<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 15, 1998
REGISTRATION NO. 333-60427
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
HEALTHEON CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7374 94-3236644
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
4600 PATRICK HENRY DRIVE
SANTA CLARA, CA 95054
(408) 876-5000
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
---------------------
W. MICHAEL LONG
CHIEF EXECUTIVE OFFICER
HEALTHEON CORPORATION
4600 PATRICK HENRY DRIVE
SANTA CLARA, CA 95054
(408) 876-5000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------
COPIES TO:
<TABLE>
<S> <C> <C>
LARRY W. SONSINI JACK DENNISON GORDON K. DAVIDSON
STEVEN E. BOCHNER VICE PRESIDENT AND LAIRD H. SIMONS III
MARK L. REINSTRA GENERAL COUNSEL JEFFREY R. VETTER
Wilson Sonsini Goodrich & Rosati HEALTHEON CORPORATION CRAIG A. MENDEN
Professional Corporation 4600 Patrick Henry Drive Fenwick & West LLP
650 Page Mill Road Santa Clara, CA 95054 Two Palo Alto Square
Palo Alto, CA 94304-1050 (408) 876-5000 Palo Alto, CA 94306
(650) 493-9300 (650) 494-0600
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
---------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /
- ----------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
- ----------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
- ----------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: (1) one to be
used in connection with an offering in the United States and Canada (the "U.S.
Prospectus") and (2) the other to be used in connection with a concurrent
offering outside of the United States and Canada (the "International Prospectus"
and, together with the U.S. Prospectus, the "Prospectuses"). The U.S. Prospectus
and the International Prospectus are identical in all respects except for the
front cover page. The front cover page of the International Prospectus is
included herein after the final page of the U.S. Prospectus and is labeled
"Alternate Page for International Prospectus." Final forms of each of the
Prospectuses will be filed with the Commission pursuant to Rule 424(b)
promulgated under the Securities Act of 1933, as amended.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL
PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
JURISDICTION.
<PAGE>
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED SEPTEMBER 15, 1998
SHARES
[LOGO]
COMMON STOCK
-----------------
OF THE SHARES OF COMMON STOCK OFFERED HEREBY, SHARES ARE BEING
OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS
AND SHARES ARE BEING OFFERED INITIALLY OUTSIDE OF THE UNITED
STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS. SEE "UNDERWRITERS."
ALL OF THE SHARES OF COMMON STOCK BEING OFFERED HEREBY ARE BEING SOLD
BY THE COMPANY. PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC
MARKET FOR THE COMMON STOCK OF THE COMPANY. IT IS CURRENTLY
ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN
$ AND $ PER SHARE. SEE "UNDERWRITERS" FOR A DISCUSSION
OF THE FACTORS TO BE CONSIDERED IN DETERMINING THE INITIAL
PUBLIC OFFERING PRICE. APPLICATION HAS BEEN MADE TO LIST
THE COMMON STOCK FOR QUOTATION ON THE NASDAQ NATIONAL
MARKET UNDER THE SYMBOL "HLTH."
---------------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON
PAGE 4 HEREOF.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
PRICE $ A SHARE
-------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
--------------------- ----------------------- -----------------------
<S> <C> <C> <C>
PER SHARE.................................... $ $ $
TOTAL(3)..................................... $ $ $
</TABLE>
- ------------
(1) THE COMPANY HAS AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST CERTAIN
LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. SEE "UNDERWRITERS."
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $ .
(3) THE COMPANY HAS GRANTED THE U.S. UNDERWRITERS AN OPTION, EXERCISABLE
WITHIN 30 DAYS OF THE DATE HEREOF, TO PURCHASE UP TO AN AGGREGATE OF
ADDITIONAL SHARES AT THE PRICE TO PUBLIC, LESS UNDERWRITING DISCOUNTS
AND COMMISSIONS, FOR THE PURPOSE OF COVERING OVER-ALLOTMENTS, IF ANY. IF
THE U.S. UNDERWRITERS EXERCISE SUCH OPTION IN FULL, THE TOTAL PRICE TO
PUBLIC, UNDERWRITING DISCOUNTS AND COMMISSIONS AND PROCEEDS TO COMPANY
WILL BE $ , $ AND $ , RESPECTIVELY. SEE "UNDERWRITERS."
------------------------
THE SHARES ARE OFFERED, SUBJECT TO PRIOR SALE, WHEN, AS AND IF ACCEPTED BY
THE UNDERWRITERS NAMED HEREIN AND SUBJECT TO APPROVAL OF CERTAIN LEGAL MATTERS
BY FENWICK & WEST LLP, COUNSEL FOR THE UNDERWRITERS. IT IS EXPECTED THAT
DELIVERY OF THE SHARES WILL BE MADE ON OR ABOUT , 1998 AT THE OFFICE OF
MORGAN STANLEY & CO. INCORPORATED, NEW YORK, N.Y., AGAINST PAYMENT THEREFOR IN
IMMEDIATELY AVAILABLE FUNDS.
-------------------
MORGAN STANLEY DEAN WITTER GOLDMAN, SACHS & CO.
HAMBRECHT & QUIST VOLPE BROWN WHELAN & COMPANY
, 1998
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION
WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
-------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
-------------------
FOR INVESTORS OUTSIDE THE UNITED STATES: NO ACTION HAS BEEN OR WILL BE TAKEN
IN ANY JURISDICTION BY THE COMPANY OR BY ANY UNDERWRITER THAT WOULD PERMIT A
PUBLIC OFFERING OF THE REGISTERED SECURITIES OR POSSESSION OR DISTRIBUTION OF
THIS PROSPECTUS IN ANY JURISDICTION WHERE ACTION FOR THAT PURPOSE IS REQUIRED,
OTHER THAN IN THE UNITED STATES. PERSONS INTO WHOSE POSSESSION THIS PROSPECTUS
COMES ARE REQUIRED BY THE COMPANY AND THE UNDERWRITERS TO INFORM THEMSELVES
ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THE OFFERING OF THE REGISTERED
SECURITIES AND THE DISTRIBUTION OF THIS PROSPECTUS.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................ 3
Risk Factors...................... 4
The Company....................... 17
Use of Proceeds................... 18
Dividend Policy................... 18
Capitalization.................... 19
Dilution.......................... 20
Selected Consolidated Financial
Data............................ 21
Management's Discussion and
Analysis of Financial Condition
and Results of Operations....... 23
Business.......................... 34
<CAPTION>
PAGE
----
<S> <C>
Management........................ 48
Certain Transactions.............. 61
Principal Stockholders............ 65
Description of Capital Stock...... 68
Shares Eligible for Future Sale... 71
Certain United States Tax
Consequences to Non-U.S. Holders
of Common Stock................. 73
Underwriters...................... 76
Legal Matters..................... 79
Experts........................... 79
Additional Information............ 80
Index to Consolidated Financial
Statements...................... F-1
</TABLE>
-------------------
The Company intends to furnish its stockholders with annual reports
containing consolidated financial statements audited by an independent public
accounting firm and quarterly reports containing unaudited consolidated
financial data for the first three quarters of each year.
-------------------
The Company's executive offices are located at 4600 Patrick Henry Drive,
Santa Clara, California 95054. Its telephone number at this location is
408-876-5000.
-------------------
Healtheon, Healtheon's logo, Virtual Healthcare Network, VHN and
ProviderLink are trademarks of the Company. SBCL SCAN is a trademark of
SmithKline Beecham Clinical Laboratories, Inc., and each other trademark, trade
name or service mark of any other company appearing in this Prospectus is the
property of its holder.
-------------------
UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS (i) ASSUMES
NO EXERCISE OF THE U.S. UNDERWRITERS' OVER-ALLOTMENT OPTION, (ii) GIVES EFFECT
TO THE FILING, PRIOR TO THE CLOSING OF THIS OFFERING, OF A CERTIFICATE OF
INCORPORATION AUTHORIZING 150,000,000 SHARES OF COMMON STOCK AND 5,000,000
SHARES OF UNDESIGNATED PREFERRED STOCK AND (iii) GIVES EFFECT TO A 5,000,000
SHARE INCREASE IN THE NUMBER OF SHARES RESERVED UNDER THE COMPANY'S 1996 STOCK
INCENTIVE PLAN (THE "1996 PLAN"). IN THIS PROSPECTUS, UNLESS THE CONTEXT
OTHERWISE INDICATES, REFERENCES TO "HEALTHEON" OR THE "COMPANY" ARE TO HEALTHEON
CORPORATION, A DELAWARE CORPORATION, AND ITS CONSOLIDATED SUBSIDIARIES.
-------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING
AND MAY BID FOR, AND PURCHASE, SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."
<PAGE>
DESCRIPTION OF ARTWORK
At the top of the page there is a colored band with the Healtheon name and
logo on the left and the text "Pioneering the use of the Internet to simplify
workflows, decrease costs, and improve the quality of patient care throughout
the healthcare industry."
On the middle left is the heading "Healtheon's Virtual Healthcare Networks"
over a cloud labeled "Internet" with the Healtheon logo superimposed. The cloud
has pictures of a telephone, a handheld computing device, a television with
internet access, and a computer monitor. The cloud is connected to four
photographs by lightning bolts. The upper left picture shows images from a
laboratory and has the heading "Suppliers" with the subheadings "Laboratories,
Pharmacies, Mail Order Drug and Pharmacy Benefit Managers." The upper right
picture is of doctors and has the heading "Providers" with the subheadings
"Physicians, Hospitals, Integrated Delivery Networks, Independent Practice
Associations and Practice Management Companies." The lower left picture shows
patients and has the heading "Consumers" with the subheadings "Employers",
Government Agencies, Individuals and Benefit Brokers." The lower right picture
shows business people and has the heading "Payors" with the subheadings
"Government Agencies, Insurance Companies, Managed Care Companies, and Preferred
Provider Organizations."
On the middle right are two layers of plugs which connect the Healtheon logo
identified as the "Healtheon Platform." This section has the heading "The
Healtheon Platform" and is connected by a colored band to the cloud on the left.
The upper level of plugs is identified as applications and has plugs for
"Claims, Transcription, Authorizing, Workflow Engine, M.D. Search, Referrals,
Reporting, Rules Engine, Registration, Eligibility, Person Index, Enrollment,
Lab Orders and Prescriptions." There is a plug called "New Applications" over an
arrow coming from three sources -- "Healtheon Applications, 3rd Party
Applications and Legacy Applications." The lower level of plugs is identified as
"Data Objects." One plug, labeled "Data", is over an arrow coming from two
sources -- "Legacy Databases" and "Private Networks." The large Healtheon logo
is surrounded by an inner band labeled "Security" and an outer band labeled
"Flexibility - Usability - Sealability - Availability
- Extensibility - Manageability - Performance - Fault Tolerance."
