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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q

  [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  For the quarterly period ended September 30, 2003

or

  [  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  For the transition period from            to           

Commission file number 0-24975

WEBMD CORPORATION

(Exact name of registrant as specified in its charter)
     
Delaware
  94-3236644
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification Number)

669 River Drive, Center 2

Elmwood Park, New Jersey 07407-1361
(Address of principal executive offices)

(201) 703-3400

(Registrant’s telephone number, including area code)


     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x     No o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes x     No o

As of November 10, 2003, there were 306,910,104 shares of the

registrant’s Common Stock outstanding.




TABLE OF CONTENTS

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
PART I
ITEM 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
ITEM 4. Controls and Procedures
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
ITEM 2. Changes in Securities and Use of Proceeds
ITEM 4. Submission of Matters to a Vote of Security Holders
ITEM 5. Other Information
ITEM 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
EX-2.1 STOCK PURCHASE AGREEMENT
EX-3.1 RESTATED CERTIFICATE OF INCORPORATION
EX-10.1 EMPLOYMENT AGREEMENT, DATED SEPT. 23, 2003
EX-10.2 2003 NON-QUALIFIED STOCK OPTION PLAN
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO


Table of Contents

WEBMD CORPORATION

QUARTERLY REPORT ON FORM 10-Q

For the period ended September 30, 2003

TABLE OF CONTENTS

             
Page
Number

Cautionary Statement Regarding Forward-Looking Statements     3  
Part I
 
Financial Information
       
Item 1.
 
Financial Statements:
       
   
Consolidated Balance Sheets as of September 30, 2003 (unaudited) and December 31, 2002
    4  
   
Unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2003 and 2002
    5  
   
Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002
    6  
   
Notes to Consolidated Financial Statements
    7  
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
    23  
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
    53  
Item 4.
 
Controls and Procedures
    53  
Part II
 
Other Information
       
Item 1.
 
Legal Proceedings
    54  
Item 2.
 
Changes in Securities and Use of Proceeds
    57  
Item 4.
 
Submission of Matters to a Vote of Security Holders
    57  
Item 5.
 
Other Information
    58  
Item 6.
 
Exhibits and Reports on Form 8-K
    60  
Signatures     61  
Exhibit Index     E-1  

WebMD®, WebMD Health®, The Medical Manager®, ULTIATM, Intergy®, Envoy®, ExpressBill®, Medscape®, Optate®, WellMed® and POREX® are trademarks of WebMD Corporation or its subsidiaries.

2


Table of Contents

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

      This Quarterly Report on Form 10-Q contains both historical and forward-looking statements. All statements other than statements of historical fact are, or may be, forward-looking statements. These forward-looking statements are not based on historical facts, but rather reflect management’s current expectations concerning future results and events. These forward-looking statements generally can be identified by use of expressions such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “foresee,” “likely,” “will” or other similar words or phrases. Similarly, statements that describe our objectives, plans or goals are, or may be, forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be different from any future results, performance and achievements expressed or implied by these statements. In addition to the risk factors described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors That May Affect Our Future Financial Condition or Results of Operations” beginning on page 35, the following important risks and uncertainties could affect future results, causing these results to differ materially from those expressed in our forward-looking statements:

  •  the failure to achieve sufficient levels of customer utilization and market acceptance of new or updated services,
 
  •  the inability to successfully deploy new or updated applications,
 
  •  difficulties in forming and maintaining mutually beneficial relationships with customers and strategic partners, some of whom are also competitors,
 
  •  difficulties in integrating acquired companies, businesses and technologies,
 
  •  the inability to attract and retain qualified personnel, and
 
  •  general economic, business or regulatory conditions affecting the healthcare, information technology, Internet and plastic industries being less favorable than expected.

      These factors and the risk factors described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors That May Affect Our Future Financial Condition or Results of Operations” beginning on page 35 are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could have material adverse effects on our future results. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date of this Quarterly Report. We expressly disclaim any intent or obligation to update any forward-looking statements to reflect subsequent events or circumstances.

