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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, 2004

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 4, 2004, there were 312,644,362 shares of the

registrant’s Common Stock outstanding.




WEBMD CORPORATION

QUARTERLY REPORT ON FORM 10-Q

For the period ended September 30, 2004

TABLE OF CONTENTS

             
Page
Number

 Cautionary Statement Regarding Forward-Looking Statements     3  
         
         
        4  
        5  
        6  
        7  
      23  
      56  
      56  
         
      57  
      59  
      59  
      60  
 Signatures     61  
 Exhibit Index     E-1  
 EX-3.1 11TH AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
 EX-3.2 CERTIFICATE OF DESIGNATIONS
 EX-10.1 2004 NON-QUALIFIED STOCK OPTION PLAN / DAKOTA IMAGING, INC.
 EX-10.2 2004 NON-QUALIFIED STOCK OPTION PLAN / VIPS, INC.
 EX-31.1 SECTION 302 CERTIFICATION OF CEO
 EX-31.2 SECTION 302 CERTIFICATION OF CFO
 EX-32.1 SECTION 906 CERTIFICATION OF CEO
 EX-32.2 SECTION 906 CERTIFICATION OF CFO

WebMD®, dakota imagingTM, Digital Office Manager®, DIMDX®, Envoy®, ExpressBill®, Intergy®, Medifax®, Medifax-EDI®, Medscape®, MEDPOR®, Medpulse®, POREX®, Publishers’ Circle®, The Little Blue BookTM, The Little Yellow BookTM, The Medical Manager®, ULTIATM, ViPSSM, WebMD Health HubTM and WellMed® 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 deemed to 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 deemed to be, forward-looking statements. These 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. 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 36, the following important risks and uncertainties could affect future results, causing those 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 products and services,
 
  •  the inability to successfully deploy new or updated applications,
 
  •  difficulties in forming and maintaining relationships with customers and strategic partners,
 
  •  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 36 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.

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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,
2004 2003


(Unaudited)
ASSETS
Current assets:
               
 
Cash and cash equivalents
  $ 108,204     $ 63,298  
 
Short-term investments
    25,784       207,383  
 
Accounts receivable, net
    203,288       181,173  
 
Inventory
    12,579       12,158  
 
Current portion of prepaid content and distribution services
    16,221       18,116  
 
Other current assets
    24,978       25,973  
     
     
 
   
Total current assets
    391,054       508,101  
 
Marketable debt securities
    515,096       451,290  
Marketable equity securities
    3,373       4,744  
Property and equipment, net
    83,071       77,278  
Prepaid content and distribution services
    19,020       31,992  
Goodwill
    959,799       844,448  
Intangible assets, net
    270,426       184,130  
Other assets
    35,800       33,323  
     
     
 
    $ 2,277,639     $ 2,135,306  
     
     
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
               
 
Accounts payable
  $ 10,777     $ 10,390  
 
Accrued expenses
    207,271       208,430  
 
Deferred revenue
    104,794       86,708  
     
     
 
   
Total current liabilities
    322,842       305,528  
 
3 1/4% convertible subordinated notes due 2007
    299,999       299,999  
1.75% convertible subordinated notes due 2023
    350,000       350,000  
Other long-term liabilities
    974       1,182  
 
Commitments and contingencies
               
 
Convertible redeemable exchangeable preferred stock, $0.0001 par value; 10,000 shares authorized, issued and outstanding at September 30, 2004
    98,240        
Stockholders’ equity:
               
 
Preferred stock, $0.0001 par value; 4,990,000 shares authorized; no shares issued
           
 
Common stock, $0.0001 par value; 900,000,000 shares authorized; 391,879,504 shares issued at September 30, 2004; 384,751,705 shares issued at December 31, 2003
    39       38  
 
Additional paid-in capital
    11,767,066       11,726,734  
 
Deferred stock compensation
    (7,232 )     (4,683 )
 
Treasury stock, at cost; 79,394,471 shares at September 30, 2004; 76,576,865 shares at December 31, 2003
    (370,125 )     (347,858 )
 
Accumulated deficit
    (10,192,534 )     (10,212,054 )
 
Accumulated other comprehensive income
    8,370       16,420  
     
     
 
   
Total stockholders’ equity
    1,205,584       1,178,597  
     
     
 
    $ 2,277,639     $ 2,135,306  
     
     
 

See accompanying notes.