The bottom of the page has a large arrow going from left to right with the
heading "Enabling a New Model for Managing Healthcare Information and
Transactions." To the left of the arrow is the term "Fragmented Legacy
Software", and to the right is the term "Network Services Model." Inside the
arrow is the following text: "HEALTHEON'S VIRTUAL HEALTHCARE NETWORKS connect
providers, payors, consumers and suppliers over the public Internet or private
intranets, and provide services and applications that enable the secure exchange
of information, transactions and simplified workflows across the healthcare
industry. At the center of these networks is THE HEALTHEON PLATFORM, an open
framework for providing mission-critical applications and supporting complex
healthcare transactions, while at the same time ensuring scalability,
availability and security."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION INCLUDING "RISK FACTORS" AND THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING
ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
Healtheon is pioneering the use of the Internet to simplify workflows,
decrease costs and improve the quality of patient care throughout the healthcare
industry. Healtheon has designed and developed an Internet-based information and
transaction platform (the "Healtheon Platform") that allows it to create Virtual
Healthcare Networks ("VHNs") that facilitate and streamline interactions among
the myriad participants in the healthcare industry. The Healtheon VHN solution
includes a suite of services delivered through applications operating on its
Internet-based platform. Healtheon's solution enables the secure exchange of
information among disparate healthcare information systems and supports a broad
range of healthcare transactions, including enrollment, eligibility
determination, referrals and authorizations, laboratory and diagnostic test
ordering, clinical data retrieval and claims processing. Healtheon provides its
own applications on the Healtheon Platform and also enables third-party
applications to operate on the platform. In addition to Virtual Healthcare
Networks, Healtheon provides comprehensive consulting, implementation and
network management services to enable its customers to take full advantage of
the capabilities of the Healtheon Platform. To date, the Company's revenue has
been derived primarily from non-Internet network services and from management
and operation of customers' information technology infrastructure. The Company
has established strategic relationships with leading healthcare companies,
including United HealthCare Corporation, SmithKline Beecham Clinical
Laboratories, Inc., Brown & Toland Physician Services Organization and Beech
Street Corporation, to enhance its application portfolio, provide important
specialized industry expertise and increase its market penetration.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered:
U.S. offering..................................................... shares
International offering............................................ shares
Total........................................................... shares
Common Stock to be outstanding after the offering(1)................ shares
Use of proceeds..................................................... To retire short-term debt and for general corporate
purposes, including working capital and capital
expenditures. See "Use of Proceeds."
Proposed Nasdaq National Market symbol.............................. "HLTH"
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------- ---------
1995 1996 1997
--------- --------- --------- 1997
---------
(UNAUDITED)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA(2):
Revenue...................................................................... $ 2,175 $ 11,013 $ 13,390 $ 4,286
Loss from operations......................................................... (3,936) (20,452) (23,684) (11,827)
Net loss applicable to common stockholders................................... $ (4,458) $ (22,517) $ (26,266) $ (13,307)
Basic and diluted net loss per common share (unaudited as to the year ended
December 31, 1995)......................................................... $ (.85) $ (3.42) $ (3.64) $ (1.85)
Weighted-average shares outstanding used in computing basic and diluted net
loss per common share (unaudited as to the year ended December 31,
1995)(3)................................................................... 5,246 6,583 7,223 7,193
Pro forma basic and diluted net loss per common share (unaudited)(4)......... $ (.59)
Shares used in computing pro forma basic and diluted net loss per common
share (unaudited)(3)....................................................... 44,715
<CAPTION>
1998
-----------
<S> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA(2):
Revenue...................................................................... $ 20,653
Loss from operations......................................................... (20,943)
Net loss applicable to common stockholders................................... $ (21,447)
Basic and diluted net loss per common share (unaudited as to the year ended
December 31, 1995)......................................................... $ (1.22)
Weighted-average shares outstanding used in computing basic and diluted net
loss per common share (unaudited as to the year ended December 31,
1995)(3)................................................................... 17,632
Pro forma basic and diluted net loss per common share (unaudited)(4)......... $ (.46)
Shares used in computing pro forma basic and diluted net loss per common
share (unaudited)(3)....................................................... 46,631
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
--------------------------
ACTUAL
--------- AS ADJUSTED(4)
---------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA(2):
Cash, cash equivalents and short-term investments.................................................... $ 12,801 $
Working capital...................................................................................... 2,560
Total assets......................................................................................... 48,122
Long-term obligations, net of current portion........................................................ 1,459
Stockholders' equity................................................................................. 30,427
</TABLE>
- ------------
(1) Based on the number of shares outstanding as of June 30, 1998. Excludes (i)
8,997,995 shares of Common Stock issuable upon the exercise of options then
outstanding, with a weighted average exercise price of $1.17 per share, (ii)
6,022,523 shares reserved for issuance under the 1996 Plan and the Company's
1998 Employee Stock Purchase Plan (the "1998 Purchase Plan"), (iii)
2,077,240 shares of Common Stock issuable upon the exercise of warrants then
outstanding, with a weighted average exercise price of $2.81 per share and
500,000 shares of Common Stock to be subject to a warrant with an exercise
price of $10.40 per share issuable to a customer, and (iv) 1,600,000 shares
of Common Stock issued in connection with the acquisition of Metis, LLC in
August 1998, of which 476,548 shares will be issued to employees pursuant to
restricted stock purchase agreements subject to a lapsing right of
repurchase, at the option of the Company, over the respective vesting
periods. In July and September 1998, the Company granted options to purchase
Common Stock and issued shares of Common Stock pursuant to restricted stock
agreements equal to a total of 3,433,500 shares of Common Stock with a
weighted-average exercise or purchase price of $5.44 per share. The Company
estimates that it will record deferred compensation during the three months
ending September 30, 1998 of approximately $6.0 million with regard to these
grants and issuances. See "Management -- Employee Benefit Plans,"
"Description of Capital Stock" and Notes 10, 11, 14 and 15 of Notes to
Consolidated Financial Statements.
(2) The consolidated financial data reflects the business combination of
Healtheon and ActaMed Corporation ("ActaMed"), which was accounted for as a
pooling of interests for accounting purposes. All statements of operations
prior to the acquisition on May 19, 1998 have been restated to reflect the
combined results of Healtheon and ActaMed from inception. The consolidated
statement of operations data for the year ended December 31, 1995 are
derived solely from the ActaMed statement of operations for such period
because Healtheon did not commence operations until January 1996. See Notes
1 and 2 of Notes to Consolidated Financial Statements for a discussion of
the accounting for the acquisition of ActaMed.
(3) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of shares used in computing basic and diluted net loss per Common share.
(4) As adjusted to give effect to the sale of the shares of Common Stock offered
hereby at an assumed initial public offering price of $ per share,
after deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by the Company and the application of
the net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
3
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE SHARES
OF COMMON STOCK OFFERED HEREBY. THIS PROSPECTUS CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THE RESULTS CONTEMPLATED BY THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE DISCUSSED BELOW AND
ELSEWHERE IN THIS PROSPECTUS.
LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT AND UNPROVEN BUSINESS
MODEL. The Company was founded in December 1995, commenced operations in
January 1996 and, until late 1997, had not recognized substantial revenue and
was considered to be in the development stage. In May 1998, the Company acquired
ActaMed Corporation ("ActaMed"). As a result of the limited operating history of
Healtheon and ActaMed as a combined entity and the emerging nature of the
markets in which the Company operates, the Company's historical financial data
is of limited value in projecting future operating results. The combined
Company's limited revenue to date has been derived primarily from proprietary
non-Internet network services offered by ActaMed and from management and
operation of customers' information technology infrastructure. The Company has
incurred net losses since inception and, as of June 30, 1998, had an accumulated
deficit of $73.0 million. The Company intends to continue investing heavily in
acquisitions, infrastructure development, application development and sales and
marketing. As a result, the Company expects to incur substantial operating
losses at least through 1999 and there can be no assurance that the Company will
ever achieve significant revenue or profitability or that, if significant
revenue and profitability are achieved, they can be sustained. The Company's
business model is still in an emerging stage, and revenue and income potential
from the Company's business is unproven, making an evaluation of the Company and
its prospects difficult. Investors should not use the Company's past results as
a basis to predict future performance. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
EMERGING MARKET; UNCERTAIN ACCEPTANCE BY THE HEALTHCARE INDUSTRY. The
healthcare industry in general has been extremely resistant to adopting new
information technology solutions. Electronic information exchange and
transaction processing by the healthcare industry is still developing, and
complexities in the nature and types of transactions that must be processed have
hindered the development and acceptance of information technology solutions.
There can be no assurance that conversion from traditional methods to electronic
information exchange will continue to occur or that any such conversion will
occur as rapidly as the Company anticipates. Even if the conversion does occur
as rapidly as the Company anticipates, there can be no assurance that healthcare
industry participants will use the Company's applications and services.
Healtheon's success is dependent on its ability to attract a significant
number of customers from the healthcare industry. There can be no assurance that
the Company will be successful in achieving widespread acceptance of its
applications and services or in achieving market share before competitors offer
products, applications or services with features similar to those of the
Company's current or proposed offerings. The Company's business plan is based on
its belief that the value and market appeal of its solution will grow as the
number of participants and the scope of the transaction services available on
the Company's platform increase. If a significant number of participants fail to
adopt the Company's information technology solutions or adopt such solutions
more slowly than anticipated, the number of transactions conducted over the
Company's platform will be lower than expected and the Company may not achieve
the critical mass of users it believes is necessary to enable the success of its
applications and services. The Company anticipates generating a substantial
portion of its revenue from subscription and transaction-based fees.
Consequently, any significant shortfall in the number of users or transactions
occurring over the Company's platform from those anticipated by the Company
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Industry Background."
4
<PAGE>
RELIANCE ON STRATEGIC RELATIONSHIPS. The Company is substantially dependent
on establishing and maintaining strategic relationships with multiple healthcare
industry leaders in a number of healthcare segments to extend the reach of
Healtheon's applications and services to the various participants in the
healthcare industry, to obtain specialized healthcare expertise, to develop and
deploy new applications, to establish the Healtheon brand and to generate
revenue. The Company has limited experience in establishing and maintaining
strategic relationships with healthcare industry participants. The Company's
ability to build strategic relationships is complicated by the fact that some of
the Company's partners and potential partners are possible competitors of the
Company. In addition, as the Company builds relationships with particular
partners, it may become difficult or impossible for the Company to build
relationships with competitors of these partners which may also be key
participants in the healthcare industry. Consequently, it is important that the
Company be perceived as independent of any particular customer or partner.
Moreover, many potential partners may be hesitant to work with the Company until
the Company's applications and services have been successfully introduced and
have achieved market acceptance.
The Company's success will depend both on the success of the other parties
to these strategic relationships and on the ability of these other parties to
drive increased adoption and usage of the Company's platform, applications and
services. Failure of one or more of the Company's strategic relationships to
increase the adoption and usage of the Company's platform, applications and
services could have a material adverse effect on the Company's business,
financial condition and results of operations. To date, the Company has
established only a limited number of strategic relationships, and the loss of
any of these strategic relationships, the failure to enter into new strategic
relationships in the Company's target markets or the failure of the Company's
strategic partners to actively pursue these relationships could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Strategy" and "-- Strategic Relationships."
NEED TO EXPAND SUITE OF APPLICATIONS. The Company believes that its success
is partially dependent upon its ability to introduce new applications in several
healthcare markets in a relatively short period of time. The Company currently
offers a limited number of applications on its platform. The Company does not
have the internal resources and specialized healthcare expertise to develop all
such applications independently and, consequently, must rely on a combination of
internal development, strategic relationships, licensing and acquisitions. Each
of these methods has risks, including the risk of unanticipated costs and
delays. See "-- Reliance on Strategic Relationships" and "-- Risks Associated
with Acquisitions." Any such applications, whether developed internally by the
Company or licensed or acquired from third parties, must be integrated and
customized to operate with existing customer legacy systems and the Company's
platform. These development, integration and customization efforts will require
significant expenditures by the Company, and there can be no assurance that the
Company will be able to develop such additional applications and services or to
integrate or customize such applications and services in a timely manner, or at
all. Even if the Company is able to develop and introduce additional
applications for the Healtheon Platform, there can be no assurance that these
new applications will achieve market acceptance. The inability of Healtheon to
significantly expand the breadth of applications available on its platform in a
timely manner, or the failure of new applications introduced by the Company to
achieve market acceptance, could have a material adverse effect on the Company's
business, financial condition and results of operations.
