Edgar Filing: WEBMD CORP /NEW/

e10-q

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, 2001


	[ ]	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 (State or other jurisdiction of incorporation or organization)		94-3236644 (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)

Check whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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

As of November 8, 2001, there were 311,244,735 shares of the

Registrant’s Common Stock outstanding.

TABLE OF CONTENTS


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
PART I FINANCIAL INFORMATION
	ITEM 1. Financial Statements
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF OPERATIONS
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED 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
PART II OTHER INFORMATION
	ITEM 1. Legal proceedings
	ITEM 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
Letter Agreement

WEBMD CORPORATION

QUARTERLY REPORT ON FORM 10-Q

For the Period Ended September 30, 2001

TABLE OF CONTENTS


		Page
		Number

Cautionary Statement Regarding Forward-Looking Statements			3
Part I	Financial Information
Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets as of September 30, 2001 (unaudited) and December 31, 2000		4
	Unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2001 and 2000		5
	Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and 2000		6
	Notes to Condensed Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		37
Part II	Other Information
Item 1.	Legal Proceedings		38
Item 6.	Exhibits and Reports on Form 8-K		39
Signatures			40
Exhibits			E-1

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 within the meaning of section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are not based on historical facts, but rather reflect management’s current expectations concerning future results and events. These forward-looking statements generally can be identified by use of statements that include phrases such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “foresee,” “likely,” “will” or other similar words or phrases. Similarly, statements that describe our objectives, plans or goals are or may be forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be different from any future results, performance and achievements expressed or implied by these statements. In addition to the risk factors described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors That May Affect Future Results of Operations” beginning on page 24, the following important risks and uncertainties could affect future results, causing these results to differ materially from those expressed in our forward-looking statements:


	•	the expected benefits from our restructuring and integration efforts not being fully realized or not being realized within the expected time frames

	•	the failure to achieve sufficient levels of customer utilization and market acceptance of new services or newly integrated services

	•	the inability to successfully deploy new applications or newly integrated applications

	•	the inability to attract and retain qualified personnel

	•	outcome of pending litigation and claims

	•	general economic, business or regulatory conditions affecting the healthcare and information technology industries being less favorable than expected.

These factors and the risk factors described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors That May Affect Future Results of Operations” beginning on page 24 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.

PART I

FINANCIAL INFORMATION

ITEM 1. Financial Statements

WEBMD CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


				September 30,			December 31,
				2001			2000

				(unaudited)
ASSETS
Current assets:
	Cash and cash equivalents			$	490,432		$	490,797
	Short-term marketable securities				96,336			—
	Accounts receivable, net				154,711			195,071
	Current portion of prepaid content, services and distribution				29,486			28,333
	Assets held for sale				185,000			214,556
	Other current assets				18,848			38,941

			Total current assets		974,813			967,698
Marketable securities					7,716			219,686
Property and equipment, net					40,730			90,356
Prepaid content, services and distribution					78,101			206,016
Intangible and other assets, net					798,395			6,971,875

				$	1,899,755		$	8,455,631


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable			$	15,839		$	19,563
	Accrued expenses				230,073			272,932
	Deferred revenue				57,099			45,891

			Total current liabilities		303,011			338,386
Other long-term liabilities					1,568			15,260
Series B convertible redeemable preferred stock, $0.0001 par value; 200 shares authorized; 100 shares issued and outstanding					10,000			10,000
Stockholders’ equity:
	Series A convertible preferred stock; $0.0001 par value; 213,000 shares authorized; 155,951 shares issued and outstanding at December 31, 2000				—			710,746
	Common stock, $0.0001 par value; September 30, 2001:
		600,000,000 shares authorized; 366,001,359 shares issued; December 31, 2000: 600,000,000 shares authorized; 361,233,643 shares issued			37			36
	Additional paid-in capital				11,635,974			11,028,461
	Treasury stock, at cost, September 30, 2001: 8,418,595 and December 31, 2000: 5,163,509				(42,954	)		(30,759	)
	Unrealized gain on marketable securities				4,956			4,996
	Deferred stock compensation				(51,021	)		(144,467	)
	Accumulated deficit				(9,961,816	)		(3,477,028	)

			Total stockholders’ equity		1,585,176			8,091,985

				$	1,899,755		$	8,455,631

See notes to condensed consolidated financial statements.

WEBMD CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data, unaudited)



		Three Months Ended						Nine Months Ended
		September 30,						September 30,

		2001			2000			2001			2000

Revenue (1)		$	167,035		$	151,247		$	530,240		$	318,202
Costs and expenses:
	Cost of operations		111,606			108,903			356,316			246,462
	Development and engineering		8,958			18,975			30,471			45,233
	Sales, marketing, general and administrative		98,804			137,965			341,171			362,627
	Depreciation and amortization		751,487			597,728			2,266,357			1,352,866
	Impairment of long-lived and other assets		3,826,893			—			3,826,893			—
	Restructuring and integration charge		267			44,881			220,161			44,881
	Loss on investments		—			39,602			—			39,602
	Interest income, net		6,380			9,882			25,387			36,775

Loss from continuing operations			(4,624,600	)		(786,925	)		(6,485,742	)		(1,736,694	)

Discontinued operations:
	Net income from discontinued operations		954			—			954			—

Net loss		$	(4,623,646	)	$	(786,925	)	$	(6,484,788	)	$	(1,736,694	)

Basic and diluted net loss per common share:
	Loss from continuing operations	$	(12.86	)	$	(3.17	)	$	(18.11	)	$	(8.41	)
	Net income from discontinued operations		.00			—			.00			—

	Net loss per common share	$	(12.86	)	$	(3.17	)	$	(18.11	)	$	(8.41	)

Weighted-average shares outstanding used in computing basic and diluted net loss per common share			359,600			247,873			358,095			206,462


(1)	Includes revenue from related parties of $0 and $14,189 for the three months ended September 30, 2001 and 2000, respectively, and $3,000 and $37,237 for the nine months ended September 30, 2001 and 2000, respectively.

See notes to condensed consolidated financial statements.

WEBMD CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)



					Nine Months Ended
					September 30,

					2001			2000

CASH FLOWS FROM OPERATING ACTIVITIES:
	Net loss				$	(6,484,788	)	$	(1,736,694	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization				2,266,357			1,352,866
		Impairment of long-lived and other assets				3,826,893			—
		Non-cash stock compensation				70,184			42,172
		Amortization of non-cash prepaid content, services and distribution				26,230			62,832
		Non-cash portion of restructuring and integration charge				185,498			14,078
		Loss on investments				—			39,602
		Changes in operating assets and liabilities:
			Accounts receivable			37,358			(49,684	)
			Prepaid content, services and distribution			(8,071	)		—
			Other assets			22,804			(23,461	)
			Accounts payable			(7,716	)		(49,327	)
			Accrued expenses			(33,463	)		8,782
			Deferred revenue			10,630			1,967

				Net cash used in operating activities		(88,084	)		(336,867	)

CASH FLOWS FROM INVESTING ACTIVITIES:
	Redemption of marketable securities					119,000			—
	Purchases of marketable securities					—			(49,600	)
	Purchases of property and equipment					(20,689	)		(22,351	)
	Cash paid in business combinations, net of cash received					(6,042	)		(226,018	)

				Net cash provided by (used in) investing activities		92,269			(297,969	)

CASH FLOWS FROM FINANCING ACTIVITIES:
	Proceeds from issuance of common stock, net of repurchase and issuance costs					10,134			951,460
	Principal payments of capital lease obligations					(2,489	)		(4,755	)
	Purchases of treasury stock					(12,195	)		—

				Net cash (used in) provided by financing activities		(4,550	)		946,705

	Net (decrease) increase in cash and cash equivalents					(365	)		311,869
	Cash and cash equivalents at beginning of period					490,797			291,286

	Cash and cash equivalents at end of period				$	490,432		$	603,155

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
	Issuance of equity securities in connection with strategic alliances and services				$	17,500		$	—

	Issuance of common stock for asset purchases				$	—		$	4,733,220

	Issuance of preferred stock for asset purchases				$	—		$	639,000

	Deferred compensation related to options granted				$	—		$	197,003

See notes to condensed consolidated financial statements.

WEBMD CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

1. Summary of Significant Accounting Policies

Organization and Business

WebMD Corporation (the “Company” or “WebMD”) was incorporated in December 1995 and commenced operations in January 1996, as Healtheon Corporation. In May 1998, the Company merged with ActaMed Corporation in a transaction accounted for as a pooling of interests. In November 1999, the Company completed the acquisitions of WebMD, Inc., MedE America Corporation (“MedE America”) and Greenberg News Networks, Inc. (“Medcast”) and changed its name from Healtheon Corporation to Healtheon/ WebMD Corporation. In January 2000, the Company completed its acquisition of Kinetra LLC (“Kinetra”). In May 2000, the Company completed its acquisition of Envoy Corporation (“Envoy”). In September 2000, the Company completed its acquisitions of Medical Manager Corporation (“Medical Manager”), CareInsite, Inc. (“CareInsite”) and OnHealth Network Company (“OnHealth”) and changed its name from Healtheon/ WebMD Corporation to WebMD Corporation. All financial information has been presented to reflect the combined operations of the Company and the WebMD, Inc., MedE America, Medcast, Envoy, Medical Manager, CareInsite and OnHealth acquisitions for the period subsequent to each respective acquisition date.

Basis of Presentation

The unaudited condensed consolidated financial statements have been prepared by management and reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of the interim periods presented. The results of operations for the three and nine months ended September 30, 2001 are not necessarily indicative of the results to be expected for any subsequent period or for the entire year ending December 31, 2001. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted under the Securities and Exchange Commission’s rules and regulations.

These unaudited condensed consolidated financial statements and notes included herein should be read in conjunction with the Company’s audited consolidated financial statements and notes for the year ended December 31, 2000, which were included in our annual report on Form 10-K filed with the Securities and Exchange Commission.

Revenue

The Company provides a range of transaction and information services and technology solutions for participants across the entire continuum of healthcare, including physicians and other healthcare providers, payers, patients and suppliers. The revenue associated with these solutions provided by the Company are aggregated into the following primary product groupings:



	Three Months Ended				Nine Months Ended
	September 30,				September 30,

	2001		2000		2001		2000

Transaction services	$	91,595	$	88,200	$	286,008	$	174,716
Physician services		61,081		28,976		191,307		44,929
Portal services		14,359		28,600		50,130		76,771
Other		—		5,471		2,795		21,786

	$	167,035	$	151,247	$	530,240	$	318,202

WEBMD CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Revenue recognized from arrangements deemed to be non-monetary exchanges of our products and services for customer products and services totaled approximately $5,814 and $17,322 during the three and nine months ended September 30, 2001, respectively, and $6,221 and $15,522 during the three and nine months ended September 30, 2000, respectively. Revenue was determined at the time of the exchange based upon the fair value of the products and services to be provided or received, whichever is more clearly evident.

Revenue from related parties consists of revenues for services provided to Microsoft for the three and nine months ended September 30, 2001, revenue for services provided to News Corporation for the three months ended March 31, 2001 and revenue for services provided to News Corporation, Microsoft and UnitedHealth Group for the three and nine months ended September 30, 2000. Revenue from UnitedHealth Group ceased being considered from a related party in January 2000 when the Chairman and Chief Executive Officer of UnitedHealth Group resigned from our board of directors. Revenue from News Corporation ceased being considered from a related party as of February 15, 2001 when News Corporation surrendered the Company’s Series A convertible preferred stock.

Reclassifications

Certain reclassifications have been made to the financial statements to conform with the current period presentation. These reclassifications had no effect on previously reported financial position or results of operations.

2. Business Combinations and Strategic Relationships

America Online, Inc.

In May 2001, the Company entered into an agreement for a strategic alliance with AOL Time Warner, Inc. (“AOL”). The term of the agreement is three years. Under the agreement, the Company will be the primary provider of healthcare content, tools and services for use on AOL properties that include AOL, AOL.com, CompuServe and Netscape.com. In addition, the Company will create a co-branded personalized health service for AOL that will feature the Company’s personalized news, health assessment and monitoring tools, communities and newsletters, integrated with AOL’s calendaring and reminders. The Company and AOL intend, through the co-branded services, to provide users with the ability to communicate with their health plans, physicians, pharmacies and other providers. The Company and AOL will share revenue from advertising (whether or not related to healthcare), commerce and programming on the health channels of the AOL properties and on the co-branded service, with the Company receiving 80% of revenues up to an agreed-upon annual threshold and 60% thereafter. The Company will not make any cash payments for carriage fees to AOL. In connection with the strategic alliance, WebMD issued to AOL a warrant to purchase 2,408,908 shares of WebMD common stock at an exercise price of $9.25 per share. The warrant was valued at approximately $17,500 using the Black Scholes options pricing model and is being amortized over the term of the strategic alliance as a non-cash sales and marketing expense.

