shareholder approval,
including the election of our directors and approval of
significant corporate transactions. In addition, our
Parent’s controlling interest may discourage a change of
control that the holders of our Class A common stock may
favor.
As of the date of this prospectus, our Parent has indicated that
it has no current intention to sell or otherwise dispose of its
Class B common stock. However, our Parent is not subject to
any contractual obligation to retain any of its Class B
common stock, except that it has agreed not to sell or otherwise
dispose of any of our common stock for a period of 180 days
after the date of this prospectus without the prior written
consent of the representatives of the underwriters, as described
in “Underwriting.”
Agreements Between Us and Our Parent. We expect to enter
into a number of agreements with our Parent governing our future
relationship with our Parent, including a services agreement, a
tax sharing agreement, a release and indemnity agreement and an
intellectual property license agreement. These agreements cover
a variety of matters, including matters related to our Parent
providing us with administrative services, such as payroll,
accounting, tax, employee benefit plan, employee insurance,
intellectual property, legal and information processing
services, tax-related matters and the indemnification by our
Parent against certain liabilities. The terms of these
agreements will be determined by our Parent, in preparation for
this offering, and may be more or less favorable than those that
we could have negotiated with unaffiliated third parties.
It is our Parent’s intention that, under the services
agreement, our Parent will receive an amount that reasonably
approximates its cost of providing services to us. Our Parent
has agreed to make the services available to us for up to
5 years. However, we will not be required, under the
services agreement, to continue to obtain services from our
Parent. In the event we decide to replace our Parent’s
services, we will have the option to terminate services, in
whole or in part, at any time we choose to do so, generally by
providing, with respect to the specified services or groups of
services, 60 days’ prior notice and, in some cases,
paying a termination fee of not more than $30,000 to cover costs
of our Parent relating to the termination.
We also expect to enter into several agreements pursuant to
which our Parent or one or more of its
subsidiaries will be a
customer for some of our services, including our private portal
services.
Company Information
Our principal executive offices are located at 111 Eighth
Avenue,
New York,
New York 10011 and our telephone number at
that address is (
212) 624-3700.
7
The Offering
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Class A common stock offered
by us |
|
shares |
| |
|
Common stock outstanding after the offering: |
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| |
|
Class A common stock |
|
shares |
| |
|
Class B common stock |
|
shares |
| |
|
Use of proceeds |
|
We estimate that our net proceeds from this offering will be
approximately
$ million
($ million
if the underwriters exercise in full their option to purchase
additional shares). We intend to use these net proceeds for
working capital and general corporate purposes, including
capital expenditures and acquisitions. |
| |
|
Voting rights |
|
Each share of our Class A common stock will entitle its
holder to one vote on all matters to be voted on by stockholders
generally. The holders of our Class B common stock
generally will have rights identical to holders of our
Class A common stock, except that each share of
Class B common stock will entitle its holder to ten votes
on all matters to be voted on by stockholders generally. Holders
of our Class A common stock and Class B common stock
will generally vote together as a single class. |
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|
Conversion rights |
|
Each share of Class B common stock is convertible while
held by our Parent at the option of our Parent into one share of
Class A common stock. Under certain circumstances, our
Class B common stock may be converted into our Class A
common stock at the option of the holder or automatically. |
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|
Risk factors |
|
See “Risk Factors” and other information included in
this prospectus for a discussion of factors you should carefully
consider before deciding to invest in shares of our Class A
common stock. |
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| |
|
Proposed Nasdaq National Market symbol |
|
“WBMD.” |
Unless we specifically state otherwise, all information in this
prospectus:
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• |
assumes that the underwriters do not exercise their option to
purchase additional shares; |
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• |
assumes the conversion of all outstanding shares of our common
stock into shares of Class B common stock immediately prior
to the completion of this offering; and |
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| |
• |
excludes shares
of our Class A common stock reserved for grants under our
incentive compensation plans. Following this offering, we expect
to make initial grants in respect
of shares
of our Class A common stock, of
which will
be in the form of options to purchase shares of our Class A
common stock with an exercise price equal to the initial public
offering price per share,
and will
be in the form of restricted Class A common stock. |
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|
8
Summary Financial Data
You should read the following summary combined consolidated
financial data in conjunction with
“Management’s
Discussion and Analysis of Financial Condition and Results of
Operations,” our combined consolidated financial statements
and notes thereto and the unaudited pro forma financial
statements and related notes, all included elsewhere in this
prospectus. The
“Pro Forma” combined consolidated
statement of operations data for the year ended
December 31, 2004 and for the three months ended
March 31, 2005 is adjusted to reflect our acquisitions of
MedicineNet, Inc. and HealthShare Technology, Inc., as though
those acquisitions occurred as of
January 1, 2004. The pro
forma 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 as
of
January 1, 2004, nor is it indicative of future
operating results. The
“As Adjusted” combined
consolidated balance sheet data as of
March 31, 2005 is
adjusted to reflect the sale of the shares of our Class A
common stock offered hereby and the receipt of the estimated net
proceeds after deducting underwriting discounts and commissions
and the estimated offering expenses. All amounts in the
following tables are presented in thousands.
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|
Years Ended December 31, | |
|
Three Months Ended March 31, | |
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2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
| |
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| |
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| |
|
| |
|
| |
|
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|
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|
Pro Forma | |
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|
Actual | |
|
Pro Forma | |
| |
|
|
|
|
|
Actual | |
|
(unaudited) | |
|
(unaudited) | |
|
(unaudited) | |
|
(unaudited) | |
| |
|
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|
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|
Combined Consolidated Statements of Operations Data:
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Revenue
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$ |
84,203 |
|
|
$ |
110,152 |
|
|
$ |
134,148 |
|
|
$ |
144,637 |
|
|
$ |
26,266 |
|
|
$ |
33,761 |
|
|
$ |
35,585 |
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|
Costs and expenses:
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|
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Cost of operations
|
|
|
47,888 |
|
|
|
46,998 |
|
|
|
52,377 |
|
|
|
55,327 |
|
|
|
11,207 |
|
|
|
14,895 |
|
|
|
15,353 |
|
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Sales and marketing
|
|
|
49,033 |
|
|
|
47,917 |
|
|
|
49,315 |
|
|
|
51,201 |
|
|
|
11,585 |
|
|
|
10,988 |
|
|
|
11,207 |
|
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General and administrative
|
|
|
15,690 |
|
|
|
18,016 |
|
|
|
20,165 |
|
|
|
23,487 |
|
|
|
4,979 |
|
|
|
6,540 |
|
|
|
7,310 |
|
| |
Depreciation and amortization
|
|
|
2,486 |
|
|
|
4,463 |
|
|
|
5,620 |
|
|
|
12,016 |
|
|
|
1,204 |
|
|
|
2,233 |
|
|
|
3,003 |
|
| |
Restructuring and integration benefit
|
|
|
(5,850 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Other (income) expense
|
|
|
(823 |
) |
|
|
— |
|
|
|
— |
|
|
|
19 |
|
|
|
— |
|
|
|
— |
|
|
|
(3 |
) |
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|
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|
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|
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|
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|
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|
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Income (loss) before income tax provision
|
|
|
(24,221 |
) |
|
|
(7,242 |
) |
|
|
6,671 |
|
|
|
2,587 |
|
|
|
(2,709 |
) |
|
|
(895 |
) |
|
|
(1,285 |
) |
| |
Income tax provision
|
|
|
140 |
|
|
|
183 |
|
|
|
210 |
|
|
|
397 |
|
|
|
44 |
|
|
|
61 |
|
|
|
52 |
|
| |
|
|
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|
|
|
|
|
|
|
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|
|
|
|
|
|
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Net income (loss)
|
|
$ |
(24,361 |
) |
|
$ |
(7,425 |
) |
|
$ |
6,461 |
|
|
$ |
2,190 |
|
|
$ |
(2,753 |
) |
|
$ |
(956 |
) |
|
$ |
(1,337 |
) |
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|
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|
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|
March 31, 2005 | |
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|
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|
December 31, | |
|
December 31, | |
|
Actual | |
|
As Adjusted(1) | |
| |
|
2003 | |
|
2004 | |
|
(unaudited) | |
|
(unaudited) | |
| |
|
| |
|
| |
|
| |
|
| |
|
Combined Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$ |
3,384 |
|
|
$ |
9,119 |
|
|
$ |
2,665 |
|
|
|
|
|
|
Total assets
|
|
|
120,630 |
|
|
|
146,496 |
|
|
|
173,274 |
|
|
|
|
|
|
Owner’s net investment/Stockholders’ equity
|
|
|
85,527 |
|
|
|
100,737 |
|
|
|
124,839 |
|
|
|
|
|
|
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| (1) |
Reflects (a) the sale of the shares of our Class A
common stock in this offering and the receipt of the estimated
net proceeds after deducting underwriting discounts and
commissions and estimated offering expenses, (b) the
reclassification of Owner’s net investment to
Stockholders’ equity, reflecting the contribution to
capital of net amounts due to our Parent and (c) the
conversion of our outstanding shares of common stock into shares
of our Class B common stock. |
9
RISK FACTORS
Any investment in our Class A common stock involves a
high degree of risk. This section describes circumstances or
events that could have a negative effect on our business. You
should consider carefully the following information about these
risks, together with the other information contained in this
prospectus, before you decide whether to buy our Class A
common stock. The occurrence of one or more of the circumstances
or events described below could have a material adverse effect
on our financial condition, results of operations and cash flows
or on the trading price of our Class A common stock, and
you could lose all or part of your investment. The risks and
uncertainties described below are not exhaustive, and additional
risks and uncertainties that are not currently known to us or
that we currently believe are immaterial may also adversely
affect our business and operations. Our Risk Factors are
organized into the following broad categories: “Risks
Related to Our Operations and Financial Performance,”
“Risks Related to Our Relationships with Clients,”
“Risks Related to Use of the Internet and to Our
Technological Infrastructure,” “Risks Related to the
Legal and Regulatory Environment in Which We Operate,”
“Risks Related to Our Relationship With Our Parent”
and “Risks Related to Ownership of the Class A Common
Stock and this Offering.”
Risks Related to Our Operations and Financial Performance
Our online businesses are difficult to evaluate because they
have a limited operating history
Our online businesses have a limited operating history and
participate in relatively new and rapidly evolving markets.
These businesses have undergone significant changes during their
short history as a result of changes in the services provided,
changes in market conditions, and changes in ownership and
management, and are expected to continue to change for similar
reasons. We cannot assure you that our current business strategy
will be successful in the long term.
Many companies with business plans based on providing healthcare
information through the Internet have failed to be profitable
and some have filed for bankruptcy and/or ceased operations. We
have only earned income in three of our historical fiscal
quarters and, even if demand from users exists, we cannot assure
you that our business will be profitable.
We have incurred and may continue to incur losses
Our operating results have fluctuated significantly in the past
from quarter to quarter and may continue to do so in the future.
In addition, other than for the year ended
December 31,
2004, we have experienced net losses in each year since 2001,
and our net losses from 2001 to 2003 totaled approximately
$2.6 billion.
You should not rely on the results for any particular period as
an indication of our future performance. It is possible that, in
future periods, our results of operations may be below the
expectations of public market analysts and investors.
Fluctuations in our quarterly operating results or our inability
to achieve or maintain profitability may cause volatility in the
price of our Class A common stock in the public market.
The timing of our advertising and sponsorship revenues may
vary significantly, which could have adverse effects on our
operating results
Our advertising and sponsorship revenues, which accounted for
approximately 62% of our total revenues for the year ended
December 31, 2004, may vary significantly from quarter to
quarter due to a number of factors, not all of which are in our
control, and any of which may be difficult to forecast
accurately. The majority of our advertising and sponsorship
contracts are for terms of approximately four to 12 months.
We have relatively few longer term
contracts. We cannot assure
you that our current
10
customers will continue to participate in our existing programs
beyond the terms of their existing
contracts or that they will
enter into any additional
contracts for new programs that we
offer.
In addition, the time between the date of initial contact with a
potential advertiser or sponsor regarding a specific program and
the execution of a
contract with the advertiser or sponsor for
that program may be lengthy, especially for larger
contracts,
and may be subject to delays over which we have little or no
control, including as a result of budgetary constraints of the
advertiser or sponsor or their need for internal approvals.
Factors that could affect the timing of our revenues from
advertisers and sponsors include:
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the timing of FDA approval for new products or for new approved
uses for existing products; |
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seasonal factors relating to the prevalence of specific health
conditions and other seasonal factors that may affect the timing
of promotional campaigns for specific products; and |
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the scheduling of conferences for physicians and other
healthcare professionals. |
Lengthy sales and implementation cycles for our private
online portals make it difficult to forecast our revenues from
these applications and, as a result, may have an adverse impact
on our business
The period from our initial contact with a potential client for
a private online portal and the first purchase of our solution
by the client is difficult to predict. In the past, it has
generally ranged from six to 12 months, but in some cases
has been longer. These sales may be subject to delays due to a
clients’ internal procedures for approving large
expenditures and other factors beyond our control. The time it
takes to implement a private online portal is also difficult to
predict and has lasted as long as six months from
contract
execution to the commencement of live operation. Implementation
may be subject to delays based on the availability of the
internal resources of the client that are needed and other
factors outside of our control. As a result, we have limited
ability to forecast the timing of revenue from new clients.
This, in turn, makes it more difficult to predict our financial
performance from quarter to quarter.
During the sales cycle and the implementation period, we may
expend substantial time, effort and money preparing
contract
proposals, negotiating
contracts and implementing the private
online portal without receiving any related revenue. In
addition, many of the expenses related to providing private
online portals are relatively fixed in the short term, including
personnel costs and technology and infrastructure costs. Even if
our revenue is lower than expected, we may not be able to reduce
our short-term spending in response. Any shortfall in revenue
would have a direct impact on our results of operations.
As a result, we may be unable to adjust spending quickly enough
to offset any unexpected revenue shortfall or delay, in which
case our results of operations would suffer. In addition, in an
attempt to enhance our long-term competitive position, we may
from time to time make decisions regarding pricing, marketing,
services and technology that could have a near-term adverse
effect on our operating results.
If we are unable to provide content that attracts and retains
users to The WebMD Health Network at a level that is
attractive to advertisers and sponsors, our revenues will be
reduced
We believe that interest in our public portals for consumers,
physicians and healthcare professionals is based upon our
ability to make available high quality health content,
decision-support tools and other services that meet the needs of
our users. Our ability to do so depends, in turn, on:
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our ability to hire and retain qualified authors, journalists
and independent writers; |
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our ability to license quality content from third
parties; and |
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our ability to monitor and respond to increases and decreases in
user interest in specific topics. |
We cannot assure you that we will be able to continue to develop
or acquire needed content at a reasonable cost. If we are unable
to provide content that attracts and retains users at a level
that is attractive to advertisers and sponsors, our revenues
will be reduced. In addition, our ability to deploy new
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interactive tools and other features will require us to continue
to improve the technology underlying our
Web sites. The required
changes may be significant and expensive, and we cannot assure
you that we will be able to execute them quickly and efficiently.
We face significant competition for our products and
services
The markets in which we operate are intensely competitive,
continually evolving and, in some cases, subject to rapid change.
Public Portals. Our public portals face competition from
numerous other companies, both in attracting users and in
generating revenue from advertisers and sponsors. We compete
with online services and
Web sites that provide health-related
information, including both commercial sites and not-for-profit
sites. Since there are no substantial barriers to entry into the
markets in which we participate, we expect that competitors will
continue to enter these markets. These competitors include
companies like yahoo.com and msn.com that provide general
purpose consumer online services and portals and other
high-traffic
Web sites that include healthcare-related and non
healthcare-related content and services. Our competitors also
include more specialized providers of online services, tools and
applications for healthcare consumers, such as iVillage.com,
DrKoop.com, and drugs.com. Our competitors that provide
services, tools and applications to physicians include
merkmedicus.com, eMedicine.com, uptodate.com and mdconsult.com.
We also face competition from governmental and non-profit sites,
such as NIH.com and medline.com.
Other competitors for advertising and sponsorship revenue
include:
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publishers and distributors of traditional online media,
including television and magazines targeted to consumers, as
well as print journals and other specialized media targeted to
healthcare professionals, many of which have established or may
establish their own Web sites or partner with other Web sites; |
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online medical conferences, CME programs and symposia; and |
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vendors of healthcare information, products and services
distributed through other means, including direct sales, mail
and fax messaging. |
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Competitors for the attention of healthcare professionals and
consumers include:
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the competitors for advertisers and sponsors described above; and |
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public sector, non-profit and other Web sites, including some
Web sites maintained by our clients, that provide healthcare
information without advertising or sponsorships from third
parties. |
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Private Portals. Our private portals compete with various
providers and vendors in the licensing of content and in the
sale of decision-support services and tools. Our competitors in
this market include:
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providers of decision-support tools, such as Hewitt Associates
LLP and Subimo, LLC; |
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wellness and disease management vendors, including the Mayo
Foundation for Medical Education and Research and Staywell
Productions/MediMedia USA, Inc.; |
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suppliers of online health management applications, including
HealthMedia, Health A-Z and Consumer Health Interactive; and |
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health information services and health management offerings of
health plans and their affiliates, including those of Humana,
Aetna and United Healthcare. |
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Publishing Services. Our Publishing Services segment
products and services compete with numerous other online and
offline sources of healthcare information, including:
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traditional publishers and distributors in the medical field,
such as medical reference publications, print journals and other
specialized publications targeted to physicians, some of which
have a more complete range of titles and better access to
traditional distribution channels than we have; |
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public sector, non-profit and other Web sites that provide
healthcare information; and |
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online conferences, CME programs and symposia. |
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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 or users 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.
If we are unable to provide high quality healthcare content
for our Publishing Services segment that attracts and retains
users, our revenues will be reduced
Interest in our publications for physicians, such as The
Little Blue Book and ACP Medicine and ACS Surgery:
Principles and Practice, is based upon our ability to make
available up-to-date, high quality health content that meets the
needs of our physician users. Although we have been able to
continue to update and maintain the physician practice
information that we publish in The Little Blue Book, if
we are unable to continue to do so for any reason, the value of
The Little Blue Book would diminish and interest in this
publication and advertising in this publication would be
adversely affected.
Similarly, our ability to maintain or increase the subscriptions
to ACP Medicine and ACS Surgery is based upon our
ability to make available up-to-date, high quality content which
depends on our ability to retain qualified physician authors and
writers in the disciplines covered by these publications. We
cannot assure you that we will be able to retain qualified
physician editors or authors to provide and review needed
content at a reasonable cost. If we are unable to provide
content that attracts and retains subscribers, subscriptions to
these products will be reduced. In addition, the American
College of Physicians permits WebMD to use the ACP name in the
title of ACP Medicine and the American College of
Surgeons permits WebMD to use the name ACS in the title of
ACS Surgery: Principles and Practice. If we lose the
right to use the ACP or ACS name in our publications,
subscribers may find the publication less attractive and cease
to subscribe to these publications.
WebMD the Magazine was launched in April 2005 and as a
result has a very short operating history. We cannot assure you
that WebMD the Magazine will be able to attract
advertisers to make this publication successful in the long-term.
Governmental and private initiatives to support the adoption
of healthcare information technology may encourage additional
companies or governmental agencies to compete with us
There are currently numerous federal, state and private
initiatives and studies seeking ways to increase the use of
information technology in healthcare as a means of improving
care and reducing costs. For example, the Department of Health
and Human Services, which we refer to as HHS, issued a report in
2004 entitled “The Decade of Health Information Technology:
Delivering Consumer-centric and Information-rich Health
Care” and the report was followed up by a Request for
Information and, in June 2005, several Requests for Proposals.
In addition, several bills have been introduced in 2005 in both
the Senate and the House of Representatives reflecting various
approaches to fostering the use of information technology in
healthcare. These initiatives may encourage more companies to
develop applications and services that compete with us,
especially with our private online portals. The effect that
these initiatives may have on our business is difficult to
predict and we cannot assure you that we will adequately address
the risks created by these initiatives or that we will be able
to take advantage of any resulting opportunities.
We have not been operated as an entity separate from our
Parent, and, as a result, our historical and pro forma financial
information may not be indicative of our historical financial
results or future financial performance
Our combined consolidated financial information included in this
prospectus assumes that, for the periods presented, we had
existed as a separate legal entity, and has been derived from
the consolidated
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financial statements of our Parent. Some costs have been
reflected in the combined consolidated financial statements that
are not necessarily indicative of the costs that we would have
incurred had we operated as an independent, stand-alone entity
for all periods presented. These costs include allocated
portions of our Parent’s corporate overhead, interest
expense and income taxes. Our combined consolidated financial
information included in this prospectus may not be indicative of
our future financial performance, because these statements do
not necessarily reflect our historical financial condition,
results of operations and cash flows as they would have been had
we been operated during the periods presented as a separate,
stand-alone entity.
We expect that accounting for employee stock options using
the fair value method will have a material impact on our
combined consolidated results of operations and earnings per
share
In December 2004, the FASB issued SFAS 123R, which requires
all share-based payments to employees, including grants of stock
options by us and our Parent to our employees, to be recognized
in the financial statements based on their fair values,
beginning with the fiscal year that begins after
June 15,
2005. As permitted by SFAS No. 123, we currently
account for share-based payments to employees using the
intrinsic value method prescribed in APB Opinion No. 25. As
described in Note 2 to our audited combined consolidated
financial statements, if, instead of the intrinsic value method,
we had used the fair value recognition provisions of
SFAS 123 to calculate stock based employee compensation,
instead of reporting net income for 2004 of $6.5 million,
we would have reported a loss of $2.4 million. Although
neither we nor our Parent has yet chosen the valuation
methodology it will employ when we and it adopt
SFAS No. 123R, the adoption of
SFAS No. 123R’s fair value method will have a
material impact on the combined consolidated results of
operations and earnings per share. We cannot predict what effect
the reduction in our net income may have on our stock price.