RISKS ASSOCIATED WITH ACQUISITIONS. A principal component of the Company's
growth strategy is the acquisition of other healthcare technology companies and
technologies to increase the number and variety of applications on the Company's
platform and to increase the Company's customer base. For example, in May 1998,
Healtheon acquired ActaMed, and in August 1998 the Company acquired
substantially all the assets of Metis, LLC. The Company's ability to expand
successfully through acquisitions depends on many factors, including the
identification of applications, technologies or businesses that are
complementary to those of Healtheon, the integration of disparate technologies
and corporate cultures and the operation of a geographically dispersed company.
In addition, acquisitions could divert management's attention from
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other business concerns, expose the Company to unforeseen liabilities or risks
associated with entering markets in which the Company may have no direct prior
experience or to risks associated with the market acceptance of acquired
applications and technologies, or result in the loss of key employees of the
Company or the acquired company. See "-- Dependence on Key Personnel."
The Company's future performance will depend on its ability to integrate the
organizations and technologies acquired by the Company, which, even if
successful, may take a significant period of time, will place a significant
strain on the Company's resources, and could subject the Company to additional
expenses during the integration process. In addition, existing or potential
customers might be threatened by certain strategic relationships that acquired
companies have with competitors of Healtheon's customers. As a result, there can
be no assurance that the Company will be able to integrate any acquired
businesses or technologies successfully or in a timely manner, to operate any
acquired businesses on a profitable basis, or to achieve operating synergies
necessary to make the acquisitions successful. There is significant competition
for acquisition opportunities, which may intensify due to increasing
consolidation in the healthcare industry. The Company competes for acquisition
opportunities with other companies that have significantly greater financial and
managerial resources than the Company. The Company's inability to identify
appropriate acquisition opportunities, consummate acquisitions or integrate
acquired applications, technologies, operations, personnel or businesses
successfully could have a material adverse effect on the Company's business,
financial condition and results of operations.
Healtheon intends to use its securities as consideration for future
acquisitions, which may result in potentially dilutive issuances of securities.
To date, the Company has not used cash as acquisition consideration; to the
extent the Company chooses to do so in the future, the Company may be required
to obtain additional financing, and there can be no assurance that such
financing will be available on favorable terms, if at all. In addition,
Healtheon may be required to amortize significant amounts of goodwill and other
intangible assets in connection with future acquisitions and may incur
additional compensation expenses which could have a material adverse effect on
the Company's results of operations. See "-- Future Capital Needs; Uncertainty
of Additional Financing."
MANAGEMENT OF GROWTH. The Company has rapidly and significantly expanded
its operations and anticipates that significant future expansion will be
required. Such growth has placed, and is expected to continue to place, a
significant strain on the Company's managerial, operational, financial and other
resources. As of June 30, 1998, the Company had grown to 379 employees, from 109
employees on December 31, 1997, primarily as a result of its acquisition of
ActaMed in May 1998, which resulted in the addition of 196 employees. In
addition, the Company has only recently hired its Chief Financial Officer, as
well as other members of senior management. The Company expects that continued
hiring of new personnel will be required to support its business. The Company is
in the process of evaluating its accounting and management information systems
and anticipates that it may implement new systems within the next 12 months. The
Company could experience interruptions to its business in transitioning to new
systems. There can be no assurance that the Company's systems, procedures or
controls will continue to be adequate to support the Company's operations or
that the Company's management will be able to achieve the rapid execution
necessary to exploit the market for the Company's applications and services. See
"Management."
UNCERTAIN ADOPTION OF INTERNET SOLUTIONS. Growth in the market for the
Company's applications and services will depend upon the adoption of Internet
solutions by healthcare participants. The adoption of Internet solutions for
commerce and communications requires the acceptance of a new way of conducting
business and exchanging information. The healthcare industry, in particular,
relies on legacy systems that may be unable to benefit from Healtheon's
Internet-based platform. The Internet may not prove to be a viable commercial
marketplace for a number of reasons, including inadequate development of the
necessary infrastructure, security concerns, lack of development of
complementary products, such as high speed modems and high speed communication
lines, implementation of competing technologies, delays in the development or
adoption of new standards and protocols required to handle increased levels of
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Internet activity and governmental regulation. The Internet has experienced, and
is expected to continue to experience, significant growth in the number of users
and volume of traffic. There can be no assurance that Internet infrastructure
will continue to be able to support the demands placed on it by this continued
growth. If critical issues concerning the ability of Internet solutions to
improve business processes are not resolved or if the necessary infrastructure
is not developed, the Company's business, financial condition and results of
operations will be materially adversely affected.
The adoption of the Company's solution depends upon the acceptance of
network computing, in which computers with relatively little software and
storage capacity use Internet protocol networks to access software functions and
databases that are contained on remote servers. Although the Company's
applications and services can generally accommodate legacy and client-server
systems, customers using these systems may be reluctant to adopt new systems
when they have made extensive investment in hardware, software and training for
older systems. Furthermore, although aspects of the network computing model
exist today, large-scale implementation is untested. Problems with speed,
access, server reliability, security and public acceptance of Internet protocol
networks could materially adversely affect the adoption of Internet-based
systems such as the Company's platform. For the Healtheon Platform to be as
successful as the Company desires, healthcare participants must be willing to
allow sensitive information to be stored in Healtheon's databases. Although
Healtheon processes transactions for healthcare participants that maintain
information on proprietary systems, the benefits of connectivity and
sophisticated information management that the Company provides are limited under
such circumstances. If any of the foregoing limits the acceptance or
effectiveness of network computing, the Company's business, financial condition
and results of operations could be materially and adversely affected.
SECURITY, NETWORK AND CONFIDENTIALITY RISKS. Critical issues concerning the
use of Internet solutions including security, reliability and confidentiality
remain unresolved and may affect the growth and use of such solutions to solve
business problems. If these issues are not addressed successfully, the Internet
may prove not to be a viable means of conducting complex business transactions,
which would have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company currently processes substantially all its customer transactions
and data at its facilities in Santa Clara, California and Atlanta, Georgia.
Although the Company has safeguards for emergencies, the Company has no mirror
processing site to which processing could be transferred in the case of a
catastrophic event at either of these facilities. Consequently, transactions
supported in one facility cannot be supported in the Company's other facility
should a catastrophic event occur. The occurrence of a major catastrophic event
at either the Santa Clara or the Atlanta facility could lead to an interruption
of data processing or loss of stored data and could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, the ability of the Company to process health-related transactions
is dependent on the efficient operation of the Internet connections from
customers to its systems. Such connections, in turn, are dependent upon
efficient operation of Web browsers, Internet service providers and Internet
backbone service providers, all of which have had periodic operational problems
or experienced outages in the past. Any such problems or outages could adversely
affect customer satisfaction with the Company's applications and services, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company retains confidential customer and patient information in its
processing centers. Therefore, it is critical that the Company's facilities and
infrastructure remain secure and that its facilities and infrastructure are
perceived by the marketplace to be secure. Despite the implementation of
security measures, the Company's infrastructure may be vulnerable to physical
break-ins, computer viruses, programming errors, attacks by third parties or
similar disruptive problems. Any material security breach could result in
liability to the Company and damage to its reputation. There can be no assurance
that the Company will be successful in maintaining the security of its
operations or the data stored at its processing centers.
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RAPID TECHNOLOGICAL CHANGE; NEW APPLICATION AND SERVICES INTRODUCTIONS. The
emerging market for healthcare information exchange and transaction processing
is characterized by rapid technological developments, frequent new product
introductions and evolving industry standards. The emerging nature of this
market and its rapid evolution will require that the Company continually improve
the performance, features and reliability of its applications and services,
particularly in response to competing offerings, and that it introduce new
applications and services or enhancements to existing applications and services
as quickly as possible and prior to its competitors. The success of new
applications and services introductions is dependent on several factors,
including proper definition of new applications or services, timely completion
and introduction of new applications and services, differentiation of new
applications and services from those of the Company's competitors and market
acceptance. There can be no assurance that the Company will be successful in
developing and marketing new applications and services that respond to
competitive and technological developments and changing customer needs. The
failure of the Company to develop and introduce new applications and services
successfully on a timely basis and to achieve market acceptance for such
applications and services could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
widespread adoption of new Internet, networking or telecommunication
technologies or standards or other technological changes could render its
applications and services obsolete or require substantial expenditures by the
Company to adapt its applications and services. Moreover, there is a risk that a
competitor's product might become the standard for healthcare information
services. See "Business -- Healtheon's Services" and "-- Development and
Engineering."
UNPROVEN PLATFORM INFRASTRUCTURE AND SCALABILITY. To date, the type and
volume of transactions processed over the Company's platform and the number of
healthcare participants connected to it have been relatively limited. The
Company must continue to expand and adapt its network infrastructure to
accommodate additional users, increased transaction volumes and changing
customer requirements. The expansion, adaptation and maintenance of the
Company's network infrastructure will require substantial financial, operational
and management resources. Increased usage will place additional stress upon the
Company's network hardware and traffic management systems. Due to the limited
deployment of the Company's services to date, the ability of the Company's
networks to connect and manage a substantially larger number of customers and
transactions at high transmission speeds is as yet unknown, and the Company
faces risks related to the networks' abilities to scale to expected customer
levels while maintaining sufficient performance. Many of the Company's services
agreements contain performance standards, and the failure by the Company to meet
these standards could result in the termination of these agreements, which could
have a material adverse effect on the Company's business, financial condition
and results of operations. There can be no assurance that the Company will be
able to expand or adapt its network infrastructure to meet additional demand or
its customers' changing requirements on a timely basis and at a commercially
reasonable cost, or at all. If the Company's platform architecture is unable to
scale to support the variety and number of transactions and healthcare
participants anticipated, the Company's business, financial condition and
results of operations would be materially adversely affected.
CUSTOMER CONCENTRATION AND RELATED PARTY REVENUE. Four customers have
historically accounted for the substantial majority of the Company's revenue.
United HealthCare Corporation ("United HealthCare"), SmithKline Beecham Clinical
Laboratories, Inc. ("SmithKline Labs"), Brown & Toland Physician Services
Organization ("Brown & Toland") and Beech Street Corporation ("Beech Street")
each accounted for over 10% and collectively accounted for over 90% of the
Company's total revenue for the six months ended June 30, 1998. In addition,
United HealthCare and Brown & Toland, each accounted for over 10% and
collectively accounted for approximately 70% of the Company's total revenue for
the year ended December 31, 1997. In addition, related party customers,
including United HealthCare and SmithKline Labs, accounted for 55% and 45% of
the Company's total revenue for the year ended December 31, 1997 and the six
months ended June 30, 1998, respectively. United HealthCare and SmithKline Labs
will own approximately % and %, respectively, of the Company's Common
Stock after this offering. The Company expects that a small number of customers
will continue to account for a
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substantial portion of the Company's total revenue for the foreseeable future.
The loss of one or more of the Company's significant customers, or the failure
of the Company to generate anticipated revenue from these customers, could have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Strategic Relationships."
COMPETITION. The market for healthcare information services is intensely
competitive, rapidly evolving and subject to rapid technological change. Many of
the Company's actual and potential competitors have announced or introduced
Internet strategies. The Company's competitors can be divided into several
groups: healthcare information software vendors, including HBO & Company and
Shared Medical Systems Corporation; healthcare electronic data interchange
companies, including ENVOY Corporation and National Data Corporation; and large
information technology consulting service providers, including Andersen
Consulting, International Business Machines Corporation and Electronic Data
Systems Corporation. Each of these companies is expected to compete with the
Company within certain segments of the healthcare information technology market.