3


Table of Contents

PART I

FINANCIAL INFORMATION

 
 
ITEM 1. Financial Statements

WEBMD CORPORATION

 
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
                     
September 30, December 31,
2003 2002


(Unaudited)
ASSETS
               
Current assets:
               
 
Cash and cash equivalents
  $ 83,872     $ 175,596  
 
Short-term investments
    211,378       10,888  
 
Accounts receivable, net
    172,988       163,244  
 
Inventory
    11,120       9,976  
 
Current portion of prepaid content and distribution services
    23,582       25,406  
 
Assets of discontinued operations
          94,056  
 
Other current assets
    23,810       25,814  
     
     
 
   
Total current assets
    526,750       504,980  
 
Marketable debt securities
    678,315       449,289  
Marketable equity securities
    5,681       7,427  
Property and equipment, net
    80,264       70,488  
Prepaid content and distribution services
    32,670       48,532  
Goodwill
    667,444       586,043  
Intangible assets, net
    91,806       73,222  
Other assets
    34,733       26,267  
     
     
 
    $ 2,117,663     $ 1,766,248  
     
     
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
 
Accounts payable
  $ 10,389     $ 10,063  
 
Accrued expenses
    217,479       208,342  
 
Deferred revenue
    83,959       81,179  
 
Liabilities of discontinued operations
          12,365  
     
     
 
   
Total current liabilities
    311,827       311,949  
 
3 1/4% convertible subordinated notes due 2007
    299,999       300,000  
1.75% convertible subordinated notes due 2023
    350,000        
Other long-term liabilities
    1,338       498  
Commitments and contingencies
               
Stockholders’ equity:
               
 
Common stock, $0.0001 par value; 900,000,000 shares authorized at September 30, 2003; 600,000,000 shares authorized at December 31, 2002; 382,291,875 shares issued at September 30, 2003; 374,661,064 shares issued at December 31, 2002
    38       37  
 
Additional paid-in-capital
    11,717,401       11,682,443  
 
Deferred stock compensation
    (6,216 )     (17,805 )
 
Treasury stock, at cost; 76,324,165 shares at September 30, 2003; 74,254,669 shares at December 31, 2002
    (345,667 )     (327,542 )
 
Accumulated deficit
    (10,222,587 )     (10,195,048 )
 
Accumulated other comprehensive income
    11,530       11,716  
     
     
 
   
Total stockholders’ equity
    1,154,499       1,153,801  
     
     
 
    $ 2,117,663     $ 1,766,248  
     
     
 

See accompanying notes.

4


Table of Contents

WEBMD CORPORATION

 
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data, unaudited)
                                   
Three Months Ended Nine Months Ended
September 30, September 30,


2003 2002 2003 2002




Revenue
  $ 250,635     $ 217,004     $ 705,584     $ 642,220  
Costs and expenses:
                               
 
Cost of operations
    149,270       123,360       410,556       379,101  
 
Development and engineering
    11,334       10,869       32,654       32,640  
 
Sales, marketing, general and administrative
    72,450       66,883       209,917       218,501  
 
Depreciation, amortization and other
    11,097       32,073       52,961       95,575  
 
Legal expense
    493             493        
 
Restructuring and integration benefit
          2,100             5,850  
 
Gain on investments
    3,039       681       3,222       6,547  
 
Interest income
    6,401       5,222       16,434       14,341  
 
Interest expense
    4,703       2,819       10,444       5,677  
 
Other income
          2,323       1,118       2,323  
     
     
     
     
 
Income (loss) from continuing operations before income tax provision (benefit)
    10,728       (8,674 )     9,333       (60,213 )
 
Income tax provision (benefit)
    1,273       (12,103 )     3,261       (10,700 )
     
     
     
     
 
 
Income (loss) from continuing operations
    9,455       3,429       6,072       (49,513 )
 