We will incur increased costs as a result of being a
separately traded public company
As a separately traded public company, we will incur legal,
accounting and other expenses that we did not incur as a wholly
owned subsidiary of our Parent, including costs associated with
the periodic reporting requirements applicable to a company
whose securities are registered under the Securities Exchange
Act of 1934, or the Exchange Act, recently adopted corporate
governance requirements, including requirements under the
Sarbanes-Oxley Act of 2002, and other rules implemented
relatively recently by the Securities and Exchange Commission,
or the SEC, and The Nasdaq National Market. We expect these
rules and regulations to increase substantially our legal and
financial compliance costs and to make some activities more
time-consuming and costly. We also expect that these rules and
regulations will make it more difficult and more expensive for
us to obtain directors and officers’ liability insurance.
Investors could lose confidence in our financial reports, and
our stock price may be adversely affected, if our or our
Parent’s internal controls over financial reporting are
found not to be effective by management or by an independent
registered public accounting firm or if we or our Parent make
disclosure of existing or potential significant deficiencies or
material weaknesses in those controls
Beginning with our Annual Report for the year ending
December 31, 2006, Section 404 of the Sarbanes-Oxley
Act of 2002 will require us to include an internal control
report with our Annual Report on Form 10-K. That report
must include management’s assessment of the effectiveness
of our internal control over financial reporting as of the end
of the fiscal year. Additionally, our independent registered
public accounting firm will be required to issue a report on
management’s assessment of our internal control over
financial reporting and a report on their evaluation of the
operating effectiveness of our internal control over financial
reporting. Our Parent is an
“accelerated filer” and
was required to include an internal control report in its most
recent and in its future Annual Reports on Form 10-K.
We continue to evaluate our existing internal controls over
financial reporting against the standards adopted by the Public
Company Accounting Oversight Board (PCAOB). During the course of
our ongoing evaluation of the internal controls, we may identify
areas requiring improvement, and may have to design enhanced
processes and controls to address issues identified through this
review. Remedying any
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deficiencies, significant deficiencies or material weaknesses
that we or our independent registered public accounting firm may
identify, may require us to incur significant costs and expend
significant time and management resources. We cannot assure you
that any of the measures we implement to remedy any such
deficiencies will effectively mitigate or remedy such
deficiencies. In addition, we cannot assure you that we will be
able to complete the work necessary for our management to issue
its management report in a timely manner, or that we will be
able to complete any work required for our management to be able
to conclude that our internal control over financial reporting
is operating effectively. If we are not able to complete the
assessment under Section 404 in a timely manner, we and our
independent registered public accounting firm would be unable to
conclude that our internal control over financial reporting is
effective as of
December 31, 2006. Investors could lose
confidence in our financial reports, and our stock price may be
adversely affected, if our internal controls over financial
reporting are found not to be effective by management or by an
independent registered public accounting firm or if we make
disclosure of existing or potential significant deficiencies or
material weaknesses in those controls.
A determination that there is a significant deficiency or
material weakness in the effectiveness of our internal controls
over financial reporting could also reduce our ability to obtain
financing or could increase the cost of any financing we obtain
and require additional expenditures to comply with applicable
requirements.
In addition, investors could lose confidence in our financial
reports, if our Parent’s internal controls over financial
reporting are found not to be effective by management or by an
independent registered public accounting firm or if our Parent
makes disclosure of existing or potential significant
deficiencies or material weaknesses in those controls,
particularly if the reasons are relevant or related to our
internal controls or intercompany transactions with our Parent.
Acquisitions, business combinations and other transactions
may be difficult to complete and, if completed, may have
negative consequences for our business and our
securityholders
We have been built, in part, through a series of acquisitions.
We intend to continue to seek to acquire or to engage in
business combinations with companies engaged in complementary
businesses. In addition, we may enter into joint ventures,
strategic alliances or similar arrangements with third parties.
These transactions may result in changes in the nature and scope
of our operations and changes in our financial condition. Our
success in completing these types of transactions will depend
on, among other things, our ability to locate suitable
candidates, negotiate mutually acceptable terms with them and to
obtain adequate financing. Significant competition for these
opportunities exists, which may increase the cost of and
decrease the opportunities for these types of transactions.
Financing for these transactions may come from several sources,
including:
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cash and cash equivalents on hand and marketable securities; |
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proceeds from the incurrence of indebtedness; and |
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proceeds from the issuance of additional Class A common
stock, preferred stock, convertible debt or other securities. |
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The issuance of additional equity or debt securities could:
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cause substantial dilution of the percentage ownership of our
stockholders at the time of the issuance; |
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cause substantial dilution of our earnings per share; |
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subject us to the risks associated with increased leverage,
including a reduction in our ability to obtain financing or an
increase in the cost of any financing we obtain; |
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subject us to restrictive covenants that could limit our
flexibility in conducting future business activities; and |
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adversely affect the prevailing market price for our outstanding
securities. |
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We do not intend to seek securityholder approval for any such
acquisition or security issuance unless required by applicable
law, regulation or by the terms of then existing securities.
Our business will suffer if we fail to successfully integrate
acquired businesses and technologies or to assess the risks in
particular transactions
We have in the past acquired, and may in the future acquire,
businesses, technologies, services, product lines and other
assets. The successful integration of the acquired businesses
and assets into our operations, on a cost-effective basis, can
be critical to our future performance. The amount and timing of
the expected benefits of any acquisition, including potential
synergies between
our company and the acquired business, are
subject to significant risks and uncertainties. These risks and
uncertainties include, but are not limited to, those relating to:
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our ability to maintain relationships with the customers of the
acquired business; |
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our ability to retain or replace key personnel; |
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potential conflicts in sponsor or advertising relationships; |
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our ability to coordinate organizations that are geographically
diverse and may have different business cultures; and |
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compliance with regulatory requirements. |
We cannot guarantee that any acquired businesses will be
successfully integrated with our operations in a timely or
cost-effective manner, or at all. Failure to successfully
integrate acquired businesses or to achieve anticipated
operating synergies, revenue enhancements or cost savings could
have a material adverse effect on our business, financial
condition and results of operations.
Although our management attempts to evaluate the risks inherent
in each transaction and to value acquisition candidates
appropriately, we cannot assure you that we will properly
ascertain all such risks or that acquired businesses and assets
will perform as we expect or enhance the value of
our company as
a whole. In addition, acquired companies or businesses may have
larger than expected liabilities that are not covered by the
indemnification, if any, we are able to obtain from the sellers.
We have previously incurred significant impairment and
restructuring charges
In 1999 and 2000, our Parent acquired eight companies for over
$10 billion in aggregate purchase price, primarily through
the issuance of its common stock. During 2000 and 2001, our
Parent initiated two restructuring and integration plans, with
the objective of eliminating duplication and redundancies that
resulted from prior acquisitions and to restructure certain
strategic relationships our Parent had with third parties. In
2001, we incurred a restructuring and integration charge of
$114.9 million. During 2001, our Parent identified certain
indicators of possible impairment of our long-lived assets,
primarily goodwill and other intangible assets. Our Parent
evaluated our long-lived assets for impairment by determining
identifiable cash flows to related asset groupings, and compared
the projected undiscounted cash flows for each asset grouping to
its carrying value. Once our Parent determined there was an
impairment, our Parent quantified the impairment based on
projected discounted cash flows, and recorded a charge of
$1.4 billion for the impairment of long-lived and other
assets in 2001. We cannot assure you that other unknown future
causes of possible impairment charges, such as a significant
downturn in one of our business segments or general economic
conditions, will not occur; if they do occur, they could result
in an additional assessment of our long-lived assets for
impairment which, in turn, could result in an additional
impairment charge in the future.
Our failure to attract and retain qualified executives and
employees may have a material adverse effect on our business
Our business depends largely on the skills, experience and
performance of key members of our senior management team. Roger
C. Holstein, who served as our chief executive officer since
October 2004,
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resigned, effective
April 27, 2005, from all his positions
with our Parent and its
subsidiaries. Wayne Gattinella, who has
served as President of the WebMD Health segment of our Parent
since August 2001, is our President and CEO. We cannot assure
you that the transition in leadership will occur without
disruption to our businesses.
We also depend, in part, on our ability to attract and retain
qualified writers and editors, software developers and other
technical personnel and sales and marketing personnel. We
anticipate the need to hire and retain qualified employees in
these areas from time to time. We cannot assure you that we will
be able to hire or retain a sufficient number of qualified
personnel to meet our requirements, or that we will be able to
do so at the salary and benefit costs that are acceptable to us.
Failure to do so may have an adverse effect on our business.
Risks Related to Our Relationships with Clients
Developments in the healthcare industry could adversely
affect our business
Most of our revenue is derived from the healthcare industry and
could be affected by changes affecting healthcare spending.
General reductions in expenditures by healthcare industry
participants could result from, among other things:
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government regulation or private initiatives that affect the
manner in which healthcare providers interact with patients,
payers or other healthcare industry participants, including
changes in pricing or means of delivery of healthcare products
and services; |
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consolidation of healthcare industry participants; |
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reductions in governmental funding for healthcare; and |
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adverse changes in business or economic conditions affecting
healthcare payers or providers, pharmaceutical, biotechnology or
medical device companies or other healthcare industry
participants. |
We are particularly dependent on pharmaceutical, biotechnology
and medical device companies for our advertising and sponsorship
revenues. Our business will be adversely impacted if business or
economic conditions result in the reduction of purchases by our
customers if they decide not to renew their commitments or
decide to renew their commitments at lower levels. Even if
general expenditures by industry participants remain the same or
increase, developments in the healthcare industry may result in
reduced spending in some or all of the specific segments of that
market we serve or are planning to serve. For example, use of
our products and services could be affected by:
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changes in the design of health insurance plans; |
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a decrease in the number of new drugs or medical devices coming
to market; and |
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decreases in marketing expenditures by pharmaceutical companies
or consumer product companies, including as a result of
governmental regulation or private initiatives that discourage
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device companies. |
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In addition, our customers’ expectations regarding pending
or potential industry developments may also affect their
budgeting processes and spending plans with respect to products
and services of the types we provide.
The healthcare industry has changed significantly in recent
years and we expect that significant changes will continue to
occur. However, the timing and impact of developments in the
healthcare industry are difficult to predict. We cannot assure
you that the markets for our products and services will continue
to exist at current levels or that we will have adequate
technical, financial and marketing resources to react to changes
in those markets.
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The WebMD Health Network includes Web sites that we
supply content to, but do not own, and the termination of our
relationship with the owners of these Web sites, including AOL,
may negatively affect our results of operations
We cannot assure you that we will be able to continue to attract
a large audience of health-involved consumers and
clinically-active healthcare professionals to
The WebMD
Health Network. Although the substantial majority of the
visitors to
The WebMD Health Network and the page views
we generate on
The WebMD Health Network are from Web
sites we own, some are from
Web sites owned by third parties
that carry our content and, as a result, our traffic may vary
based on the amount of traffic to
Web sites of these third
parties and other factors outside our control. During the first
quarter of 2005,
AOL accounted for approximately 17% of
The WebMD Health Network’s unique users and
approximately 8% of its aggregate page views and other third
party
Web sites accounted for 8% of
The WebMD Health
Network’s unique users and 5% of its aggregate page
views during such period. In the event that our relationship
with AOL or other third party
Web sites is terminated, the user
traffic and page views in
The WebMD Health Network may be
negatively affected, which may negatively affect our results of
operations.
We may not be able to attract visitors to our Web sites on a
consistent basis, which could have a material adverse effect on
our results of operations
Since users of our public portals may be attracted to
The
WebMD Health Network as a result of a specific condition or
for a specific purpose, it is difficult for us to predict the
rate at which users will return to the public portals. Further,
users of
The WebMD Health Network have numerous other
online and offline sources of healthcare information services,
and some users may visit
The WebMD Health Network as a
result of our existing third party relationships. If one or more
of these third parties engages in conduct that negatively
affects users of those third party
Web sites, users that come to
The WebMD Health Network through these third party Web
sites may decrease.
Because we generate revenues by, among other things, selling
sponsorships of specific pages, sections or events on The
WebMD Health Network for healthcare providers and consumers
and related e-newsletters, a decline in user traffic levels or a
reduction in the number of pages viewed by users could cause our
revenues to decrease and could have a material adverse effect on
our results of operations.
We may be unsuccessful in our efforts to increase advertising
and sponsorship revenue from consumer products companies
Most of our advertising and sponsorship revenues have, in the
past, come from pharmaceutical, biotechnology and medical device
companies. During the past year, we have begun to focus on
increasing sponsorship revenue from consumer products companies
that are interested in communicating health-related or
safety-related information about their products to our audience.
However, while a number of consumer products companies have
indicated an intent to increase the portion of their promotional
spending used on the Internet, we cannot assure you that these
advertisers and sponsors will find our consumer
Web site to be
as effective as other
Web sites or traditional media for
promoting their products and services. If we encounter
difficulties in competing with the other alternatives available
to consumer products companies, this portion of our business may
develop more slowly than we expect or may fail to develop.
Risks Related to Use of the Internet and to Our Technological
Infrastructure
Our users depend on Internet service providers, online
service providers and other Web site operators to access our
online services
Users of our Web-based services depend on Internet service
providers, online service providers and other
Web site operators
for access to our
Web sites. Many of these providers have
experienced significant outages in the past and could experience
outages, delays and other difficulties in the future due to
system
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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 Web-based services.
We rely on bandwidth providers, data center providers, other
third parties and our own systems for key aspects of the process
of providing products and services to our users, and any failure
or interruption in the services provided by these third parties
or our own systems could harm our business
Our online services are designed to operate 24 hours a day,
seven days a week, without interruption. However, we have
experienced and expect that we will experience interruptions and
delays in services and availability from time to time. We rely
on internal systems as well as third party vendors, including
data center providers and bandwidth providers, to provide our
online services. We do not maintain redundant systems or
facilities for some of these services. In the event of a
catastrophic event at one of our data centers, we may experience
an extended period of system unavailability which could
negatively impact our relationship with users and adversely
affect our brand and our business.
To operate without interruption, both we and our service
providers must guard against:
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damage from fire, power loss and other natural disasters; |
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communications failures; |
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software and hardware errors, failures and crashes; |
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security breaches, computer viruses and similar disruptive
problems; and |
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other potential interruptions. |
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Any disruption in the network access or co-location services
provided by these third party providers or any failure of or by
these third-party providers or our own systems to handle current
or higher volume of use could significantly harm our business.
We exercise little control over these third party vendors, which
increases our vulnerability to problems with services they
provide.
Any errors, failures, interruptions or delays experienced in
connection with these third party technologies and information
services or our own systems could negatively impact our
relationships with users and adversely affect our brand and our
business and could expose us to liabilities to third parties.
Although we maintain insurance for our business, the coverage
under our policies may not be adequate to compensate us for all
losses that may occur. In addition, we cannot provide assurance
that we will continue to be able to obtain adequate insurance
coverage at an acceptable cost.
Implementation of changes in hardware and software platforms
used to deliver our online services may result in performance
problems and may not provide the additional functionality that
was expected
From time to time, we implement changes to the hardware and
software platforms we use for providing our online services.
During and after the implementation of those changes, a platform
may not perform as expected, which could result in interruptions
in operations, an increase in response time or an inability to
track performance metrics. Any significant interruption in our
ability to operate any of our online services could have an
adverse effect on our relationships with users and clients and,
as a result, on our financial results.
We rely on a combination of purchasing, licensing, internal
development, and acquisitions to develop our hardware and
software platforms. Our implementation of changes in these
platforms may cost more than originally expected, may take
longer than originally expected, and may require more testing
than originally anticipated. In addition, we cannot provide
assurance that changes in these platforms will provide the
additional functionality and other benefits that were originally
expected.
19
If the systems we use to provide online portals experience
security breaches or are otherwise perceived to be insecure, our
business could suffer
We retain and transmit confidential information, including
personal health records, in the processing centers and other
facilities we use to provide online services. It is critical
that these facilities and infrastructure remain secure and be
perceived by the marketplace as secure. A security breach could
damage our reputation or result in liability. We may be required
to expend significant capital and other resources to protect
against security breaches and hackers or to alleviate problems
caused by breaches. Despite the implementation of security
measures, this infrastructure or other systems that we interface
with, including the Internet and related systems, may be
vulnerable to physical break-ins, hackers, improper employee or
contractor access, computer viruses, programming errors, attacks
by third parties or similar disruptive problems. Any compromise
of our security, whether as a result of our own systems or the
systems that they interface with, could reduce demand for our
services, and could subject us to legal claims from our clients
and users, including for breach of
contract or breach of
warranty.
Risks Related to the Legal and Regulatory Environment in
Which We Operate
Government regulation of the Internet could adversely affect
our business
The Internet and its associated technologies are subject to
government regulation. Our failure, or the failure of our
business partners or third party providers, to accurately
anticipate the application of laws and regulations affecting our
products and services and the manner in which we deliver them,
or any other failure to comply, could create liability for us,
result in adverse publicity and negatively affect our business.
In addition, new laws and regulations, or new interpretations of
existing laws and regulations, may be adopted with respect to
the Internet or other online services covering user privacy,
patient confidentiality, consumer protection and other issues,
including pricing, content, copyrights and patents, distribution
and characteristics and quality of products and services. We
cannot predict whether these laws or regulations will change or
how such changes will affect our business.
Government regulation of healthcare creates risks and
challenges with respect to our compliance efforts and our
business strategies
The healthcare industry is highly regulated and is subject to
changing political, legislative, regulatory and other
influences. Existing and new laws and regulations affecting the
healthcare industry could create unexpected liabilities for us,
cause us to incur additional costs and restrict our operations.
Many healthcare laws are complex and their application to
specific products and services may not be clear. In particular,
many existing healthcare laws and regulations, when enacted, did
not anticipate the healthcare information services that we
provide. However, these laws and regulations may nonetheless be
applied to our products and services. Our failure to accurately
anticipate the application of these laws and regulations, or
other failure to comply, could create liability for us, result
in adverse publicity and negatively affect our businesses. Some
of the risks we face from healthcare regulation are as follows:
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Regulation of Drug and Medical Device Advertising and
Promotion |
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The WebMD Health Network provides services involving
advertising and promotion of prescription and over-the-counter
drugs and medical devices. Any increase in regulation of these
areas by the Federal Food and Drug Administration, or the FDA,
or the Federal Trade Commission, or the FTC, could make it more
difficult for us to contract for sponsorships and advertising.
Physician groups and others have criticized the FDA’s
current policies, and have called for restrictions on
advertising of prescription drugs to consumers and increased FDA
enforcement. We cannot predict what actions the FDA or industry
participants may take in response to these criticisms. It is
also possible that new laws would be enacted that impose
restrictions on such advertising. Our advertising and
sponsorship revenues could be materially reduced by additional
restrictions on the |
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advertising of prescription drugs and medical devices to
consumers, whether imposed by law or regulation or by policies
adopted by industry members. |
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If the FDA or the FTC finds that any information on our Web
sites violate FDA or FTC regulations, they may take regulatory
or judicial action against us or the advertiser or sponsor of
that information. State attorneys general may also take similar
action based on their state’s consumer protection statutes. |
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There are federal and state laws that govern patient referrals,
physician financial relationships and inducements to healthcare
providers and patients. The federal healthcare programs
anti-kickback law prohibits any person or entity from offering,
paying, soliciting or receiving anything of value, directly or
indirectly, for the referral of patients covered by Medicare,
Medicaid and other federal healthcare programs or the leasing,
purchasing, ordering or arranging for or recommending the lease,
purchase or order of any item, good, facility or service covered
by these programs. Many states also have similar anti-kickback
laws that are not necessarily limited to items or services for
which payment is made by a federal healthcare program. These
laws are applicable to manufacturers and distributors and,
therefore, may restrict how we and some of our customers market
products to healthcare providers. Also, in 2002, the Office of
the Inspector General, or OIG, of Health and Human Services, the
federal government agency responsible for interpreting the
federal anti-kickback law, issued an advisory opinion that
concluded that the sale of advertising and sponsorships to
healthcare providers and vendors by Web-based information
services implicates the federal anti-kickback law. However, the
advisory opinion suggests that enforcement action will not
result if the fees paid represent fair market value for the
advertising/sponsorship arrangements, the fees do not vary based
on the volume or value of business generated by the advertising
and the advertising/sponsorship relationships are clearly
identified as such to users. |
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The laws in this area are broadly written and it is often
difficult to determine precisely how the laws will be applied in
specific circumstances. Penalties for violating the federal
anti-kickback law include imprisonment, fines and exclusion from
participating, directly or indirectly, in Medicare, Medicaid and
other federal healthcare programs. Any determination by a state
or federal regulatory agency that any of our practices violate
any of these laws could subject us to civil or criminal
penalties and require us to change or terminate some portions of
our business and could have an adverse effect on our business.