Furthermore, major software information systems companies and others, including
those specializing in the healthcare industry that are not presently offering
applications competitive with those offered by the Company, may enter the
Company's markets. In some cases, large customers may have the ability to
compete directly with the Company as well. The Company also competes with
smaller regional competitors. Many of the Company's competitors and potential
competitors have significantly greater financial, technical, product
development, marketing and other resources and greater market recognition than
the Company. Many of the Company's competitors also currently have, or may
develop or acquire, substantial installed customer bases in the healthcare
industry. As a result of these factors, the Company's competitors may be able to
respond more quickly to new or emerging technologies and changes in customer
requirements or to devote greater resources to the development, promotion and
sale of their applications or services than the Company. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors or that competitive pressures faced by the Company will
not materially adversely affect its business, financial condition and results of
operations.
CHANGES IN THE HEALTHCARE INDUSTRY. The healthcare industry is highly
regulated and is subject to changing political, economic and regulatory
influences that may affect the procurement practices and operation of healthcare
organizations. Changes in current healthcare financing and reimbursement systems
could result in the need for unplanned enhancements of applications or services,
in delays or cancellations of orders or in the revocation of endorsement of the
Company's applications and services by healthcare participants. Federal and
state legislatures have periodically considered programs to reform or amend the
U.S. healthcare system at both the federal and state level. 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 react to
these proposals and the uncertainty surrounding such proposals by curtailing or
deferring investments, including investments in the Company's applications and
services. The Company cannot predict what impact, if any, such proposals or
healthcare reforms might have on the Company. In addition, many healthcare
providers are consolidating to create integrated healthcare delivery systems
with greater regional market power. As a result, these emerging systems could
have greater bargaining power, which might lead to price erosion for the
Company's applications and services. The failure of the Company to maintain
adequate price levels could have a material adverse effect on the Company's
business, financial condition and results of operations. As the number of
healthcare delivery enterprises decreases due to further industry consolidation,
each new customer will become more significant and competition for such
customer, will become greater.
GOVERNMENT REGULATION. Laws and regulations may be adopted with respect to
the Internet or other on-line services covering issues such as user privacy,
pricing, content, copyrights, distribution and characteristics and quality of
products and services. The adoption of any additional laws or regulations may
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impede the growth of the Internet or other on-line services, which could, in
turn, decrease the demand for the Company's applications and services and
increase the Company's cost of doing business, or otherwise have an adverse
effect on the Company's business, financial condition and results of operations.
For example, under current Health Care Financing Administration guidelines,
Medicare eligibility information cannot be transmitted over the Internet.
Moreover, the applicability to the Internet of existing laws in various
jurisdictions governing issues such as property ownership, sales and other
taxes, libel and personal privacy is uncertain and may take years to resolve.
Any such new legislation or regulation, the application of laws and regulations
from jurisdictions whose laws do not currently apply to the Company's business,
or the application of existing laws and regulations to the Internet and other
online services could have a material adverse effect on the Company's business,
financial condition and results of operations.
The confidentiality of patient records and the circumstances under which
such records may be released for inclusion in the Company's databases are
subject to substantial regulation by state governments. These state laws and
regulations govern both the disclosure and the use of confidential patient
medical record information. Although compliance with these laws and regulations
is at present principally the responsibility of the hospital, physician or other
healthcare provider, regulations governing patient confidentiality rights are
evolving rapidly. Additional legislation governing the dissemination of medical
record information has been proposed at both the state and federal level. This
legislation may require holders of such information to implement security
measures that may require substantial expenditures by the Company. There can be
no assurance that changes to state or federal laws will not materially restrict
the ability of healthcare providers to submit information from patient records
using the Company's applications.
Legislation currently being considered at the federal level could impact the
manner in which the Company conducts its business. For example, the Health
Insurance Portability and Accountability Act of 1996 ("HIPAA") mandates the use
of standard transactions, standard identifiers, security and other provisions by
the year 2000. The Company is designing its platform and applications to enable
compliance with the proposed regulations; however, until such regulations become
final, they could change, which could require the Company to expend additional
resources to comply with the revised standards. In addition, the success of the
Company's compliance efforts may be dependent on the success of healthcare
participants in dealing with the standards.
International regulations with respect to the Internet, privacy and
transborder data flows are considerably more developed than such regulations in
the United States. The Company intends to develop applications and services to
be used on a worldwide basis and, consequently, will be required to comply with
international regulations regarding the Internet and electronic commerce, as
well as with U.S. regulations. The Company has not evaluated the effect that
these regulations would have on its business, and there can be no assurance that
such regulations will not have an adverse effect on the Company's ability to
compete internationally.
The United States Food and Drug Administration ("FDA") is responsible for
assuring the safety and effectiveness of medical devices under the Federal Food,
Drug and Cosmetic Act. Computer applications and software are considered medical
devices and subject to regulation by the FDA when they are indicated, labeled or
intended to be used in the diagnosis of diseases or other conditions, or in the
cure, mitigation, treatment or prevention of disease, or are intended to affect
the structure or function of the body. The Company does not believe that any of
its current applications or services are subject to FDA jurisdiction or
regulation; however, the Company plans to expand its application and service
offerings into areas that may subject it to FDA regulation. The Company has no
experience in complying with FDA regulations. Healtheon's compliance with FDA
regulations could prove to be time consuming, burdensome and expensive, which
could have a material adverse effect on the Company's ability to introduce new
applications or services in a timely manner.
VARIABILITY IN QUARTERLY OPERATING RESULTS. The Company's quarterly revenue
and operating results have varied in the past and are likely to vary
substantially in the future. Quarterly revenue and operating
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results may fluctuate as a result of a number of factors, including: changes in
relationships with the Company's present or prospective strategic partners; the
timing and significance of any future acquisitions by the Company; the timing
and significance of the entry by the Company into new healthcare markets; the
timing and significance of new customer acquisitions; changes in the Company's
application and service offerings; software defects, delays in application
development and other quality factors; demand for the Company's applications and
services; the ability of the Company to meet project milestones or otherwise
meet customer expectations; the mix of consulting and transaction fee revenue
recorded by the Company; variability in demand for Internet-based healthcare
solutions; changes within the healthcare industry; and seasonality of demand.
The Company intends to increase its marketing, sales, development and
engineering, and administrative activities and to increase other operating
expenses as required to integrate the operations, technologies and networks of
recent and any future acquisitions and to expand its platform infrastructure and
operations. The Company anticipates that these expenses could significantly
precede any revenue generated by such increased spending. If the Company does
not experience significantly increased revenue from these efforts, the Company's
business, financial condition and results of operations could be materially and
adversely affected. In addition, the Company's expense levels are based in part
upon its expectations concerning future revenue and are relatively fixed in the
short-term. Consequently, if the Company's revenue is below expectations in any
period, the Company may not be able to adjust its spending levels in a timely
manner, which could have an immediate and material adverse effect on the
Company's business, financial condition and results of operations. For these and
other reasons, in some future quarters, the Company's results of operations may
fall below the expectations of securities analysts or investors, which could
have a material adverse effect on the market price of the Company's Common
Stock. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
RISK OF PRODUCT-RELATED CLAIMS. Applications and services as complex as
those offered or developed by the Company frequently contain defects or
failures. There can be no assurance that, despite testing by the Company and
potential customers, defects or errors will not occur in existing or new
applications or that the Company's platform will not experience problems in
security, availability, scalability or other critical features, any of which
could result in loss of or delay in revenue, loss of market share, failure to
achieve market acceptance, diversion of development resources, injury to the
Company's reputation, or increased insurance costs, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. Furthermore, many of the Company's services agreements
contain performance standards, and the failure by the Company to meet these
standards could result in the early termination of these agreements, which could
have a material adverse effect on the Company's business, financial condition
and results of operation.
Many of the Company's strategic relationships and services agreements
involve the development, implementation and maintenance of Internet or
electronic data interchange-based applications and services that are critical to
the operations of its clients' businesses. In many cases, these services are
provided within a complex environment of legacy or client-server systems or rely
on third party applications. The Company's failure or inability to meet a
client's expectations in the performance of its services (particularly with
regard to proprietary information and patient records) could injure the
Company's reputation or result in a claim for substantial damages against the
Company, regardless of the Company's responsibility for such failure. In
addition, if healthcare industry participants receive incorrect information or
fail to receive required information in a timely manner, patient care may be
adversely affected, which could lead to claims of liability against the Company.
There can be no assurance that the Company's insurance would protect it from
such risks. Any unauthorized disclosure or use of this confidential information
could result in a claim for substantial damages.
The Company attempts to limit contractually its damages arising from
negligent acts, errors, mistakes or omissions in rendering its services;
however, there can be no assurance that any contractual protections will be
enforceable or would otherwise protect the Company from liability for damages.
Although the
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Company maintains general liability insurance coverage that it believes is
adequate, including coverage for errors and omissions, there can be no assurance
that such coverage will continue to be available on reasonable terms or will be
available in sufficient amounts to cover one or more large claims, or that the
insurer will not disclaim coverage as to any future claim. The successful
assertion of one or more large claims against the Company, with respect to which
the Company is uninsured or that exceed available insurance coverage or result
in changes to the Company's insurance policies, including premium increases or
the imposition of a large deductible or co-insurance requirements, could
adversely affect the Company's business, financial condition and results of
operations.
DEPENDENCE ON PROPRIETARY TECHNOLOGY; POTENTIAL LITIGATION. The Company
relies upon a combination of trade secret, copyright and trademark laws, license
agreements, confidentiality procedures, employee nondisclosure agreements and
technical measures to protect its intellectual property. Substantial litigation
regarding intellectual property rights exists in the Company's industry, and the
Company expects that its applications may be increasingly subject to third-party
infringement claims as the number of competitors in the Company's industry grows
and the functionality of applications overlaps. There can be no assurance that
the Company will be able to prevent misappropriation of its intellectual
property. Effective intellectual property protection may not be available in
every country in which the Company intends to offer its services. There can be
no assurance that the steps taken by the Company to protect its proprietary
rights will be adequate or that third parties will not infringe or
misappropriate the Company's copyrights, trademarks and similar proprietary
rights, or that the Company will be able to detect unauthorized use of its
intellectual property and take appropriate steps to enforce its rights. There
can be no assurance that other parties will not assert infringement claims
against the Company. Such claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources by the Company. If
it were determined that the Company infringed the intellectual property rights
of third parties, the Company would be required to develop non-infringing
technology, obtain a license to such intellectual property or cease selling the
applications that contain the infringing intellectual property. There can be no
assurance that the Company would be able to develop noninfringing technology or
that it could obtain a license on commercially reasonable terms, or at all.
Moreover, if it is determined that the Company infringed the intellectual
property rights of others, it could be required to pay substantial damages,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
LENGTHY SALES AND IMPLEMENTATION CYCLES FOR CERTAIN APPLICATIONS AND
SERVICES. A key element of the Company's strategy is to market its applications
and services directly to large healthcare organizations. Based on its sales
experience to date, the Company expects that the sale and implementation of its
applications to these large healthcare organizations will be lengthy and involve
a significant technical evaluation and commitment of capital and other resources
by these organizations. Therefore, the Company expects that the sale and
implementation of the Company's healthcare applications and services will be
subject to the risk of delays associated with customers' internal budgets and
other procedures for approving large capital expenditures, deploying new
technologies within their networks and testing and accepting new technologies
that affect key operations. For these and other reasons, the sales and
implementation cycles associated with certain of the Company's applications and
services are expected to be unpredictable and are subject to a number of
significant risks that are beyond the Company's control.
