Irregularities, lack of profits fail to frighten investors from WebMD

By Ellen Simon
Associated Press

NEW YORK » WebMD's recent sizzling IPO suggests investors are willing to overlook issues ranging from the company losing money to an investigation by federal authorities.

What's hanging over health information company WebMD? There's an investigation by the U.S. Attorney's Office. There's the fact that WebMD's one profitable year, 2004, would have been wiped out had options accounting rules now in place been in effect then. There are also a couple of disclosures by the man who is chairman of WebMD and its parent that corporate governance experts say are unusual.

"From a shareholder standpoint, it's not a particularly clear pond," said Charles Elson, chairman of the John L. Weinberg Center for Corporate Governance at the University of Delaware.

The parent company, WebMD Corp., went public in 1999. It's best known for its Web sites, but it also has electronic health records, billing and plastics businesses. On Sept. 30, the parent spun off WebMD Health Corp. as a separate company. It changed its own name to Emdeon Corp.

WebMD Health, the offspring company, does what WebMD is known for: It runs a group of Web sites explaining health issues to regular people, using plain English. WebMD Health went public on Sept. 29 at $17.50. It closed that day at $24.40 and has traded near $25 a share since.

A close reading of the company's prospectus, though, shows some troubling details about the company. Asked about information in the prospectus, Jennifer Meyer, a spokeswoman for the company said, "We are still in a quiet period because of the IPO and are not in a position to comment."

According to the prospectus, the U.S. Attorney's Office "has been investigating all levels of WebMD's parent company's management."

A company the parent bought, called Medical Manager Corp., has been investigated for accounting improprieties, including artificially inflating revenues and earnings.

Three former Medical Manager employees have pleaded guilty to mail fraud and tax evasion. The former employees, in their plea agreements, said they engaged in fraudulent conduct "in concert with senior management," according to the prospectus.

WebMD's parent has set up a special committee comprising independent directors to respond to the allegations that have been raised. The committee has retained outside counsel.

"We're continuing the investigation," said Kevin McDonald, an assistant U.S. Attorney with the U.S. Attorney's Office in South Carolina. He would not comment on whether anyone currently at WebMD is involved.

The prospectus said the company does not believe "any member of its senior management whose duties were not primarily related to the operations of Medical Manager engaged in the alleged improprieties."

Martin J. Wygod, who is chairman of WebMD and its parent, was chairman for more than five years at Synetic Inc., which changed its name to Medical Manager. His chairmanship ended in 2000, when the original WebMD bought Medical Manager. WebMD's executive vice president for finance and chief financial officer, Anthony Vuolo, was senior vice present for business development and treasurer at Medical Manager.

There's more in the prospectus:

» The company showed a loss for the first six months of 2005. It also lost money in 2002 and 2003. It reported a profit in 2004. But under new accounting rules, companies must change how they account for stock options. Had those rules been in place in 2004, its profit of $6.5 million would have been a loss of $2.4 million, according to the prospectus.
» The company's CEO, Roger C. Holstein, resigned for personal reasons in April after less than eight months as CEO. Holstein will continue to receive his annual base salary of $660,000 until Oct. 27, 2007. Holstein did not return a message requesting comment.
» The company is still controlled by Emdeon, which owns 87.5 percent of WebMD common stock and has 97.1 percent of voting power over WebMD. The chairman of both companies is Martin Wygod.

That's important, because some things about Wygod in the prospectus raise questions among corporate governance experts.

In 2004, Wygod reimbursed WebMD's parent for $236,000 for his personal use, and use by a corporation he controls, of the parent company's staff and office facilities and for the personal portion of some travel expenses, according to WebMD's prospectus. In 2003, he reimbursed the company for $230,000 for the same reason.

The amount of money involved is unusual, said Paul Lapides, director of the Corporate Governance Center at the University of Tennessee.

"It raises questions," Lapides said. "How could this be in the best interest of the business? If it's not in the best interest of the business, why is the company lending its staff and resources to the chairman for his personal use?"

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