Microsoft

The Company originally entered into a strategic relationship with Microsoft in May 1999. In April 2001, the Company and Microsoft entered into definitive agreements to implement a new relationship effective as of January 1, 2001. The original relationship and the new relationship are each described below.

WEBMD CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Original Strategic Relationship

Under the terms of the original strategic relationship, the Company has been developing, hosting and maintaining on its servers a health channel for MSN and was required to pay Microsoft an aggregate of $162,000 in carriage fees for the distribution of that content. In addition, Microsoft and the Company each committed co-marketing funds of $50,000 over the first two years of the term.

Microsoft was required to remit to the Company 100% of the net revenue over the term of the agreement from banner and other advertising and e-commerce transactions generated on the health channel or advertising that Microsoft placed on WebMD.com each year during the term until the Company received an amount equal to that year’s carriage fees, including guaranteed minimum amounts of $22,500 in each of the first two years of the term, and was required to share revenue equally after that. The Company was required to pay Microsoft a 25% commission on the portion of the revenue received up to the annual guaranteed minimum amounts for all advertisements placed by Microsoft. The Company recognized this advertising revenue when Microsoft notified the Company that advertisements had been placed on the health channel and billed by Microsoft, not based on the guaranteed minimum amounts.

Microsoft agreed to sponsor up to 5.0 million subscriber months to the Company’s physician Web site for $29.95 per month over the term of the agreement. The Company was required to pay a $5 per month commission on all subscriptions placed by Microsoft.

The Company was required to share with Microsoft 50% of net revenue from banner and other advertising on the Company’s physician Web site generated by sponsored subscriptions until Microsoft received the amount it had incurred for its sponsored subscriptions. Thereafter, the Company was required to share 25% of this revenue with Microsoft. In addition, the Company was required to share with Microsoft 15% of its net revenue from e-commerce transactions and additional services not included in the basic subscriptions to the Company’s physician Web site generated by these sponsored subscriptions.


	New Strategic Relationship

To implement the new relationship, the parties entered into two definitive agreements. The first agreement related to technology matters and was terminated by the parties on September 14, 2001. No payments were made by either party under the terminated agreement. Under the second agreement, WebMD will program the majority of the MSN health channel, and WebMD and MSN will share revenues derived from advertising, sponsorship and e-commerce on the MSN health channel site, with WebMD receiving 100% of revenues up to an agreed upon annual threshold (or until an agreed upon maximum for the contract period is reached) and 60% thereafter. WebMD will no longer pay carriage fees to Microsoft. The term of this agreement is scheduled to expire on June 30, 2004. In connection with the new relationship, the parties agreed that Microsoft would no longer be responsible for funding the sponsorship of the subscriptions to WebMD’s physician portal, and WebMD would no longer be required to share with Microsoft revenue generated by physician usage of WebMD’s healthcare portals.

News Corporation

Pursuant to an agreement signed and publicly announced in December 1999 and closed in January 2000, the Company entered into a strategic relationship with News Corporation. On December 29, 2000, this strategic alliance was revised by the parties. On February 15, 2001, the Company completed all transactions related to its revised strategic relationship with News Corporation. The original relationship and the revised relationship are each described below.

WEBMD CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	Original Strategic Relationship

The financial terms of the strategic relationship included: $700,000 in media branding services by News Corporation, comprised of $400,000 domestically and $300,000 internationally over 10 years; a $100,000 cash investment commitment by News Corporation in an international joint venture; a $60,000 five-year licensing agreement for syndication of WebMD daily broadcast content; and the transfer to the Company of 50% interests in The Health Network, a health-focused cable network, and thehealthnetwork.com. The Company issued an aggregate of 155,951 shares of Series A preferred stock, convertible into 21,282,645 shares of the Company’s common stock. In addition, affiliates of News Corporation purchased 2,000,000 shares of the Company’s common stock for an aggregate purchase price of $100,000 in cash.


	New Strategic Relationship

The Company retained the right to receive $205,000 in domestic media services from News Corporation over ten years and will continue to provide content for use across News Corporation’s media properties for the next four years. News Corporation transferred its 50% interest in the international joint venture to the Company and was relieved of its commitment to provide any future capital to the international joint venture and its commitment to provide any international media services. The Company transferred its interest in The Health Network to News Corporation. The Company was also relieved of all future capital commitments to The Health Network. In connection with the revisions to the relationship, News Corporation surrendered 155,951 shares of WebMD’s Series A Convertible Preferred Stock. The Company granted to News Corporation a warrant to acquire 3,000,000 shares of its common stock at an exercise price of $15 per share.

2001 Acquisitions

During May and June of 2001, the Company acquired the assets of four physician services companies for approximately $9,800 including cash, notes and liabilities assumed. These acquisitions were accounted for using the purchase method of accounting with the purchase price being allocated to assets acquired and liabilities assumed based on their fair values. The goodwill of $9,800 related to these transactions is being amortized over three years. The results of operations of these physician services companies have been included in the Company’s financial statements as of their respective acquisition dates.

2000 Acquisitions

On September 12, 2000, the Company completed its acquisition of Medical Manager, a provider of physician practice management systems in the U.S. and its publicly traded subsidiary, CareInsite, a developer of an Internet-based healthcare e-commerce network that links physicians, suppliers and patients. The total purchase consideration was approximately $2,906,856, comprised primarily of common stock. Both acquisitions were accounted for using the purchase method of accounting.

On September 12, 2000, the Company completed its acquisition of OnHealth, a source of consumer-oriented health and wellness information, products and services on the Web. The total purchase consideration was approximately $363,010, comprised primarily of common stock. The acquisition was accounted for using the purchase method of accounting.

On May 26, 2000, the Company completed its acquisition of Envoy, a provider of electronic data interchange and transaction processing services to participants in the healthcare market. The total purchase consideration was approximately $2,440,240, comprised primarily of common stock. The acquisition was accounted for using the purchase method of accounting.

WEBMD CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

On January 31, 2000, the Company completed its acquisition of Kinetra, a provider of health information networks and e-commerce services. The total purchase consideration was approximately $291,538, comprised primarily of common stock. The acquisition was accounted for using the purchase method of accounting.

Unaudited Pro Forma Financial Information

The following unaudited pro forma financial information gives effect to the acquisitions of Kinetra, Envoy, Medical Manager, CareInsite and OnHealth, including the amortization of goodwill and other intangible assets, as if they had occurred as of the beginning of each period presented. The effect of all other business combinations was not material to the pro forma financial information presented below. The information is provided for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred if the transactions had been consummated at the dates indicated, nor is it necessarily indicative of future operating results of the combined company and should not be construed as representative of these amounts for any future periods.


	Three Months			Nine Months
	Ended			Ended
	September 30, 2000			September 30, 2000

Total revenue	$	203,635		$	595,319

Net loss	$	(1,004,628	)	$	(2,808,387	)

Basic and diluted net loss per share	$	(2.76	)	$	(7.84	)

3. Impairment of Long-Lived and Other Assets

During the three months ended September 30, 2001, the Company identified certain indicators of possible impairment of its long-lived assets, primarily goodwill and other acquired intangible assets. The indicators of possible impairment that were identified included a further decline in the price of the Company’s common stock to its lowest price in the last twelve months accompanied by a significant decline in the volatility of the Company’s stock price, a sustained decline in valuations in the e-health, technology and Internet sectors and the impact of recent trends in general economic conditions.

The Company reviewed substantially all of its long-lived assets for impairment. The Company’s long-lived assets primarily related to goodwill and other acquired intangible assets recorded in connection with the acquisitions of WebMD, Inc., MedEAmerica and Medcast in November 1999 and the acquisitions of Kinetra, Envoy, Medical Manager, CareInsite and OnHealth during 2000. The Company utilized its common stock as the primary consideration for the acquisitions.

The Company evaluated its long-lived assets for impairment by determining identifiable cash flows to related asset groupings at the lowest level that were largely independent of the cash flows of other asset groupings. The projected undiscounted cash flows for each asset grouping was compared to the related carrying value. As a result of these comparisons, the Company determined its long-lived assets were impaired.

The Company determined the amount of the impairment by comparing the fair value of each asset grouping to the related carrying value. The fair value for each asset grouping was determined primarily using a discounted cash flow approach. As a result of these comparisons and the adjustment to reflect the carrying value of the Company’s plastic and filtration technologies business to fair value (see note 6), the Company recorded a write-down of $3,826,893 related to its long-lived assets reflecting the difference between the carrying value and fair value of the asset groupings. The write-down consisted of $3,663,233

WEBMD CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

of goodwill, $94,186 of other acquired intangibles and $69,474 of other long-lived assets and assets held for sale.

4. Restructuring and Integration Charge

In the third quarter of 2000, the Company’s board of directors approved a restructuring and integration plan, with the objective of eliminating duplication and redundancies as a result of the acquisitions made by the Company since November 1999 and consolidating the Company’s operational infrastructure into a common platform to more efficiently serve its customers.

Additionally, as part of the Company’s restructuring and integration efforts, the Company also undertook a review of its existing strategic relationships in light of several criteria, including strategic relevance to both the Company and its partners, potential conflicts with other agreements as a result of the numerous acquisitions made by the Company, profitability and impact on future revenue streams. As a result of this process, the Company has been and is still in discussions with several of its partners in an effort to redefine the relationships in a manner that better serves the needs of each party. These discussions have resulted in revisions to some strategic relationships. It is possible that, as a result of continuing discussions, additional relationships may be revised or terminated, which may result in additional restructuring charges. During calendar year 2000, the Company’s restructuring and integration efforts resulted in the identification of and notification to approximately 1,100 employees whose positions with the Company were to be terminated primarily as a result of eliminating duplicate functions within the combined company, the identification of duplicate facilities to be vacated and the restructuring of several strategic relationships including those with News Corporation and DuPont.

The Company’s restructuring and integration efforts continued in 2001. In connection with these efforts, a charge of $267 was recorded for three months ended September 30, 2001 which consists of (i) personnel-related costs of $2,324 associated with severance and outplacement services for approximately 150 additional employees that the Company notified of termination; (ii) a facilities charge of $13,553 primarily associated with additional anticipated costs of exiting previously vacated facilities as a result of a decline in rental values in certain markets and (iii) a $15,610 benefit relating to the settlement of certain obligations under the original strategic relationship with Microsoft.

A charge was recorded for the nine months ended September 30, 2001 of $220,161, which consists of: (i) $122,429 primarily relating to the restructuring of the original strategic relationship with Microsoft, of which $133,500 represented non-cash charges related to the write-off of intangible assets associated with the Company’s original Microsoft agreement recorded as part of the Company’s acquisition of WebMD, Inc. in 1999 offset by a $15,610 benefit relating to the settlement of certain obligations from the original strategic relationship with Microsoft (ii) personnel-related costs of $65,787, of which $51,998 represented non-cash stock option compensation charges primarily related to the resignation or termination of certain employees pursuant to the applicable employment and separation arrangements, with the remaining balance relating to severance and outplacement services for approximately 500 additional employees that the Company identified and notified of termination during the nine months ended September 30, 2001, (iii) facilities charges of $15,538, comprised of future lease obligations and lease cancellation penalties related to additional anticipated costs of exiting previously vacated facilities as a result of decline in rental values in certain markets and vacating additional facilities identified during the nine months ended September 30, 2001, (iv) $8,000 in payments made to customers to exit contractual obligations, and (v) $8,407 of integration costs, consisting of employee retention arrangements related to exit activities, moving and relocation expenses, as well as outside professional fees related to the integration of our business.

WEBMD CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table presents activity in the restructuring and integration accrual through September 30, 2001:


	Severance			Facilities			Other			Total

Balance at December 31, 2000	$	8,599		$	35,843		$	8,683		$	53,125
Accruals		13,789			15,538			5,336			34,663
Net cash payments		(18,303	)		(7,149	)		(12,937	)		(38,389	)

Balance at September 30, 2001	$	4,085		$	44,232		$	1,082		$	49,399

The Company expects to pay substantially all the remaining restructuring and integration liabilities noted above, other than those related to lease payments that are long-term in nature, by March 2002.