Even an unsuccessful challenge by regulatory authorities of our
practices could result in adverse publicity and be costly for us
to respond to. |
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Medical Professional Regulation |
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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. If a state
determines that some portion of our business violates these
laws, it may seek to have us discontinue those portions or
subject us to penalties or licensure requirements. Any
determination that we are a healthcare provider and have acted
improperly as a healthcare provider may result in liability to
us. |
Risks related to privacy regulations are described below under
“We face potential liability related to the privacy and
security of personal information we collect from consumer and
healthcare professionals through our Web sites.”
We face potential liability related to the privacy and
security of personal information we collect from consumer and
healthcare professionals through our Web sites
Internet user privacy has become a major issue both in the
United States and abroad. We have privacy policies posted on our
Web sites that we believe comply with applicable laws requiring
notice to users about our information collection, use and
disclosure practices. However, whether and how existing privacy
and consumer protection laws in various jurisdictions apply to
the Internet is still uncertain and
21
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
cannot assure you that the privacy policies and other statements
on our
Web sites or our practices will be found sufficient to
protect us from liability or adverse publicity relating to the
privacy and security of personal information.
Under the Health Insurance Portability and Accountability Act of
1996, or HIPAA, Congress established a set of federal national
privacy standards for the protection by health plans, healthcare
clearinghouses, healthcare providers and their business
associates of individually identifiable health information. We
cannot assure you that we will adequately address the risks
created by these privacy and security rules and we are unable to
predict what changes to HIPAA might be made in the future or how
those changes could affect our business.
In addition to HIPAA, numerous other state and federal laws
govern the collection, dissemination, use, access to and
confidentiality of patient health information. In addition, some
states are considering new laws and regulations that further
protect the confidentiality of medical records or medical
information. In many cases, these state laws are not preempted
by the HIPAA Privacy Standard and may be subject to
interpretation by various courts and other governmental
authorities, thus creating potentially complex compliance issues
for us and our customers and strategic partners. These privacy
laws at a state or federal level, or new interpretations of
these laws, could create liability for us, could impose
additional operational requirements on our business, could
affect the manner in which we use and transmit patient
information and could increase our cost of doing business.
Changes in industry guidelines or government regulation could
adversely affect our online Medscape offerings
Our CME activities are planned and implemented in accordance
with the Essential Areas and Policies of the Accreditation
Council for Continuing Medical Education, or ACCME, which
oversees providers of CME credit, and other applicable
accreditation standards. In September 2004, ACCME revised its
standards for commercial support of CME. The revised standards
are intended to ensure, among other things, that CME activities
of ACCME-accredited providers are independent of providers of
healthcare goods and services that fund the development of CME.
ACCME required accredited providers to implement these standards
by May 2005. Implementation has required additional disclosures
to CME participants about those in a position to influence
content and other adjustments to the management and operations
of our CME programs. We believe we have modified our procedures
as appropriate to meet the revised standards. However, we cannot
be certain whether these adjustments will ensure that we meet
the new standards or predict whether ACCME may impose additional
requirements.
In the event that ACCME concludes that we have not met its
revised standards relating to CME, we would not be permitted to
offer accredited ACCME activities to physicians and healthcare
professionals, and we may be required, instead, to use third
parties to accredit such CME-related services on Medscape
from WebMD. In addition, any failure to maintain our status
as an accredited ACCME provider as a result of a failure to
comply with existing or new ACCME standards could discourage
potential sponsors from engaging in CME or education related
activities with us, which could have a material adverse effect
on our business.
CME activities may also be subject to government regulation by
the FDA, the OIG, or HHS, the federal agency responsible for
interpreting certain federal laws relating to healthcare, and
state regulatory agencies.
During the past several years, educational programs, including
CME, directed toward physicians have been subject to increased
scrutiny to ensure that sponsors do not influence or control the
content of the program. In response to governmental and industry
initiatives, pharmaceutical companies and medical device
companies have been developing and implementing internal
controls and procedures that promote adherence to applicable
regulations and requirements. In implementing these controls and
procedures,
22
different clients may interpret the regulations and requirements
differently and may implement procedures or requirements that
vary from client to client. These controls and procedures:
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may discourage pharmaceutical companies from engaging in
educational activities; |
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may slow their internal approval for such programs; |
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may reduce the volume of sponsored educational programs
implemented through our Medscape Web site to levels that are
lower than in the past; and |
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may require us to make changes to how we offer or provide
educational programs, including CME. |
In addition, future changes to existing regulations or
accreditation standards, or to the internal compliance programs
of potential clients, may further discourage or prohibit
potential clients from engaging in educational activities with
us, or may require us to make further changes in the way we
offer or provide educational programs.
We may not be successful in protecting our intellectual
property and proprietary rights
Our intellectual property is important to our businesses. We
rely on a combination of trade secret, patent and other
intellectual property laws and confidentiality procedures and
non-disclosure contractual provisions to protect our
intellectual property. We believe that our non-patented
proprietary technologies and business processes are protected
under trade secret, contractual and other intellectual property
rights. However, those rights do not afford the statutory
exclusivity provided by patented processes. In addition, the
steps that we take to protect our intellectual property,
proprietary information and trade secrets may prove to be
inadequate and, whether or not adequate, may be expensive.
We cannot assure you that we will be able to detect potential or
actual misappropriation or infringement of our intellectual
property, proprietary information or trade secrets. Even if we
detect misappropriation or infringement by a third party, we
cannot assure you that we will be able to enforce our rights at
a reasonable cost, or at all. In addition, our rights to
intellectual property, proprietary information and trade secrets
may not prevent independent third-party development and
commercialization of competing products or services.
Third parties may claim that we are infringing their
intellectual property, and we could suffer significant
litigation or licensing expenses or be prevented from providing
certain services, which may harm our business
We could be subject to claims that we are misappropriating or
infringing intellectual property or other proprietary rights of
others. These claims, even if not meritorious, could be
expensive to defend and divert management’s attention from
our operations. If we become liable to third parties for
infringing these rights, we could be required to pay a
substantial damage award and to develop non-infringing
technology, obtain a license or cease selling the products or
services that use or contain the infringing intellectual
property. We may be unable to develop non-infringing products or
services or obtain a license on commercially reasonable terms,
or at all. We may also be required to indemnify our customers if
they become subject to third party claims relating to
intellectual property that we license or otherwise provide to
them, which could be costly.
We may be subject to claims brought against us as a result of
content we provide
Consumers access health-related information through our online
services, including information regarding particular medical
conditions and possible adverse reactions or side effects from
medications. If our content, or content we obtain from third
parties, contains inaccuracies, it is possible that consumers,
employees, health plan members or others may sue us for various
causes of action. Although our
Web sites contain terms and
conditions, including disclaimers of liability, that are
intended to reduce or eliminate our liability, 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
23
agreements with consumers and physicians that provide the terms
and conditions for use of our public or private portals are
unenforceable. A finding by a court that these agreements are
invalid and that we are subject to liability could harm our
business and require costly changes to our business.
We have editorial procedures in place to provide quality control
of the information that we publish or provide. However, we
cannot assure you that our editorial and other quality control
procedures will be sufficient to ensure that there are no errors
or omissions in particular content. Even if potential claims do
not result in liability to us, investigating and defending
against these claims could be expensive and time consuming and
could divert management’s attention away from our
operations. In addition, our business is based on establishing
the reputation of our portals as trustworthy and dependable
sources of healthcare information. Allegations of impropriety or
inaccuracy, even if unfounded, could therefore harm our
reputation and business.
We could be subject to breach of warranty or other claims by
clients of our online portals if the software and systems we use
to provide them contain errors or experience failures
Errors in the software and systems we use could cause serious
problems for clients of our online portals. We may fail to meet
contractual performance standards or fail to meet expectations
that our clients have for them. Clients of our online portals
may seek compensation from us or may seek to terminate their
agreements with us, withhold payments due to us, seek refunds
from us of part or all of the fees charged under those
agreements or initiate litigation or other dispute resolution
procedures. In addition, we could face breach of warranty or
other claims by clients or additional development costs. Our
software and systems are inherently complex and, despite testing
and quality control, we cannot be certain that they are error
free.
We attempt to limit, by
contract, our liability to our clients
for damages arising from our negligence, errors or mistakes.
However, contractual limitations on liability may not be
enforceable in certain circumstances or may otherwise not
provide sufficient protection to us from liability for damages.
We maintain liability insurance coverage, including coverage for
errors and omissions. However, it is possible that claims could
exceed the amount of our applicable insurance coverage, if any,
or that this coverage may not continue to be available on
acceptable terms or in sufficient amounts. Even if these claims
do not result in liability to us, investigating and defending
against them could be expensive and time consuming and could
divert management’s attention away from our operations. In
addition, negative publicity caused by these events may delay or
hinder market acceptance of our services, including unrelated
services.
The ongoing Department of Justice investigation of our Parent
could have an adverse impact on our company
On
September 3, 2003, our Parent first learned that the
U.S. Attorney for the District of South Carolina, with the
assistance of the Federal Bureau of Investigation and the
Internal Revenue Service, was conducting an investigation of our
Parent relating to activities which may have been engaged in
before and after Medical Manager Corporation (now part of our
Parent’s Practice Services business segment) merged in 1999
with a predecessor of our Parent, as well as after the merged
entity became a subsidiary of our Parent in 2000. Our Parent
believes that the investigation relates principally to issues of
financial accounting improprieties relating to Medical Manager,
including activities that artificially inflated revenues and
earnings of Medical Manager. Our Parent understands that the SEC
is also conducting a formal investigation into this matter. In
2005, certain former employees of Medical Manager agreed to
plead guilty to mail fraud and tax evasion as a result of the
foregoing investigation. In the event members of senior
management were to be implicated in any wrongdoing, it could
have an adverse impact on
our company.
Our Parent has been cooperating and intends to continue to
cooperate fully with the U.S. Attorney’s Office. Our
Parent’s Board of Directors has formed a Special Committee
consisting solely of independent directors to oversee this
matter, with the sole authority to direct our Parent’s
response to the allegations that have been raised. The Special
Committee has retained independent legal counsel to advise it.
Our
24
Parent has retained counsel to advise it in connection with the
investigation, and such counsel reports directly to the Special
Committee.
Risks Related to Our Relationship With Our Parent
Our Parent controls the direction of our business. The
concentrated ownership of our common stock and certain corporate
governance arrangements will prevent you and other stockholders
from influencing significant corporate decisions
We have two classes of common stock:
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Class A common stock, which entitles the holder to one vote
per share on all matters submitted to our stockholders; and |
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Class B common stock, which entitles the holder to ten
votes per share on all matters submitted to our stockholders. |
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Following completion of this offering, our Parent will own 100%
of our Class B common stock, which will represent
approximately %
of our outstanding common stock after this offering, or
approximately %
if the underwriters exercise in full their option to purchase
additional shares. These shares collectively will
represent %
of the combined voting power of our outstanding common stock
(or %
if the underwriters exercise their in full option to purchase
additional shares). Given its ownership interest, our Parent
will be able to control the outcome of all matters submitted to
our shareholders for approval, including the election of
directors. Accordingly, either in its capacity as a stockholder
or through its control of our Board of Directors, our Parent
will be able to control all key decisions regarding
our company,
including mergers or other business combinations and
acquisitions, dispositions of assets, future issuances of our
common stock or other securities, the incurrence of debt by us,
the payment of dividends on our common stock (including the
frequency and the amount of dividends that would be payable on
our common stock, a substantial majority of which our parent
owns) and amendments to our
certificate of incorporation and
bylaws. Further, as long as our Parent and its
subsidiaries
(excluding
our company and our
subsidiaries) continue to
beneficially own shares representing at least a majority of the
votes entitled to be cast by the holders of our outstanding
voting stock, it may take actions required to be taken at a
meeting of stockholders without a meeting or a vote and without
prior notice to holders of our Class A common stock. In
addition, our Parent’s controlling interest may discourage
a change of control that the holders of our Class A common
stock may favor. Any of these provisions could be used by our
Parent for its own advantage to the detriment of our other
stockholders and
our company. This in turn may have an adverse
affect on the market price of our Class A common stock.
Provisions in our charter documents and Delaware law may
inhibit a takeover, which could adversely affect the value of
our Class A common stock
Our
certificate of incorporation and
bylaws, as well as Delaware
corporate law, contain provisions that could delay or prevent a
change of control or changes in our management and board of
directors that a holder of our Class A common stock might
consider favorable and may prevent you from receiving a takeover
premium for your shares. These provisions include, for example,
our classified board structure, the disproportionate voting
rights of the Class B common stock (relative to the
Class A common stock) and the authorization of our board of
directors to issue up to 50 million shares of
preferred stock without a stockholder vote. In addition, our
restated
certificate of incorporation provides that after the
time our Parent and its affiliates cease to own, in the
aggregate, a majority of the combined voting power of our
outstanding capital stock stockholders may not act by written
consent and may not call special meetings.
25
These provisions apply even if the offer may be considered
beneficial by some of our stockholders. If a change of control
or change in management is delayed or prevented, the market
price of our Class A common stock could decline.
The interests of our Parent may conflict with the interests
of our other stockholders
We cannot assure you that the interests of our Parent will
coincide with the interests of the other holders of our common
stock. For example, our Parent could cause us to make
acquisitions that increase the amount of our indebtedness or
outstanding shares of common stock or sell revenue-generating
assets. Also, after this offering, our Parent or its directors
and officers, may allocate corporate opportunities to itself or
direct them to other affiliates, which, prior to this offering,
could have been directed to us. So long as our Parent continues
to own shares of our common stock with significant voting power
our Parent will continue to be able to strongly influence or
effectively control our decisions.
Some of our directors, officers and employees may have
potential conflicts of interest as a result of having positions
with, or owning equity interests in, our Parent
Martin J. Wygod, in addition to being Chairman of the Board of
our company, is Chairman of the Board of our Parent. Some of our
other directors, officers and employees may, at the time of or
after our initial public offering, also serve as directors,
officers or employees of our Parent. In addition, some of our
directors, officers and employees own shares of our
Parent’s common stock. Furthermore, because our officers
and employees have participated in our Parent’s equity
compensation plans and because service at
our company will, so
long as we are a majority-owned subsidiary of our Parent,
qualify those persons for continued participation and continued
vesting of equity awards under our Parent’s equity plans,
many of our officers and employees and some of our directors
hold, and may continue to hold, options to purchase our
Parent’s common stock and shares of our Parent’s
restricted stock. The following table lists the number of shares
of our Parent’s common stock and number of options to
purchase our Parent’s common stock owned, as of
June 24, 2005, by our directors, our named executive
officers and all of our directors and executive officers as a
group:
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Common Stock | |
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Common Stock | |
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Wayne T. Gattinella
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29,835 |
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769,700 |
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Chief Executive Officer, President and Director |
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Nan-Kirsten Forte
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22,532 |
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930,557 |
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Executive Vice President — Consumer Services |
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Anthony Vuolo
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64,765 |
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1,945,000 |
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Executive Vice President — Finance and Chief Financial
Officer
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Martin J. Wygod
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8,554,164 |
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3,685,000 |
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Chairman of the Board |
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All of our directors and executive officers as a group |
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8,889,973 |
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9,263,303 |
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The ownership listed above with respect to shares of our
Parent’s common stock includes all shares beneficially
owned by each person listed, as of
June 24, 2005, as
determined under the rules and regulations of the SEC, including
all such shares for which each person listed has voting or
dispositive power, but does not include shares that can be
acquired pursuant to options to purchase common stock. The
ownership listed above with respect to options to purchase our
Parent common stock includes all options held, as of
June 24, 2005, by each person listed, both those that are
exercisable now and those that may become exercisable at some
point in the future.
These arrangements and ownership interests or cash- or
equity-based awards could create, or appear to create, potential
conflicts of interest when directors or officers who own our
Parent’s stock or stock options or who participate in our
Parent’s benefit plans are faced with decisions that could
have different implications for our Parent than they do for us.
We cannot assure you, that the provisions in our amended
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and restated
certificate of incorporation will adequately
address potential conflicts of interest or that potential
conflicts of interest will be resolved in our favor.
We are currently wholly owned by our Parent. Prior to the
completion of this offering, no officer or director of our
Parent has any direct equity or other interest in us. Our
directors and officers will be receiving options to purchase
common stock and/or restricted share grants at the completion of
this offering.
Following this offering, we will no longer receive capital
contributions from our Parent or have access to its assets or
borrowing power. We may not be able to raise additional funds
when needed for our business or to exploit opportunities
To date, our primary sources of financing have been from our
Parent. We will receive all of the net proceeds of this
offering. Following completion of this offering, our Parent will
have no obligation to provide any additional financing to us and
we will no longer have access to the borrowing capacity, cash
flow or assets of our Parent. Our future liquidity and capital
requirements will depend upon numerous factors, some of which
are outside our control, including the future development of the
markets we participate in. We may need to raise additional funds
to support expansion, develop new or enhanced services, respond
to competitive pressures, acquire complementary businesses or
technologies or take advantage of unanticipated opportunities.
If our capital resources are not sufficient to satisfy our
liquidity needs, we may seek to sell additional equity or debt
securities or obtain other debt financing. The sale of
additional equity or convertible debt securities would result in
additional dilution to our stockholders. The sale of debt would
result in increased expenses and could result in covenants that
would restrict our operations. We have not made arrangements to
obtain additional financing. We may not be able to obtain
additional financing, if required, in amounts or on terms
acceptable to us, or at all. As discussed below, we may also be
limited for tax reasons in our ability to sell equity or
convertible debt securities.
Following this offering, we will continue to be dependent on
our Parent to provide us with many key services for our
business
We have not been operated as a stand-alone company. We have been
operated as a wholly owned subsidiary of our Parent, and many
key services required by us for the operation of our business
are currently provided to us by our Parent, which will continue
to provide those services after this offering. We will, as a
result, be dependent on our relationship with our Parent for
these important services for a period following this offering.
Prior to the completion of this offering, we will enter into
agreements with our Parent relating to certain intercompany
transactions between us and our Parent, including, among others,
a services agreement, a registration
rights agreement, a release
and indemnity agreement, a tax sharing agreement and an
intellectual property license agreement. The terms and
provisions of these agreements may be less favorable to us than
terms and provisions that we could have obtained in arm’s
length negotiations with unaffiliated third parties. Under the
services agreement, our Parent will provide us with
administrative services, including services relating to payroll,
accounting, tax planning and compliance, employee benefit plans,
legal matters and information processing. We anticipate that our
services agreement with our Parent will be for a term of up to
five years. We will have the option to terminate these services,
in whole or in part, at any time we choose to do so, generally
by providing, with respect to the specified services or groups
of services, 60 days’ notice and, in some cases,
paying a termination fee of not more than $30,000 to cover the
costs of our Parent relating to the termination. If the services
agreement expires or is not renewed, or if our Parent does not
or is unable to perform its obligations under the services
agreement, we will be required to provide some or all these
services ourselves or to obtain substitute arrangements with
third parties. We may be unable to provide some or all these
services because of financial or other constraints or be unable
to timely implement substitute arrangements on terms that are
favorable to us, or at all, which could have an adverse effect
on our business, financial condition and results of operations.
27
Our prior and continuing relationship with our Parent exposes
us to risks attributable to our Parent’s businesses
We expect to enter into a release and indemnification agreement
with our Parent, to be effective upon completion of this
offering. Under the terms of this agreement, our Parent is
obligated to indemnify us for losses that a party may seek to
impose upon us or our
subsidiaries for liabilities relating to
our Parent’s business that are incurred through a breach of
any agreement to which our Parent is a party, if such losses are
attributable to our Parent or are not otherwise expressly
assumed by us under any such agreement. Immediately following
this offering, any claims made against us that are properly
attributable to our Parent would require us to exercise our
rights under the release and indemnification agreement that we
expect to enter into with our Parent to obtain payment from our
Parent. We are exposed to the risk that, in these circumstances,
our Parent cannot or will not make the required payment. If this
were to occur, our business and financial performance could be
adversely affected.
We may be prevented from issuing stock to raise capital, to
effectuate acquisitions or to provide equity incentives to
members of our management and Board of Directors
Beneficial ownership of at least 80% of the total voting power
and value of our capital stock is required in order for our
Parent to continue to include us in its consolidated group for
federal income tax purposes, and beneficial ownership of at
least 80% of the total voting power of our capital stock and 80%
of each class of any non-voting capital stock that we may issue
is required in order for our Parent to effect a tax-free
split-off, spin-off or other similar transaction. As of the date
of this prospectus, our Parent does not intend or plan to
undertake a split-off or spin-off of our capital stock to our
Parent’s shareholders or to deconsolidate us from our
Parent’s consolidated group. Under the terms of the tax
sharing agreement that we anticipate entering into with our
Parent, however, we have agreed that we will not knowingly take
or fail to take any action that could reasonably be expected to
preclude our Parent’s ability to undertake a tax-free
split-off or spin-off. This may prevent us from issuing
additional equity securities to raise capital, to effectuate
acquisitions or to provide management or director equity
incentives.
If certain transactions occur with respect to our common
stock, we may be unable to utilize our net operating loss
carryforwards and tax credits to reduce our income taxes
As of
December 31, 2004, we had net operating loss
carryforwards of approximately $606.1 million for federal
income tax purposes and federal tax credits of approximately
$1.6 million. If certain changes occur with respect to the
ownership of our capital stock or the ownership of our
Parent’s capital stock, the U.S. Internal Revenue Code may
impose an annual limitation with respect to our ability to
utilize our net operating loss carryforwards and federal tax
credits against any taxable income we achieve in future periods.