In addition, the Company will be required to expend substantial resources to
integrate its applications with the existing architectures of these large
healthcare organizations. The Company has very limited experience in integrating
its applications with large legacy and client-server architectures, and there
can be no assurance that it will not experience delays in integrating its
applications into these large healthcare organizations. Any delays in the
Company's implementation of its applications would delay its ability to generate
revenue from such applications. Because of the anticipated lengthy
implementation cycle and the potentially large size of such orders, if orders
forecasted for a specific customer for a particular quarter are not realized or
revenue is not otherwise recognized in that quarter, the Company's business,
financial condition and results of operations could be materially adversely
affected. See "-- Variability in Quarterly
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Operating Results" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
YEAR 2000 COMPLIANCE. Many currently installed computer systems and
software products are unable to distinguish between twentieth century dates and
twenty-first century dates. As a result, many companies' software and computer
systems may need to be upgraded or replaced to comply with such "Year 2000"
requirements. The Company's business is dependent on the operation of numerous
systems that could potentially be impacted by Year 2000 related problems. Those
systems include, among others: hardware and software systems used by the Company
to deliver services to its customers (including the Company's proprietary
software systems as well as hardware and software supplied by third parties);
communications networks, such as the Internet and private intranets, which the
Company depends on to provide electronic transactions to its customers; the
internal systems of the Company's customers and suppliers; the hardware and
software systems used internally by the Company in the management of its
business; and non-information technology systems and devices used by the Company
in its business, such as telephone systems and building systems.
The Company has internally reviewed the proprietary software systems it uses
to deliver services to its customers. Although the Company believes that its
internally developed applications and systems are designed to be Year 2000
compliant, the Company utilizes third-party equipment and software that may not
be Year 2000 compliant. Also, two systems acquired by ActaMed, specifically SBCL
SCAN ("SCAN") and ProviderLink, which together accounted for approximately 47%
of the Company's total revenue in the first six months of 1998, will require
modifications to become Year 2000 compliant. The Company plans to release Year
2000 upgrades to these systems in late 1998 or early 1999. The Company estimates
the cost of these Year 2000 upgrades to SCAN and ProviderLink to be less than
$1.0 million. In addition, the Company's SCAN product is installed on
approximately 4,400 Company-owned workstations located in provider offices. Many
of these workstations are not Year 2000 compliant and must be upgraded or
replaced by the Company. The Company expects the cost of such upgrades or
replacements to be less than $1.0 million. However, the Company could experience
delays and cost overruns in the development of these upgrades, such upgrades
could contain defects and the Company could experience difficulties in getting
the Company's installed base of physicians to implement these upgrades in a
timely manner. If the Company experiences these or other difficulties in
developing and deploying its Year 2000 upgrades, revenues from SCAN and
ProviderLink could be significantly reduced, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
Failure of such third-party or Healtheon equipment or software to operate
properly with regard to the Year 2000 and thereafter could require the Company
to incur unanticipated expenses to remedy any problems, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. In certain of its agreements, the Company warrants that
its applications and services are Year 2000 compliant. Failure of the Company's
applications and services to be Year 2000 compliant could result in the
termination of these agreements or in liability for damages, the occurrence of
either of which could have a material adverse effect on the Company's business,
financial condition and results of operations.
Furthermore, the success of the Company's efforts may depend on the success
of other healthcare participants in dealing with their Year 2000 issues. Many of
these organizations are not Year 2000 compliant, and the impact of widespread
customer failure on the Company's systems is difficult to determine. Customer
difficulties due to Year 2000 issues could interfere with healthcare
transactions or information, which might expose the Company to significant
potential liability. If client failures result in the failure of Healtheon
systems, the Company's business, financial condition and results of operations
would be materially adversely affected. Furthermore, the purchasing patterns of
these customers or potential customers may be affected by Year 2000 issues as
companies expend significant resources to become Year 2000 compliant. The costs
of becoming Year 2000 compliant for current or potential customers may result in
reduced funds being available to purchase and implement the Company's
applications and services.
13
<PAGE>
The Company, with the assistance of an independent consulting firm
specializing in Year 2000 issues, is conducting a formal assessment of its Year
2000 exposure in order to determine what steps beyond those identified by the
Company's internal review may be advisable. The Company expects to complete such
assessment in the fourth quarter of 1998. The Company does not presently have a
contingency plan for handling Year 2000 problems that are not detected and
corrected prior to their occurrence. Any failure of the Company to address
unforeseen Year 2000 issues could adversely affect the Company's business,
financial condition and results of operations.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING. The Company
currently anticipates that the net proceeds from this offering, together with
its available cash resources and credit facilities, will be sufficient to meet
its presently anticipated working capital, capital expenditure and business
expansion requirements for at least the next 12 months. However, the Company may
need to raise additional funds prior to such time 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. The Company's future liquidity and capital
requirements will depend upon numerous factors, including the success of the
Company's existing and new application and service offerings and competing
technological and market developments. The Company may be required to raise
additional funds through public or private financing, strategic relationships or
other arrangements. There can be no assurance that such additional funding, if
needed, will be available on terms acceptable to the Company, or at all.
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF COMMON STOCK PRICE. Prior to
this offering, there has been no public market for the Company's Common Stock,
and there can be no assurance that an active public market for the Common Stock
will develop or be sustained after the offering. The initial public offering
price, which will be established by negotiation between the Company and the U.S.
Underwriters based upon a number of factors, may not be indicative of prices
that will prevail in the public market. See "Underwriters" for a discussion of
the factors to be considered in determining the initial public offering price.
The stock market has experienced significant price and volume fluctuations that
have particularly affected the market prices of equity securities of many
technology companies and that often have been unrelated or disproportionate to
the operating performance of such companies. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock. In addition,
the market price of the Company's Common Stock is likely to be highly volatile
and could be subject to wide fluctuations in response to quarterly variations in
operating results, announcements of technological innovations, announcements
relating to strategic relationships of the Company, developments in the
Company's relationships with its customers and conditions affecting the Internet
or healthcare industries, in general, or other events or factors. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has often been instituted against such a
company. Such litigation could result in substantial costs and the diversion of
management's attention and resources, which would have a material adverse effect
on the Company's business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL. The Company's future success will be highly
dependent on the performance of its senior management team and other key
employees. The Company's success will also depend on its ability to attract,
integrate, motivate and retain additional highly skilled technical personnel,
particularly trained and experienced professionals capable of developing,
selling and installing complex healthcare information systems. There is intense
competition for personnel at all levels, including senior management and
technical professionals. The Company's management believes that its executive
management, including W. Michael Long, the Company's Chief Executive Officer,
and Pavan Nigam, the Company's Vice President. Engineering, is critical to the
success of Healtheon. The Company does not maintain key person life insurance
for any of its officers or key employees. The loss of the services of any member
of the Company's senior management team or other key employees or the failure of
the Company to attract, integrate, motivate and retain additional key employees
could have a material adverse effect on
14
<PAGE>
the Company's business, financial condition and results of operations. See
"Business -- Employees" and "Management."
CERTAIN ANTI-TAKEOVER PROVISIONS. Certain provisions of the Company's
Certificate of Incorporation and Bylaws could have the effect of delaying,
deferring or preventing a change of control of the Company. These provisions
provide, among other things, that the Board of Directors is divided into three
classes to serve staggered three-year terms, that stockholders may not take
actions by written consent and that the ability of stockholders to present
proposals or director nominations at stockholder meetings is restricted. In
addition, the Company is subject to the anti-takeover provisions of Section 203
of the Delaware General Corporation Law, which will prohibit the Company from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner.
Furthermore, the Company's Certificate of Incorporation and Bylaws provide
that the Company will indemnify its directors and officers to the fullest extent
permitted by Delaware law. The Company also intends to enter into separate
indemnification agreements with its directors and executive officers. Such
indemnification provisions and agreements may be broad enough to cover losses
that such officers and directors may incur in connection with investigations and
legal proceedings resulting from services performed in connection with takeover
defense measures, and may have the effect of preventing changes in the
management of the Company. See "Description of Capital Stock."
In addition, the Board of Directors has the authority to issue up to
5,000,000 shares of Preferred Stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by the stockholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock could have the effect of making it more
difficult for a third party to acquire a majority of the outstanding voting
stock of the Company.
SHARES ELIGIBLE FOR FUTURE SALE. Sales of a substantial number of shares of
Common Stock in the public market following this offering could adversely affect
the market price of the Company's Common Stock. The number of shares of Common
Stock available for sale in the public market is limited by restrictions under
the Securities Act of 1933, as amended (the "Securities Act"), and lock-up
agreements executed by the security holders of the Company under which such
security holders have agreed not to sell or otherwise dispose of any of their
shares for a period of 180 days after the date of this Prospectus without the
consent of Morgan Stanley & Co. Incorporated. Morgan Stanley & Co. Incorporated
may, however, in its sole discretion and at any time without notice, release all
or any portion of the shares subject to lock-up agreements. In addition to the
shares of Common Stock offered hereby (assuming no exercise of the U.S.
Underwriters' over-allotment option), there will be shares of Common
Stock outstanding as of the date of this Prospectus. On the date of this
Prospectus, 689,609 shares other than the shares offered hereby will be
eligible for immediate sale. Upon the expiration of lock-up agreements on
, 1999, an additional 49,674,154 shares will become eligible for sale
in the public market, subject in the case of all but 8,660,434 shares to the
volume limitations and other conditions of Rule 144 adopted under the Securities
Act. In addition, the Company intends to file a registration statement on Form
S-8 with the Securities and Exchange Commission shortly after this offering
covering the 18,100,489 shares of Common Stock reserved for issuance under the
1996 Plan and the Company's 1998 Employee Stock Purchase Plan. The holders of
approximately 42,785,650 shares of Common Stock are also entitled to certain
rights with respect to registration of such shares of Common Stock for offer or
sale to the public. If such holders, by exercising their registration rights,
cause a large number of shares to be registered and sold in the public market,
such sales could have a material adverse effect on the market price for the
Company's Common Stock.
BENEFITS OF THE OFFERING TO AND CONTROL BY OFFICERS, DIRECTORS AND
AFFILIATED ENTITIES. Upon the completion of this offering, the present
executive officers and directors of the Company and their affiliates
15
<PAGE>
will, in the aggregate, beneficially own shares of Common Stock, which
shares represent approximately % of the Company's outstanding Common Stock
( % if the U.S. Underwriters' over-allotment option is exercised in full).
Existing stockholders have paid an average of $1.97 per share for the Common
Stock held by them, as compared to an assumed initial public offering price of
$ per share representing an increase in the market price per share of $ ,
or an aggregate increase of $ . This offering will also create a public
market for the resale, and substantially increase the market value, of shares
held by existing investors. Furthermore, such persons, acting together, will be
able to significantly influence the management and affairs of the Company and
will have the ability to control all matters requiring stockholder approval,
including the election and removal of directors and the approval of significant
corporate transactions, such as a merger or consolidation of the Company or a
sale of significantly all of the Company's assets. Such concentration of
ownership may have the effect of delaying, deferring or preventing a change in
control of the Company, and may adversely affect the market price of the
Company's Common Stock and the voting and other rights of the Company's other
stockholders. See "Principal Stockholders."
16
<PAGE>
THE COMPANY
Healtheon is pioneering the use of the Internet to simplify workflows,
decrease costs and improve the quality of patient care throughout the healthcare
industry. Healtheon has designed and developed an Internet-based information and
transaction platform (the "Healtheon Platform") that allows it to create Virtual
Healthcare Networks ("VHNs") that facilitate and streamline interactions among
the myriad participants in the healthcare industry. The Healtheon VHN solution
includes a suite of services delivered through applications operating on its
Internet-based platform. Healtheon's solution enables the secure exchange of
information among disparate healthcare information systems and supports a broad
range of healthcare transactions, including enrollment, eligibility
determination, referrals and authorizations, laboratory and diagnostic test
ordering, clinical data retrieval and claims processing. Healtheon provides its
own applications on the Healtheon Platform and also enables third-party
applications to operate on the platform. In addition to Virtual Healthcare
Networks, Healtheon provides comprehensive consulting, implementation and
network management services to enable its customers to take full advantage of
the capabilities of the Healtheon Platform. The Company has established
strategic relationships with leading healthcare companies, including United
HealthCare Corporation, SmithKline Beecham Clinical Laboratories, Inc., Brown &
Toland Physician Services Organization and Beech Street Corporation, to enhance
its application portfolio, provide important specialized industry expertise and
increase its market penetration.