5. Stockholders’ Equity

On March 29, 2001, the Company announced a stock repurchase program (the “Program”). Under the Program, the Company was authorized to use up to $50,000 to purchase shares of its common stock from time to time beginning on April 2, 2001, subject to market conditions. As of September 30, 2001, the Company has repurchased 3,255,086 shares at a cost of approximately $12,195 under the Program. Subsequent to September 30, 2001, the Company purchased the remaining amount available under the Program. On November 2, 2001 the Company announced that its Board of Directors authorized an additional $50,000 under the Program. As of November 12, 2001, approximately $38,000 remains available for use in stock repurchases under the expanded Program.

6. Discontinued Operations

In connection with the acquisition of Medical Manager and the related integration and consolidation of the Company’s acquired businesses, the Company’s board of directors approved management’s plan to dispose of Porex Corporation and its other plastics and filtration technologies subsidiaries (collectively referred to as “Porex”). Porex was wholly owned by Medical Manager prior to the completion of the Company’s acquisition of Medical Manager on September 12, 2000. Porex designs, manufactures and distributes porous and solid plastic components and products used in life sciences, healthcare, industrial and consumer applications.

The expected net proceeds and the cash flows of Porex until sold were initially allocated to assets held for sale in the allocation of the Medical Manager purchase price and were included as a single line item in current assets as provided by Emerging Issues Task Force EITF 87-11, “Allocation of Purchase Price to Assets to be Sold”. Porex had net income of $3,700 for the period from July 1, 2001 through September 12, 2001, net income of $12,300 for the period from January 1, 2001 through September 12, 2001, and net income of $16,000 from the acquisition date through September 12, 2001. Porex’s net income reflects the impact of tax benefits from being included in the Company’s consolidated tax return. Porex’s results of operations have been excluded from the consolidated statement of operations prior to September 12, 2001.

As the divestiture of Porex was not completed within the one year time period allotted by EITF 87-11, the Company is now required to record the results of operations of Porex in the statement of operations beginning September 13, 2001 as a discontinued operation in accordance with EITF 90-6, “Accounting for Certain Events Not Addressed in Issue No. 87-11 Relating to an Acquired Operating Unit to be Sold.” The Company expects Porex to generate earnings while the Company continues to explore various divestiture alternatives. The fair value of Porex was estimated by management to be $185,000. As a result, the Company recorded an adjustment to its carrying value. The adjustment to the carrying value is included in the impairment of long-lived and other assets (see note 3). The fair value of

WEBMD CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Porex continues to be recorded in assets held for sale and its cash flow activity has been excluded from the consolidated statement of cash flows for the three and nine months ended September 30, 2001.

Assets and liabilities of the discontinued operations were as follows:


Current assets	$	67,329
Property, plant and equipment		46,264
Other long term assets		113,705
Current liabilities		22,089
Long term liabilities		20,209

Assets held for sale	$	185,000

7. Marketable Securities

All highly liquid marketable securities with an original maturity from date of purchase of three months or less are considered to be cash equivalents. Management determines the appropriate classification of its investments in debt securities at the time of purchase and re-evaluates such determinations at each balance sheet date. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Debt securities that the Company does not have the intent or ability to hold to maturity are classified as available-for-sale. Available-for-sale securities are carried at fair value as of the balance sheet date. At September 30, 2001, the Company’s investments consisted principally of U.S. Treasury Notes. These investments, which had an aggregate market value of $96,336 and a cost of $93,292, were classified as available-for-sale. Unrealized gains on these securities were $3,044 at September 30, 2001.

In addition, at September 30, 2001 the Company had equity investments in publicly traded companies with an aggregate market value of $7,716 and a book value of $5,804. Unrealized gains on these securities were $1,912 at September 30, 2001.

8. Net Loss Per Common Share

Basic net loss per common share and diluted net loss per common share are presented in conformity with Statement of Financial Accounting Standards No. 128, “Earnings Per Share” (SFAS No. 128). Under SFAS No. 128, basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

The Company has excluded all convertible redeemable preferred stock, convertible preferred stock, warrants, and outstanding stock options from the calculation of diluted loss per common share because all such securities are anti-dilutive for the periods presented. The total number of shares excluded from the calculation of diluted net loss per share was approximately 165.2 million shares at September 30, 2001 and approximately 192.3 million shares at September 30, 2000.

9. Recent Accounting Pronouncements

On August 1, 2001, the Financial Accounting Standards Board, (FASB) issued SFAS No. 144, “Accounting For Impairment of Long-Lived Assets”. The Company is required to adopt this pronouncement beginning January 1, 2002. SFAS No. 144 prescribes the accounting for long-lived assets (excluding goodwill) to be disposed of by sale. SFAS No. 144 retains the requirement of SFAS No. 121

WEBMD CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

to measure long-lived assets classified as held for sale at the lower of its carrying value or fair market value less the cost to sell. Therefore, discontinued operations are no longer measured on a net realizable basis, and future operating results are no longer recognized before they occur. The impact of adopting SFAS No. 144 is not expected to be significant.

On July 20, 2001, the FASB issued SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.” The Company is required to adopt these pronouncements beginning January 1, 2002. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting. SFAS No. 142 changes the accounting for goodwill and other intangible assets. Goodwill will no longer be subject to amortization over its estimated useful life. Rather, goodwill will be subject to at least an annual assessment for impairment by applying a fair-value-based test. All other acquired intangibles should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, or exchanged, regardless of the acquirer’s intent to do so. Other intangibles will be amortized over their useful lives. As a result of adopting SFAS No. 141 and SFAS No. 142 effective as of January 1, 2002, the amortization of goodwill will be eliminated, resulting in a significant reduction of amortization expense for goodwill and certain other intangible assets. Additionally, the Company will be required to assess goodwill for impairment at least annually. The Company does not expect the impact of adopting the fair value based impairment test to be significant.

10. Commitments and Contingencies

Since July 2001, seven purported class action lawsuits have been filed against Morgan Stanley & Co. Incorporated and Goldman Sachs & Co., underwriters of the initial public offering of the Company (then known as Healtheon) in the United States District Court for the Southern District of New York. Three of these suits also named the Company and certain former officers and directors of the Company as defendants. The complaints against the Company and its former officers and directors allege violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 under that Act and Section 11 of the Securities Act of 1933 because of failure to disclose certain practices alleged to have occurred in connection with the distribution of shares in the Healtheon IPO. Claims under Section 12(a)(2) of the Securities Act of 1933 have also been brought against the underwriters. Similar suits have been filed in connection with well over 100 other initial public offerings that occurred in 1999 and 2000, following reports of governmental investigations of the underwriters’ practices in the distribution of shares in certain initial public offerings. The Company believes that the claims alleged in the lawsuits are primarily directed at the underwriters and, as they relate to the Company, are without merit. To the extent that these claims concern practices and disclosures relating to the plan of distribution in the Healtheon initial public offering, the Company believes that it will have a claim for indemnification from the underwriters.

In the normal course of business, the Company and its subsidiaries are involved in various other claims and legal proceedings. While the ultimate resolution of these matters, including those discussed above and in our 2000 Annual Report on Form 10-K under the heading “Legal Proceedings,” has yet to be determined, the Company does not believe that their outcome will have a material adverse effect on our financial position.

11. Subsequent Events

As part of the transaction in which the Company acquired Envoy from Quintiles Transnational Corp. in May 2000, Quintiles and the Company entered into a Data Rights Agreement and an Internet Product Development and Marketing Agreement. In February 2000, Quintiles filed an action for breach of the Data Rights Agreement against the Company. On October 12, 2001, the Company and Quintiles entered into an agreement to settle this litigation (“Settlement Agreement”). Pursuant to the Settlement

WEBMD CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Agreement, the Company and Quintiles terminated the Data Rights Agreement and the Internet Product Development and Marketing Agreement and all other agreements between them. Pursuant to the court order in the litigation, Quintiles will continue to receive de-identified data from the Company until February 28, 2002. Following that date, the Company and Envoy will have no further obligation to provide any data to Quintiles.

In accordance with the terms of the Settlement Agreement, the Company purchased from Quintiles all 35,000,000 shares of WebMD common stock held by Quintiles for $185,000. The Settlement Agreement also provides that Quintiles will have the right to receive a contingent payment (payable at the Company’s option in cash and/or stock) in the event that, on or before June 30, 2004, a transaction closes in which the Company is acquired at a price per WebMD share greater than $4.00 or in which Envoy is sold at an aggregate price of greater than $500,000. The Company is under no obligation to pursue either of these types of transactions. In the event an acquisition of the Company agreed to on or before June 30, 2003 closes on or before June 30, 2004, the contingent payment to Quintiles will equal the amount by which the price paid in the acquisition exceeds $4.00 per share, multiplied by 35,000,000. If the acquisition is agreed to after June 30, 2003 and closes on or before June 30, 2004, the contingent payment will be 80% of the payment described in the preceding sentence. In the event a sale of Envoy agreed to on or before June 30, 2003 closes on or before June 30, 2004, the contingent payment to Quintiles will equal 10% of the amount by which the price received in the sale exceeds $500,000. If the sale is agreed to after June 30, 2003 and closes on or before June 30, 2004, the contingent payment will be 80% of the payment described in the preceding sentence.

The Company will record a charge in the three months ended December 31, 2001 for the difference between the purchase price and fair value of the 35,000,000 shares of WebMD common stock acquired from Quintiles.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

WebMD Corporation is a Delaware corporation that was incorporated in December 1995 and commenced operations in January 1996 as Healtheon Corporation. Our common stock has traded on the Nasdaq National Market under the symbol “HLTH” since February 11, 1999. In November 1999, Healtheon completed mergers with WebMD, Inc., MedE America and Medcast. Following these mergers, Healtheon changed its name to Healtheon/ WebMD Corporation. Healtheon/ WebMD completed acquisitions of Kinetra and Envoy in January 2000 and May 2000, respectively. On September 12, 2000, Healtheon/ WebMD completed mergers with Medical Manager, CareInsite and OnHealth and changed its name to WebMD Corporation.

As a result of the completion of these transactions, our core business encompasses the following products and services:


	•	Transaction services. We offer value-added solutions designed to increase productivity for both providers and payers, to speed healthcare reimbursements and to improve communications among healthcare participants. From simple point-of-service devices to fully integrated transaction processing applications and Internet solutions, we offer a full suite of products and services to automate key business and clinical functions.

	•	Physician services. We develop and market integrated physician practice management systems, including administrative, financial and clinical applications, under The Medical Manager® brand.

	•	Portal services. We offer a variety of services for advertisers, sponsors, consumers, physicians and physician office managers through our online distribution channels and the online and offline distribution channels of our strategic partners.

In the third quarter of 2000, our board of directors approved a restructuring and integration plan, with the objective of eliminating duplication and redundancies as a result of all the acquisitions made by us since November 1999 and consolidating our operational infrastructure into a common platform to more efficiently serve our customers.

As part of our restructuring and integration efforts, we also undertook a review of our existing strategic relationships in light of several criteria, including strategic relevance to both us and our partners, potential conflicts with other agreements as a result of the numerous acquisitions made by us, profitability and impact on future revenue streams. As a result of this process, we have been and are in discussions with several of our partners in an effort to redefine the relationships in a manner that better serves the needs of each party. These discussions have resulted in revisions to some strategic relationships. It is possible as a result of continuing discussions, additional relationships may be revised or terminated, which may result in additional restructuring charges.

In connection with our restructuring and integration efforts, we recorded restructuring and integration charges of $0.3 million in the three months ended September 30, 2001, and $220.2 million, of which $185.5 million were non-cash charges, in the nine months ended September 30, 2001. As we continue our consolidation and integration efforts, we are likely to incur additional costs relating to asset impairments and write-offs, severance and employee retention arrangements related to exit activities, that will be expensed according to the applicable accounting guidelines.

During the quarter ended September 30, 2001, we identified certain indicators of possible impairment of long-lived assets, primarily goodwill and other acquired intangible assets which included a further decline in the price of our common stock to its lowest price in the last twelve months accompanied by a significant decline in the volatility of our stock price, a sustained decline in valuations in the e-health, technology and Internet sectors, and the impact of recent trends in general economic conditions. Based on these indicators, we reviewed substantially all of our long-lived assets for impairment. As a result of this review, we determined that our long-lived and other assets, primarily goodwill and other acquired

intangibles, were impaired and recorded a write-down of $3.827 billion during the three months ended September 30, 2001.