As of the date of this prospectus, our Parent has indicated that
it has no current intention to sell or otherwise dispose of its
Class B common stock. However, our Parent is not subject to
any contractual obligation to retain any of its Class B
common stock, except that it has agreed not to sell or otherwise
dispose of any of our common stock for a period of 180 days
after the date of this prospectus without the prior written
consent of the representatives of the underwriters, as described
in
“Underwriting.” Moreover, there can be no assurance
that limitations on the use of our net operating loss
carryforwards and federal tax credits will not occur as a result
of changes in the ownership of our Parent’s capital stock
(which changes may be beyond the control of us and our Parent).
If our Parent has taxable income, a portion of our net
operating loss carryforwards may be utilized to reduce their
taxable income
Due to provisions of the U.S. Internal Revenue Code relating to
the utilization of net operating loss carryforwards, a portion
of our net operating loss carryforwards may be utilized by our
Parent before our Parent can utilize its own net operating loss
carryforwards. However, under the tax sharing agreement, our
Parent is not obligated to reimburse us currently for the tax
savings attributable to the utilization of these net operating
losses. We may become entitled to reimbursement from our Parent
for such tax savings only
28
if we are no longer included in our Parent’s consolidated
group for federal income tax purposes and certain circumstances
are present.
We will be included in our Parent’s consolidated group
for federal income tax purposes and, as a result, may be liable
for any shortfall in our Parent’s federal income tax
payments
For so long as our Parent continues to own 80% of the total
voting power and value of our capital stock, we will be included
in our Parent’s consolidated group for federal income tax
purposes. By virtue of its controlling ownership and the tax
sharing agreement that we anticipate entering into with our
Parent, our Parent will effectively control all our tax
decisions. Moreover, notwithstanding the tax sharing agreement,
federal tax law provides that each member of a consolidated
group is jointly and severally liable for the group’s
entire federal income tax obligation. Thus, to the extent our
Parent or other members of the group fail to make any federal
income tax payments required of them by law, we would be liable
for the shortfall. Similar principles generally apply for state
income tax purposes in many states.
Risks Related to Ownership of the Class A Common Stock
and this Offering
The price of our Class A common stock may be subject to
wide fluctuations and may trade below the initial public
offering price
Before this offering, there has not been a public market for our
Class A common stock. The initial public offering price of
our Class A common stock will be determined by negotiations
between our Parent, us and representatives of the underwriters,
based on numerous factors, including those that we discuss under
“Underwriting.” This price may not be indicative of
the market price of our Class A common stock after this
offering. We cannot assure you that an active public market for
our Class A common stock will develop or be sustained after
this offering. The market price of our common stock also could
be subject to significant fluctuations. As a result, you may not
be able to sell your shares of our Class A common stock
quickly or at prices equal to or greater than the price you paid
in this offering.
Among the factors that could affect our Class A common
stock price are the risks described in this section and other
factors, including:
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quarterly variations in our operating results compared to market
expectations; |
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changes in expectations as to our future financial performance,
including financial estimates or reports by securities analysts; |
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changes in market valuations of similar companies; |
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liquidity and activity in the market for our common stock; |
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sales of our common stock by our Parent or other stockholders; |
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strategic moves by us or our competitors, such as acquisitions
or restructurings; |
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general market conditions; and |
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domestic and international economic, legal and regulatory
factors unrelated to our performance. |
Stock markets in general have experienced extreme volatility
that has often been unrelated to the operating performance of a
particular company. These broad market fluctuations may
adversely affect the trading price of our common stock,
regardless of our operating performance.
29
Sales of substantial amounts of our common stock in the
public markets, including by our Parent, or the perception that
they might occur could reduce the price our Class A common
stock might otherwise obtain and may dilute your voting power
and your ownership interest in us
After the completion of this offering, we will
have outstanding
shares of Class A common stock
( shares
of Class A common stock if the underwriters exercise in
full their option to purchase additional shares). This number is
comprised of all the shares of our Class A common stock
that we are selling in this offering, which may be resold
immediately in the public market.
In addition, our Parent will
own shares
of our Class B common stock. It is anticipated that our
directors, executive officers and our Parent will agree, with
limited exceptions, that we and they will not directly or
indirectly, without the prior written consent of the
underwriters, offer to sell, sell or otherwise dispose of any of
our common stock for a period of 180 days after the date of
this prospectus. Subject to the selling restrictions described
under
“Shares Eligible for Future Sale” and
“Underwriting,” our Parent could, from time to time,
convert its Class B common stock into Class A common
stock on a one-for-one basis and sell any or all of those shares
of Class A common stock. Further, following the
consummation of this offering, pursuant to the terms of a
registration
rights agreement that we expect to enter into with
our Parent, our Parent and its permitted transferees will have
the right to require us to register their common stock under the
Securities Act of 1933, or the Securities Act, for sale into the
public markets. Upon the effectiveness of any such registration
statement, all shares covered by the registration statement will
be freely transferable. Following the consummation of this
offering, we also intend to file a registration statement on
Form S-8 under the Securities Act to register an aggregate
of shares
of Class A common stock reserved for issuance under our
Long-Term Incentive Plan. Subject to the exercise of issued and
outstanding options, shares registered under the registration
statement on Form S-8 will be available for sale into the
public markets after the expiration of the 180-day lock-up
agreements.
We cannot predict what effect, if any, future sales of our
common stock, or the availability of common stock for future
sale, will have on the market price of our Class A common
stock. Sales of substantial amounts of our common stock in the
public market following our initial public offering, or the
perception that such sales could occur, could adversely affect
the market price of our Class A common stock and may make
it more difficult for you to sell your Class A common stock
at a time and price which you deem appropriate. The sale by our
Parent of additional shares of Class A common stock in the
public market, or the perception that such sales might occur,
could reduce the price that our Class A common stock might
otherwise obtain or could impair our ability to obtain capital
through an offering of equity securities.
Our management has broad discretion as to the use of the net
proceeds from this offering and may not use those proceeds in
ways that will enhance the market value of our Class A
common stock
Our management has broad discretion as to the use of the net
proceeds that we will receive from this offering. In the event
management does not apply these funds effectively, your
investment in our common stock may diminish in value.
We do not expect to pay dividends in the foreseeable
future
We currently anticipate that we will retain all of our future
earnings, if any, to fund the operation and expansion of our
business and to use as working capital and for other general
corporate purposes. Our Board of Directors will have sole
discretion to determine the dividend amount, if any, to be paid.
Our Board of Directors will consider a number of factors,
including applicable provisions of Delaware corporate law, our
financial condition, capital requirements, funds generated from
operations, future business prospects, applicable contractual
restrictions and any other factors our Board may deem relevant.
30
Our Parent’s ownership of our Class B common stock
and the provisions of Delaware law and of our charter and
by-laws may discourage a change of control that our stockholders
may favor, which could negatively affect our stock price
Following completion of this offering, our Parent will own 100%
of our Class B common stock, which will represent
approximately %
of our outstanding common stock after this offering, or
approximately %
if the underwriters exercise in full their option to purchase
additional shares. These shares collectively will
represent %
of the combined voting power of our outstanding common stock
(or %
if the underwriters exercise in full their option to purchase
additional shares). Given its ownership interest, our Parent
will be able to control the outcome of all matters submitted to
our stockholders for approval, including the composition of our
Board of Directors, and will be able to prevent a change in
control of
our company that our stockholders may otherwise favor.
Further, provisions in our
certificate of incorporation and
by-laws and in the Delaware General Corporation Law may make it
difficult and expensive for a third party to pursue a tender
offer, change in control or takeover attempt that our management
and Board of Directors oppose. Public stockholders that might
desire to participate in one of these transactions may not have
an opportunity to do so. Such anti-takeover provisions could
substantially impede the ability of public stockholders to
benefit from a change in control or to change our management and
Board of Directors.
Investors purchasing Class A common stock in this
offering will experience immediate and substantial dilution
The assumed initial public offering price of our Class A
common stock is substantially higher than the net tangible book
value per outstanding share of our common stock immediately
after this offering. As a result, you will pay a price per share
that substantially exceeds the book value of our assets after
subtracting our liabilities. Purchasers of our Class A
common stock in this offering will incur immediate and
substantial dilution of
$ per
share in the net tangible book value of our common stock from
the assumed initial public offering price of
$ per
share, which is the mid-point of the estimated range set forth
on the cover of this prospectus. If the underwriters exercise in
full their option to purchase additional shares, there will be
an additional dilution of
$ per
share in the net tangible book value of our common stock,
assuming the same public offering price.
31
FORWARD-LOOKING STATEMENTS
This prospectus 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.
For example, statements concerning projections, predictions,
expectations, estimates or forecasts and statements that
describe our objectives, plans or goals are or may be
forward-looking statements. These forward-looking statements
reflect management’s current expectations concerning future
results and events and generally can be identified by use of
expressions such as “may,” “will,”
“should,” “could,” “would,”
“predict,” “potential,”
“continue,” “expect,”
“anticipate,” “future,” “intend,”
“plan,” “foresee,” “believe,”
“estimate,” and similar expressions, as well as
statements in future tense.
Forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual
results, performance or achievements to be different from any
future results, performance and achievements expressed or
implied by these statements. General economic, business or
regulatory conditions affecting the healthcare, information
technology and Internet industries being less favorable than
expected and the other risks and uncertainties described under
the headings “Risk Factors,” “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations,” “Business” and “Government
Regulation,” could affect our future results, causing those
results to differ materially from those expressed in our
forward-looking statements. In addition, other unknown or
unpredictable factors could also have material adverse effects
on our future results.
The forward-looking statements included in this prospectus are
made only as of the date of this prospectus. We expressly
disclaim any intent or obligation to update any forward-looking
statements to reflect subsequent events or circumstances.
OUR USE OF MARKET AND INDUSTRY DATA
This prospectus contains market and industry data and forecasts
that we obtained from third-party industry publications and
research firms, including Manhattan Research LLC, a leading
Internet marketing research firm. Industry publications and
studies generally state that the information contained therein
has been obtained from sources believed to be reliable, but we
cannot assure you as to the accuracy and completeness of such
information. We have not independently verified any of the
publications or studies prepared by third parties. The
information contained in such publications or studies may prove
to be inaccurate because of the way they were prepared and other
limitations and uncertainties inherent in the data gathering
processes. As a result, you should be aware that market, ranking
and other similar information included in this prospectus, and
estimates and beliefs based on such information, may be
incorrect. Neither we nor the underwriters can guarantee the
accuracy of such information contained in this prospectus.
The following Manhattan Research reports are referenced in the
Prospectus: (1) The 2005 Consumer Technology Adoption
Market Trends Report (the “Consumer Technology
Report”); (2) The New Online Consumer
Segmentation Report, dated July 2004, which was initiated
and paid for by us (the “Consumer Segmentation
Report”); (3) The Taking the Pulse: Physicians and
Emerging Information Technologies Report (the
“Taking the Pulse Report”); and (4) The
Growth of the Internet and Its Increasing Influence on
Consumer and Physician Health Decisions Report, dated July
2003, which was initiated and paid for by us (the
“Growth of the Internet Report”). We refer to
each of the studies initiated by Manhattan Research, without our
participation, as a “subscription study,” since these
studies are available to their clients on a subscription basis.
The Consumer Technology Report was conducted in 2004 and
comprised a telephone survey of online and offline consumers
over a sample size of 4,068, with a margin of error of +/-2.8%.
The Consumer Segmentation Report was conducted in June
and July of 2003 and comprised an online quantitative survey
over a sample size of 411 physicians, with a margin of error of
+/-4.9%, and a sample size of 500 online consumers, with a
margin of error of +/-4.38%. The Taking the Pulse Report
was conducted in 2004 and involved a survey of 1,201 practicing
U.S. physicians, with a margin of error of +/-2.8%. The
Growth of
32
the Internet Report was conducted in June and July of
2003 and involved a telephone study of 1,505 consumers, with a
margin of error of +/-2.5%, and a telephone study of 403
practicing physicians, with a margin of error of +/-4.9%.
OUR USE OF CERTAIN MEASURES OF USAGE OF THE WEBMD HEALTH
NETWORK
In this prospectus, we provide information regarding usage of
The WebMD Health Network that we have calculated using an
internal technology solution that identifies and monitors usage
by individual computers. As used in this prospectus:
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A “unique user” during any calendar month is an
individual computer that accesses a Web site in The WebMD
Health Network during the course of such calendar month.
Accordingly, with respect to such calendar month, once a
“unique user” accesses that Web site in The WebMD
Health Network, the user is included in the total number of
“unique users” for that month. Similarly, with respect
to any calendar month, a computer accessing a specific Web site
in The WebMD Health Network may only be counted once as a
single “unique user” regardless of the number of times
such user accesses that Web site or the number of individuals
who may use such computer. However, if that computer accesses
more than one site within The WebMD Health Network during
a calender month, it will be counted once for each such site. A
computer that does not access any of the Web sites in The
WebMD Health Network during a particular calendar month is
not included in the total number of “unique users” for
that calendar month, even if such computer has in the past
accessed one or more of these Web sites. |
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A “page view” is the Web page that is sent to the
browser of a computer user upon a single request made by such
user and received by a server in The WebMD Health Network. |
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With respect to any given time period, “aggregate page
views” are the total number of “page views”
during such time period on all of the Web sites in The WebMD
Health Network. “Aggregate page views” do not
include page views from our private portals. |
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33
USE OF PROCEEDS
The net proceeds from the sale of the shares of the Class A
common stock offered by us will be approximately
$ million,
based on an estimated initial public offering price of
$ per
share (the mid-point of the range set forth on the cover page of
this prospectus), after deducting the underwriting discounts and
commissions and estimated offering expenses payable by us.
The primary purposes of the offering are to create a public
market for our common stock and to obtain additional capital. We
will be retaining all of the net proceeds of the offering and
expect to use those proceeds for working capital and general
corporate purposes, including capital expenditures and
acquisitions. We have no present commitments with respect to any
future acquisitions. Management will have broad discretion as to
the use of the net proceeds from this offering.
The amounts actually expended for each purpose and the timing of
such expenditures will depend on a number of factors, including
our realization of the different elements of our growth strategy
and the amount of cash generated by our operations. Pending
their use, the proceeds of the offering will be invested in
interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid dividends on our common stock.
Following consummation of this offering, we do not intend to pay
any cash dividends on our common stock in the foreseeable
future. Instead, we currently anticipate that we will retain all
of our future earnings, if any, to fund the operation and
expansion of our business and to use as working capital and for
other general corporate purposes. Our Board of Directors will
have sole discretion to determine whether to pay dividends in
the future based on conditions then existing, including our
earnings, financial condition and capital requirements, the
availability of third-party financing and any economic and other
conditions that our Board of Directors may deem relevant.
Pursuant to our
certificate of incorporation, holders of our
Class A common stock and Class B common stock will
share equally on a per share basis in any dividend declared on
our common stock by our Board of Directors. See
“Description of Capital Stock — Dividend
Rights.”
34
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
our capitalization as of
March 31, 2005:
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on an actual basis; |
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on an “as adjusted” basis to give effect to
(1) the sale of the shares of our Class A common stock
in this offering and the receipt of the estimated net proceeds
after deducting underwriting discounts and commissions and
estimated offering expenses, (2) the reclassification of
Owner’s net investment to Stockholder’s equity,
reflecting the contribution to capital of net amounts due to our
Parent and (3) the conversion of our outstanding shares of
common stock into shares of our Class B common stock. |
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You should read this table together with the “Use of
Proceeds,” “Management’s Discussion and Analysis
of Financial Condition and Results of Operations,”
“Description of Capital Stock,” our combined
consolidated financial statements, our pro forma financial
statements and the individual financial statements of certain
acquired businesses, along with the notes thereto, included
elsewhere in this prospectus. All amounts in the following table
are in thousands, except per share data.
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As of March 31, 2005 |
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Actual | |
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As Adjusted |
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(unaudited) |
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Cash and cash equivalents
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$ |
3,840 |
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$ |
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Stockholders’ equity(1):
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Preferred stock, 50,000 shares authorized (actual and as
adjusted); no shares issued and outstanding (actual and as
adjusted)
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— |
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— |
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Class A common stock, $.01 par value per share,
500,000 shares authorized (actual and as
adjusted); shares
issued and outstanding
(actual); shares
issued and outstanding (as adjusted)
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Class B common stock, $.01 par value per share,
150,000 shares authorized (actual and as
adjusted); shares
issued and outstanding
(actual); shares
issued and outstanding (as adjusted)
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Additional paid-in capital
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Accumulated deficit
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Owner’s net investment
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124,839 |
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Total stockholders’ equity
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124,839 |
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Total capitalization
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$ |
124,839 |
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$ |
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Excludes shares
of our Class A common stock reserved for grants under our
incentive compensation plans. Following this offering, we expect
to make initial grants in respect
of shares of our
Class A common stock, of
which will
be in the form of options to purchase shares of our Class A
common stock with an exercise price equal to the initial public
offering price per share,
and will
be in the form of restricted Class A common stock. |
35
DILUTION
If you invest in our Class A common stock, your interest
will be diluted to the extent of the difference between the
initial public offering price per share of our Class A
common stock and the pro forma net tangible book value per share
of our common stock after the offering. Dilution results from
the fact that the per share offering price of the common stock
is substantially in excess of the net tangible book value per
share attributable to the existing sole stockholder for the
currently outstanding stock.
Our pro forma net tangible book value at
March 31, 2005,
after giving effect to our formation as a Delaware corporation
and assuming that our Parent converted all outstanding shares of
our Class B common stock
into shares
of Class A common stock, was
$ million,
or
$ per
share of common stock. Pro forma net tangible book value per
share represents the amount of total tangible assets less total
liabilities, divided by the number of shares of Class A
common stock outstanding.
After giving effect to our sale
of shares
of our Class A common stock offered by this prospectus at
an estimated initial public offering price of
$ per
share (the mid-point of the range set forth on the cover of this
prospectus) and after deducting the underwriting discounts and
commissions and estimated offering expenses payable by us, our
pro forma net tangible book value as of
March 31, 2005,
after giving effect to our formation as a Delaware corporation
and assuming that our Parent converted all outstanding shares of
our Class B common stock
into shares
of Class A common stock, would have been
$ million,
or
$ per
share of Class A common stock. This represents an immediate
increase in pro forma net tangible book value of
$ per
share to our Parent, currently our sole stockholder, and an
immediate dilution of
$ per
share to new investors purchasing the Class A common stock
in this offering. The following table illustrates this per share
dilution:
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Assumed initial public offering price per share of Class A
common stock
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$ |
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Pro forma net tangible book value per share of Class A
common stock at March 31, 2005 |
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Increase in pro forma net tangible book value per share of
Class A common attributable to new investors purchasing
Class A common stock in this offering
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Pro forma net tangible book value per share of common stock
after this offering
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Pro forma dilution per share of common stock to new investors(1)
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$ |
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If the underwriters’ option to purchase additional shares
is exercised in full, the dilution per share to new investors
will be
$ per share. |
The following table summarizes, on a pro forma basis as of
March 31, 2005, the differences between our Parent
(currently our sole stockholder) and new investors with respect
to the number of shares of Class A common stock purchased
from us, the total consideration paid and the average price per
share paid before deducting the underwriting discounts and
commissions and our estimated offering expenses, assuming an
initial public offering price of
$ per
share and assuming that our Parent converted all outstanding
shares of our Class B common stock
into shares
of Class A common stock as of the date of this offering.
| |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Total | |
|
|
| |
|
Shares Purchased | |
|
Consideration | |
|
Average | |
| |
|
| |
|
| |
|
Price per | |
| |
|
Number | |
|
Percent | |
|
Amount | |
|
Percent | |
|
Share | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands, except per share amount) | |
|
Our Parent
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
Investors purchasing common stock in the offering
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
|
|
|
|
|
100% |
|
|
$ |
|
|
|
|
100% |
|
|
|
|
|
36
SELECTED COMBINED CONSOLIDATED FINANCIAL INFORMATION
We present below our selected combined consolidated financial
data. The selected combined consolidated statement of operations
for each of the years in the three-year period ended
December 31, 2004 and the selected combined consolidated
balance sheet data as of
December 31, 2003 and
2004 have
been derived from the audited financial statements of WebMD
Health Holdings, Inc. included elsewhere in this prospectus. The
selected historical combined consolidated statement of
operations data for the year ended
December 31, 2001 and
the combined consolidated balance sheet data as of
December 31, 2001 and
2002 have been derived from our
unaudited combined consolidated financial statements that are
not included in this prospectus. The combined consolidated
statement of operations data for the three months ended
March 31, 2005 and
2004 and the combined consolidated
balance sheet data as of
March 31, 2005 have been derived
from our unaudited combined consolidated financial statements
included elsewhere in this prospectus. Our unaudited financial
information was prepared on a basis consistent with that used in
preparing our audited combined consolidated financial statements
and includes all adjustments, consisting of normal and recurring
items, that we consider necessary for a fair presentation of the
financial position and results of operations for the unaudited
periods.
Our Parent managed its operations as a single business segment
from its inception in 1995 until 2001 when, as a result of a
restructuring plan, it segregated its business into multiple
segments. As a result of this restructuring plan, as of
January 1, 2001, our operations were identified and managed
as a separate segment of our Parent. The Internet operations
that were unrelated to our Parent’s other segments were
identified and established as the WebMD Health segment, which
now comprises
our company. Our combined consolidated results of
operations and balance sheet data as of and for the year ended
December 31, 2000 are not available without unreasonable
effort and expense. It is impracticable to identify our results
of operations for
our company for periods prior to 2001 because
our business was commingled with other operations of our Parent.