Income (loss) from discontinued operations, net of income taxes
    (3,366 )     1,109       (33,611 )     2,240  
     
     
     
     
 
Net income (loss)
  $ 6,089     $ 4,538     $ (27,539 )   $ (47,273 )
     
     
     
     
 
Basic income (loss) per common share:
                               
 
Income (loss) from continuing operations
  $ 0.03     $ 0.01     $ 0.02     $ (0.16 )
 
Income (loss) from discontinued operations
    (0.01 )     0.01       (0.11 )     0.01  
     
     
     
     
 
Net income (loss)
  $ 0.02     $ 0.02     $ (0.09 )   $ (0.15 )
     
     
     
     
 
Diluted income (loss) per common share:
                               
 
Income (loss) from continuing operations
  $ 0.03     $ 0.01     $ 0.02     $ (0.16 )
 
Income (loss) from discontinued operations
    (0.01 )     0.00       (0.10 )     0.01  
     
     
     
     
 
Net income (loss)
  $ 0.02     $ 0.01     $ (0.08 )   $ (0.15 )
     
     
     
     
 
Weighted-average shares outstanding used in computing income (loss) per common share:
                               
 
Basic
    305,471       297,352       304,121       306,161  
     
     
     
     
 
 
Diluted
    328,463       308,537       326,396       306,161  
     
     
     
     
 

See accompanying notes.

5


Table of Contents

WEBMD CORPORATION

 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
                         
Nine Months Ended
September 30,

2003 2002


Cash flows from operating activities:
               
 
Net loss
  $ (27,539 )   $ (47,273 )
 
Adjustments to reconcile net loss to net cash provided by operating activities:
               
   
Loss (income) from discontinued operations
    33,611       (2,240 )
   
Depreciation, amortization and other
    52,961       95,575  
   
Amortization of debt issuance costs
    1,505       740  
   
Non-cash content and distribution services
    18,224       19,558  
   
Non-cash stock-based compensation
    10,948       21,559  
   
Gain on investments
    (3,222 )     (6,547 )
   
Changes in operating assets and liabilities:
               
     
Accounts receivable
    3,580       5,226  
     
Inventory
    (1,144 )     711  
     
Federal income tax receivable
          (12,887 )
     
Prepaid content and distribution services
    (537 )     (201 )
     
Other assets
    5,685       (8,001 )
     
Accounts payable
    (775 )     (3,220 )
     
Accrued expenses
    (12,174 )     (10,216 )
     
Deferred revenue
    (2,228 )     6,822  
     
     
 
       
Net cash provided by continuing operations
    78,895       59,606  
       
Net cash provided by discontinued operations
    5,130       5,809  
     
     
 
       
Net cash provided by operating activities
    84,025       65,415  
Cash flows from investing activities:
               
 
Proceeds from maturities and sales of available-for-sale securities
    11,322       106,108  
 
Proceeds from maturities and redemptions of held-to-maturity securities
    157,919       59,095  
 
Purchases of available-for-sale securities
    (7,754 )     (206,983 )
 
Purchases of held-to-maturity securities
    (590,113 )     (300,970 )
 
Purchases of property and equipment
    (13,643 )     (20,737 )
 
Proceeds received from sale of discontinued operations
    46,500        
 
Cash paid in business combinations, net of cash acquired
    (133,471 )     (9,929 )
 
Other changes in equity of discontinued operations
    1,754       7,511  
     
     
 
       
Net cash used in continuing operations
    (527,486 )     (365,905 )
       
Net cash used in discontinued operations
    (2,529 )     (9,184 )
     
     
 
       
Net cash used in investing activities
    (530,015 )     (375,089 )
Cash flows from financing activities:
               
 
Proceeds from issuance of common stock
    35,367       14,313  
 
Purchases of treasury shares
    (18,125 )     (103,784 )
 
Payments of notes payable and other
    (211 )     (2,899 )
 
Net proceeds from issuance of convertible debt
    339,125     <