As we announced on September 28, 2000, our board of directors approved management’s plan to dispose of Porex, which we acquired in our merger with Medical Manager on September 12, 2000. Porex designs, manufactures and distributes porous and solid plastic components and products used in life sciences, healthcare, industrial and consumer applications. In accordance with EITF 87-11, the expected net proceeds and the cash flows of Porex until sold were initially allocated to assets held for sale in the allocation of the Medical Manager purchase price and were included in current assets. At that time, we reduced the consolidated balance sheet for all items that pertained specifically to Porex. As the divestiture of Porex was not completed within the one year period allotted by EITF 87-11, we are now required to record the results of Porex in our statement of operations as of September 13, 2001, as a discontinued operation in accordance with EITF 90-6. We expect Porex to continue to generate earnings while we continue to explore various divestiture alternatives. We estimated the fair value of Porex to be $185.0 million. The fair value of Porex continues to be recorded in assets held for sale and its cash flow activity has been excluded from the consolidated statement of cash flows for the three and nine months ended September 30, 2001.

Results of Operations

The following discussion includes a comparison of the September 30, 2001 results of operations to the September 30, 2000 results on both an actual and pro forma basis. The pro forma information gives effect to the acquisitions of Kinetra, Envoy, Medical Manager, CareInsite and OnHealth (the “2000 Acquisitions”) as if they had occurred at the beginning of each period presented. The effect of all other business combinations was not material to the pro forma information presented below. The information is provided for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred if the transactions had been consummated at the dates indicated, nor is it necessarily indicative of future operating results of the combined company and should not be construed as representative of these amounts for any future periods.

Revenue. Revenue for the three and nine months ended September 30, 2001 and 2000 and pro forma revenues for the three and nine months ended September 30, 2000 were as follows:



		Three Months Ended September 30,


		2001					2000					Pro Forma 2000

		$		%			$		%			$		%

Transaction services		$	91,595		54.8	%	$	88,200		58.3	%	$	93,185		45.7	%
Physician services			61,081		36.6			28,976		19.2			73,058		35.9
Portal services			14,359		8.6			28,600		18.9			31,500		15.5
Other			—		0.0			5,471		3.6			5,892		2.9

	Total	$	167,035		100.0	%	$	151,247		100.0	%	$	203,635		100.0	%



		Nine Months Ended September 30,


		2001					2000					Pro Forma 2000

		$		%			$		%			$		%

Transaction services		$	286,008		54.3	%	$	174,716		54.9	%	$	273,369		45.9	%
Physician services			191,307		36.1			44,929		14.1			210,072		35.3
Portal services			50,130		9.5			76,771		24.1			84,764		14.2
Other			2,795		0.1			21,786		6.9			27,114		4.6

	Total	$	530,240		100.0	%	$	318,202		100.0	%	$	595,319		100.0	%

The increase in transaction service revenues for both the three and nine months ended September 30, 2001 compared to the prior year periods was primarily attributable to the acquisition of CareInsite in September 2000 and Envoy in May 2000. The increase in physician service revenue for both the three and

nine months ended September 30, 2001 compared to the prior year periods was primarily attributable to the acquisition of Medical Manager in September 2000 offset in part by the elimination of revenue related to the sponsorship of physician subscriptions to our physician portal as a result of the termination of our agreement with DuPont in December 2000 and the new arrangement with Microsoft which was effective as of January 1, 2001. The decrease in portal service revenue for both the three and nine months ended September 30, 2001 compared to the prior year periods was primarily attributable to the termination of the agreement with DuPont in December 2000, the new arrangement with News Corporation agreed to in December 2000 and the impact of the softness in the market for internet advertising on us and certain of our carriage partners. The decrease in other revenues for both the three and nine months ended September 30, 2001 compared to the prior year periods is primarily attributable to our decision during 2000 to exit our information technology consulting and outsourcing relationships.

The decrease in transaction service revenues for the three months ended September 30, 2001 compared to the prior year period on a pro forma basis was primarily attributable to a reduction in revenues related to certain products such as hospital and laboratory physician connectivity arrangements and the consolidation of duplicate product offerings. The increase in transaction service revenues for the nine months ended September 30, 2001 compared to the prior year periods on a pro forma basis was primarily attributable to an increase in the volume of electronic transactions processed. The decrease in physician service revenue for both the three and nine months ended September 30, 2001 compared to the prior year periods on a pro forma basis was primarily attributable to the elimination of revenues related to the sponsorship of physician subscriptions to the Company’s physician portal as a result of the termination of the agreement with DuPont in December 2000 and the new arrangement with Microsoft, which was effective as of January 1, 2001. The decrease in portal service revenues for both the three and nine months ended September 30, 2001 compared to the prior year periods on a pro forma basis was primarily attributable to the termination of the agreement with DuPont in December 2000, the new arrangement with News Corporation agreed to in December 2000 and the impact of the softness in the market for internet advertising on WebMD and certain of our carriage partners. The decrease in other revenues for both the three and nine months ended September 30, 2001 compared to the prior year periods on a pro forma basis is primarily attributable to our decision during 2000 to exit our information technology consulting and outsourcing relationships.

Revenue from related parties consists of revenues for services to News Corporation for the three months ended March 31, 2001 and revenue for services provided to News Corporation, Microsoft and UnitedHealth Group for the three and nine months ended September 30, 2000. Revenue from related parties was $3.0 million for the nine months ended September 30, 2001 compared to $14.2 million and $37.2 million for the three and nine months ended September 30, 2000, respectively. The decrease was primarily attributable to the new arrangement with Microsoft, which was effective January 1, 2001 and the revenue from News Corporation which ceased being considered from a related party as of February 15, 2001 when News Corporation surrendered the Company’s Series A convertible preferred stock. Revenue from UnitedHealth Group ceased being considered from a related party in January 2000 when the Chairman and Chief Executive Officer of UnitedHealth Group resigned from our board of directors.

Cost of Operations. Cost of operations primarily consists of the expenses associated with maintaining our networks and providing products and services. Cost of operations was $111.6 million and $356.3 million for the three and nine months ended September 30, 2001, respectively, compared to $108.9 million and $246.5 million for the three and nine months ended September 30, 2000, respectively. The increase for the nine months ended September 30, 2001 compared to the prior year period is primarily attributable to the cost of operations associated with the 2000 Acquisitions. Cost of operations represented 66.8% and 67.2% of revenue for the three and nine months ended September 30, 2001, respectively, compared to 72.0% and 77.5% of revenues for the three and nine months ended September 30, 2000, respectively. The decrease in cost of operations as a percentage of revenues is primarily due to changes in product revenues mix as well as the elimination of costs as a result of our restructuring and integration efforts over the past twelve months.

Cost of operations decreased to $111.6 million and $356.3 million for the three and nine months ended September 30, 2001, respectively, compared to $139.5 million and $394.4 million on a pro forma basis for the three and nine months ended September 30, 2000, respectively. This decrease is primarily related to the decrease in revenue as compared to the pro forma prior periods. Cost of operations represented 66.8% and 67.2% of revenues for the three and nine months ended September 30, 2001, respectively, compared to 68.5% and 66.3% of revenues on a pro forma basis for the three and nine months ended September 30, 2000, respectively. The decrease in cost of operations as a percentage of revenues for the three months ended September 30, 2001 compared to the prior year period is related primarily to the elimination of costs as a result of our restructuring and integration efforts over the past twelve months. The increase in costs of operations as a percentage of revenues for the nine months ended September 30, 2001 compared to the prior year period is due primarily to changes in product revenues mix, partially offset by the elimination of costs as a result of our restructuring and integration efforts over the past twelve months.

Development and Engineering. Development and engineering expense consists primarily of salaries paid to engineering personnel, fees paid to outside contractors and consultants, facilities expenses and maintenance of capital equipment used in the development process. Development and engineering expense decreased to $9.0 million and $30.5 million for the three and nine months ended September 30, 2001, respectively, compared to $19.0 million and $45.2 million for the three and nine months ended September 30, 2000, respectively, and $28.9 million and $92.7 million on a pro forma basis for the three and nine months ended September 30, 2000, respectively. These decreases compared to actual and on a pro forma basis are primarily due to the impact of cost reductions resulting from our restructuring and integration efforts.

Sales, Marketing, General and Administrative. Sales, marketing, general and administrative expense consists primarily of advertising, product and brand promotion, salaries and related expenses for sales, administrative, finance, legal, human resources and executive personnel. Also included in sales, marketing, general and administrative expense is amortization of non-cash prepaid content, services and distribution and amortization of non-cash deferred stock compensation.

Sales, marketing, general and administrative expense was $98.8 million and $341.2 million for the three and nine months ended September 30, 2001, respectively, compared to $138.0 million and $362.6 million for the three months and nine months ended September 30, 2000, respectively. Sales, marketing, general and administrative expense excluding non-cash amortization of prepaid content, services, and distribution and non-cash stock compensation was $72.3 million and $244.8 million for the three and nine months ended September 30, 2001, respectively, and $99.0 million and $257.6 million for the three and nine months ended September 30, 2000, respectively. This decrease is primarily due to the impact of cost reductions resulting from our restructuring and integration efforts, offset partially by costs associated with the 2000 Acquisitions and $3.0 million in severance costs associated with the departure of our former President. Amortization of non-cash prepaid content, services and distribution expense was $9.8 million and $26.2 million for the three and nine months ended September 30, 2001, respectively, and $23.6 million and $62.8 million for the three and nine months ended September 30, 2000, respectively. The decrease from the comparable prior year periods was a result of the restructuring of our strategic relationships with Microsoft and News Corporation. Non-cash deferred stock compensation was $16.6 million and $70.2 million for the three and nine months ended September 30, 2001, respectively and $15.4 million and $42.2 million for the three and nine months ended September 30, 2000, respectively. The increase for the nine months ended September 30, 2001 is primarily a result of the impact of amortization of deferred stock compensation related to stock options issued and assumed in connection with the 2000 Acquisitions.

Sales, marketing, general and administrative expense was $98.8 million and $341.2 million for the three and nine months ended September 30, 2001, respectively, compared to $144.2 million and $413.4 million on a pro forma basis for the three and nine months ended September 30, 2000, respectively. Sales, marketing, general and administrative expense excluding non-cash amortization of prepaid content, services, and distribution and non-cash stock compensation was $72.3 million and $244.8 million for the

three and nine months ended September 30, 2001, respectively, and $144.2 million and $413.4 million on a pro forma basis for the three and nine months ended September 30, 2000, respectively. This decrease is primarily due to the impact of cost reductions resulting from our restructuring and integration efforts. Amortization of non-cash prepaid content, services and distribution expense was $9.8 million and $26.2 million for the three and nine months ended September 30, 2001, respectively, and $23.6 million and $62.8 million on a pro forma basis for the three and nine months ended September 30, 2000, respectively. The decrease from the comparable prior year period was a result of the restructuring of our strategic relationships with Microsoft and News Corporation. Non-cash stock compensation was $16.6 million and $70.2 million for the three and nine months ended September 30, 2001, respectively and $30.2 million and $101.5 million on a pro forma basis for the three and nine months ended September 30, 2000, respectively. The decrease from the comparable prior year period is primarily related to the vesting schedules of stock options issued and assumed in connection with the 2000 Acquisitions.

Depreciation and Amortization. Depreciation and amortization expense was $751.5 million and $2.266 billion for the three and nine months ended September 30, 2001, respectively, compared to $597.7 million and $1.353 billion for the three and nine months ended September 30, 2000, respectively. The increase was attributable to the amortization of goodwill and intangible assets related to the 2000 Acquisitions, which are being amortized over expected lives of one to five years.

As a result of the $3.827 billion write-down related to our long-lived and other assets, primarily goodwill and other acquired intangibles, we expect depreciation and amortization will be approximately $130 million in the three months ended December 31, 2001. Additionally, upon the adoption of SFAS No. 142 on January 1, 2002, goodwill will no longer be subject to amortization and, as a result, we expect our quarterly depreciation and amortization expense to be approximately $35 to $40 million beginning in 2002.

Restructuring and Integration Charge. In September 2000, our board of directors approved a restructuring plan to consolidate offices and data centers, to reduce marketing and promotional expenses and to substantially eliminate redundancies that were created in the acquisitions made by us since November 1999. During calendar year 2000, our restructuring and integration efforts resulted in the identification and notification of approximately 1,100 employees whose positions were to be terminated primarily as a result of eliminating duplicate functions within the combined company, the identification of duplicate facilities to be vacated and the restructuring of several strategic relationships including those with News Corporation and DuPont.

During the nine months ended September 30, 2001, our restructuring and integration efforts continued. In connection with these efforts, a charge was recorded for the three months ended September 30, 2001 of $0.3 million, which consisted of:


	•	personnel-related costs of $2.3 million, associated with severance and outplacement services for approximately 150 additional employees that the company identified and notified of termination during the three months ended September 30, 2001,

	•	facilities charges of $13.6 million primarily related to additional anticipated costs of exiting previously vacated facilities as a result of a decline in rental values in certain markets, and

	•	$15.6 million benefit relating to the settlement of certain obligations under the original strategic relationship with Microsoft.