We do not believe that comparisons to financial data for the
year ended
December 31, 2000 will have a material impact on
the ability to understand the financial results and condition
and related trends, because of the significant changes in our
business since 2000, including our 2001 restructuring and
related charges and the number of acquisitions in 2002, 2003,
2004 and the first quarter of 2005.
You should read the following selected combined consolidated
financial data in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations,” the combined consolidated financial statements
and notes thereto and the unaudited pro forma financial
statements and related notes, all included elsewhere in this
prospectus.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Three Months Ended | |
| |
|
Years Ended December 31, | |
|
March 31, | |
| |
|
| |
|
| |
| |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in thousands, except share and per share data) | |
|
Combined Consolidated Statements of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
74,626 |
|
|
$ |
84,203 |
|
|
$ |
110,152 |
|
|
$ |
134,148 |
|
|
$ |
26,266 |
|
|
$ |
33,761 |
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cost of operations
|
|
|
76,082 |
|
|
|
47,888 |
|
|
|
46,998 |
|
|
|
52,377 |
|
|
|
11,207 |
|
|
|
14,895 |
|
| |
Sales and marketing
|
|
|
85,207 |
|
|
|
49,033 |
|
|
|
47,917 |
|
|
|
49,315 |
|
|
|
11,585 |
|
|
|
10,988 |
|
| |
General and administrative
|
|
|
28,332 |
|
|
|
15,690 |
|
|
|
18,016 |
|
|
|
20,165 |
|
|
|
4,979 |
|
|
|
6,540 |
|
| |
Depreciation and amortization
|
|
|
883,923 |
|
|
|
2,486 |
|
|
|
4,463 |
|
|
|
5,620 |
|
|
|
1,204 |
|
|
|
2,233 |
|
| |
Impairment of long-lived and other assets
|
|
|
1,415,888 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Restructuring and integration charge (benefit)
|
|
|
114,918 |
|
|
|
(5,850 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Other income
|
|
|
— |
|
|
|
(823 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax provision
|
|
|
(2,529,724 |
) |
|
|
(24,221 |
) |
|
|
(7,242 |
) |
|
|
6,671 |
|
|
|
(2,709 |
) |
|
|
(895 |
) |
| |
Income tax provision
|
|
|
104 |
|
|
|
140 |
|
|
|
183 |
|
|
|
210 |
|
|
|
44 |
|
|
|
61 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(2,529,828 |
) |
|
$ |
(24,361 |
) |
|
$ |
(7,425 |
) |
|
$ |
6,461 |
|
|
$ |
(2,753 |
) |
|
$ |
(956 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma income (loss) per common share — basic and
diluted(1)
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma weighted-average common shares outstanding —
basic and diluted(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of December 31, | |
|
As of | |
| |
|
| |
|
March 31, | |
| |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in thousands) | |
|
Combined Consolidated Balance Sheets Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
520 |
|
|
$ |
149 |
|
|
$ |
358 |
|
|
$ |
3,456 |
|
|
$ |
3,840 |
|
|
Working capital (deficit)
|
|
|
(3,642 |
) |
|
|
(547 |
) |
|
|
3,384 |
|
|
|
9,119 |
|
|
|
2,665 |
|
|
Total assets
|
|
|
132,522 |
|
|
|
127,529 |
|
|
|
120,630 |
|
|
|
146,496 |
|
|
|
173,274 |
|
|
Owner’s net investment
|
|
|
92,045 |
|
|
|
86,426 |
|
|
|
85,527 |
|
|
|
100,737 |
|
|
|
124,839 |
|
|
|
| (1) |
The computation of pro forma basic and diluted income (loss) per
share is based on an
anticipated shares
outstanding upon the completion of this offering. |
38
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This management’s discussion and analysis of financial
condition and results of operations contains forward-looking
statements that involve risks and uncertainties. Please see
“Forward-Looking Statements” for a discussion of the
uncertainties, risks and assumptions associated with these
statements. The results of operations for the periods reflected
herein are not necessarily indicative of results that may be
expected for future periods, and our actual results may differ
materially from those discussed in the forward-looking
statements as a result of various factors, including but not
limited to those listed under “Risk Factors” and
included elsewhere in this prospectus. In this management’s
discussion and analysis of financial condition and results of
operations, or MD&A, dollar amounts are in thousands.
Overview
MD&A is a supplement to our combined consolidated financial
statements and notes thereto included elsewhere in this
prospectus to provide an understanding of our results of
operations and financial condition. Our MD&A is organized as
follows:
|
|
|
|
|
| |
• |
Introduction. This section provides a general description
of our company and operating segments, key trends affecting
demand for our online services, a description of the basis of
presentation of our financial statements, a summary of the
acquisitions we completed during the current year and the last
three years, and a discussion of how seasonal factors may impact
the timing of our revenue. |
|
|
| |
|
|
| |
• |
Critical Accounting Policies and Estimates. This section
discusses those accounting policies that both are considered
important to our financial condition and results of operations,
and require us to exercise subjective or complex judgments in
their application. In addition, all of our significant
accounting policies, including our critical accounting policies,
are summarized in Note 2 to the combined consolidated
financial statements included in this prospectus. |
|
|
| |
|
|
| |
• |
Transactions with Our Parent. This section describes the
services that we receive from our Parent and the costs of these
services, as well as the fees we charge our Parent for
advertising services. |
|
|
| |
|
|
| |
• |
Results of Operations and Results of Operations by Operating
Segment. These sections provide our analysis and outlook for
the significant line items on our combined consolidated
statements of operations, on both a company-wide and a
segment-by-segment basis. |
|
|
| |
| |
• |
Liquidity and Capital Resources. This section provides an
analysis of our liquidity and cash flows, as well as a
discussion of our commitments that existed as of
December 31, 2004. |
| |
|
|
| |
• |
Recent Accounting Pronouncements. This section provides a
summary of the most recent authoritative accounting standards
and guidance that have either been recently adopted by our
company or may be adopted in the future. |
|
|
Introduction
We are a leading provider of health information services to
consumers, physicians and healthcare professionals. We have
aligned our business into two operating segments as follows:
|
|
|
| |
• |
Online Services. We provide both public and private
online portals. Our public portals generate revenue primarily
through the sale of advertising and sponsorship products,
including CME services. Our sponsors and advertisers include
pharmaceutical, biotechnology, medical device and consumer
products companies. Our private portals for employers and health
plans provide information and services that enable their
employees and members to make more informed benefit, provider
and treatment decisions. We generate revenue from private
portals through the licensing of our private portals to
employers and health plans. We also distribute our online
content and services to other |
39
|
|
|
| |
|
entities and generate revenue from these arrangements through
the sale of advertising and sponsorship products and content
syndication fees. |
| |
|
|
| |
• |
Publishing Services. We publish: ACP Medicine and
ACS Surgery: Principles of Practice, our medical
reference textbooks; The Little Blue Book, a physician
directory; and WebMD the Magazine, a consumer publication
launched in early 2005 that we distribute free of charge to
physician office waiting rooms. We generate revenue from sales
of subscriptions to our medical reference publications, from
sales of The Little Blue Book directories and from
advertisements in those directories, as well as from sales of
advertisements in WebMD the Magazine. Our Publishing
Services segment is a complementary business to our Online
Services and extends the reach of our brand and our influence
with health-involved consumers and clinically-active physicians. |
|
|
|
|
|
Key Trends Affecting Demand for Our Online Services |
Demand for our online services is affected by the continuing
evolution of the Internet and by trends affecting the healthcare
industry, including changes in healthcare regulation. The key
trends that are affecting that demand and, as a result are
influencing our current strategies are:
|
|
|
|
|
| |
• |
Consumers, Physicians and Healthcare Professionals Are
Increasingly Turning to the Internet. The Internet is
transforming the way health and medical information is accessed
by consumers, physicians and healthcare professionals. Over the
past several years, usage of our online services by consumers,
physicians and healthcare professionals has grown significantly.
The monthly average number of unique users for The WebMD
Health Network was 17.1 million in 2002,
20.4 million in 2003, 21.8 million in 2004 and
23.8 million in the first quarter of 2005. These users
generated aggregate page views of 1.3 billion in 2002,
1.7 billion in 2003, 2.0 billion in 2004 and
588 million in the first quarter of 2005. While we cannot
provide assurance that usage will grow as quickly as it has
during the past several years, we intend to continue to provide
high quality and timely content and interactive services and to
continue to increase awareness of our brand. |
|
|
| |
| |
• |
Increased Online Marketing and Education Spending for
Healthcare Products. Pharmaceutical, biotechnology and
medical device companies spend large amounts each year marketing
their products and educating consumers and physicians about
them, only a small portion of which is currently spent for
online services. We believe that these companies are becoming
increasingly aware of the effectiveness of the Internet relative
to traditional media in providing appropriate health and
clinical information to inform consumers and physicians about
their products. We believe the increasing awareness of the value
of the Internet is likely to result in continued increases in
demand for our services from those advertisers and sponsors. |
| |
|
|
| |
• |
Continued Rapid Increases in Healthcare Costs. In
response to rising healthcare costs, employers and health plans
have been changing benefit plan designs to increase consumer
out-of-pocket costs and have taken other steps to motivate their
members and employees to evaluate their healthcare decisions
more carefully in order to be more cost effective. This has led
employers and health plans to enhance wellness programs and to
take steps to provide healthcare information and education to
employees and members, including through the use of online
services of the types we provide through our private portals. We
expect the efforts to control healthcare costs to continue and
to create opportunities for additional revenue from providing
existing and new products and services through our private
portals and our public portals. |
|
|
In addition, there are other trends that we believe may become
more important over the next several years, including the
increasing focus at various levels of government on the
potential benefits of increased use of healthcare information
technology and related services.
Our Parent managed its operations as a single segment from its
inception in 1995 until 2001 when, as a result of a
restructuring plan, it segregated its business into multiple
segments. As a result of this
40
restructuring plan, as of
January 1, 2001, our operations
were identified and managed as a separate segment of our Parent.
The Internet operations that were unrelated to our Parent’s
other segments were identified and established as its WebMD
Health business segment (then known as Portal Services), which
now comprises
our company.
Our combined consolidated financial statements have been derived
from the consolidated financial statements and accounting
records of our Parent, principally representing the WebMD Health
segment, using the historical results of operations, and
historical basis of assets and liabilities of the WebMD Health
related businesses. Management believes the assumptions
underlying the combined consolidated financial statements are
reasonable. However, the combined consolidated financial
statements included herein may not necessarily reflect our
results of operations, financial position and cash flows in the
future or what our results of operations, financial position and
cash flows would have been had we been a stand-alone company
during the periods presented.
On
March 14, 2005, we acquired HealthShare Technology,
Inc., which provides online tools that compare cost and quality
measures of hospitals for use by consumers, providers and health
plans. We acquired HealthShare for a total purchase
consideration of approximately $29,783, comprised of $29,533 in
cash, net of cash acquired and $250 of estimated acquisition
costs. In connection with the preliminary allocation of the
purchase price and intangible asset valuation, we recorded
goodwill of $23,141 and an intangible asset of $10,000 related
to content, with an estimated useful life of three years. In
addition, we have agreed to pay up to an additional $5,000
during the three months ending
March 31, 2006 if
HealthShare reaches certain revenue thresholds for the calendar
year 2005. The results of operations of HealthShare are included
in our Online Services segment beginning
March 14, 2005,
the closing date of the acquisition.
In 2004, we acquired two companies, MedicineNet, Inc. and
RxList, LLC, which we refer to as the 2004 Acquisitions.
On
December 24, 2004, we acquired MedicineNet, a health
information site for consumers, for a total purchase
consideration of approximately $17,034, comprised of $16,394 in
cash, net of cash acquired, $338 to be paid during 2005 and $302
of estimated acquisition costs. In connection with the
preliminary allocation of the purchase price and intangible
asset valuation, we recorded goodwill of $8,929 and intangible
assets of $7,200 related to content, customer relationships and
acquired technology, with estimated useful lives ranging from
two to three years. In addition, we have agreed to pay up to an
additional $15,000 during the three months ending
March 31,
2006, if the number of page views on MedicineNet’s Web
sites exceeds certain thresholds during the calendar year 2005.
The results of operations of MedicineNet are included in our
Online Services segment.
On
October 1, 2004, we acquired RxList, a privately held
operator of an online drug directory, for a total purchase
consideration of approximately $5,455, comprised of $4,500 in
cash, $500 to be paid during 2006 and $455 of estimated
acquisition costs. In connection with the preliminary allocation
of the purchase price and intangible asset valuation, we
recorded goodwill of $4,420 and an intangible asset of $1,054
related to content, with an estimated useful life of five years.
In addition, we have agreed to pay up to an additional $2,500
during each of the three month periods ending
March 31,
2006 and
2007, if the number of page views on RxList’s Web
sites exceeds certain thresholds during each of the three month
periods ending
December 31, 2005 and
2006, respectively.
The results of operations of RxList are included in our Online
Services segment.
In 2003, we acquired the companies that comprise The Little
Blue Book and we acquired the assets of Optate, Inc., which
we refer to as the 2003 Acquisitions.
On
May 29, 2003, we acquired
The Little Blue Book, a
company that maintains a database containing physician practice
information and publishes a pocket-sized reference book
containing physician practice and contact information, for a
total purchase consideration of approximately $10,061, comprised
of $9,926 in cash, net of cash acquired and $135 of acquisition
costs. In connection with the initial allocation of the
41
purchase price, we recorded goodwill of $8,545 and intangible
assets of $2,815 related to trade name, customer relationships
and acquired technology, with estimated useful lives of three to
seven years. In addition, we paid an additional purchase price
of $1,500 and $1,000 in April 2004 and 2005, respectively, as a
result of achieving certain financial milestones during 2003 and
2004, with such payments being recorded as increases to
goodwill. The results of operations of The Little Blue
Book are included in our Publishing Services segment.
On
April 30, 2003, we acquired the assets of Optate, a
provider of online healthcare benefit decision-support tools and
solutions to its clients through online technology, for a total
purchase consideration of approximately $4,052, comprised of
$4,000 in cash and $52 of acquisition costs. In connection with
the initial allocation of the purchase price, we recorded
goodwill of $4,070 and an intangible asset of $710 related to
customer relationships, with an estimated useful life of five
years. The results of operations of Optate are included in our
Online Services segment.
On
October 31, 2002, we acquired WellMed, a provider of
online healthcare decision-support and health management tools
for use by consumers, for a total purchase consideration of
approximately $19,013, comprised of $18,763 in cash, net of cash
acquired and $250 of acquisition costs. We refer to this as the
2002 Acquisition. In connection with the allocation of the
purchase price, we recorded goodwill of $18,380 and an
intangible asset of $2,700 related to acquired unpatented
technology, with an estimated useful life of three years. The
results of operations of WellMed are included in our Online
Services segment.
The timing of our revenues is affected by seasonal factors.
Advertising and sponsorship revenues within our Online Services
segment are seasonal, primarily as a result of the annual budget
approval process of the advertising and sponsorship clients of
our public portals. This portion of our revenues is usually the
lowest in the first quarter of each calendar year, and increases
during each consecutive quarter throughout the year. Our private
portal licensing revenues are historically highest in the second
half of the year as new customers are typically added during
this period in conjunction with their annual open enrollment
periods for employee benefits. Finally, the annual distribution
cycle within our Publishing Services segment results in
approximately two thirds of our revenue in this segment being
recognized in the second and third quarter of each calendar
year. The timing of revenues in relation to our expenses, much
of which does not vary directly with revenue, has an impact on
cost of operations, sales and marketing and general and
administrative expenses as a percentage of revenue in each
calendar quarter during the year.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and
results of operations are based upon our combined consolidated
financial statements and notes to combined consolidated
financial statements, which were prepared in conformity with
U.S. generally accepted accounting principles. The
preparation of the combined consolidated financial statements
requires us to make estimates and assumptions that affect the
amounts reported in the combined consolidated financial
statements and accompanying notes. We base our estimates on
historical experience, current business factors, and various
other assumptions that we believe are necessary to form a basis
for making judgments about the carrying values of assets and
liabilities and disclosure of contingent assets and liabilities.
We are subject to uncertainties such as the impact of future
events, economic, environmental and political factors, and
changes in our business environment; therefore, actual results
could differ from these estimates. Accordingly, the accounting
estimates used in preparation of our financial statements will
change as new events occur, as more experience is acquired, as
additional information is obtained and as our operating
environment changes. Changes in estimates are made when
circumstances warrant. Such changes in estimates and refinements
in estimation methodologies are reflected in reported results of
operations; if material, the effects of changes in estimates are
disclosed in the notes to our combined consolidated financial
statements.
42
We evaluate our estimates on an ongoing basis, including those
related to revenue recognition, the allowance for doubtful
accounts, the carrying value of prepaid advertising, the
carrying value of long-lived assets (including goodwill and
intangible assets), the amortization period of long-lived assets
(other than goodwill), the carrying value, capitalization and
amortization of software development costs, the provision for
income taxes and related deferred tax accounts, certain accrued
expenses and contingencies, transactions with Parent and the
value attributed to warrants issued for services.
We believe the following reflects our critical accounting
policies and our more significant judgments and estimates used
in the preparation of our combined consolidated financial
statements:
|
|
|
|
|
| |
• |
Revenue Recognition. Revenues from advertising are
recognized as advertisements are delivered or as publications
are distributed. Revenues from sponsorship arrangements, content
syndication and distribution arrangements and licenses of our
healthcare management tools and private online portals are
recognized ratably over the term of the applicable agreement.
Revenue from the sponsorship of CME is recognized over the
period we deliver the minimum number of CME credit hours
required by the applicable agreements. Subscription revenue is
recognized over the subscription period. When contractual
arrangements contain multiple elements, revenue is allocated to
the elements based on their relative fair values, determined
using prices charged when elements are sold separately. |
|
|
| |
|
|
| |
• |
Long-Lived Assets. Our long-lived assets consist of
property and equipment, goodwill and other intangible assets.
Goodwill and other intangible assets arise from the acquisitions
we have made. The amount assigned to intangible assets is
subjective and based on our estimates of the future benefit of
the intangible assets using accepted valuation techniques, such
as discounted cash flow and replacement cost models. Our
long-lived assets, other than goodwill, are amortized over their
estimated useful lives, which we determined based on the
consideration of several factors including the period of time
the asset is expected to remain in service. We evaluate the
carrying value and remaining useful lives of long-lived assets,
other than goodwill, whenever indicators of impairment are
present. We evaluate the carrying value of goodwill annually,
and whenever indicators of impairment are present. We use a
discounted cash flow approach to determine the fair value of
goodwill. There was no impairment of goodwill noted as a result
of our impairment testing in 2002, 2003 or 2004. |
|
|
| |
|
|
| |
• |
Deferred Tax Assets. Our deferred tax assets are
comprised primarily of net operating loss carryforwards. At
December 31, 2004, we had net operating loss carryforwards
of approximately $607,000. Subject to certain limitations, these
loss carryforwards may be used to offset taxable income in
future periods, reducing the amount of taxes we might otherwise
be required to pay. Due to a lack of a history of generating
taxable income, we record a valuation allowance equal to 100% of
our net deferred tax assets. In the event that we are able to
generate taxable earnings in the future and determine it is more
likely than not that we can realize our deferred tax assets, an
adjustment to the valuation allowance would be made which may
increase income in the period that such determination is made,
and may decrease income in subsequent periods. |
|
|
| |
|
|
| |
• |
Transactions with Our Parent. As discussed further below,
our expenses reflect a services fee for costs related to
corporate services provided by our Parent. Our expenses also
reflect healthcare expenses related to the cost of our
Parent’s healthcare plans and stock compensation expense
related to restricted stock awards and other stock compensation.
Our sales and marketing expense reflects an allocation to our
Parent for the utilization by it of advertising services
available to us from News Corporation. We and our Parent
consider the services fee, healthcare expenses and stock
compensation, as well as the allocation of advertising services
to our Parent, to be a reasonable estimate of the utilization of
the services. |
|
|
Transactions with Our Parent
Our expenses reflect a services fee for costs related to
corporate services provided by our Parent for accounting, tax,
treasury, legal, human resources, certain information technology
functions and other services. Costs allocated include
compensation related costs, insurance and audit fees, leased
property,
43
facilities costs, professional fees, software maintenance and
telecommunication costs. The services fee is based on our
Parent’s incurred costs of such services utilized by us.
A portion of the services fee is comprised of costs identified
for dedicated employees managed centrally by our Parent’s
corporate management for certain of its functions across all of
its segments. The portion of the fee charged for dedicated
employees includes a charge for their salaries, plus an overhead
charge for these employees calculated based on a pro rata
portion of their salaries to total salaries within the function.
Prior to completion of the offering, some of the dedicated
employees that have been centrally managed by our Parent are
expected to be transferred to us and the services fee will be
reduced and our expenses will be increased as a result of the
transfer. The other portion of the services fee is also
comprised of an estimate of the cost of shared services utilized
by us calculated primarily based on an allocation of total
employees of both us and our Parent or other reasonable measures
of allocation.