The Internet's open architecture, universal accessibility and growing
acceptance make it an increasingly important environment for
business-to-business and business-to-consumer interaction. Use of the Internet
is rapidly expanding from simple information publishing, messaging, and data
gathering to critical business transactions and confidential communications. For
many industries, the Internet is connecting previously disconnected business
processes and allowing companies to automate workflows, lower distribution costs
and extend their market reach. The Company believes the healthcare industry,
because of its size, fragmentation and extreme dependence on information
exchange, is particularly well suited to benefit from greater use of the
Internet.
The Healtheon Platform is designed to ensure security, scalability,
reliability, availability and flexibility. The platform includes a CORBA-based
distributed application framework that allows reliable, simultaneous access by
large numbers of users. Open architecture and object-oriented design permit
standards-based integration with legacy systems and third-party applications,
and a combination of advanced technologies, including digital encryption,
digital certificates and audit trail tracking, ensures security. The platform is
deployed on redundant, fault tolerant servers and software to create 24-hour
availability.
Healtheon's objective is to become the leading provider of Internet-based
transaction and information services to the healthcare industry. The Company's
strategy includes leveraging Internet technology to provide secure transactions
and communications among a broad range of healthcare participants, regardless of
their computing platforms; expanding the functionality and transaction
capability of its platform through the development, acquisition or enablement of
Internet-based applications; forming additional strategic relationships to
increase its portfolio of applications and services, to increase the number of
connected healthcare participants and to provide specialized industry expertise
for its new applications; targeting regional markets where it can gain critical
mass, thereby expanding nationally region by region; and employing its
usage-based business model to reduce the initial investment required by
customers to obtain the benefits of high-end information technology systems and
enable physicians, small organizations and individuals to gain access to
advanced information systems for the first time.
The Company was incorporated in Delaware in December 1995 and commenced
operations in January 1996. In May 1998, the Company completed its acquisition
of ActaMed, a leading provider of network services to the healthcare industry.
In August 1998, the Company completed its acquisition of Metis, LLC, a leading
consulting, design and development firm focused on Internet and intranet-based
solutions for medical centers and integrated delivery networks.
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of
Common Stock offered hereby are estimated to be approximately $ million
(approximately $ million if the U.S. Underwriters' over-allotment option is
exercised in full), at an assumed initial public offering price of $ per
share and after deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by the Company. The principal purposes of
this offering are to obtain additional capital, to create a public market for
the Company's Common Stock, to enhance the ability of the Company to acquire
other businesses, products or technologies, and to facilitate future access by
the Company to public equity markets.
The Company currently expects to use approximately $1.5 million of the net
proceeds of this offering to retire short-term debt and use the remainder of the
net proceeds of this offering for general corporate purposes, including working
capital and capital expenditures. The Company may also use a portion of the net
proceeds of this offering to acquire or invest in complementary businesses or
technologies, although the Company has no present commitments or agreements with
respect to any such acquisition or investment. However, the Company from time to
time enters into nondisclosure agreements with third parties for the purpose of
evaluating strategic transactions involving complementary businesses or
technologies. Pending such uses, the Company intends to invest such funds in
short-term, interest-bearing, investment grade securities.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock or other securities and does not intend to pay any cash dividends with
respect to its Common Stock in the foreseeable future. The Company intends to
retain any earnings for use in the operation of its business and to fund future
growth. In addition, the terms of the Company's credit agreement prohibit the
payment of cash dividends on its capital stock.
18
<PAGE>
CAPITALIZATION
The following table sets forth the total capitalization of the Company as of
June 30, 1998 (i) on an actual basis and (ii) on an as adjusted basis to reflect
the receipt by the Company of the estimated net proceeds from the sale of the
shares of Common Stock offered hereby (at an assumed initial public
offering price of $ per share) and after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by the
Company.
<TABLE>
<CAPTION>
JUNE 30, 1998
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Capital lease obligations, net of current portion........................................ $ 1,459 $ 1,459
---------- -----------
Stockholders' equity:
Convertible Preferred Stock, $.0001 par value; no shares authorized, no shares issued
or outstanding, actual; 5,000,000 shares authorized, no shares issued or outstanding,
as adjusted.......................................................................... -- --
Common Stock, $.0001 par value; 75,000,000 shares authorized, 51,704,947 shares issued
and outstanding, actual; 150,000,000 shares authorized, shares issued and
outstanding, as adjusted(1).......................................................... 5
Additional paid-in capital............................................................. 106,832
Deferred stock compensation............................................................ (3,411) (3,411)
Accumulated deficit.................................................................... (72,999) (72,999)
---------- -----------
Total stockholders' equity........................................................... 30,427
---------- -----------
Total capitalization............................................................... $ 31,886 $
---------- -----------
---------- -----------
</TABLE>
- ---------
(1) Excludes (i) 8,997,995 shares of Common Stock issuable upon the exercise of
options outstanding on June 30, 1998, with a weighted average exercise price
of $1.17 per share, (ii) 6,022,523 shares reserved for issuance under the
1996 Plan and the 1998 Purchase Plan, (iii) 2,077,240 shares of Common Stock
issuable upon the exercise of warrants then outstanding, with a weighted
average exercise price of $2.81 per share, and 500,000 shares of Common
Stock to be subject to a warrant with an exercise price of $10.40 per share
issuable to a customer, and (iv) 1,600,000 shares of Common Stock issued in
connection with the acquisition of Metis, LLC in August 1998, of which
476,548 shares will be issued to employees pursuant to restricted stock
purchase agreements subject to a lapsing right of repurchase, at the option
of the Company, over the respective vesting periods. In July and September
1998, the Company granted options to purchase Common Stock and issued shares
of Common Stock pursuant to restricted stock purchase agreements equal to a
total of 3,433,500 shares of Common Stock with a weighted-average exercise
or purchase price of $5.44 per share. The Company estimates that it will
record deferred compensation during the three months ending September 30,
1998 of approximately $6.0 million with regard to these grants and
issuances. See "Management -- Employee Benefit Plans," "Description of
Capital Stock" and Notes 10, 11, 14 and 15 of Notes to Consolidated
Financial Statements.
19
<PAGE>
DILUTION
The net tangible book value of the Company as of June 30, 1998 was
approximately $13.5 million, or $.26 per share. "Net tangible book value" per
share is determined by dividing the net tangible book value of the Company
(total tangible assets less total liabilities) by the number of shares of Common
Stock at that date. Dilution per share represents the difference between the
amount per share paid by purchasers of shares of Common Stock in the offering
made by the Company hereby and the net tangible book value per share of Common
Stock immediately after completion of the offering. After giving effect to the
sale of shares of Common Stock offered by the Company hereby (at an
assumed initial public offering price of $ per share and after deducting
estimated underwriting discounts and commissions and estimated offering expenses
payable by the Company) and the application of the estimated net proceeds
therefrom, the Company's net tangible book value at June 30, 1998 would have
been $ , or $
per share. This represents an immediate increase in pro forma net tangible book
value to existing stockholders of $ per share and an immediate dilution to
new investors of $ per share. The following table illustrates the per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $
Net tangible book value per share as of June 30, 1998........... $ .26
Increase per share attributable to new investors................
------
Net tangible book value per share after this offering.............
------
Dilution per share to new public investors........................ $
------
------
</TABLE>
The following table sets forth, on a pro forma basis, as of June 30, 1998,
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
existing stockholders and by the new investors (at an assumed initial public
offering price of $ per share and before deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by the
Company):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------- --------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------------ ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 51,704,947 % $ 101,722,000 % $ 1.97
New public investors..........
------------ ----- -------------- -----
Total....................... 100.0% $ 100.0%
------------ ----- -------------- -----
------------ ----- -------------- -----
</TABLE>
As of June 30, 1998, there were options outstanding to purchase a total of
8,997,995 shares of Common Stock, with a weighted average exercise price of
$1.17 per share, and warrants to purchase a total of 2,077,240 shares of Common
Stock, with a weighted average exercise price of $2.81 per share and 500,000
shares of Common Stock to be subject to a warrant with an exercise price of
$10.40 per share issuable to a customer. In July and September 1998, the Company
granted options to purchase Common Stock and issued shares of Common Stock
pursuant to restricted stock agreements equal to a total of 3,433,500 shares of
Common Stock, with a weighted average exercise or purchase price of $5.44 per
share. To the extent that any of the outstanding options or warrants are
exercised, there will be further dilution to new public investors. If all
outstanding options and warrants (through , 1998) were exercised, the
dilution per share to new public investors would be $ .
In addition, in August 1998, the Company issued 1,600,000 shares of Common
Stock in connection with the acquisition of Metis, LLC in August 1998, of which
476,548 shares will be issued to employees pursuant to restricted stock purchase
agreements subject to a lapsing right of repurchase, at the option of the
Company, over the respective vesting periods. This transaction will also cause
further dilution to new public investors. See "Capitalization," "Management --
Employee Benefit Plans," "Description of Capital Stock" and Notes 10, 11, 14 and
15 of Notes to Consolidated Financial Statements.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and with the Consolidated Financial Statements and
Notes thereto, which are included elsewhere in this Prospectus. During the six
months ended June 30, 1998, Healtheon acquired ActaMed in a transaction
accounted for as a pooling of interests. All financial information has been
restated to reflect the combined operations of the Company and ActaMed. The
consolidated statements of operations data for the three-year period ended
December 31, 1997 and the consolidated balance sheet data at December 31, 1996
and 1997 are derived from, and are qualified by reference to, the audited
Consolidated Financial Statements included elsewhere in this Prospectus. The
consolidated statements of operations data for the two-year period ended
December 31, 1994 and the consolidated balance sheet data at December 31, 1993,
1994 and 1995 are derived from, and are qualified by reference to, audited
Consolidated Financial Statements that are not included in this Prospectus. The
statements of operations data for the six-month periods ended June 30, 1997 and
1998 and the balance sheet data as of June 30, 1998 are derived from unaudited
financial statements included elsewhere in this Prospectus and, in the opinion
of the Company, include all adjustments, consisting only of normal recurring
adjustments, which are necessary for a fair presentation of the financial
position and the results of operations for these periods. Historical operating
results are not necessarily indicative of results in the future, and the results
for interim periods are not necessarily indicative of the results that may be
expected for the entire year.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA(1):
Revenue:
Services......................................... $ -- $ 190 $ 458 $ 1,795 $ 4,301 $ 656 $ 10,893
Services to related parties(2)................... -- -- -- 4,237 7,309 3,240 9,370
Software licenses................................ -- -- 1,717 4,981 1,780 390 390
--------- --------- --------- --------- --------- --------- ---------
Total revenue.................................... -- 190 2,175 11,013 13,390 4,286 20,653
Cost of revenue:
Services......................................... -- 507 1,573 1,487 3,792 518 10,739
Services to related parties...................... -- -- -- 3,776 5,016 2,339 6,478
Software licenses................................ -- -- 343 160 -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total cost of revenue............................ -- 507 1,916 5,423 8,808 2,857 17,217
Development and engineering expense................ 1,002 1,863 2,446 8,596 12,986 6,409 8,332
Sales, general and administrative expense.......... 769 938 1,749 9,042 11,031 4,723 12,123
Amortization of intangible assets.................. -- -- -- 3,189 4,249 2,124 3,924
Write-off of acquired in-process research and
development costs................................ -- -- -- 5,215 -- -- --
--------- --------- --------- --------- --------- --------- ---------
Loss from operations............................... (1,771) (3,118) (3,936) (20,452) (23,684) (11,827) (20,943)
Interest income.................................... 5 172 208 539 611 254 637
Interest expense................................... (117) (57) (6) (56) (323) (128) (251)
Dividends on ActaMed's convertible redeemable
preferred stock.................................. -- -- -- (2,548) (2,870) (1,606) (890)
--------- --------- --------- --------- --------- --------- ---------
Net loss........................................... (1,883) (3,003) (3,734) (22,517) (26,266) (13,307) (21,447)
Dividends on ActaMed's convertible redeemable
preferred stock.................................. -- (423) (724) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net loss applicable to common stockholders......... $ (1,883) $ (3,426) $ (4,458) $ (22,517) $ (26,266) $ (13,307) $ (21,447)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Basic and diluted net loss per common share
(unaudited as to the year ended December 31,
1995)............................................ $ (.85) $ (3.42) $ (3.64) $ (1.85) $ (1.22)
Weighted-average shares outstanding used in
computing basic and diluted net loss per common
share (unaudited as to the year ended December
31, 1995)(3)..................................... 5,246 6,583 7,223 7,193 17,632
Pro forma basic and diluted net loss per common
share (unaudited)................................ $ (.59) $ (.46)
Shares used in computing pro forma basic and
diluted net loss per common share
(unaudited)(3)................................... 44,715 46,631
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------- JUNE 30,
1993 1994 1995 1996 1997 1998
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA(1):
Cash, cash equivalents and short-term investments.. $ 74 $ 4,186 $ 9,386 $ 7,539 $ 21,804 $ 12,801
Working capital (deficit).......................... (1,737) 4,226 7,244 2,505 14,790 2,560
Total assets....................................... 899 5,379 10,801 30,496 51,575 48,122
Long-term obligations, net of current portion...... 159 63 -- 1,210 932 1,459
Convertible redeemable preferred stock............. -- 7,919 16,029 39,578 50,948 --
Stockholders' equity (net capital deficiency)...... (1,335) (2,838) (7,697) (18,464) (12,102) 30,427
</TABLE>
- ----------
(1) The consolidated financial data reflects the business combination of
Healtheon and ActaMed, which was accounted for as a pooling of interests.