A charge was recorded for the nine months ended September 30, 2001 of $220.2 million which consists of:


	•	$122.4 million primarily relating to the restructuring of the original strategic relationship with Microsoft, of which $133.5 million represented non-cash charges related to the write-off of intangible assets associated with our original Microsoft agreement recorded as part of our acquisition of WebMD, Inc. in 1999 offset by a $15.6 million benefit relating to the settlement of certain obligations under the original strategic relationship,


	•	personnel-related costs of $65.8 million, of which $52.0 million represented non-cash stock option compensation charges primarily related to the resignation or termination of certain employees pursuant to the applicable employment and separation arrangements, with the remaining personnel-related charge associated with severance and outplacement services for approximately 500 additional employees that the company identified and notified of termination during the nine months ended September 30, 2001,

	•	facilities charges of $15.5 million, comprised of future lease obligations and lease cancellation penalties related to additional anticipated costs of exiting previously vacated facilities as a result of a decline in rental values in certain markets and vacating additional facilities identified during the nine months ended September 30, 2001,

	•	$8.0 million in payments made to customers to exit contractual obligations, and

	•	$8.4 million of integration costs, consisting of employee retention arrangements related to exit activities, as well as outside professional fees related to the integration of our business.

Loss on Investments. We recorded a non-cash charge of $39.6 million to write down certain of our investments in Internet-related companies to their fair market value as of September 30, 2000. The charge reflected the decline in value of these investments based upon the financial condition of the individual companies and market conditions at the time.

Interest Income, Net. Interest income, net of interest expense, was $6.4 million and $25.4 million for the three and nine months ended September 30, 2001, respectively, compared to $9.9 million and $36.8 million for the three and nine months ended September 30, 2000, respectively. The decrease for both the three and nine months ended September 30, 2001 compared with the prior year is attributable to lower average cash balances available for investment as well as continuing reduction in interest rates.

Liquidity and Capital Resources

As of September 30, 2001, we had approximately $586.8 million in cash, cash equivalents and short-term marketable securities, and working capital of $671.8 million including the fair value of Porex.

Cash used in operating activities was $88.1 million for the nine months ended September 30, 2001. The cash used was primarily attributable to net operating losses and payments made related to our restructuring and integration efforts.

Cash provided by investing activities was $92.3 million for the nine months ended September 30, 2001 primarily related to $119.0 million of proceeds from the redemption of marketable securities, net of purchases of marketable securities.

Cash used in financing activities was $4.6 million for the nine months ended September 30, 2001, primarily related to the repurchase of treasury stock, offset by the proceeds from the exercise of stock options.

As of September 30, 2001, we did not have any material commitments for capital expenditures.

On October 12, 2001, Quintiles Transnational Corp. and WebMD entered into an agreement to settle the litigation between the companies. Pursuant to the settlement agreement, WebMD and Quintiles terminated all agreements between them, including the Data Rights Agreement and the Internet Product Development and Marketing Agreement. Pursuant to the court order in the litigation, Quintiles will continue to receive de-identified data from us until February 28, 2002. Following that date, we will have no further obligation to provide any data to Quintiles. In accordance with the terms of the Settlement Agreement, we purchased from Quintiles all 35 million shares of the WebMD common stock held by Quintiles for $185 million. The settlement agreement also provides that Quintiles will have the right to receive a contingent payment (payable at our option in cash and/or stock) in the event that, on or before June 30, 2004, a transaction closes in which WebMD is acquired at a price per share greater than $4.00 or in which Envoy is sold at an aggregate price of greater than $500 million. We have no obligation to pursue

either of these types of transactions. In the case of an acquisition of WebMD agreed to on or before June 30, 2003 that closes on or before June 30, 2004, the contingent payment to Quintiles will equal the amount by which the price paid in the acquisition exceeds $4.00 per share, multiplied by 35 million. If the acquisition is agreed to after June 30, 2003 and closes on or before June 30, 2004, the contingent payment will be 80% of the payment described in the preceding sentence. In the case of a sale of Envoy agreed to on or before June 30, 2003 that closes on or before June 30, 2004, the contingent payment to Quintiles will equal 10% of the amount by which the price received in the sale exceeds $500 million. If the sale is agreed to after June 30, 2003 and closes on or before June 30, 2004, the contingent payment will be 80% of the payment described in the preceding sentence. We will record a charge in the three months ended December 31, 2001 for the difference between the purchase price and fair value of the 35 million shares of our common stock acquired from Quintiles.

On March 29, 2001, we announced a stock repurchase program. Under this program, our Board of Directors authorized the use of up to $50 million to repurchase shares of our common stock from time to time in the open market, through block trades or in private transactions, depending upon market conditions and other factors. As of September 30, 2001, we had repurchased approximately 3.3 million shares under the program at a cost of approximately $12 million. On November 2, 2001, we announced that we had fully utilized the $50 million authorized in March 2001 and that an additional $50 million had been authorized by our Board of Directors for the stock repurchase program. As of November 12, 2001, approximately $38 million remains available for use in stock repurchases under the expanded program.

In September 2000, our board of directors approved a restructuring and integration plan, with the objective of eliminating duplication and redundancies as a result of all the acquisitions made by us since November 1999 and consolidating our operational infrastructure into a common platform to more efficiently serve our customers. As part of our restructuring and integration efforts, we also undertook a review of our existing strategic relationships in light of several criteria, including strategic relevance to both us and our partners, potential conflicts with other agreements as a result of the numerous acquisitions made by us, profitability, and impact on future revenue streams. As a result of this process, we have been and are in discussions with several of our partners in an effort to redefine the relationships in a manner that better serves the needs of each party. These discussions have resulted in revisions to some strategic relationships. It is possible that, as a result of continuing discussions, additional relationships may be revised or terminated, which may result in additional restructuring charges.

As we announced on September 28, 2000, our board of directors approved management’s plan to dispose of Porex, which we acquired in our acquisition of Medical Manager on September 12, 2000. Porex designs, manufactures and distributes porous and solid plastic components and products used in life sciences, healthcare, industrial and consumer applications. The expected net proceeds and the cash flows of Porex until sold were allocated to assets held for sale in the allocation of the Medical Manager purchase price and are included in the line item “assets held for sale.” We plan to continue to explore various divesture alternatives for the Porex business, but no longer expect to complete its disposition in 2001.

We expect that our interest income for the three months ended December 31, 2001 and future periods will be significantly less than the interest income for the three months ended September 30, 2001. This reduction is a result of a combination of the funds expended in our settlement with Quintiles and in repurchases of our common stock under the program along with a continuing reduction in interest rates.

We believe that we will have sufficient cash resources to meet our presently anticipated working capital and capital expenditure requirements for at least the next 12 months. However, we expect to incur losses before restructuring and integration charges, depreciation, amortization and other non-cash items, until the end of 2001. Our future liquidity and capital requirements will depend upon numerous factors, including the success of the integration of our businesses, our existing and new applications and service offerings, competing technologies and market developments, potential future acquisitions and additional repurchases of our common stock. We may need to raise additional funds to support expansion, develop new or enhanced applications and services, respond to competitive pressures, acquire complementary businesses or technologies or take advantage of unanticipated opportunities. If required, we may raise such

additional funds through public or private debt or equity financing, strategic relationships or other arrangements. There can be no assurance that such financing will be available on acceptable terms, if at all, or that such financing will not be dilutive to our stockholders.

Factors That May Affect Future Results of Operations


	Our ability to generate revenue could suffer if we do not continue to update and improve our existing products and services and develop new ones

We may not be successful in responding to technological developments and changing customer needs. The pace of change in the markets we serve is rapid and there are frequent new product and service introductions by our competitors and by vendors whose products and services we use in providing our own products and services. If we do not respond successfully to technological changes and evolving industry standards, our products and services may become obsolete. Technological changes may also result in the offering of competitive products and services at lower prices than we are charging for our products and services, which could result in our losing sales unless we lower the prices we charge. We rely on a combination of internal development, strategic relationships, licensing and acquisitions to develop our products and services. The cost of developing new healthcare information technology products and services is inherently difficult to estimate. Our development of proposed products and services may take longer than originally expected, require more testing than originally anticipated and require the acquisition of additional personnel and other resources. In addition, there can be no assurance that the products we develop or license will be able to compete with the alternatives available to our customers. See “— We face significant competition for our products and services” beginning on page 25.

We currently offer a limited number of applications on our Internet-based platform and some of our products and services, including our handheld solution, are not fully developed or launched. We must introduce new products and services and improve the functionality of our existing products and services in a timely manner in order to retain existing customers and attract new ones.


	New or newly integrated products and services will not become profitable unless they achieve sufficient levels of physician penetration and market acceptance

There can be no assurance that physicians will accept from us new products and services or products and services that result from integrating existing and/or acquired products and services, including the products and services we are developing to integrate our transaction services and portal services into their office workflow, such as our handheld solution. Even physicians who are already our customers may not purchase new or newly integrated products or services, especially when they are initially offered. Physicians using our existing products and services may refuse to adopt new or newly integrated products and services when they have made extensive investments in hardware, software and training relating to those existing products and services. Similarly, other healthcare participants may not accept new or newly integrated products and services from us developed for their use. In addition, there can be no assurance that any pricing strategy that we implement for any such products and services will be economically viable or acceptable to the target markets. Failure to achieve broad penetration in target markets with respect to new or newly integrated products and services could have a material adverse effect on our business prospects.

Achieving market acceptance for new or newly integrated products and services is likely to require substantial marketing efforts and expenditure of significant funds to create awareness and demand by participants in the healthcare industry. In addition, deployment of new or newly integrated products may require the use of additional resources for training our existing sales force and customer service personnel and for hiring and training additional salespersons and customer service personnel. There can be no assurance that the revenue opportunities from new or newly integrated products and services will justify amounts spent for their development, marketing and roll-out.


	Lengthy sales and implementation cycles for our applications could adversely affect our ability to generate revenue

A key element of our strategy is to market our solutions directly to large healthcare organizations. The sale and implementation of our solutions are subject to delays due to our customers’ and potential customers’ internal budgeting and procedures for approving large expenditures and deploying new technologies. We are unable to control many of the factors that will influence the buying decisions of these organizations. We expect that the sales and implementation processes will be lengthy and will involve a significant evaluation period prior to commitment of capital and other resources by customers and potential customers.


	Developments in the healthcare industry could adversely affect our revenues

Most of our revenues come from customers in various parts of the healthcare industry. Developments that result in a reduction of expenditures by customers or potential customers in the healthcare industry could have a material adverse effect on our business. 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. Reductions in expenditures by healthcare industry participants could result from, among other things:


	•	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

	•	decreases in marketing expenditures by pharmaceutical companies or medical device manufacturers, including as a result of governmental regulation or private initiatives that discourage or prohibit promotional activities by pharmaceutical or medical device companies

	•	consolidation of healthcare industry participants

	•	reductions in governmental funding for healthcare

	•	adverse changes in business or economic conditions affecting healthcare payers or providers, pharmaceutical companies, medical device manufacturers or other healthcare industry participants.

In addition, developments in the healthcare industry may, even if general expenditures remain the same or increase, result in reduced spending on information technology and services or in some or all of the specific portions of that market we serve or are planning to serve. Expectations of our customers regarding pending or potential developments may also affect their budgeting processes and spending plans. We cannot provide assurance that the markets for our products and services will expand and develop or that we will have adequate technical, financial and marketing resources to maintain or increase our share of these markets or to enter additional markets.

For additional discussion of the potential effects of regulatory matters on our business and on participants in the healthcare industry, see “— Healthcare regulation could adversely affect our business” beginning on page 31.

We face significant competition for our products and services

The markets in which we operate are intensely competitive, continually evolving and subject to rapid technological change. We have many competitors, including:


	•	healthcare information system vendors and support providers, including physician practice management system vendors and support providers

	•	transaction processing companies, including those providing EDI and/or Internet-based services and those providing services through other means, such as paper and fax

	•	large information technology consulting service providers


	•	online services, portals or Web sites targeted to the healthcare industry, healthcare consumers and/or physicians generally

	•	consortiums of health insurance companies and of pharmacy benefit managers that have announced that they are developing Web-based transaction services for use by their members and other potential customers

	•	publishers and distributors of traditional offline media, including those targeted to healthcare professionals, many of which have established or may establish Web sites

	•	general purpose consumer online services and portals and other high-traffic Web sites which provide access to healthcare-related content and services

	•	public sector and non-profit Web sites that provide healthcare information without advertising or commercial sponsorships

	•	vendors of healthcare information, products and services distributed through other means, including direct sales, mail and fax messaging.