Our expenses also reflect healthcare expenses related to the
cost of our Parent’s healthcare plans and stock
compensation expense related to restricted stock awards and
other stock compensation. Our sales and marketing expense
reflects an allocation to our Parent for the utilization by our
Parent of advertising services available to us from News
Corporation. We and our Parent consider the types of costs
considered as well as the allocation methodology of the services
fee, healthcare expenses, stock compensation, and the allocation
of advertising services to our Parent, to be a reasonable
estimate of the utilization of the services. Our cost and
benefit received as a stand-alone company would likely be
different than the amounts reflected in the combined
consolidated statements of operations. The costs we would incur
as a standalone entity would be higher due to our inability to
duplicate the efficiencies achieved by our Parent as a result of
its ability to provide certain of these services at greater
volumes in a shared service model across all of its business
segments.
The above costs and allocation methodology will be used as a
basis for determining the service fee under the services
agreement that we expect to enter into with our Parent, prior to
the completion of this offering. It is our Parent’s
intention that, under the services agreement, our Parent will
receive an amount that reasonably approximates its cost of
providing services to us. Our Parent has agreed to make the
services available to us for up to 5 years. However, we
will not be required, under the services agreement, to continue
to obtain services from our Parent. In the event we wish to
receive those services from a third party or provide them
internally, we will have the option to terminate services, in
whole or in part, at any time we choose to do so, generally by
providing, with respect to the specified services or groups of
services, 60 days’ notice and, in some cases, paying a
termination fee not to exceed $30, to cover costs of our Parent
relating to the termination.
We also expect to enter into several agreements pursuant to
which our Parent or one or more of its
subsidiaries will be a
customer for some of our services, including our private portal
services. The terms of these agreements will be determined by
our Parent and are expected to be substantially similar to
agreements we have or could have with third parties with respect
to those services.
The combined consolidated statements of operations include
expense allocations for the following:
|
|
|
| |
• |
Advertising Expense. Our Parent utilizes the advertising
services available to us from News Corporation which are
included in prepaid advertising within the accompanying combined
consolidated balance sheets. We allocate costs to our Parent
related to the utilization of this asset by our Parent. This
charge includes a proportional allocation based on the number of
our Parent’s operating segments identified in each
advertisement and an allocation of cost to our Parent relating
to promotion of the WebMD brand. Our portion of the advertising
services utilized is reflected in sales and marketing expense
and is reported net of what is charged to our Parent. |
44
|
|
|
|
|
| |
• |
Corporate Services. We are charged a services fee for
costs related to corporate services provided by our Parent.
These amounts are reflected in general and administrative
expenses within the accompanying combined consolidated
statements of operations. |
|
|
| |
|
|
| |
• |
Healthcare Expense. We are charged for healthcare expense
for our employees’ participation in our Parent’s
healthcare plans. Healthcare expense is charged based on the
number of total employees of our company and reflects our
Parent’s average cost of these benefits per employee.
Healthcare expense is reflected in the accompanying combined
consolidated statements of operations in the same expense
caption as the related salary costs of those employees. |
|
|
| |
|
|
| |
• |
Stock Compensation Expense. Stock compensation expense is
related to restricted stock awards in our Parent’s common
stock that have been granted to certain of our employees and
stock options assumed or issued in connection with certain
acquisitions with exercise prices less than the fair market
value of our Parent’s common stock on the date of grant.
Stock compensation expenses are allocated on a specific employee
identification basis. Stock compensation is reflected in the
accompanying combined consolidated statements of operations in
the same expense caption as the related salary costs of those
employees. We expect that stock compensation expense allocated
to us by our Parent will increase significantly when we and our
Parent adopt the new share-based payment expensing rules under
SFAS 123R. |
|
|
|
|
| |
The following table summarizes the expense allocations reflected
in our combined consolidated financial statements: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Three Months | |
| |
|
Years Ended December 31, | |
|
Ended March 31, | |
| |
|
| |
|
| |
| |
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Advertising expense
|
|
$ |
5,550 |
|
|
$ |
7,807 |
|
|
$ |
4,702 |
|
|
$ |
1,287 |
|
|
$ |
875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Corporate services — specific identification
|
|
|
3,331 |
|
|
|
3,377 |
|
|
|
3,618 |
|
|
|
760 |
|
|
|
792 |
|
| |
Corporate services — shared service allocation
|
|
|
3,089 |
|
|
|
2,882 |
|
|
|
2,973 |
|
|
|
691 |
|
|
|
829 |
|
| |
Healthcare expense
|
|
|
1,548 |
|
|
|
1,743 |
|
|
|
2,357 |
|
|
|
553 |
|
|
|
759 |
|
| |
Stock compensation expense
|
|
|
2,665 |
|
|
|
1,597 |
|
|
|
1,749 |
|
|
|
279 |
|
|
|
483 |
|
45
Results of Operations
The following table sets forth our combined consolidated
statements of operations data and expresses that data as a
percentage of revenue for the periods presented (amounts in
thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
|
Three Months Ended March 31, | |
| |
|
| |
|
| |
| |
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited) | |
|
Revenue
|
|
$ |
84,203 |
|
|
|
100.0 |
% |
|
$ |
110,152 |
|
|
|
100.0 |
% |
|
$ |
134,148 |
|
|
|
100.0 |
% |
|
$ |
26,266 |
|
|
|
100.0 |
% |
|
$ |
33,761 |
|
|
|
100.0 |
% |
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cost of operations
|
|
|
47,888 |
|
|
|
56.9 |
|
|
|
46,998 |
|
|
|
42.7 |
|
|
|
52,377 |
|
|
|
39.0 |
|
|
|
11,207 |
|
|
|
42.7 |
|
|
|
14,895 |
|
|
|
44.1 |
|
| |
Sales and marketing
|
|
|
49,033 |
|
|
|
58.2 |
|
|
|
47,917 |
|
|
|
43.5 |
|
|
|
49,315 |
|
|
|
36.8 |
|
|
|
11,585 |
|
|
|
44.1 |
|
|
|
10,988 |
|
|
|
32.6 |
|
| |
General and administrative
|
|
|
15,690 |
|
|
|
18.6 |
|
|
|
18,016 |
|
|
|
16.4 |
|
|
|
20,165 |
|
|
|
15.0 |
|
|
|
4,979 |
|
|
|
18.9 |
|
|
|
6,540 |
|
|
|
19.4 |
|
| |
Depreciation and amortization
|
|
|
2,486 |
|
|
|
3.0 |
|
|
|
4,463 |
|
|
|
4.0 |
|
|
|
5,620 |
|
|
|
4.2 |
|
|
|
1,204 |
|
|
|
4.6 |
|
|
|
2,233 |
|
|
|
6.6 |
|
| |
Restructuring and integration benefit
|
|
|
(5,850 |
) |
|
|
(6.9 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Other income
|
|
|
(823 |
) |
|
|
(1.0 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax provision
|
|
|
(24,221 |
) |
|
|
(28.8 |
) |
|
|
(7,242 |
) |
|
|
(6.6 |
) |
|
|
6,671 |
|
|
|
5.0 |
|
|
|
(2,709 |
) |
|
|
(10.3 |
) |
|
|
(895 |
) |
|
|
(2.7 |
) |
| |
Income tax provision
|
|
|
140 |
|
|
|
0.1 |
|
|
|
183 |
|
|
|
0.1 |
|
|
|
210 |
|
|
|
0.2 |
|
|
|
44 |
|
|
|
0.2 |
|
|
|
61 |
|
|
|
0.1 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(24,361 |
) |
|
|
(28.9 |
)% |
|
$ |
(7,425 |
) |
|
|
(6.7 |
)% |
|
$ |
6,461 |
|
|
|
4.8 |
% |
|
$ |
(2,753 |
) |
|
|
(10.5 |
)% |
|
$ |
(956 |
) |
|
|
(2.8 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue is derived from our two business segments: Online
Services and Publishing Services. Our Online Services segment
derives revenue from advertising, sponsorship, including online
CME services, content syndication and distribution, and licenses
of private online portals to employers and healthcare payers.
Included in our Online Services’ revenue are revenues
related to our agreements with News Corporation and AOL:
|
|
|
|
|
| |
• |
We licensed our content to News Corporation for use across News
Corporation’s media properties for four years ending in
January 2005, for cash payments totaling $12,000 per contract
year. |
|
|
| |
|
|
| |
• |
Our company and AOL share certain revenue from advertising,
commerce and programming on the health channels of certain AOL
online sites and on a co-branded service we created for AOL. The
original term of the agreement was for three years expiring May
2004. We had the right to extend the original agreement for an
additional three-year term if certain thresholds were not
achieved during the original three-year term. These thresholds
were not achieved and we exercised our right to extend the
contract term until May 2007. Under the terms of the extension,
our revenue share is subject to a minimum annual guarantee.
Included in the accompanying combined consolidated statements of
operations, for the years ended December 31, 2002, 2003 and
2004 and for the three months ended March 31, 2004 and 2005
is revenue of $4,159, $5,087, $7,242, $1,557 and $3,379,
respectively, which represents sales to third parties of
advertising and sponsorship on the AOL health channels,
primarily sold through our sales efforts. Also included in
revenue during 2004 and during the three months ended
March 31, 2005 is $3,754 and $1,243, respectively, related
to the guarantee discussed above. |
|
|
Our Publishing Services segment derives revenue from sales of,
and advertising in, physician directories, subscriptions to
professional medical reference textbooks, broadcast fax
services, and advertisements in our consumer publication
distributed to physician waiting rooms.
Our customers include pharmaceutical, biotechnology, medical
device and consumer products companies, as well as employers and
health plans. In addition, our physician directories and
reference text book are sold to physicians and other healthcare
providers.
46
Our discussions throughout MD&A make references to certain
non-cash expenses. We consider non-cash expenses to be those
expenses that result from the issuance of our Parent’s
equity instruments. The following is a summary of our principal
non-cash expenses:
|
|
|
|
|
| |
• |
Non-cash advertising expense. Expense related to the
usage of our prepaid advertising inventory that we received from
News Corporation in exchange for equity instruments our Parent
issued in connection with an agreement our Parent entered into
with News Corporation in 1999 and subsequently amended in 2000.
Our non-cash advertising expense related to the usage of the
prepaid advertising is included in cost of operations when we
utilize this advertising in conjunction with online advertising
and sponsorship programs, and is included in sales and marketing
expense when we utilize the asset for promotion of our brand.
The portion of the non-cash expense that is included in sales
and marketing expense is reflected net of the expense we charge
to our Parent in connection with their usage of this asset. |
|
|
| |
|
|
| |
• |
Non-cash distribution expense. Expense related to the
amortization of a warrant that our Parent issued to AOL as part
of a strategic alliance our Parent entered into with Time Warner
in May 2001 under which our company became the primary provider
of healthcare content, tools and services for use on certain AOL
properties. |
|
|
| |
|
|
| |
• |
Non-cash stock compensation expense. Expense related to
restricted stock awards in our Parent’s common stock that
have been granted to certain of our employees as well as stock
options assumed in connection with certain acquisitions in 2000
and options granted in 2000 with exercise prices less than the
fair market value of our Parent’s stock on the date of
grant. Non-cash stock compensation expense is reflected in the
accompanying combined consolidated statements of operations in
the same expense captions as the related salary costs of the
respective employees. |
|
|
Cost of operations consists of costs related to services and
products we provide to customers and costs associated with the
operation and maintenance of our public and private portals.
These costs include editorial and production,
Web site
operations and development, and costs related to the production
and distribution of our publications. These costs consist of
expenses related to compensation, non-cash stock compensation,
creating and licensing content, telecommunication, leased
properties, printing and distribution, and non-cash advertising
expenses related to the sale of offline advertising through our
media partners.
Sales and marketing expense consists primarily of advertising,
product and brand promotion, salaries and related expenses, and
non-cash stock compensation. These expenses include items
related to salaries and related expenses of account executives,
account management and marketing personnel, costs and expenses
for marketing programs, and fees for professional marketing and
advertising services. Also included in sales and marketing
expense are non-cash advertising and distribution expenses
related to services acquired in exchange for equity securities
of our Parent in connection with our arrangements with News
Corporation and AOL.
General and administrative expense consists primarily of
salaries, non-cash stock compensation and related expenses of
administrative, finance, legal, information technology, human
resources and executive personnel. These expenses include costs
of general insurance and costs of accounting and internal
control systems to support our operations, a services fee for
our portion of certain expenses shared across all segments of
our Parent, as well as facilities expense.
The following discussion is a comparison of our results of
operations on a combined consolidated basis for the three months
ended
March 31, 2005 to the three months ended
March 31, 2004.
Revenue
Our total revenues increased 28.5% to $33,761 in the three
months ended
March 31, 2005 from $26,266 in the three
months ended
March 31, 2004. Online Services and Publishing
Services accounted for
47
$7,313 or 97.6% and $182 or 2.4%, of the revenue increase,
respectively. Our revenues from customers acquired through our
acquisitions in 2005 and 2004 contributed $1,203 of the overall
increase. We integrate acquisitions as quickly as practicable,
and only revenue recognized during the first twelve months
following the quarter in which the acquisitions close is
considered to be revenue from acquired customers. For purposes
of this discussion, only revenue from existing customers of the
acquired business on the date of the acquisition is considered
to be revenue from customers acquired. Our revenues for the
three months ended
March 31, 2005 also reflect a $2,000
decline in content syndication revenues relating to the
expiration of our content syndication agreement with News
Corporation in January 2005.
Cost of Operations. Cost of operations increased to
$14,895 in the three months ended
March 31, 2005 from
$11,207 in the three months ended
March 31, 2004. Our cost
of operations represented 44.1% of revenue in the three months
ended
March 31, 2005 compared to 42.7% of revenue in the
three months ended
March 31, 2004. The $3,688 increase was
primarily attributable to increases in compensation related cost
due to higher staffing levels and outside personnel expense for
information technology for our
website operations and
development as well as increased costs associated with creating
and licensing our content. Included in cost of operations were
non-cash advertising costs of $255 related to the sale and
fulfillment of offline advertising for the three months ended
March 31, 2004.
Sales and Marketing. Sales and marketing expense
decreased to $10,988 in the three months ended
March 31,
2005 from $11,585 in the three months ended
March 31, 2004.
Included in sales and marketing expense were non-cash expenses
related to advertising and distribution services of $1,751 in
the three months ended
March 31, 2005, a decrease from
$4,033 in the three months ended
March 31, 2004. This
decrease was primarily due to a decline in the expense related
to our distribution arrangement with AOL which was fully
amortized in May 2004. Sales and marketing expense excluding
these non-cash expenses was $9,237 or 27.4% of revenue in the
three months ended
March 31, 2005, compared to $7,552, or
28.8% of revenue in the three months ended
March 31, 2004.
This increase is primarily due to compensation related costs due
to increased staffing and sales commissions.
General and Administrative. General and administrative
expense increased to $6,540 in the three months ended
March 31, 2005 from $4,979 in the three months ended
March 31, 2004. General and administrative expense
represented 19.4% of revenue in the three months ended
March 31, 2005, compared to 18.9% of revenue in the three
months ended
March 31, 2004. The $1,561 increase is due to
increases in personnel related expenses resulting from an
increase in the number of staff, including increases related to
acquisitions which were completed in the fourth quarter of 2004.
We expect to report a charge related to the resignation of our
former CEO and other personnel and the recruitment of our
Executive Vice President — Product and Programming and
Chief Technology Officer during the second quarter of 2005 in an
amount of approximately $3,000.
Depreciation and Amortization. Depreciation and
amortization expense increased to $2,233 in the three months
ended
March 31, 2005 from $1,204 in the three months ended
March 31, 2004. The increase was primarily due to
amortization of intangible assets relating to the 2004
Acquisitions.
Income Tax Provision. Income tax provision primarily
represents taxes from profitable operations in certain
jurisdictions in which we do not have net operating losses to
offset that income. Accordingly, we provided for taxes of $61
and $44 related to state and other jurisdictions during the
three months ended
March 31, 2005 and
2004, respectively.
The following discussion is a comparison of our results of
operations on a combined consolidated basis for the year ended
December 31, 2004 to the year ended
December 31, 2003.
Our total revenues increased 21.8% to $134,148 in 2004 from
$110,152 in 2003. Online Services and Publishing Services
accounted for $20,136 or 83.9% and $3,860 or 16.1%, of the
revenue increase, respectively. The increase in Publishing
Services revenue was primarily due to $3,564 from the full year
48
impact of, as well as growth within, the 2003 acquisition of
The Little Blue Book. Our revenues from customers
acquired through our acquisitions in 2004 were not a significant
portion of our 2004 revenues because these acquisitions occurred
late in 2004. Included in our 2004 and 2003 revenues are $12,000
per year relating to our content syndication agreement with News
Corporation, which expired in January 2005.
Our company achieved a significant increase in combined
consolidated revenues without incurring a proportionate increase
in overall expenses. With the exception of certain costs in our
Publishing Services segment and sales commissions, incremental
revenues generally did not require additional cost of
operations, sales, marketing and general and administrative
expenses. This resulted in an improvement in cost of operations,
sales, marketing and general and administrative expenses as a
percentage of revenue when comparing 2004 to 2003.
Cost of Operations. Cost of operations increased to
$52,377 in 2004 from $46,998 in 2003. Our cost of operations
represented 39.0% of revenue in 2004, compared to 42.7% of
revenue in 2003. Included in cost of operations were non-cash
advertising costs of $901 and $2,757 for 2004 and 2003,
respectively, which reflects lower sales of offline advertising
in 2004. Excluding the non-cash advertising costs, cost of
operations increased to $51,476 in 2004 or 38.4% of revenue from
$44,241 in 2003 or 40.2% of revenue. The $7,235 increase was
attributable to increased spending on information technology
and, to a lesser extent, the full year impact in 2004 of
printing and distribution costs as a result of the 2003
acquisition of The Little Blue Book.
Sales and Marketing. Sales and marketing expense
increased to $49,315 in 2004, from $47,917 in 2003, which
represents an increase of $1,398. Included in sales and
marketing expense were non-cash expenses related to advertising
and distribution services of $11,246 in 2004, a decrease from
$16,211 in 2003. This decrease was primarily due to a decline in
the expense related to our distribution arrangement with AOL
which was fully amortized in May 2004. Sales and marketing
expense excluding these non-cash expenses was $38,069, or 28.4%
of revenue in 2004, compared to $31,706, or 28.8% of revenue in
2003. The $6,363 increase is due to compensation related costs
due to a combination of increased commissions and increased
staffing, and the full year impact in 2004 of the acquisition of
The Little Blue Book.
General and Administrative. General and administrative
expense increased to $20,165 in 2004 from $18,016 in 2003.
General and administrative expense was 15.0% of revenue in 2004,
compared to 16.4% of revenue in 2003. The $2,149 increase is due
to increases in personnel related expenses resulting from an
increase in the number of our staff, and the full year impact in
2004 of the 2003 acquisition of The Little Blue Book.
Depreciation and Amortization. Depreciation and
amortization expense increased to $5,620 in 2004 from $4,463 in
2003. The increase was primarily due to intangible assets
relating to the 2004 Acquisitions and 2003 Acquisitions.
Income Tax Provision. Income tax provision in 2004 and
2003 primarily represents taxes from profitable operations in
certain jurisdictions in which we do not have net operating
losses to offset that income. Accordingly, we provided for taxes
of $210 and $183 related to state and other jurisdictions during
2004 and 2003, respectively.
The following discussion is a comparison of our results of
operations on a combined consolidated basis for the year ended
December 31, 2003 to the year ended
December 31, 2002.
Our total revenues increased 30.8% to $110,152 in 2003 from
$84,203 in 2002. Online Services and Publishing Services
accounted for $20,702 or 79.8% and $5,247 or 20.2%, of the
revenue increase, respectively. The increase is primarily
related to increased sales of our Online Services products and,
to a
49
lesser extent, Publishing Services products. Revenue from
customers acquired through the 2003 Acquisitions and 2002
Acquisition contributed $9,579 to the overall increase in
revenue for 2003. Included in 2003 and 2002 revenues are
$12,000 per year relating to our content syndication
agreement with News Corporation, which expired in January 2005.
Our company achieved a significant increase in combined
consolidated revenues without incurring a proportional increase
in overall expenses. This is due to the fact that, with the
exception of certain costs in our Publishing Services segment
and sales commissions, incremental revenues generally did not
require additional cost of operations, sales, marketing and
general and administrative expenses. This resulted in an
improvement in cost of operations, sales, marketing and general
and administrative expenses as a percentage of revenue when
comparing 2003 to 2002.
Cost of Operations. Cost of operations decreased to
$46,998 in 2003 from $47,888 in 2002. Our cost of operations
represented 42.7% of revenue in 2003, compared to 56.9% of
revenue in 2002. Included in cost of operations were non-cash
advertising costs of $2,757 and $3,945 for 2003 and 2002,
respectively, which reflects lower sales of offline advertising
in 2003. Cost of operations excluding these non-cash advertising
expenses was $44,241, or 40.2% of revenues in 2003, compared to
$43,943, or 52.2% of revenues in 2002. The $298 increase is due
to the full year impact of the 2002 Acquisition and the partial
year impact of increased printing and distribution costs as a
result of the 2003 acquisition of
The Little Blue Book,
offset by the full year impact of reduced compensation
related expense as a result of the consolidation of
Web site
development and operations effected during 2002.
Sales and Marketing. Sales and marketing expense
decreased to $47,917 in 2003, compared to $49,033 in 2002.