All statements of operations prior to the acquisition on May 19, 1998 have
been restated to reflect the combined results of Healtheon and ActaMed from
inception. The consolidated statements of operations and balance sheet data
as of and for the years ended December 31, 1993, 1994 and 1995 are derived
solely from the ActaMed statements of operations and balance sheets for such
periods because Healtheon did not commence operations until January 1996.
See Notes 1 and 2 of Notes to Consolidated Financial Statements for a
discussion of the accounting for the acquisition of ActaMed.
(2) Revenue from services to related parties consists of revenue from United
HealthCare and Smith Kline Labs, customers that are also significant
stockholders of the Company.
(3) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of the weighted-average shares used in computing basic
and diluted net loss per common share.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS.
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE
RESULTS CONTEMPLATED BY THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS, INCLUDING THOSE DISCUSSED BELOW AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
Healtheon is pioneering the use of the Internet to simplify workflows,
decrease costs and improve the quality of patient care throughout the healthcare
industry. Healtheon's VHN Solution enables the secure exchange of information
among a wide array of disparate healthcare information systems and provides a
framework for a broad range of healthcare transactions.
Healtheon was incorporated in December 1995, commenced operations in January
1996 and until late 1997 had not recognized substantial revenue and was
considered to be in the development stage. In May 1998, Healtheon acquired
ActaMed, which was incorporated in 1992. The acquisition of ActaMed was
accounted for as a pooling of interests. The financial information presented
reflects the combined financial position and operations of Healtheon and ActaMed
for all dates and periods presented. The Company's limited revenue to date has
been derived primarily from proprietary non-Internet network services offered by
ActaMed and from management and operation of customers' information technology
("IT") infrastructure. In March 1996, ActaMed acquired EDI Services, Inc.
("EDI"), a wholly owned subsidiary of United HealthCare, in a transaction
accounted for as a purchase. Accordingly, the operations of EDI are included in
the Company's consolidated statements of operations beginning in March 1996. In
August 1998, the Company acquired substantially all of the assets of Metis, LLC,
a leading consulting, design and development firm focused on Internet and
intranet-based solutions for medical centers and integrated delivery networks.
In connection with this acquisition, the Company issued 1,600,000 shares of its
Common Stock, of which 476,548 shares will be issued to employees pursuant to
restricted stock purchase agreements subject to a lapsing right of repurchase,
at the option of the Company, over the agreements' respective vesting periods.
Two hundred thousand shares are held in escrow to secure certain indemnification
obligations. The Asset Purchase was treated as a tax-free reorganization within
the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended.
The Company earns revenue from services and services to related parties,
which include providing access to its network-based services (including fixed
fee and transaction-based services) and performing development and consulting
services, and from licensing software. Revenue from services to related parties
consists of services provided to United HealthCare and SmithKline Labs.
Customers may purchase some or all of the Company's applications and services
and the customer relationship may evolve from utilizing development and
consulting services to utilizing transaction and subscription-based services.
The Company earns network-based services revenue from fixed fee subscription
arrangements, which revenue is recognized ratably over the term of the
applicable agreement, or revenue from arrangements that are priced on a
per-transaction or per-user basis, which revenue is recognized as the services
are performed. Revenue from development projects is recognized on a
percentage-of-completion basis or as such services are performed, depending on
the terms of the contract. Revenue from consulting services is recognized as
such services are performed. Cash received in excess of revenue recognized
relating to such services has been recorded as deferred revenue. As of June 30,
1998, the Company had deferred revenue of approximately $3.5 million.
The Company recognizes software license revenue in accordance with the
American Institute of Certified Public Accountants' Statement of Position 97-2.
ActaMed entered into a national marketing and licensing agreement with
International Business Machines Corporation ("IBM") in 1995 that granted IBM
23
<PAGE>
a nonexclusive, nontransferable right to market ActaMed's software and services
for a total of $6.3 million. For the years ended December 31, 1995, 1996 and
1997, approximately $1.7 million, $3.4 million and $1.2 million, respectively,
of this amount was recognized as software license revenue upon delivery of the
software. No software license revenue was recognized under this agreement for
the six months ended June 30, 1997 or 1998.
In December 1996, the Company entered into a new agreement (the "License")
to license its newly granted patent to IBM. As part of the License, IBM agreed
to pay ActaMed $4.8 million over a four-year period. Additionally, in
conjunction with the License, the Company issued IBM a five-year warrant to
purchase 282,522 shares of the Company's common stock at a price of $7.97 per
share. Because of the extended payment terms and issues related to the previous
agreement, the Company concluded that the license fee was not assured of
collection and, accordingly, is recognizing this revenue as the proceeds are
collected. For the years ended December 31, 1996 and 1997 and the six months
ended June 30, 1997 and 1998, the Company recognized revenue from the License of
$1.0 million, $.8 million, $.4 million and $.4 million, respectively. At
December 31, 1997, amounts due from IBM of $.7 million and $1.7 million were
included in accounts receivable and other assets, respectively. At June 30,
1998, amounts due from IBM of $.8 million and $1.3 million were included in
accounts receivable and other assets, respectively. Deferred revenue at December
31, 1996 and 1997 and June 30, 1998 included $3.1 million, $2.3 million and $2.0
million, respectively, related to the License.
The Company does not expect that it will earn a material amount of revenue
from sofware licenses in the foreseeable future.
The Company has developed strategic relationships with healthcare industry
leaders, including United HealthCare, SmithKline Labs, Brown & Toland and Beech
Street. These four companies each accounted for over 10%, and together accounted
for over 90%, of the Company's revenue for the six months ended June 30, 1998
and United HealthCare and SmithKline Labs accounted for all of the Company's
revenue from services to related parties. The Company expects that a small
number of customers will continue to account for a substantial portion of the
Company's revenue for the foreseeable future. The loss of one or more of the
Company's significant customers, or a decline in volume of business generated by
such customers, could have a material adverse effect on the Company's business,
financial condition and results of operations.
Cost of services and cost of services to related parties consist of costs
related to services the Company provides to customers and costs associated with
the operation and maintenance of Healtheon's networks. These costs include
salaries and related expenses for consulting and development personnel, network
operations personnel, customer support personnel, telecommunication costs,
depreciation and maintenance of network equipment, a portion of facilities
expenses and leased personnel and facilities costs. Cost of software licenses
consists primarily of expenses realted to royalties and sublicensing fees. Given
the Company's limited operating history, changes in revenue mix, limited history
of Internet-based network services, recent investments in personnel,
amortization of infrastructure investments, and evolving business model, the
Company believes that analysis of historical cost of revenue as a percentage of
revenue is not meaningful. The Company anticipates that its total cost of
revenue will increase in absolute dollars in the future.
Development and engineering expense (which excludes development expenses
that are included in cost of revenue) consists primarily of salaries and related
expenses associated with the development of applications and services and
includes compensation paid to engineering personnel, fees to outside contractors
and consultants, a portion of facilities expenses, and the depreciation and
amortization of capital equipment used in the development process. The Company
believes its success is partially dependent upon its ability to introduce new
applications in several healthcare markets in a relatively short period of time.
Accordingly, the Company intends to continue recruiting and hiring experienced
engineering personnel and to continue making other investments in development
and engineering. The
24
<PAGE>
Company expects that development and engineering expenses will continue to
increase in absolute dollars. Currently, all development and engineering
expenses are expensed as incurred.
Sales, general and administrative expense consists primarily of salaries and
related expenses for sales, account management, marketing, administrative,
finance, legal, human resources and executive personnel, commissions, costs and
expenses for marketing programs and trade shows, fees for professional services,
and costs of accounting and internal control systems to support the operations
of the Company. The Company anticipates that sales, general and administrative
expense will continue to increase in absolute dollars as it adds sales,
marketing and administrative personnel, increases its marketing and promotional
activities, and incurs costs related to being a public company, such as
directors' and officers' liability insurance premiums and professional fees.
The Company's business model is still in an emerging stage, and revenue and
income potential from the Company's business is unproven. Moreover, the
Company's limited operating history under its current business model makes an
evaluation of the Company and its prospects difficult; investors should not use
the Company's past results as a basis to predict future performance. The Company
has incurred net losses since inception and, as of June 30, 1998, had an
accumulated deficit of $73.0 million. The Company intends to continue investing
heavily in acquisitions, infrastructure development, application development and
sales and marketing. As a result, the Company expects to incur substantial
operating losses at least through 1999. There can be no assurance that the
Company will achieve significant revenue or profitability or, if significant
revenue or profitability are achieved, that they can be sustained. See "Risk
Factors -- Limited Operating History; Accumulated Deficit and Unproven Business
Model."