We also compete, in some cases, with alliances formed by the above competitors, including alliances that are intended to allow the participants to pursue a strategy similar to our strategy of integrating transaction processing capabilities and portal services with physician practice management systems. Major software, hardware and information systems companies, both with and without healthcare companies as their partners, offer or have announced their intention to offer products or services that are competitive with some of our solutions, including wireless handheld solutions that will compete with ULTIA, our handheld solution.

In addition, there can be no assurance that healthcare payors and providers will continue to use WebMD and other independent companies to transmit healthcare transactions. Some of our existing payer and provider customers and some of our strategic partners may compete with us or plan to do so or belong to alliances that compete with us or plan to do so. For example, some payers currently offer electronic data transmission services to healthcare providers that establish a direct link between the provider and payer, bypassing third party EDI service providers. Any significant increase in the utilization of direct links between healthcare providers and payers could have a material adverse effect on our business and results of operations. We cannot provide assurance that we will be able to maintain our existing links to payors or develop new connections on satisfactory terms, if at all.

Many of our competitors have greater financial, technical, product development, marketing and other resources than we do. These organizations may be better known than we are and have more customers than we do. We cannot provide assurance that we will be able to compete successfully against these organizations or any alliances they have formed or may form.


	Our business model for providing Internet-based services is unproven, and we may not achieve profits from this business

Our business model for providing Internet-based services is evolving, and our revenue and profit potential from these services is unproven. We intend to:


	•	offer provider and payer customers our Internet-based transaction services, to the extent appropriate to their needs

	•	integrate these transaction services with our Medical Manager practice management systems and similar systems provided by others

	•	build usage of our portal services by consumers, physicians and physician office managers

	•	generate e-commerce revenue from the sale of healthcare products or services of our strategic partners and other suppliers over the Internet.

However, the provision of services over the Internet to the healthcare industry is a developing business that is inherently riskier than businesses in industries where companies have established operating histories and there can be no assurance that our initiatives in this area will be successful or profitable.


	Our ability to generate sufficient advertising and sponsorship revenue from our portal services is unproven

We derive a portion of our revenue from advertising and sponsorships on our Web site and other Web sites that license our content. The Internet advertising and sponsorship market is new and rapidly evolving, and no standards have been widely accepted to measure its effectiveness as compared to traditional media advertising. Demand for Internet advertising in general has, during the first nine months of 2001, been weaker than in prior periods and there can be no assurance that such demand will return to the levels seen previously. We cannot provide assurance that we will be able to generate sufficient advertising or sponsorship revenue from our portal services to make these services profitable.

We are seeking to enter into relationships with advertisers and sponsors in which we will be compensated based on specific negotiated criteria designed to demonstrate the value of our portal services to the advertisers and sponsors. The amount of compensation that we receive from such arrangements is inherently difficult to estimate and may be less than we believed it would be at the time of entering such arrangements and at the time of performing the services.


	Some of our services will not be widely adopted until broadband connectivity is more generally available

Some of our services require a continuous broadband connection between the physician’s office and our data center and/or the Internet. The availability of broadband connectivity varies widely from location to location and even within a single geographic area, due to factors such as the distance of a site from the central switching office. The future availability of broadband connections is unpredictable and is not within our control. While we expect that many physician office locations will remain without ready access to broadband connectivity for some period of time, we cannot predict how long that will be. Accordingly, the lack of these broadband connections will continue to place limitations on the number of sites that are able to utilize our Internet-based services and the revenue we can expect to generate from those services.


	Our business could suffer if our software products and information technology systems contain errors, experience failures or do not meet customer expectations

The software products and information technology systems we offer are inherently complex. Despite testing and quality control, we cannot be certain that errors will not be found in prior versions, current versions or future versions or enhancements of our software products and information technology systems. We could face breach of warranty or other claims or additional development costs if our software contains undetected errors, or if our products experience failures, do not perform in accordance with their documentation, or do not meet the expectations that our customers have for them. 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 operating our business. In addition, negative publicity caused by these events may delay market acceptance for our products and services, including unrelated products and services.


	We could be subject to product liability claims if our products malfunction or provide inaccurate information

We provide products and services that assist in healthcare decision-making, including some that relate to patient medical histories and treatment plans. If these products malfunction or fail to provide accurate and timely information, we could be subject to product liability claims. 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 operating our business. We attempt to limit, by contract, our liability for damages from 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 general liability insurance coverage, including coverage for errors and omissions. However, it is possible that claims could exceed the amount of our applicable insurance coverage. In addition, this coverage may not continue to be available on acceptable terms or may not be available in sufficient amounts.


	We could lose customers and revenue if we fail to meet the performance standards in our contracts

Many of our customer contracts contain performance standards. If we fail to meet these standards, our customers 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. Despite testing and quality control, we cannot be certain that we will meet these performance standards. To the extent we fail to achieve these standards, our revenues and customer relationships could be adversely affected.


	Performance problems with our transaction services systems could adversely affect our business

Our payer and provider customer satisfaction and our business could be harmed if we or our transaction services customers experience system delays, failures or loss of data. We currently process our payer and provider transactions and data at our facilities and rely on a data center operated by a third party to perform EDI transaction processing, other than real-time EDI transaction processing. This data center is located in Tampa, Florida and is operated by Verizon Data Services, with whom we have contracted for these processing services. We rely primarily on this facility to process batch claims and other batch medical EDI transaction sets. Our contract with Verizon requires Verizon to maintain processing capability and a “hot site” disaster recovery system. We have a contingency plan for emergencies with our systems; however, we have limited backup facilities to process information if these facilities are not functioning. The occurrence of a major catastrophic event or other system failure at any of our facilities or at the Verizon facility could interrupt data processing or result in the loss of stored data, which could have an adverse impact on our business.


	If our systems or the Internet experience security breaches or are otherwise perceived to be insecure, our business could suffer

A material security breach could damage our reputation or result in liability. We retain confidential information, including patient health information, in our processing centers and other facilities. It is critical that these facilities and infrastructure remain secure and be perceived by the marketplace as secure. We may be required to expend significant capital and other resources to protect against security breaches or to alleviate problems caused by breaches. Despite the implementation of security measures, this infrastructure may be vulnerable to physical break-ins, computer viruses, programming errors, attacks by third parties or similar disruptive problems. In addition, any well-publicized compromise of Internet security, whether or not related to our own operations, could reduce demand for our Internet-based services.


	Our Internet-based services are dependent on the development and maintenance of the Internet infrastructure

Our ability to deliver our Internet-based services is dependent on the development and maintenance of the infrastructure of the Internet by third parties. This includes maintenance of a reliable network backbone with the necessary speed, data capacity and security, as well as timely development of complementary products such as high-speed modems, for providing reliable Internet access and services. The Internet has experienced, and is likely to continue to experience, significant growth in the number of users and the amount of traffic. If the Internet continues to experience increased numbers of users, increased frequency of use or more complex requirements, the Internet infrastructure may be unable to support the demands placed on it. In addition, the performance of the Internet may be harmed by increased users or more complex requirements.

The Internet has experienced a variety of outages and other delays as a result of damages to portions of its infrastructure, and it could face outages and delays in the future. These outages and delays could reduce the level of Internet usage as well as the availability of the Internet to us for delivery of our Internet-based services. In addition, our customers who utilize our Web-based services depend on Internet service providers, online service providers and other Web site operators for access to our Web site. All of these providers have experienced significant outages in the past and could experience outages, delays and other difficulties in the future due to system failures unrelated to our systems. Any significant interruptions in our services or increases in response time could result in a loss of potential or existing users of and advertisers and sponsors on our Web site and, if sustained or repeated, could reduce the attractiveness of our services.


	We are dependent on strategic relationships to generate some of our revenue

Our ability to generate revenue will suffer if we cannot establish and maintain successful strategic relationships. We have entered into strategic relationships with leading online and media distribution and healthcare partners. Successful strategic relationships are an important means to increase the number of transactions processed over our network, generate traffic on our Web site and capitalize on additional distribution and revenue opportunities. As previously announced, we have been renegotiating some of the strategic relationships we currently have in place and some of these relationships have been modified or terminated. It is possible that additional relationships may be modified or terminated. We expect that we will face intensified competition for strategic relationships.

Disputes with strategic partners and customers may be resolved unfavorably to us and may harm our relationships. Some of our strategic partners have initiated or threatened to initiate litigation or other dispute resolution mechanisms regarding alleged breaches of our agreements and other claims. Similarly, in some cases, we have initiated or threatened to initiate litigation or other dispute resolution mechanisms when we believed our partner or customer is in breach of its obligations, if we have been unable to resolve the dispute through negotiations. We cannot provide assurance that these disputes will be resolved in our favor or, even if resolved in our favor, that we will be able to preserve the benefits we expected to achieve from our relationships with those partners, which could adversely affect our financial position and results of operations.

We share revenue with our strategic partners and will incur significant expense in connection with our strategic relationships, and this expense may exceed the net revenue these relationships generate. We have agreed to share some of our revenue with some of our strategic partners and, in some cases, to make guaranteed payments to our strategic partners. We may enter into additional arrangements with current or future strategic partners that require us to share revenue, make guaranteed payments or incur other significant expenses. We cannot give assurances that we will generate sufficient revenue from our arrangements with strategic partners to offset all required payments and expenses. Failure to do so could have a material adverse effect on our financial condition or results of operations.

We have invested in some of our strategic partners, many of which are in early stages of development. We have made equity investments in some of our strategic partners. In many instances, these investments are in the form of illiquid securities of private companies engaged in e-Health and were made in conjunction with the parties entering into a strategic agreement. Typically, these strategic partners entered into agreements that obligate them to purchase advertising or other services from us. These companies are typically in an early stage of development and may be expected to incur substantial losses and may not generate sufficient revenue to pay the advertising and e-commerce fees due us. In addition, some of these companies have altered their plans to go public, and others that have gone public have experienced or may experience significant decreases in the trading prices of their common stock, adversely affecting the value of our investments. Some of these companies may go out of business before we are able to sell our investments.

We have granted exclusive rights to strategic partners. We have agreed that some of our strategic partners will be our exclusive providers of some of our applications and content. For example, we have

entered into strategic agreements with e-commerce companies to be our exclusive partners supplying online pharmacy services and to be our exclusive providers of various categories of content and services. These agreements may limit our access to other applications and content we might otherwise be able to make available to subscribers and consumers or to payer and provider customers. Our inability to offer other applications and content could cause our business to suffer. In addition, we have granted exclusive rights to strategic partners which restrict our ability to pursue some business opportunities.


	Relationships with customers and strategic partners may conflict

We have developed and rely upon important relationships with payers, providers, practice management system vendors and strategic partners, some of which may involve conflicting contractual rights, including conflicts which may result from our acquisitions. As a result of conflicts or perceived conflicts resulting from our acquisitions or our business plans and strategic initiatives, we may lose relationships with some customers and strategic partners, who may then establish relationships with our competitors. There could be litigation or other proceedings between us and some of our customers and strategic partners if they seek to enforce rights they purport to have as a result of conflicts with our other relationships or with our business plans or strategic initiatives, or their belief that these conflicts exist. For example, we had been negotiating with Medic, a practice management system vendor whose products compete with The Medical Manager products, to enter into new arrangements. These negotiations were not successful. We cannot provide assurance that disputes with any such customers or strategic partners will be resolved in our favor or, even if resolved in our favor, that we will be able to preserve the benefits we expected to receive from our relationships with those partners.

If contractual or relationship conflicts or other issues cannot be resolved, we could lose the benefits of some of our relationships with payers, providers or strategic partners. Losses of any significant relationships could harm our business or results of operations.


	The performance of our business depends on attracting and retaining qualified executives and employees

Our performance depends on attracting and retaining key personnel, including executives, product managers, software developers and other technical personnel and sales and marketing personnel. Failure to do so could have a material adverse effect on the performance of our business and the results of our operations.


	Our business will suffer if we fail to successfully integrate acquired businesses and technologies

We have in the past acquired, and may in the future acquire, businesses, technologies, services, product lines or content databases. The successful integration of the acquired businesses into our operations is critical to our future performance.

We are in the process of eliminating duplication and redundancies as a result of the acquisitions made by us since November 1999 and of consolidating our operational infrastructure. The amount and timing of the benefits of these efforts are subject to significant risks and uncertainties. These risks and uncertainties include, but are not limited to, those relating to


	•	our ability to provide additional value to our customers by integrating our transaction services, physician services and portal services

	•	our ability to cross-sell products and services to payers and providers with which we have established relationships and those with which the acquired companies have established relationships

	•	our ability to retain or replace key personnel

	•	potential conflicts in payer, provider, strategic partner, sponsor or advertising relationships


	•	our ability to coordinate organizations that are geographically diverse and have different business cultures

	•	compliance with regulatory requirements.