Included in sales and marketing expense are non-cash expenses
related to advertising and distribution services of $16,211 in
2003, compared to $18,864 in 2002. During 2003, a higher
percentage of advertising expense was allocated to our Parent as
a result of changes in the mix in the type of advertising that
aired during 2003 compared to 2002. Also included in sales and
marketing expense was non-cash stock compensation of $548 in
2003 compared to $1,219 in 2002. Non-cash stock compensation
decreased from 2002 to 2003 primarily due to the vesting
schedules of options issued and assumed in connection with our
2000 acquisitions. Sales and marketing expense excluding the
non-cash expenses previously discussed was $31,158, or 28.3% of
revenue in 2003, compared to $28,950, or 34.4% of revenue in
2002. The $2,208 increase was due to a significant increase in
membership acquisition costs in 2003, primarily related to the
acquisition of a membership database, increased staffing as a
result of the full year impact of the 2002 Acquisition and the
partial year impact of the 2003 acquisition of The Little
Blue Book, offset by a reduction in fees for marketing and
advertising services.
General and Administrative. General and administrative
expense increased to $18,016 in 2003 from $15,690 in 2002.
General and administrative expense was 16.4% of revenue in 2003,
compared to 18.6% of revenue in 2002. The $2,326 increase is due
to the full year impact of the 2002 Acquisition and the partial
year impact of the 2003 acquisition of The Little Blue
Book.
Depreciation and Amortization. Depreciation and
amortization expense increased to $4,463 in 2003 from $2,486 in
2002. The increase was primarily due to amortization of
intangible assets relating to certain 2003 Acquisitions and a
2002 Acquisition.
Restructuring and Integration Benefit. During 2000 and
2001, our Parent initiated a restructuring, during which many
business relationships were exited or restructured in an effort
to reduce operating losses. In connection with these activities,
we previously incurred a restructuring and integration charge of
$114,918 in 2001. During 2002, we recorded a benefit of $5,850
related to the 2000 and 2001 restructuring activity resulting
from the favorable settlements of certain of these restructured
arrangements.
Income Tax Provision. Income tax provision in 2003 and
2002 primarily represents taxes from profitable operations in
certain states in which we do not have net operating losses to
offset that income.
50
Accordingly, we provided for taxes of $183 and $140 related to
state and other jurisdictions during 2003 and 2002, respectively.
Results of Operations by Operating Segment
We monitor the performance of our business based on income or
loss before restructuring, taxes, non-cash and other items.
Non-cash and other items include depreciation and amortization,
other income, non-cash advertising and distribution expenses and
non-cash stock compensation expense. Corporate and other
overhead functions are allocated to segments on a specifically
identifiable basis or other reasonable method of allocation. We
consider these allocations to be a reasonable reflection of the
utilization of costs incurred. We do not disaggregate assets for
internal management reporting and, therefore, such information
is not presented. There are no inter-segment revenue
transactions and, therefore, revenues are only to external
customers.
The following table presents the results of our operations for
each of our operating segments and a reconciliation to net
income (loss):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Three Months Ended | |
| |
|
Years Ended December 31, | |
|
March 31, | |
| |
|
| |
|
| |
| |
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in thousands) | |
|
(unaudited) | |
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Advertising and sponsorship
|
|
$ |
61,611 |
|
|
$ |
71,618 |
|
|
$ |
83,828 |
|
|
$ |
15,919 |
|
|
$ |
22,787 |
|
| |
|
Licensing
|
|
|
830 |
|
|
|
8,923 |
|
|
|
15,841 |
|
|
|
2,751 |
|
|
|
5,805 |
|
| |
|
Content syndication and other
|
|
|
17,008 |
|
|
|
19,610 |
|
|
|
20,618 |
|
|
|
5,172 |
|
|
|
2,563 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total Online Services
|
|
|
79,449 |
|
|
|
100,151 |
|
|
|
120,287 |
|
|
|
23,842 |
|
|
|
31,155 |
|
|
Publishing Services
|
|
|
4,754 |
|
|
|
10,001 |
|
|
|
13,861 |
|
|
|
2,424 |
|
|
|
2,606 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
84,203 |
|
|
$ |
110,152 |
|
|
$ |
134,148 |
|
|
$ |
26,266 |
|
|
$ |
33,761 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before restructuring, taxes, non-cash and other
items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online Services
|
|
$ |
(2,086 |
) |
|
$ |
16,145 |
|
|
$ |
24,902 |
|
|
$ |
3,506 |
|
|
$ |
3,819 |
|
|
Publishing Services
|
|
|
(848 |
) |
|
|
1,641 |
|
|
|
1,285 |
|
|
|
(444 |
) |
|
|
(247 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
(2,934 |
) |
|
|
17,786 |
|
|
|
26,187 |
|
|
|
3,062 |
|
|
|
3,572 |
|
|
Restructuring, taxes, non-cash and other items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(2,486 |
) |
|
|
(4,463 |
) |
|
|
(5,620 |
) |
|
|
(1,204 |
) |
|
|
(2,233 |
) |
|
Non-cash advertising and distribution
|
|
|
(22,809 |
) |
|
|
(18,968 |
) |
|
|
(12,147 |
) |
|
|
(4,288 |
) |
|
|
(1,751 |
) |
|
Non-cash stock compensation
|
|
|
(2,665 |
) |
|
|
(1,597 |
) |
|
|
(1,749 |
) |
|
|
(279 |
) |
|
|
(483 |
) |
|
Restructuring and integration benefit
|
|
|
5,850 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Other income
|
|
|
823 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Income tax provision
|
|
|
(140 |
) |
|
|
(183 |
) |
|
|
(210 |
) |
|
|
(44 |
) |
|
|
(61 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income (loss)
|
|
$ |
(24,361 |
) |
|
$ |
(7,425 |
) |
|
$ |
6,461 |
|
|
$ |
(2,753 |
) |
|
$ |
(956 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following discussion is a comparison of the results of
operations for each of our operating segments for the three
months ended
March 31, 2005 to the three months ended
March 31, 2004.
Online Services. Revenues were $31,155 for the three
months ended
March 31, 2005, an increase of $7,313 or 30.7%
from the three months ended
March 31, 2004. The increase
was related to increased
51
advertising and sponsorship revenue related to our public
portals and licensing revenues from our private online portals,
offset by a $2,000 decline in revenues versus the prior year
relating to the expiration of our content syndication agreement
with News Corporation in January 2005. The revenue increase
is due to increases in both the number of advertising and
licensing customers as well as the number of brands our
advertising customers are promoting. The number of our
advertising and sponsorship customers grew to approximately 115,
promoting approximately 255 brands in the three months ended
March 31, 2005 compared to 80 customers promoting
approximately 170 brands in the prior year. Additionally, the
number of our licensing customers grew to approximately 45
customers (excluding the number of HealthShare customers) in the
three months ended
March 31, 2005 compared to 35 customers
in the prior year. Included in revenues during the three months
ended
March 31, 2005 was $491 related to the
March 14,
2005 acquisition of HealthShare. HealthShare had approximately
90 licensing customers as of
March 31, 2005. We expect
the revenue growth rate for all of 2005 to improve compared to
the growth rate achieved in 2004. We expect to achieve this
growth in both the number of advertising and licensing customers
and the number of brands promoted on our public portals. This
improvement anticipates the $11,000 year over year reduction in
revenue as a result of the expiration of our content syndication
agreement with News Corporation in January 2005.
Income before taxes, non-cash and other items was $3,819 for the
three months ended
March 31, 2005, an increase of $313. As
a percentage of revenue, income before taxes, non-cash and other
items was 12.3% for the three months ended
March 31, 2005,
compared to 14.7% for the three months ended
March 31,
2004. This decline is due to higher information technology and
sales and marketing expenses as well as the decline in content
syndication revenue from News Corporation, which did not have
significant related expenses. We expect income before taxes,
severance, non-cash and other items as a percentage of revenue
in 2005 to improve compared with the results achieved in 2004.
Publishing Services. Revenues were $2,606 for the three
months ended
March 31, 2005, compared to $2,424 for the
three months ended
March 31, 2004. The increase was
attributable to increased revenue from
The Little Blue
Book. We expect revenue to slightly increase for all of 2005
when compared to 2004. Our revenue growth for 2005 will be
primarily from the launch of
WebMD the Magazine and to a
lesser extent growth in
The Little Blue Book. We do not
expect the same level of growth in this segment as was achieved
when comparing 2004 to 2003, because a significant portion of
the 2004 revenue growth was a result of the full year impact of
the 2003 acquisition of
The Little Blue Book. Loss before
taxes, non-cash and other items was $247 for the three months
ended
March 31, 2005, compared to a loss of $444 for the
three months ended
March 31, 2004. The improvement is due
primarily to the increased revenue over the prior year. We
expect income before taxes, severance, non-cash and other items
for all of 2005 to decline when compared to 2004, primarily as a
result of the 2005 launch of
WebMD the Magazine.
We expect taxes, severance, non-cash and other items to increase
significantly in 2005 compared to 2004 primarily related to an
increase in amortization of intangibles from the 2004 and 2005
acquisitions, an increase in depreciation expense due to our
increased capital expenditures, offset by the elimination of
non-cash distribution expenses which were fully amortized in May
2004. Additionally, our 2005 results will include a charge of
approximately $3,000, related to the resignation of our former
Chief Executive Officer and other personnel and the recruitment
of our Executive Vice President — Product and
Programming and Chief Technology Officer.
The following discussion is a comparison of the results of
operations for each of our operating segments for the year ended
December 31, 2004 to the year ended
December 31, 2003.
Online Services. Revenues were $120,287 in 2004, an
increase of $20,136 or 20.1% from 2003. The increase was related
to increased advertising and sponsorship revenue related to our
public portals and licensing revenues from our private online
portals. The revenue increase is primarily due to increased
demand for our public and private portals. The number of our
advertising and sponsorship customers grew to approximately 180
promoting approximately 380 brands in the year ended
December 31, 2004 compared
52
to approximately 160 customers promoting approximately 325
brands in the prior year. Additionally, the number of our
licensing customers grew to approximately 40 customers in the
year ended
December 31, 2004 compared to approximately 35
customers in the prior year. Included in content syndication and
other revenues for 2004 and 2003 are $12,000 per year
related to our content syndication agreement with News
Corporation which expired in January 2005. Income before
restructuring, taxes, non-cash and other items was $24,902 in
2004, an increase of $8,757 or 54.2% from 2003. As a percentage
of revenue, income before restructuring, taxes, non-cash and
other items was 20.7% in 2004, compared to 16.1% in 2003. The
growth in earnings and margins is due to our ability to deliver
the increased revenues without incurring a proportionate
increase in overall expenses.
Publishing Services. Revenues were $13,861 in 2004,
compared to $10,001 for 2003. The increase was attributable to
the full year impact of the May 2003 acquisition of The
Little Blue Book. Income before restructuring, taxes,
non-cash and other items was $1,285 in 2004, a decrease of $356
from 2003. Our Publishing Services segment is seasonal, where
approximately 70% of our revenues were generated during the
second and third quarter of 2004 when the majority of our
physician directories are delivered. Due to the full year impact
of The Little Blue Book acquisition on 2004 fixed
expenses, as a percentage of revenue, income before
restructuring, taxes, non-cash and other items declined to 9.3%
in 2004, compared to 16.4% in 2003.
The following discussion is a comparison of the results of
operations for each of our operating segments for the year ended
December 31, 2003 to the year ended
December 31, 2002.
Online Services. Revenues were $100,151 in 2003, an
increase of $20,702 or 26.1% from 2002. Revenues from customers
acquired through the 2003 Acquisitions contributed $5,853 to the
increase in revenue. The remaining increase of $14,849 for 2003
was primarily the result of increased sales related to
advertising and sponsorship on our public portals and licensing
revenues from our private online portals. The number of our
advertising and sponsorship customers grew to approximately 160,
promoting approximately 325 brands in the year ended
December 31, 2003 compared to approximately
150 customers promoting approximately 320 brands in
the prior year. Additionally, the number of our licensing
customers grew to approximately 35 customers in the year
ended
December 31, 2003 compared to approximately
30 customers in the prior year. Included in content
syndication and other revenue for 2003 and 2002 is
$12,000 per year related to our content syndication
agreement with News Corporation which expired in January 2005.
Income before restructuring, taxes, non-cash and other items was
$16,145 in 2003, an increase of $18,231 from a 2002 loss of
$2,086. As a percentage of revenue, income (loss) before
restructuring, taxes, non-cash and other items was 16.1% in
2003, compared to (2.6%) in 2002. The growth in earnings and
margins is due our ability to deliver the increased revenues
without incurring a proportionate increase in variable expenses.
Publishing Services. Revenues were $10,001 in 2003,
compared to $4,754 for 2002. Revenues from customers acquired
through the 2003 Acquisitions contributed $3,726 to the increase
in revenue. The remaining increase of $1,521 for 2003 was
attributable to advertising revenues for The Little Blue
Book. Income before restructuring, taxes, non-cash and other
items was $1,641 in 2003, an increase of $2,489 from a loss in
2002 of $848. As a percentage of revenue, income (loss) before
restructuring, taxes, non-cash and other items was 16.4% in
2003, compared to (17.8%) in 2002. The improvement is due
primarily to the acquisition of The Little Blue Book.
Liquidity and Capital Resources
Our primary source of financing has been net cash amounts
received from our Parent. Our Parent will continue to finance
our operations until this offering is completed. We will be
receiving the net proceeds of this offering and following
completion of this offering, our Parent will have no obligation
to provide any additional financing. We plan to continue to
enhance the relevance of our online services to our audience and
sponsors and will continue to invest in acquisitions, strategic
relationships, infrastructure and product
53
development. We intend to grow each of our existing businesses
and enter into complementary ones through both internal
investments and acquisitions.
As of
March 31, 2005, we had $3,840 of cash and cash
equivalents and working capital of $2,665. Our working capital
is affected by the timing of each period end in relation to
items such as payments received from customers and payments made
to vendors, internal payroll and billing cycles, as well as the
seasonality within our business. Accordingly, our working
capital, and its impact on cash flow from operations, can
fluctuate materially from period to period.
Cash provided from operations during the three months ended
March 31, 2005 was $6,174 which reflected a net loss of
$956 adjusted for non-cash expenses of $4,467. Additionally,
changes in working capital generated cash flow of $2,663 during
the three months ended
March 31, 2005, primarily the result
of a net decrease in accounts receivable. Cash provided by
operating activities was $18,138 in 2004, which was primarily
reflected net income of $6,461 adjusted for $19,516 of non-cash
items, including depreciation and amortization, non-cash
advertising and distribution expense and non-cash stock
compensation expense. Operating cash flow was negatively
impacted by a net increase in working capital of $7,839, which
was primarily due to a net increase in accounts receivable of
$17,125 reflecting a significant increase in our revenues during
2004, particularly in the second half of 2004. Partially
offsetting the increase in accounts receivable during 2004 was
an increase in deferred revenue of $4,878, and an increase in
accrued expenses of $2,952 resulting from the timing of payments
received from customers and payments made to vendors in relation
to period end.
Cash provided by operating activities in 2003 was $2,917 and
reflected a net loss of $7,425 adjusted for $25,028 of non-cash
items, partially offset by a net increase in working capital of
$14,686. The net increase in working capital was primarily due
to the timing of payments we made to vendors during 2003 as well
as a reduction to our deferred revenue balance reflecting the
recognition of revenue in excess of the amount of advance
payments received by customers.
Cash used in investing activities was $26,742 in 2004, compared
to cash used in investing activities of $15,444 in 2003. Cash
paid for business acquisitions, net of cash acquired, was
$22,421 in 2004 and primarily related to the 2004 Acquisitions.
The 2003 Acquisitions consumed cash of $13,926 net of cash
acquired. Investments in property and equipment were $4,321 in
2004, compared to $1,518 in 2003. Additionally, we used cash of
approximately $30,308 related to our acquisition of HealthShare
during the three months ended
March 31, 2005.
Cash provided by financing activities was $11,702 in 2004,
compared to cash provided by financing activities of $12,736 in
2003. Cash provided by financing activities for 2004 and 2003
related to net cash amounts received from our Parent.
Our principal commitments at
December 31, 2004 consisted
primarily of obligations under operating leases and contingent
consideration payments of up to an aggregate of $25,000 related
to the RxList, MedicineNet and HealthShare acquisitions
achieving certain milestones. Assuming each of these required
milestones is achieved, we would expect to pay contingent
consideration of $22,500 during the three months ending
March 31, 2006 and $2,500 during the three months ending
March 31, 2007. We will not have any obligation to repay
any financing provided, prior to the completion of this
offering, by our Parent.
54
The following table summarizes our principal commitments as of
December 31, 2004, as well as management’s estimates
of the timing of the cash flows associated with these
commitments. Management’s estimates of the timing of future
cash flows are largely based on historical experience, and
accordingly, actual timing of cash flows may vary from these
estimates. The contingent consideration payments of up to an
aggregate of $25,000, have not been included in the table below
as it is impracticable to estimate the amount of any payments
related to these commitments.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Less Than | |
|
|
|
|
|
More Than | |
| |
|
Total | |
|
1 Year | |
|
1-3 Years | |
|
4-5 Years | |
|
5 Years | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in thousands) | |
|
Leases
|
|
$ |
35,389 |
|
|
$ |
2,351 |
|
|
$ |
7,034 |
|
|
$ |
6,047 |
|
|
$ |
19,957 |
|
|
Purchase obligations(1)
|
|
|
19 |
|
|
|
19 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Advertising relationship(2)
|
|
|
1,379 |
|
|
|
754 |
|
|
|
625 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
36,787 |
|
|
$ |
3,124 |
|
|
$ |
7,659 |
|
|
$ |
6,047 |
|
|
$ |
19,957 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Purchase obligations include amounts committed under legally
enforceable contracts or purchase orders for goods and services
with defined terms as to price, quantity and delivery. |
|
|
| |
|
|
| (2) |
This advertising relationship represents a commitment for
advertising placements to promote our brand. |
|
|
In addition to the commitments discussed above, we anticipate
capital expenditure requirements of approximately $40,000 for
the balance of 2005 and 2006. Approximately $15,000 of this
amount relates to the relocation of our corporate office, which
is expected to be completed prior to this offering, and
accordingly, will be funded by our Parent. The balance
represents anticipated expenditures to enhance our
Web site
infrastructure in order to enable us to service future growth in
unique users, page views and private portal customers, as well
as to create new sponsorship areas for our customers. We believe
that the net proceeds from this offering, together with our
available cash resources and future cash flow from operations,
will provide sufficient cash resources to meet the commitments
described above and our currently anticipated working capital
and capital expenditure requirements for the foreseeable future.
Our future liquidity and capital requirements will depend upon
numerous factors, including retention of customers at current
volume and revenue levels, our existing and new application and
service offerings, competing technological and market
developments, and potential future acquisitions. In addition,
our ability to generate cash flow is subject to numerous factors
beyond our control, including general economic, regulatory and
other matters affecting us and our customers. We may need to
raise additional funds to support expansion, develop new or
enhanced applications and services, respond to competitive
pressures, acquire complementary businesses or technologies or
take advantage of unanticipated opportunities. If required, we
may raise such additional funds through public or private debt
or equity financing, strategic relationships or other
arrangements. We cannot assure you that such financing will be
available on acceptable terms, if at all, or that such financing
will not be dilutive to our stockholders. Future indebtedness
may impose various restrictions and covenants on us that could
limit our ability to respond to market conditions, to provide
for unanticipated capital investments or to take advantage of
business opportunities. Our principal commitments as of
March 31, 2005 were not materially different from our
commitments as of
December 31, 2004.
Qualitative and Quantitative Disclosures About Market Risk
We have had no exposure to interest rate sensitivity or exchange
rate sensitivity. We have no investments as of
December 31,
2004 and we do not conduct business in foreign currencies. We
may have future risk related to interest rate sensitivity if we
invest the net proceeds from the sale of our Class A common
stock in certain types of interest bearing obligations.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board
(“FASB”) issued SFAS No. 123, “(Revised
2004): Share-Based Payment” (“SFAS 123R”),
which replaces SFAS No. 123, “Accounting
55
for Stock-Based Compensation,” (“SFAS 123”)
and supersedes APB Opinion No. 25, “Accounting for
Stock Issued to Employees.” SFAS 123R requires all
share-based payments to employees, including grants of stock
options by us and our Parent to our employees, to be recognized
in the financial statements based on their fair values. The pro
forma disclosures previously permitted under SFAS 123 no
longer will be an alternative to financial statement
recognition. As described in Note 2 to our audited combined
consolidated financial statements, if, instead of the intrinsic
value method, we had used the fair value recognition provisions
of SFAS 123 to calculate stock based employee compensation,
instead of reporting net income for 2004 of $6.5 million,
we would have reported a loss of $2.4 million. We
anticipate adopting SFAS 123R in the first quarter of 2006.
Under SFAS 123R, we must determine the appropriate fair
value model to be used for valuing share-based payments, the
amortization method for compensation cost and the transition
method to be used at date of adoption. The transition methods
include prospective and retroactive adoption options. Under the
retroactive option, prior periods may be restated either as of
the beginning of the year of adoption or for all periods
presented. The prospective method requires that compensation
expense be recorded for all unvested stock options and
restricted stock at the beginning of the first quarter of
adoption of SFAS 123R. We are evaluating the requirements
of SFAS 123R and expect that the adoption of SFAS 123R
will have a material impact on the combined consolidated results
of operations and earnings per share. We have not yet determined
the method of adoption or the effect of adopting SFAS 123R.