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WEBMD CORPORATION

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


2004 2003 2004 2003




Revenue
  $ 299,615     $ 250,635     $ 852,710     $ 705,584  
Costs and expenses:
                               
 
Cost of operations
    168,571       149,270       495,174       410,556  
 
Development and engineering
    14,392       11,334       38,479       32,654  
 
Sales, marketing, general and administrative
    84,762       72,450       245,054       209,917  
 
Depreciation, amortization and other
    15,189       11,097       40,922       52,961  
 
Legal expense
    2,325       493       6,577       493  
 
Restructuring and integration charge
    4,535             4,535        
 
Interest income
    4,512       6,401       14,506       16,434  
 
Interest expense
    4,843       4,703       14,429       10,444  
 
Other income, net
    94       3,039       578       4,340  
     
     
     
     
 
Income from continuing operations before income tax provision
    9,604       10,728       22,624       9,333  
 
Income tax provision
    1,435       1,273       2,979       3,261  
     
     
     
     
 
 
Income from continuing operations
    8,169       9,455       19,645       6,072  
 
Loss from discontinued operations, net of income taxes
          3,366             33,611  
     
     
     
     
 
Net income (loss)
  $ 8,169     $ 6,089     $ 19,645     $ (27,539 )
     
     
     
     
 
Basic income (loss) per common share:
                               
 
Income from continuing operations
  $ 0.03     $ 0.03     $ 0.06     $ 0.02  
 
Loss from discontinued operations
          (0.01 )           (0.11 )
     
     
     
     
 
Net income (loss)
  $ 0.03     $ 0.02     $ 0.06     $ (0.09 )
     
     
     
     
 
Diluted income (loss) per common share:
                               
 
Income from continuing operations
  $ 0.02     $ 0.03     $ 0.06     $ 0.02  
 
Loss from discontinued operations
          (0.01 )           (0.10 )
     
     
     
     
 
Net income (loss)
  $ 0.02     $ 0.02     $ 0.06     $ (0.08 )
     
     
     
     
 
Weighted-average shares outstanding used in computing income (loss) per common share:
                               
 
Basic
    312,366       305,471       311,379       304,121  
     
     
     
     
 
 
Diluted
    333,978       328,463       333,048       326,396  
     
     
     
     
 

See accompanying notes.

5


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WEBMD CORPORATION

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

2004 2003


Cash flows from operating activities:
               
 
Net income (loss)
  $ 19,645     $ (27,539 )
 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
   
Loss from discontinued operations
          33,611  
   
Depreciation, amortization and other
    40,922       52,961  
   
Amortization of debt issuance costs
    2,255       1,505  
   
Non-cash content and distribution services
    14,893       18,224  
   
Non-cash stock-based compensation
    7,241       10,948  
   
Gain on investments
    (457 )     (3,222 )
   
Gain on sale of property and equipment
    (121 )      
   
Changes in operating assets and liabilities:
               
     
Accounts receivable
    (8,001 )     3,580  
     
Inventory
    (417 )     (1,144 )
     
Prepaid content and distribution services
    (26 )     (537 )
     
Accounts payable
    (874 )     (775 )
     
Accrued expenses
    (8,189 )     (12,174 )
     
Deferred revenue
    9,284       (2,228 )
     
Other, net
    3,045       5,685  
     
     
 
       
Net cash provided by continuing operations
    79,200       78,895  
       
Net cash provided by discontinued operations
          5,130  
     
     
 
       
Net cash provided by operating activities
    79,200       84,025  
Cash flows from investing activities:
               
 
Proceeds from maturities and sales of available-for-sale securities
    384,238       11,322  
 
Proceeds from maturities and redemptions of held-to-maturity securities
          157,919  
 
Purchases of available-for-sale securities
    (274,600 )     (7,754 )
 
Purchases of held-to-maturity securities
          (590,113 )
 
Proceeds received from sale of property and equipment
    417        
 
Purchases of property and equipment
    (24,889 )     (13,643 )
 
Proceeds received from sale of discontinued operations
          46,500  
 
Cash paid in business combinations, net of cash acquired
    (225,375 )     (133,471 )
 
Other changes in equity of discontinued operations
          1,754  
     
     
 
       
Net cash used in continuing operations
    (140,209 )     (527,486 )
       
Net cash used in discontinued operations
          (2,529 )
     
     
 
       
Net cash used in investing activities
    (140,209 )     (530,015 )
Cash flows from financing activities:
               
 
Proceeds from issuance of common stock
    30,528       35,367  
 
Payments of notes payable and other
    (433 )     (211 )
 
Net proceeds from issuance of convertible debt
          339,125  
 
Net proceeds from issuance of preferred stock
    98,115        
 
Purchases of treasury shares
    (22,267 )     (18,125 )
     
     
 
       
Net cash provided by continuing operations
    105,943       356,156  
       
Net cash used in discontinued operations
          (6,546 )