The amount and timing of the benefits from future acquisitions of business or technologies will be subject to similar risks and uncertainties. We cannot guarantee that any acquired businesses will be successfully integrated with our operations in a timely manner, or at all. Failure to successfully integrate acquired businesses or to achieve anticipated operating synergies, revenue enhancements or cost savings could have a material adverse effect on our business, financial condition and results of operations.


	Our business may be subject to litigation

Our business and operations may subject us to claims, litigation and other proceedings brought by private parties and governmental authorities. For information regarding certain proceedings to which we are currently a party, see “Legal Proceedings” on page 38 and the information under “Legal Proceedings” in our 2000 Annual Report on Form 10-K.


	Healthcare regulation could adversely affect our business

The healthcare industry is highly regulated and is subject to changing political, regulatory and other influences. These factors affect the purchasing practices and operation of healthcare organizations. Federal and state legislatures and agencies periodically consider programs to reform or revise the U.S. healthcare system. These programs may contain proposals to increase governmental involvement in healthcare, lower reimbursement rates or otherwise change the environment in which healthcare industry participants operate. Healthcare industry participants may respond by reducing their investments or postponing investment decisions, including investments in our applications and services. We are unable to predict future proposals with any certainty or to predict the effect they would have on our business.

Existing laws and regulations also could create liability, cause us to incur additional cost and restrict our operations. Many healthcare laws are complex, applied broadly and subject to interpretation by courts and other governmental authorities. In addition, many existing healthcare laws and regulations, when enacted, did not anticipate the methods of healthcare e-commence and other products and services that we provide. However, these laws and regulations may nonetheless be applied to our products and services. Our failure, or the failure of our business partners, to accurately anticipate the application of these healthcare laws, or other failure to comply, could create liability for us, result in adverse publicity and negatively affect our business.

HIPAA administrative simplification. Under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, Congress mandated a package of interlocking administrative simplification rules to establish standards and requirements for the electronic transmission of certain health information. Five of these rules were published in proposed form in 1998, with two of the five published in final form. The two rules published in final form are Standards for Electronic Transactions, published August 17, 2000, and Standards for Privacy of Individually Identifiable Health Information, published December 28, 2000. These rules took effect on October 16, 2000 and April 14, 2001, respectively, with compliance required by healthcare providers, healthcare clearinghouses and large health plans two years following the respective effective dates. Small health plans are given an additional year to comply. These rules apply to certain of our operations as well as the operations of many of our customers. Compliance with these final rules will be costly and could require complex changes in our systems.

HIPAA transaction standards. The HIPAA Standards for Electronic Transactions rule is commonly referred to as the transaction standards rule. This rule establishes format and data content standards for eight of the most common healthcare transactions, using technical standards promulgated by recognized standards publishing organizations. These transactions include health claims, enrollment, payment and eligibility. Under the new standards, any party transmitting or receiving any of these eight healthcare

transactions electronically will send and receive data in a single format, rather than the large number of different data formats currently used.

The transaction standards are applicable to that portion of our business involving the processing of healthcare transactions among physicians, payers, patients and other healthcare industry participants. The transaction standards also are applicable to many of our customers and to our relationships with those customers. We intend to comply with the transaction standards by their compliance date. This compliance may require costly modifications to some of our systems, products and services. We believe that we are well-positioned to effectuate these changes and to facilitate compliance efforts of our customers and strategic partners. However, there can be no assurance that we or our customers or strategic partners will be able to do so or that we will be able to take advantage of any business opportunities that implementation of the transaction standards may provide to us.

Other regulation of transaction services. Other state and federal statutes and regulations governing transmission of healthcare information may affect our operations. For example, Medicaid rules require some processing services and eligibility verification to be maintained as separate and distinct operations. We carefully review our practices with regulatory experts in an effort to ensure that we are in compliance with all applicable state and federal laws. These laws, though, are complex and changing, and the courts and other governmental authorities may take positions that are inconsistent with our practices.

HIPAA privacy standards. The HIPAA Standards for Privacy of Individually Identifiable Health Information rule is commonly referred to as the privacy standards rule. This rule establishes a set of basic national privacy standards and fair information practices for the protection by health plans, healthcare clearinghouses, healthcare providers and their business associates of individually identifiable health information. This rule became effective on April 14, 2001 and the compliance date for most entities is April 14, 2003. The U.S. Department of Health and Human Services Secretary Thompson has stated publicly that his department intends to make or propose further changes to the medical privacy rule in the near future. The privacy standards rule applies to the portions of our business that process healthcare transactions and provide technical services to other participants in the healthcare industry. This rule provides for civil and criminal liability for its breach and requires us, our customers and our partners to use health information in a highly restricted manner, to establish policies and procedures to safeguard the information, to obtain individual authorizations for some activities, and to provide certain access rights to individuals. This rule may require us to incur significant costs to change our platform and services, may restrict the manner in which we transmit and use the information, and may adversely affect our ability to generate revenue from the provision of de-identified information to third parties. We are unable to predict what changes to the privacy standards rule will be made in the future or how those changes could affect our business.

Other restrictions regarding confidentiality and privacy of patient information. Numerous state and federal laws other than HIPAA govern the collection, dissemination, use, access to and confidentiality of patient health information. Many states are considering new laws and regulations that further protect the confidentiality of medical records or medical information. These state laws are not in most cases preempted by the HIPAA privacy standard and may be subject to interpretation by various courts and other governmental authorities, thus creating potentially complex compliance issues for us and our customers and strategic partners. The definitions in the various state and federal laws concerning what constitutes individually identifiable data sometimes differs and sometimes is not provided, creating further complexity. In addition, determining whether data has been sufficiently de-identified may require complex factual and statistical analyses. The HIPAA privacy standards rule contains a restrictive definition of de-identified information, which is information that is not individually identifiable, that could create a new standard of care for the industry. These other privacy laws at a state or federal level, or new interpretations of these laws, could create liability for us, could impose additional operational requirements on our business, could affect the manner in which we use and transmit patient information and could increase our cost of doing business. In addition, parties may also have contractual rights that provide additional limits on our collection, dissemination, use, access to and confidentiality of patient health information. Claims of

privacy right or contractual breaches, even if we are not found liable, could be expensive and time-consuming to defend and could result in adverse publicity that could harm our business.

International data regulation. Other countries also have, or are developing, their own laws governing the collection, use, storage and dissemination of personal information or patient data. These laws could create liability for our international operations, impose additional operations requirements or restrictions on our business, affect the manner in which we use or transmit data and increase our cost of doing business.

Consumer protection regulation. The Federal Trade Commission, or FTC, and many state attorneys general are applying federal and state consumer protection laws to require that the online collection, use and dissemination of data, and the presentation of Web site content, comply with certain standards for notice, choice, security and access. Courts may also adopt these developing standards. In many cases, the specific limitations regarding these standards are subject to interpretation by courts and other governmental authorities. We believe that we are in compliance with these consumer protection standards, but a determination by a state or federal agency or court that any of our practices do not meet these standards could result in liability and adversely affect our business. New interpretations of these standards could also require us to incur additional costs and restrict our business operations.

Regulation of healthcare relationships. There are federal and state laws that govern patient referrals, physician financial relationships and inducements to beneficiaries of federal healthcare programs. The federal anti-kickback law prohibits any person or entity from offering, paying, soliciting or receiving anything of value, directly or indirectly, for the referral of patients covered by Medicare, Medicaid and other federal healthcare programs or the leasing, purchasing, ordering or arranging for or recommending the lease, purchase or order of any item, good, facility or service covered by these programs. The anti-kickback law is broad and may apply to some of our activities or our relationships with our customers, advertisers or strategic partners. Penalties for violating the anti-kickback law include imprisonment, fines and exclusion from participating, directly or indirectly, in Medicare, Medicaid and other federal healthcare programs. Many states also have similar anti-kickback laws that are not necessarily limited to items or services for which payment is made by a federal healthcare program. We carefully review our practices with regulatory experts in an effort to ensure that we comply with all applicable laws. However, the laws in this area are both broad and vague and it is often difficult or impossible to determine precisely how the laws will be applied, particularly to new services similar to ours. Any determination by a state or federal regulatory agency that any of our practices violate any of these laws could subject us to civil or criminal penalties and require us to change or terminate some portions of our business.

We currently provide billing services and intend to provide repricing services to healthcare providers and, therefore, may be subject to state and federal laws that govern the submission of claims for medical expense reimbursement. These laws generally prohibit an individual or entity from knowingly presenting or causing to be presented a claim for payment from Medicare, Medicaid or other third party payers that is false or fraudulent, or is for an item or service that was not provided as claimed. These laws also provide civil and criminal penalties for noncompliance, and can be enforced by individuals through qui tam actions. We have designed our current transaction services and will design any future services to place the responsibility for compliance with these laws on provider customers. However, we cannot guarantee that state and federal agencies will regard billing errors processed by us as inadvertent and not in violation of these laws. In addition, changes in current healthcare financing and reimbursement systems could cause us to make unplanned modifications of applications or services, or result in delays or cancellations of orders or in the revocation of endorsement of our applications and services by healthcare participants.

Regulation by the U.S. Food and Drug Administration. The Food and Drug Administration, or the FDA, has jurisdiction under the 1976 Medical Device Amendments to the Federal Food, Drug and Cosmetic Act, or the FDA Act, to regulate computer products and software as medical devices if they are intended for use in the diagnosis, cure, mitigation, treatment or prevention of disease in humans. The FDA has issued a final rule under which manufacturers of medical image storage devices and related software are required to submit to the FDA premarket notification applications, which are each referred to in this document as a 510(k) application, and otherwise comply with the requirements of the FDA Act applicable

to medical devices. While we have generally attempted to design our services so that our computer applications and software are not considered to be medical devices, Medical Manager Health Systems is distributing in the U.S. a medical image management device, referred to herein as the “image device,” which was granted clearance by the FDA on August 25, 2000, and is manufactured by Medical Manager Health Systems in accordance with specifications set forth in the cleared 510(k) application. Medical Manager Health Systems has created an interface between The Medical Manager practice management system and the image device and is marketing the interface and the image device as the DIMDX System. We believe that the addition of our practice management system to the image device does not change the image device’s intended use or significantly change the safety or efficacy of the product to the extent that a new 510(k) application is required. The FDA is currently reviewing its policy for the regulation of computer software, and there is a risk that The Medical Manager software or other of our software or hardware components could in the future become subject to some or all of the above requirements. In addition, the FDA may take the position that other products and services we offer are subject to FDA regulation. In addition, we may expand our services in the future to areas that subject us to FDA regulation. Except with respect to Medical Manager Health Systems and Porex, we have no experience in complying with FDA regulations. We believe that complying with FDA regulations may be time consuming, burdensome and expensive and could delay our introduction of new applications or services.

The FDA also regulates pharmaceuticals, including the regulation of pharmaceutical advertisements or descriptions posted on a Web site or delivered electronically to physicians or consumers. Many of our advertisers are pharmaceutical companies and the content of their ads is subject to FDA scrutiny and regulation. We have attempted to disclaim responsibility for the content of these ads and to keep the FDA compliance burden squarely on our advertisers. We cannot guarantee that the FDA will not hold us also responsible in some way for this compliance, which could adversely affect or restrict our relationships with our advertisers.

Medical professional regulation. The practice of most healthcare professions requires licensing under applicable state law. In addition, the laws in some states prohibit business entities from practicing medicine, which is referred to as the prohibition against the corporate practice of medicine. We do not believe we engage in the practice of medicine and we have attempted to structure our Web site, strategic relationships and other operations to avoid violating these state licensing and professional practice laws. A state, however, may determine that some portion of our business violates these laws and may seek to have us discontinue those portions or subject us to penalties or licensure requirements. We provide Web site capabilities for our physician customers. Many states regulate the ability of medical professionals to advertise or maintain referral services. We do not represent that a physician’s use of our Web site will comply with these or other state laws regulating professional practice and we do not monitor or control the content that physicians post on their individual practice Web sites using our Web site application. It is possible a state or a court may determine we are responsible for any non-compliance with these laws, which could affect our ability to offer this service to our customers. We employ and contract with physicians who provide only medical information to consumers, and we have no intention to provide medical care or advice. We do not maintain professional liability insurance because we believe we are not a healthcare provider. Any determination that we are a healthcare provider and acted improperly as a healthcare provider may result in liability for which we are not insured.