56
BUSINESS
Overview
We are a leading provider of health information services to
consumers, physicians and healthcare professionals through our
public and private online portals. The online healthcare
information, decision-support applications and communications
services that we provide:
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| |
• |
enable consumers to obtain detailed information on a particular
disease or condition, analyze symptoms, locate physicians, store
individual healthcare information, receive periodic
e-newsletters on topics of individual interest, enroll in
interactive courses and participate in online communities with
peers and experts; |
| |
| |
• |
make it easier for physicians and healthcare professionals to
access clinical reference sources, stay abreast of the latest
clinical information, learn about new treatment options, earn
CME credits and communicate with peers; and |
| |
| |
• |
enable employers and health plans to provide their employees and
plan members with access to personalized health and benefit
information and decision-support technology that helps them make
more informed benefit, provider and treatment choices. |
We believe that we are well positioned to meet both consumer and
physician demand for timely, reliable and comprehensive health
information. We provide online services through several branded
public portals, including WebMD Health, our primary
public portal for consumers, and Medscape from WebMD, our
public portal for physicians and healthcare professionals.
WebMD Health and our other consumer portals provide
timely and credible healthcare and lifestyle information and
assist consumers in taking an active role in managing their
health.
The WebMD Health Network consists of the public portals
that we own, such as
www.WebMD.com and
www.Medscape.com, as well as third party sites through
which we provide our branded health and wellness content, tools
and services, such as the America Online service. The WebMD
Health Network had an average of approximately 23 million
aggregate unique users per month and generated approximately
588 million aggregate page views in the first quarter of
2005.
The WebMD Health Network does not include our
private portals for employers and health plans, which are
described below. We believe our focus on creating and organizing
high quality content and offering innovative interactive
services has made
The WebMD Health Network the leading
online health destination and has made the WebMD brand among the
most recognized and trusted in healthcare. According to recent
studies conducted by Manhattan Research, WebMD is the
information source most frequently recommended by physicians to
their patients for healthcare information and
Medscape from
WebMD is the information source most recommended by
physicians to their peers.
Our public portals generate revenue primarily through the sale
of advertising and sponsorship products. We do not charge user
fees for access to our public portals. The WebMD Health
Network provides an efficient and effective means for
sponsors to reach, educate and inform target audiences of
health-involved consumers and clinically-active physicians
within the trusted environment of WebMD. We work closely with
our sponsors to develop programs to reach specific groups of
consumers, physicians and healthcare professionals and give them
placement on the most relevant areas on our portals. Our
advertisers and sponsors consist primarily of pharmaceutical,
biotechnology and medical device companies and consumer products
companies whose products relate to health, wellness, diet,
fitness, lifestyle, safety and illness prevention.
Our private portals enable employees and health plan members to
make more informed benefit, treatment and provider decisions. We
provide a personalized user experience by integrating individual
user data (including personal health information), plan-specific
data from our employer or health plan clients and much of the
content, decision-support technology and personal communication
services that we make available through our public portals. We
generate revenue from private portals through the licensing of
our content and technology to employers, such as American
Airlines, Inc., Microsoft Corporation and PepsiCo,
57
Inc., and to health plans, such as Cigna and Empire Blue Cross
and Blue Shield. Our private portals do not generate revenue
from advertising or sponsorship and, accordingly, we do not
include users or page views for these portals in The WebMD
Health Network.
In addition to our online presence, we also have a Publishing
Services segment that provides complementary offline health
content. Our offline publications also increase awareness of our
brand with consumers, physicians and healthcare professionals.
These publications include The Little Blue Book, a
physician directory, ACP Medicine and ACS Surgery:
Principles of Practice, our medical reference textbooks, and
WebMD the Magazine, a consumer publication launched in
early 2005 that we distribute free of charge to physician office
waiting rooms.
Industry Background
General. The Internet has emerged as a major
communications medium, enabling millions of users to obtain and
share information and to interact and conduct business on a
real-time basis. According to industry sources, approximately
120 million American adults use the Internet on a monthly
or more frequent basis, with an estimated 90 million users
now accessing the Internet as an integral part of their every
day routine. Despite its short history, studies show that users
now devote more hours of the day to the Internet than to any
other medium. A 2004 Manhattan Research study showed that
consumers rely on the Internet as a convenient, trusted source
of healthcare information, decision-support and communication,
and that their satisfaction with general health information on
the Internet is greater than traditional sources, such as their
neighborhood library and magazines, and second only to
physicians. Rising healthcare costs and the greater financial
responsibility consumers will have for their healthcare will
increase consumers’ reliance on the Internet to help inform
their choices. The Internet allows consumers to have immediate
access to searchable and dynamic interactive content to check
symptoms, assess risks, understand diseases, find providers and
evaluate treatment options.
Effect on Healthcare. The Internet has already
fundamentally changed many sectors of the economy, including the
marketing and sales of financial services, travel, and
entertainment, among others. The Internet is also changing the
healthcare industry, as more consumers and physicians use it as
a convenient source for up-to-date health information and
interactive decision-support tools. Until recently, quality
healthcare information was not easily accessible. Most consumers
relied on their physicians, conversations with family and
friends, their neighborhood library and magazines when they
needed answers to healthcare questions. Physicians relied on
other physicians, medical societies, journals and other
publications, reference textbooks, conferences, pharmaceutical
sales representatives and industry meetings to keep informed.
Now, consumers and physicians are able to easily access
information online. According to Manhattan Research, of those
consumers who seek additional information as the result of an
offline advertisement, more than half will use the Internet. A
Manhattan Research subscription study in early 2004 cites that
approximately 63% of physicians read e-journals and
approximately 46% complete online CME programs on at least a
monthly basis. The Internet has transformed how consumers and
physicians find and utilize healthcare information and WebMD has
been a leader in enabling this transition.
Physicians Are Turning to the Internet to Improve Clinical
Practice. The Internet has become a primary source of
information for physicians and is growing relative to
traditional information sources, such as conferences, meetings
and offline journals. According to Manhattan Research,
approximately 97% of physicians are Internet users and physician
satisfaction with online sources of clinical information is
nearly equal to traditional offline sources. According to the
Accreditation Council for Continuing Medical Education, the
Internet has become an efficient way to educate physicians and
to promote adherence to clinical guidelines, crucial steps
towards reducing the variance in treatment patterns and raising
the quality of care.
58
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|
|
Advertising and Sponsorship Trends |
General. The U.S. market for advertising, broadly
defined, is made up of multiple, well-established channels,
principally consisting of print, television and radio media.
Total advertising expenditure for 2004 was estimated by
eMarketer in February 2005 to have been approximately
$264 billion, an increase of 7.6% compared to 2003, and is
projected by eMarketer to increase 5.4% in 2005.
Online Market. Internet advertising continues to grow
rapidly and, as a result, online spending is growing faster than
offline spending. Total online advertising spending in the
United States was projected by eMarketer to increase
approximately 21.0% in 2005 to $11.5 billion and to rise to
about $17.6 billion in 2008. We believe this market growth
is driven by several factors, including consumers shifting their
buying and media preferences to online services and the benefits
of online advertising relative to traditional media, which
includes interactivity, rapid and measurable user feedback and
the ability to target consumers more efficiently.
Online Healthcare and Health-Related Market. The WebMD Health
Network competes in the market for online healthcare and
health-related advertising, sponsorship and education services
targeted to consumers and physicians. According to a 2005
Jupiter Research study, online spending for healthcare related
advertising is projected to grow an average of 19.7% annually
through 2009. We believe that the two primary sources for this
spending are pharmaceutical companies and consumer products
companies whose goods or services relate to health, wellness,
diet, fitness, lifestyle, safety and prevention.
Based upon industry estimates, we believe that, in the United
States in 2004, pharmaceutical, biotechnology and medical device
companies spent approximately $12 billion on marketing and
education activities, excluding costs of product samples, and
consumer products companies spent in excess of $10 billion
on media to advertise products that relate to health, wellness,
diet, fitness, safety and prevention. We estimate that
pharmaceutical, biotechnology and medical device companies
currently spend less than 5% of their marketing and educational
budgets on online media, but that they are becoming increasingly
aware of the benefits of using online media, including the
ability to cost-effectively reach targeted audiences. As a
result, we expect these companies’ online marketing and
educational budgets to continue to increase. According to an
April 2005 report sponsored by the Interactive Advertising
Bureau, pharmaceutical and other healthcare advertisers
accounted for 6% of total online advertising in 2004, an
increase from 4% in 2003. We believe that we are well positioned
to benefit from the expected trend toward increased online
spending by these companies because of our track record in
providing a more efficient use of advertising expenditures than
traditional media and our good working relationships with a
significant number of the leading pharmaceutical, biotechnology
and medical device companies.
Healthcare Industry Trends. Our business is affected by
the following trends in the healthcare industry:
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• |
Healthcare cost-shifting by employers. According to a
report from CMS, healthcare spending in the United States rose
to $1.7 trillion in 2003, up from $1.6 trillion in
2002, $1.4 trillion in 2001 and $1.3 trillion in 2000.
The CMS report indicated a growth rate in healthcare spending of
7.7% for 2003, compared to 9.3% for 2002, and 8.5% for 2001.
While overall healthcare costs are rising at a rapid annual
rate, employers’ costs of providing healthcare benefits to
their employees are increasing at an even faster rate. In
response to these cost increases, employers and health plans
have been changing benefit plan designs to increase consumer
out-of-pocket costs and taking other steps to motivate their
members and employees to evaluate their healthcare decisions
more carefully in order to be more cost-effective. This has also
led employers and health plans to enhance wellness programs and
take steps to provide healthcare information and education to
employees and members, including through online services. |
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• |
Quality initiatives. From 1999 through 2001, studies by
the Institute of Medicine, a non-profit organization that is
part of the National Academies and whose work is conducted by
committees of volunteer scientists, suggested that the
nation’s healthcare system should be fundamentally
redirected to focus on continuous quality improvement and
anticipating |
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59
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healthcare needs, rather than controlling access to services.
Since then, we believe that health plans and employers have
begun to recognize that encouraging the good health of their
members and employees not only benefits the members and
employees but also has financial benefits for the health plans
and employers. Healthier people need less care and fewer costly
services. Thus, controlling costs by keeping people healthier
and better managing chronic conditions has become a significant
focus for America’s healthcare system. As part of the
initiatives to keep members and employees healthier and to allow
them to better manage chronic conditions, health plans and
employers are offering their members and employees online access
to health and wellness information and decision-support tools. |
We believe that we are well positioned to benefit from these
trends because our private portal provides the tools and
information employees and plan members need in order to take a
more active role in their healthcare, such as helping members
make more informed decisions about healthcare provider, benefit
and treatment options. As employers continue to implement high
deductible and consumer-directed healthcare plans, we believe we
will be able to attract more employers and health plans to use
our private online portals. Additionally, we believe that as
consumers are required to bear increased financial
responsibility for their healthcare, our public portals will
benefit as consumers utilize our decision-support and personal
health information applications better manage their health
decisions.
Market and industry data and forecasts that we disclose in this
prospectus that we obtain from third-party industry publications
and research firms may prove to be inaccurate due to limitations
and uncertainties inherent in the data gathering process and
will include a margin for error. See “Our Use of Market and
Industry Data.”
Our Strengths
Our public portals provide an efficient and effective means for
advertisers and sponsors to reach, educate and inform
health-involved consumers and clinically-active physicians
within the trusted environment of WebMD. Our private portals
provide a cost-effective way for employers and health plans to
help their members make more informed benefit, treatment and
provider decisions. We believe that we are able to fulfill the
needs of our clients with differentiated offerings based upon
our:
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Recognized and trusted brand. Our brand is widely
recognized and viewed as a trusted source of health and wellness
information. In June 2005, Consumer Health WebWatch, a joint
project of Consumer Reports WebWatch and the Health Improvement
Institute, rated the 20 most-trafficked health Web sites
(listing WebMD Health as the most-trafficked site,
according to Neilsen/ NetRatings). Three of the six sites that
were rated “Excellent” (the highest rating) are owned
by us and included in The WebMD Health Network: WebMD Health,
Medscape from WebMD and MedicneNet.com. The ratings were
based on evaluations of credibility and quality across nine
different attributes, including identity, advertising and
sponsorship disclosure, ease of use, corrections and currency,
privacy, coverage, design, accessibility and contents. The
strengths of WebMD Health that were noted included its
large amount of trustworthy information on mainstream health
topics and its coverage of current health news and trends; the
strengths of Medscape from WebMD that were noted included
its breadth and depth of authoritative articles; and the
strengths of MedicneNet.com that were noted included its
easy-to-read health information on a wide range of topics,
written by physicians. |
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• |
Leading online health destination. The WebMD Health
Network is the leading online health destination today.
According to comScore MediaMetrix, a leading Internet audience
measurement service, The WebMD Health Network had more
than twice as many unique visitors (U.S. only) in May 2005
as any other non-governmental online health destination. In
addition, Medscape from WebMD is the leading online
provider of CME programs, with approximately 67% of online
participants taking at least one of their CME courses on
Medscape from WebMD. |
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• |
Motivated users. The WebMD Health Network enables
health-involved consumers and clinically-active physicians to
readily access healthcare information relevant to their specific
areas of interest. |
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60
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• |
Highly targeted advertising and sponsorship model. We are
able to offer advertisers and sponsors programs that deliver
their message to either our entire audience or to more targeted
audiences of consumers, physicians and other healthcare
professionals based upon the audience members’ specific
interests or specialties. |
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• |
Ability to deliver efficient marketing solutions. We have
good working relationships with our advertising and sponsorship
clients and their advertising agencies and a track record of
providing them with a more efficient use of their marketing
expenditures compared to traditional media. |
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Comprehensive and personalized private portal solutions.
We offer employers and health plans a platform that provides a
personalized user experience for employees and health plan
members, which includes access to individual user data, specific
health plan benefit data, relevant health-oriented content,
treatment decision- support applications, personal communication
services, and integrated third party applications and data. We
believe that our private portal services have several important
advantages over competitive offerings, including: the fact that
we offer products and services both for selecting healthcare
benefits and for managing overall health status; the
organization of our services around our electronic personal
health record application and the capability of that application
to include both self-reported and imported claims and clinical
data; and the level of personalization, for content and
messaging, that our platform allows us to provide. |
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• |
Proven and experienced management team. Our senior
management’s experience in and understanding of the
healthcare industry allows us to respond quickly to developing
industry trends with new products and services that build on our
existing content, infrastructure and capabilities. |
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Our Strategy
We have positioned our services to benefit from the trends
described above under “— Industry
Background,” and the other trends affecting the Internet,
online advertising and healthcare industries described in this
prospectus. Our goal is to be the leading provider of online
health information services in each of the markets in which we
participate and to use our content, technology platform and
expertise to continue to enter additional complementary markets.
The strategies we expect to pursue include:
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• |
Enhancing our current products and services. We intend to
continue to invest in the resources needed to deliver high
quality health and medical information by continuing to build
our repository of in-depth health content, broadening our
interactive services and increasing their functionality,
improving our technology platform and adding additional products
and services. Our goal is to continue to increase the number of
consumers, physicians and healthcare professionals using our Web
sites, the amount of time they spend there and, most
importantly, the trust they have in WebMD. |
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Expanding awareness of the WebMD brand. We plan to
promote the WebMD brand through relationships with other
well-known Internet media and healthcare companies, through
advertising and through the breadth of products and services
that we offer. We intend to achieve this by continuing to pursue
co-branding relationships with organizations we identify as
having strong brand identities and distribution channels. Also,
we recently introduced WebMD the Magazine, as a means of
extending our brand into offline channels and attracting
incremental advertising dollars. |
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• |
Deepening our relationships with existing clients and
expanding our sponsorship base. We intend to increase The
WebMD Health Network’s advertising and sponsorship
revenues by continuing to provide an efficient and effective
channel for sponsors to reach, educate and inform large
audiences of health-involved consumers and clinically-active
physicians within the trusted environment of WebMD. By
continuing to strengthen and grow our sales and marketing
functions, we believe that we will be able to broaden our market
coverage and pursue additional clients. We believe that we are
well positioned to benefit from the expected increases in the
portion of their advertising and sponsorship spending allocated
to online media by pharmaceutical, biotechnology and medical
device companies as they continue to see the benefits of online
sponsorship relative to traditional media, including
interactivity, rapid and measurable user feedback and the
ability to more |
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61
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efficiently reach specific audiences. In addition, we are
focused on increasing sponsorship of The WebMD Health Network
by consumer products companies that wish to communicate
health- and lifestyle-related messages for their products. |
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Increasing market penetration of our private portals. We
intend to increase the market penetration of our private health
and benefits portals for employers and health plans by
demonstrating to prospective clients the return on investment
and increase in employee satisfaction on the part of our
existing clients from implementing our services. We expect
demand for these services to increase as more employers and
health plans seek to complement or replace their existing
offline benefit-related services with more efficient Web-based
decision-support tools and related online services. By
continuing to strengthen and grow our sales and marketing
functions through the addition of individuals with expertise in
health and benefits services, we believe that we will be able to
broaden our client base and expand our existing client
relationships by selling a broader range of services to these
existing clients. |
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Acquiring complementary online and offline services.
Since 2001, we have a history of acquiring and successfully
integrating complementary companies. We evaluate the success of
our acquisition integration through our ability to increase the
revenues and traffic of each acquired business and our ability
to utilize the assets of the acquired business across our other
businesses. For example, we use some of the private portal tools
we acquired through our acquisition of WellMed, Inc. on our
public portals and The Little Blue Book has become a
source for the physician finder on WebMD Health. We
expect to continue to supplement our internal product
development efforts with strategic acquisitions that add new
capabilities or help us enter additional complementary markets. |
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Capitalizing upon governmental initiatives relating to the
use of information technology in healthcare. There are
currently numerous federal, state and private initiatives
seeking ways to increase the use of information technology in
healthcare, including the creation of portable consumer health
records. For example, the Department of Health and Human
Services, or HHS, issued a report in 2004 entitled “The
Decade of Health Information Technology: Delivering
Consumer-centric and Information-rich Health Care” and the
report was followed up by a Request for Information and, in June
2005, several Requests for Proposals. In addition, several bills
have been introduced in 2005 in both the Senate and the House of
Representatives reflecting various approaches to fostering the
use of information technology in healthcare. We believe that we
are well positioned to play a role in such efforts, as well as
efforts to establish the adoption of electronic medical records
among physicians and to provide channels for the exchange of
information among patients, providers and payers. While we do
not expect to realize any short term benefit as a result of
these governmental initiatives, we believe that such initiatives
will create opportunities for our company over the long term. |
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Our Online Services
Our high quality content and services have made our public
portals the leading online health destinations for consumers,
physicians and healthcare professionals. The WebMD Health
Network consists of public portals that we own and
third-party portals through which we provide our branded health
and wellness content, tools and services.
Owned Web Sites. A substantial majority of the visitors
to
The WebMD Health Network and of the page views
generated on
The WebMD Health Network are from
Web sites
that we own. During the first quarter of 2005, sites we own
accounted for approximately 75% of
The WebMD Health
Network’s unique
62
users and approximately 87% of its page views. The following
provides a brief description of each of our owned public portals:
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Description |
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WebMD Health, our flagship consumer portal. |
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A health information site for consumers that is produced and
written by practicing physicians, including an online medical
dictionary with more than 16,000 medical terms. |
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An online drug directory with over 1,400 drug monographs, which
are comprehensive descriptions of pharmaceutical products
(including chemical name, brand names, molecular structure,
clinical pharmacology, directions and dosage, side effects, drug
interactions and precautions). |
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Our Web site for physicians and healthcare professionals. |
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The world’s first online-only, primary source,
peer-reviewed medical journal. |
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Other Sites. The third party portals that we support
include
AOL Health with WebMD, the health channels of
other AOL properties and the online
Fox News Health Channel
with WebMD. During the first quarter of 2005, third party
Web sites included in
The WebMD Health Network (such as
the
AOL and
FoxNews sites) accounted for
approximately 25% of
The WebMD Health Network’s
unique users and approximately 13% of its page views. We control
and sell the advertising on the portions of the third party Web
sites that we program.
Introduction. Healthcare consumers increasingly seek to
educate themselves online about their healthcare related issues,
motivated in part by the continued availability of new treatment
options and in part by the larger share of healthcare
expenditures they are being asked to bear due to changes in the
benefit designs being offered by health plans and employers. The
Internet has fundamentally changed the way consumers obtain
information, enabling them to have immediate access to
searchable information and dynamic interactive content. A 2004
study by Manhattan Research indicated that general health Web
sites are the primary source for healthcare information for
consumers. Manhattan Research also indicated that consumer
satisfaction with the Internet for healthcare information is
greater than for alternative sources such as health magazines,
television, news and advertisements.
Overview of Content and Service Offerings. Our goal is to
provide consumers with an objective and trusted source of
information that helps them play an active role in managing
their health. WebMD Health and the other consumer portals
in The WebMD Health Network provide our users with health
and wellness related information, tools and applications in a
variety of content formats. These content offerings include
access to high quality health and wellness news articles and
features, which are written, edited and published by our
90-person in-house staff, which includes professional writers,
editors, designers and board-certified physicians. Our in-house
staff is supplemented by medical advisors and authors from
widely respected academic institutions. The news stories and
other original content and reporting presented in The WebMD
Health Network are based on our editors’ selections of
the most important and relevant health events occurring on any
given day, obtained from an array of sources, including
peer-reviewed medical journals, medical conferences, federal or
state government actions and materials derived from interviews
with medical experts. We offer searchable access to the full
contents of our