	Regulation of the Internet could adversely affect our business

The Internet and its associated technologies are subject to government regulation. Our failure, or the failure of our business partners, to accurately anticipate the application of applicable laws and regulations, or any other failure to comply, could create liability for us, result in adverse publicity, or negatively affect our business. In addition, new laws and regulations, or new interpretations of existing laws and regulations, may be adopted with respect to the Internet or other online services covering user privacy, patient confidentiality, consumer protection and other issues, including pricing, content, copyrights and patents, distribution, and characteristics and quality of products and services. We cannot predict whether laws or regulations will change or how such changes will affect our business. Government regulation of the

Internet could limit the effectiveness of the Internet for the methods of healthcare e-commerce that we are providing or developing or even prohibit the sale of particular products and services.

For more information regarding government regulation of the Internet to which we are or may be subject, see “— Healthcare regulation could adversely affect our business” beginning on page 31.


	We face potential liability related to the privacy and security of personal information we collect on our Web sites

Internet user privacy has become a controversial issue both in the U.S. and abroad. We have privacy policies posted on our consumer portal and our professional portal that we believe comply with applicable laws requiring notice to users about our information collection, use and disclosure practices. However, whether and how existing privacy and consumer protection laws in various jurisdictions apply to the Internet still is uncertain and may take years to resolve. Any legislation or regulation in the area of privacy of personal information could affect the way we operate our Web sites and could harm our business. Further, we can give no assurance that the statements on our portals, or our practices, will be found sufficient to protect us from liability or adverse publicity in this area.

For more information regarding regulation of the collection, use and disclosure of personal information to which we may be subject, see “— Healthcare regulation could adversely affect our business” beginning on page 31.


	Third parties may challenge the enforceability of our online agreements

The law governing the validity and enforceability of online agreements and other electronic transactions is evolving. We could be subject to claims by third parties that our online agreements with consumers and physicians that provide the terms and conditions for use of our portal services and physician services are unenforceable. A finding by a court that these agreements are invalid could harm our business and require costly changes to our portals.


	Third parties may bring claims as a result of the activities of our strategic partners

We could be subject to claims by third parties, and to liability, as a result of the activities, products or services of our strategic partners. We state on our portals that we do not control or endorse the products or services of our strategic partners. However, there can be no assurance that the statements made in our portal will be found to be sufficient to ensure that we are not held responsible for such activities, products or services. Furthermore, even if these claims do not result in liability to us, investigating and defending these claims could be expensive, time-consuming and result in adverse publicity that could harm our business.


	Third parties may bring claims against us as a result of content provided on our Web site, which may be expensive and time consuming to defend

We could be subject to third party claims based on the nature and content of information supplied on our Web site by us or third parties, including content providers, medical advisors or users. We could also be subject to liability for content that may be accessible through our Web site or third party Web sites linked from our Web site or through content and information that may be posted by users in chat rooms, bulletin boards or on Web sites created by professionals using our Web site application. Even if these claims do not result in liability to us, investigating and defending against these claims could be expensive and time consuming and could divert management’s attention away from operating the business.


	Our intellectual property may be subject to infringement claims or may be infringed upon

Our intellectual property is important to our business. The steps we take to protect our intellectual property and proprietary information may prove to be inadequate and, whether or not adequate, may be expensive. There can be no assurance that we will be able to detect potential or actual misappropriation or

infringement of our intellectual property or proprietary information. Even if we do detect misappropriation or infringement by a third party, there can be no assurance that we will be able to enforce our rights at a reasonable cost, or at all. In addition, our rights to intellectual property and proprietary information may not prevent independent third-party development and commercialization of competing products or services.

We could be subject to claims that we are misappropriating or infringing intellectual property or other proprietary rights of others. These claims, even if not meritorious, could be expensive to defend and divert 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 applications that contain the infringing intellectual property. We may be unable to develop non-infringing technology or obtain a license on commercially reasonable terms, or at all. We may also be require to indemnify our customers if they become subject to third party claims relating to intellectual property that we license or otherwise provide to them.


	We may not be able to raise additional funds when needed for our business or to exploit opportunities

Our future liquidity and capital requirements will depend upon numerous factors, including the success of the integration of our businesses, our existing and new applications and service offerings, competing technologies and market developments, potential future acquisitions and additional repurchases of our common stock. We may need to raise additional funds to support expansion, develop new or enhanced applications and services, respond to competitive pressures, acquire complementary businesses or technologies or take advantage of unanticipated opportunities. If required, we may raise such additional funds through public or private debt or equity financing, strategic relationships or other arrangements. There can be no assurance that such financing will be available on acceptable terms, if at all, or that such financing will not be dilutive to our stockholders.


	The proposed disposition of our plastics and filtration technologies business may not be completed in accordance with our expectations

The proposed disposition of our Porex plastics and filtration technologies business has taken longer than originally expected. We determined not to accept any of the offers made by potential buyers because we believed that the offers did not reflect the value of the Porex business. We plan to continue to explore various divestiture alternatives for the Porex business, but no longer expect to complete the disposition in 2001. If the proposed disposition of Porex fails to be completed or does not provide us with the proceeds anticipated, we may not be able to execute strategies that are important to our business.


	Until we dispose of our plastics and filtration technologies business, we will be subject to risks associated with that business

Until the proposed disposition of our Porex plastic and filtration technologies business is completed, we will continue to operate that business and to be subject to additional risks associated with that business, which include:

We face significant competition for the products and services of our plastic and filtration technologies business. Competition in our plastics and filtration technology business is characterized by the introduction of competitive products at lower prices. We believe that Porex’s principal competitive strengths are its manufacturing processes, quality control, relationships with its customers and distribution of its proprietary healthcare products.

In the porous plastics area, Porex’s competitors include other producers of porous plastic materials as well as companies that manufacture and sell products made from materials other than porous plastics which can be used for the same purposes as Porex’s products. In this area, Porex has several direct competitors in the U.S., Europe and Asia. Porex’s porous plastic pen nibs compete with felt and fiber tips manufactured by a variety of suppliers worldwide. Other Porex industrial products made of porous plastic compete, depending on the industrial application, with porous metals, metal screens, fiberglass tubes, pleated paper, resin-impregnated felt, ceramics and other substances and devices.

The market for Porex’s injection molded solid plastic components and products, including its medical products, is highly competitive and highly fragmented. Porex’s pipette tips and racks also compete with similar products manufactured by domestic and foreign manufacturers. Porex’s injection molding and mold making services compete with services offered by several foreign and domestic companies. The MEDPOR® Biomaterial products compete for surgical use against autogenous and allograph materials and alloplastic biomaterials. Porex’s surgical drains and markers compete against a variety of products from several manufacturers.

Healthcare regulation could adversely affect our plastics and filtration technologies business. Porex manufactures and distributes medical/surgical devices, such as plastic and reconstructive surgical implants and tissue expanders, which are subject to government regulations, under the FDA Act and additional regulations promulgated by the FDA. Future healthcare products may also be subject to these regulations and approval processes. Compliance with these regulations and the process of obtaining approvals can be costly, complicated and time-consuming, and we cannot assure you that these approvals will be granted on a timely basis, if ever.

The nature of Porex’s products exposes it to product liability claims and may make it difficult to get adequate insurance coverage. The products sold by Porex expose it to potential risk for product liability claims, particularly with respect to Porex’s life sciences, clinical, surgical and medical products. We believe that Porex carries adequate insurance coverage against product liability claims and other risks. We cannot assure you, however, that claims in excess of Porex’s insurance coverage will not arise. In addition, Porex’s insurance policies must be renewed annually. Although Porex has been able to obtain adequate insurance coverage at an acceptable cost in the past and believes that it is adequately indemnified for products manufactured by others and distributed by it, we cannot assure you that in the future Porex will be able to obtain this insurance at an acceptable cost or be adequately protected by this indemnification.

Since March 1991, Porex has been named as one of many co-defendants in a number of actions brought by recipients of silicone gel mammary implants. For more information regarding these actions, see the information under “Legal Proceedings” in our 2000 Annual Report on Form 10-K.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity

The primary objective of our investment activities is to preserve principal and maintain adequate liquidity, while at the same time maximizing the yield we receive from our investment portfolio. This objective is accomplished by adherence to our investment policy, which establishes the list of eligible securities and credit requirements for each investment.

Changes in prevailing interest rates will cause the principal amount of the investment to fluctuate. To minimize this risk, we maintain our portfolio of cash equivalents, short-term investments and marketable securities in commercial paper, non-government debt securities, money market funds and highly liquid U.S. Treasury notes. We view these high grade securities within our portfolio as having similar market risk characteristics. Principal amounts for short-term investments and marketable securities expected to mature are $94.8 million during 2002.

We have not utilized derivative financial instruments in our investment portfolio.

Exchange Rate Sensitivity

Currently, the majority of our sales and expenses are denominated in U.S. dollars and, as a result, we have experienced no significant foreign exchange gains and losses to date. We conduct only limited transactions in foreign currencies, and we do not anticipate that foreign exchange gains or losses will be significant in the foreseeable future. We have not engaged in foreign currency hedging activities to date.

PART II

OTHER INFORMATION

ITEM 1. Legal proceedings

Quintiles v. WebMD

As part of the transaction in which WebMD acquired Envoy from Quintiles Transnational Corp. in May 2000, Quintiles and WebMD entered into a Data Rights Agreement and an Internet Product Development and Marketing Agreement. In February 2000, Quintiles filed an action for breach of the Data Rights Agreement against WebMD. For a description of this litigation, see WebMD’s Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2001 under “Legal Proceedings.” On October 12, 2001, WebMD and Quintiles entered into an agreement to settle this litigation (“Settlement Agreement”). Pursuant to the Settlement Agreement, WebMD and Quintiles terminated the Data Rights Agreement and the Internet Product Development and Marketing Agreement and all other agreements between them. Pursuant to the court order in the litigation, Quintiles will continue to receive de-identified data from WebMD until February 28, 2002. Following that date, WebMD and Envoy will have no further obligation to provide any data to Quintiles.

In accordance with the terms of the Settlement Agreement, on October 12, 2001, WebMD purchased from Quintiles, for $185 million in cash, all 35,000,000 shares of WebMD common stock held by Quintiles. The Settlement Agreement also provides that Quintiles will have the right to receive a contingent payment (payable at WebMD’s option in cash and/or stock) in the event that, on or before June 30, 2004, a transaction closes in which WebMD is acquired at a price per WebMD share greater than $4.00 or in which Envoy is sold at an aggregate price of greater than $500 million. WebMD is under no obligation to pursue either of these types of transactions. In the case of an acquisition of WebMD agreed to on or before June 30, 2003 that closes on or before June 30, 2004, the contingent payment to Quintiles will equal the amount by which the price paid in the acquisition exceeds $4.00 per share, multiplied by 35 million. If the acquisition is agreed to after June 30, 2003 and closes on or before June 30, 2004, the contingent payment will be 80% of the payment described in the preceding sentence. In the case of a sale of Envoy agreed to on or before June 30, 2003 that closes on or before June 30, 2004, the contingent payment to Quintiles will equal 10% of the amount by which the price received in the sale exceeds $500 million. If the sale is agreed to after June 30, 2003 and closes on or before June 30, 2004, the contingent payment will be 80% of the payment described in the preceding sentence.

Litigation Regarding Distribution of Shares in Healtheon Initial Public Offering

Other Legal Proceedings

In the normal course of business, WebMD and its subsidiaries are involved in various other claims and legal proceedings. While the ultimate resolution of these matters, including those discussed above and in our 2000 Annual Report on Form 10-K under “Legal Proceedings,” has yet to be determined, WebMD does not believe that their outcome will have a material adverse effect on its financial position.

ITEM 6. Exhibits and Reports on Form 8-K

(a) The exhibits listed in the accompanying Exhibit Index on page E-1 are filed as part of this Quarterly Report.

(b) No reports on Form 8-K were filed during the quarter ended September 30, 2001.

SIGNATURES

In accordance with the requirements of the Securities Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	WEBMD CORPORATION


	By:	/s/ ANTHONY VUOLO



	Anthony Vuolo
	Executive Vice President and Chief
	Financial Officer

Date: November 13, 2001

EXHIBIT INDEX


Exhibit No.		Description

	10.1	Settlement Agreement dated October 12, 2001 between Registrant and Quintiles Transnational Corp. (incorporated by reference to Exhibit 10.01 to Quintiles Transnational Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001, filed with the Securities and Exchange Commission on November 1, 2001)
	10.2	Letter Agreement dated September 26, 2001 between Registrant and Marvin P. Rich

E-1