25
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain data expressed as a percentage of
total revenue for the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ ---------------
1995 1996 1997 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenue:
Services......................... 21.1% 16.3% 32.1% 15.3% 52.7%
Services to related parties(1)... -- 38.5 54.6 75.6 45.4
Software licenses................ 78.9 45.2 13.3 9.1 1.9
------ ------ ------ ------ ------
Total revenue.................... 100.0 100.0 100.0 100.0 100.0
Operating costs and expenses:
Cost of revenue:
Cost of services............... 72.3 13.5 28.3 12.1 52.0
Cost of services to related
parties...................... -- 34.2 37.5 54.5 31.4
Cost of software licenses...... 15.8 1.5 -- -- --
------ ------ ------ ------ ------
Total cost of revenue.......... 88.1 49.2 65.8 66.6 83.4
Development and engineering...... 112.5 78.0 97.0 149.5 40.3
Sales, general and
administrative................. 80.4 82.1 82.4 110.2 58.7
Amortization of intangible
assets......................... -- 29.0 31.7 49.6 19.0
Write-off of acquired in-process
research and development
costs.......................... -- 47.4 -- -- --
------ ------ ------ ------ ------
Total operating costs and
expenses......................... 281.0 285.7 276.9 375.9 201.4
------ ------ ------ ------ ------
Loss from operations............... (181.0) (185.7) (176.9) (275.9) (101.4)
Interest income.................... 9.6 4.9 4.6 5.9 3.1
Interest expense................... (0.3) (0.5) (2.4) (3.0) (1.2)
Dividends on ActaMed's convertible
redeemable preferred stock....... -- (23.1) (21.4) (37.5) (4.3)
------ ------ ------ ------ ------
Net loss........................... (171.7) (204.4) (196.1) (310.5) (103.8)
Dividends on ActaMed's convertible
redeemable preferred stock....... (33.3) -- -- -- --
------ ------ ------ ------ ------
Net loss applicable to common
stockholders..................... (205.0)% (204.4)% (196.1)% (310.5)% (103.8)%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
- ---------
(1) Revenue from services to related parties consists of revenue from United
HealthCare and SmithKline Labs, customers that are also significant
stockholders of the Company.
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
REVENUE. Total revenue increased to $20.7 million in the first six months
of 1998 from $4.3 million in the same period of 1997. Revenue from services
increased to $10.9 million in the first six months of 1998 from $.7 million in
the same period in 1997. The significant increase in revenue was due principally
to new contracts with Brown & Toland and Beech Street for the management and
operation of their IT infrastructure beginning in late 1997. To provide these
services, the Company utilizes its own personnel, certain outside contractors
and certain personnel and facilities of the customers that are leased to the
Company. The cost of these leased customer personnel and facilities are included
as part of the total costs of the IT and development services billed to the
customers by the Company. In the first six months of 1998, the Company
recognized revenue for IT services of $7.3 million, which included costs of
leased personnel
26
<PAGE>
and facilities of $6.1 million. In addition, the Company recognized revenue of
approximately $2.5 million for development services in the same period.
Revenue from services to related parties increased to $9.4 million in the
first six months of 1998 from $3.2 million in the same period of 1997 primarily
due to a new contract with SmithKline Labs in December 1997 to service its SCAN
laboratory test order and results service. Revenue from software licenses was
unchanged in the first six months of 1998 from the same period in 1997. The
Company expects that revenue from software licenses will continue to decline in
future periods as a percentage of total revenue.
COST OF REVENUE. Total cost of revenue increased to $17.2 million in the
first six months of 1998 from $2.9 million in the same period of 1997. Cost of
services increased to $10.7 million in the first six months of 1998 from $.5
million in the same period in 1997. This increase includes $6.1 million related
to costs of leased personnel and facilities utilized to provide IT services and
$2.5 million related to development services. The remainder of the increase
resulted from increased personnel to support the Brown & Toland and Beech Street
contracts. The Company had no cost of software licenses revenue in the first six
months of 1998 or in the comparable period of 1997.
Cost of services to related parties increased to $6.5 million in the first
six months of 1998 from $2.3 million in the same period of 1997. This increase
resulted from higher personnel and network operations costs necessary to support
increased transactions from the Company's SCAN services.
DEVELOPMENT AND ENGINEERING. Development and engineering expense (which
excludes development expenses that are included in cost of revenue) increased to
$8.3 million in the first six months of 1998 from $6.4 million in the same
period of 1997. The increase in development and engineering expenses was caused
by a significant increase in the number of engineers engaged in the development
of the Company's applications and services.
SALES, GENERAL AND ADMINISTRATIVE. Sales, general and administrative
expense increased to $12.1 million in the first six months of 1998 from $4.7
million in the same period of 1997. The increase resulted primarily from the
addition of sales personnel and executive management (approximately $2.1 million
in salaries and $3.4 million in related support costs), approximately $.8
million of costs related to the merger with ActaMed and from the amortization of
deferred compensation. The Company recorded deferred compensation of $2.4
million during the first six months of 1998, and recorded $1.1 million of
amortization of deferred compensation in this period. In July 1998, the Company
recorded deferred compensation of approximately $6.0 million. Deferred
compensation represents the difference between the purchase or exercise price of
certain restricted stock and stock option grants and the deemed fair value of
the Company's Common Stock at the time of such grants. The remaining deferred
compensation will be amortized over the vesting period, generally four years, of
the respective option or restricted stock grants. Amortization is estimated to
total $3.1 million for the last six months of 1998, $4.0 million for 1999, $2.0
million for 2000, and $.6 million for 2001.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets was
$3.9 million in the first six months of 1998 and $2.1 million in the same period
of 1997. This amortization relates to the acquisition of EDI in March 1996 and
certain intangible assets related to SCAN in December 1997. At June 30, 1998, a
total of $16.9 million remained to be amortized, and the amortization charges
for the six months ending December 31, 1998 and for the years ending 1999 and
2000, are estimated to be $5.2 million, $6.5 million and $5.2 million,
respectively, assuming no impairment of the remaining unamortized intangible
asset balances. The Company anticipates that it will incur additional
amortization of intangible assets in connection with its acquisition of Metis,
LLC. See Note 14 of Notes to Consolidated Financial Statements.
INTEREST INCOME AND EXPENSE. Interest income has been derived primarily
from cash investments, which increased from $.3 million in the first six months
of 1998 compared to $.6 million in the same period of 1997. The increase
resulted from the Company's $25.0 million Preferred Stock financing in
27
<PAGE>
October 1997. Interest expense results from the Company's borrowings and from
capitalized lease obligations for equipment purchases.
DIVIDENDS ON ACTAMED'S CONVERTIBLE REDEEMABLE PREFERRED STOCK. As dividends
on ActaMed's convertible redeemable preferred stock were cumulative whether
declared or not, the Company accrued such dividends on a quarterly basis.
Dividends of $1.6 million and $.9 million are shown as a charge against income
in the consolidated statement of operations for the first six months of 1997 and
1998, respectively. None of the dividends were paid, and, in conjunction with
approving the acquisition of ActaMed by the Company, the Preferred Stockholders
waived their right to receive such dividends, which totaled $7.5 million at the
time of the acquisition, and received an aggregate of 17,252,408 shares of
Healtheon Common Stock in exchange for their ActaMed Preferred Stock.
INCOME TAXES. At June 30, 1998, the Company had net operating loss
carryforwards for federal income tax purposes of $50.0 million and federal tax
credits of $1.0 million, both expiring from 2009 through 2013. Of these net
operating losses, $20.0 million relates to a consolidated subsidiary. This loss
carryforward is available only to offset future taxable income of that
subsidiary. Because of the "change of ownership" provisions of the Internal
Revenue Code, a portion of the Company's net operating loss carryforwards and
tax credit carryforwards may be subject to an annual limitation regarding their
utilization against taxable income in future periods. Thus, a portion of these
carryforwards may expire before becoming available to reduce future income tax
liabilities.
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
REVENUE. Total revenue increased to $13.4 million in 1997 from $11.0
million in 1996 and $2.2 million in 1995. Revenue from services increased to
$4.3 million in 1997 from $1.8 million in 1996 and $.5 million in 1995. The
increase is due primarily to the contract with Brown & Toland, which began in
October 1997. In 1997, the Company recognized $2.1 million of revenue for IT
services under this contract, which included costs of leased personnel and
facilities of $1.9 million.
Revenue from services to related parties increased to $7.3 million in 1997
from $4.2 million in 1996. There was no revenue from services to related parties
in 1995. The Company's acquisition of ProviderLink in March 1996 from United
HealthCare accounts for substantially all of the related party revenue in 1996
and the 1997 increase is substantially due to recording a full year of revenue
in 1997 compared to nine months in 1996.
Revenue from software licenses was $1.8 million, $5.0 million and $1.7
million in 1997, 1996 and 1995, respectively. Substantially all of this revenue
was derived from licensing agreements with IBM. The full amount of revenue to be
derived from one of these agreements had been recognized by the end of 1997.
Revenue will continue to be recognized under a second agreement through December
2000.
COST OF REVENUE. Cost of services was $3.8 million, $1.5 million and $1.6
million in 1997, 1996 and 1995, respectively. The increase from 1996 to 1997 was
primarily due to the $1.9 million cost related to the leased personnel and
facilities under the Brown & Toland contract. Cost of services to related
parties increased to $5.0 million in 1997 from $3.8 million in 1996. This
increase was primarily due to recording a full year of costs related to
ProviderLink in 1997 compared to only nine months in 1996. Cost of software
licenses in 1996 and 1995 related principally to royalties and sublicense fees
paid by the Company.
DEVELOPMENT AND ENGINEERING. Development and engineering expense (which
excludes development expenses that are included in cost of revenue) was $13.0
million in 1997 compared to $8.6 million in 1996 and $2.4 million in 1995. The
increase in development and engineering expense was caused by a significant
increase in the number of engineers engaged in the development of the Company's
applications and services.
28
<PAGE>
SALES, GENERAL AND ADMINISTRATIVE. Sales, general and administrative
expense was $11.0 million in 1997, compared to $9.0 million in 1996 and
approximately $1.7 million in 1995. The increase resulted primarily from the
addition of sales personnel and executive management (related salaries increased
approximately $1.4 million in 1997 from 1996) and from the amortization of
deferred compensation. The Company recorded deferred compensation of $2.7
million during 1997 and recorded $.6 million of amortization of deferred
compensation in 1997.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of acquisition-related
costs including intangible assets was $4.2 million in 1997 and $3.2 million in
1996. This amortization relates to the acquisition of EDI in March 1996.
WRITE-OFF OF ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT COSTS. The
write-off of acquired in-process research and development costs of $5.2 million
in 1996 relates to the acquisition of EDI in March 1996. Consistent with the
Company's tests for internally developed software, the Company determined the
amounts to be allocated to developed software and in-process research and
development based on whether technological feasibility had been achieved and
whether there was any alternative future use for the technology. At the date of
the acquisition of EDI, the Company concluded that the in-process research and
development had no alternative future use after taking into consideration the
potential for usage of the software in different products, resale of the
software and internal usage.
The amount written off as acquired in-process research and development
consisted of ten projects related to various applications to be used to process
various types of healthcare transactions and to link different healthcare
providers. Estimated costs to complete each project ranged from $16,000 to $.8
million, with an average cost per project of $.2 million. Estimated completion
dates ranged from May 1996 to December 1997. The amount to be written off
related to each in-process project was estimated by determining the number of
hours expended on each project as of the date of the acquisition plus the
estimated number of hours required to complete the project. An average cost per
hour was then applied to the total hours so determined. The average cost per
hour was determined based on prevailing salary and benefit rates for the
personnel expected to be utilized to complete the projects.
As of the acquisition date, the Company believed the successful development
of the in-process projects was highly likely, and therefore the expected effect
of the uncertainty surrounding the projects' completion would be minimal. The
Company believed that the impact of a failure to develop the acquired in-process
projects successfully would affect the value of the acquired business in an
amount reasonably consistent with the value ascribed to the specific, failed
project. All but one of the in-process research and development projects was
successfully deployed within the timeframe expected. The project that was not
completed had been allocated a value of $.5 million and was abandoned in late
1996.
INTEREST INCOME AND EXPENSE. Interest income was derived from cash
investments following the Company's issuance of Preferred Stock and imputed
interest on payments due from IBM beginning in early 1997. Interest expense
increased in 1997 as a result of bridge financing and bank borrowings of the
Company and from capitalized lease obligations for equipment purchases.
29
<PAGE>
QUARTERLY FINANCIAL RESULTS
The following table presents the Company's operating results for each of the
six quarters in the period ended June 30, 1998, as well as such data expressed
as a percentage of the Company's total revenue for the periods indicated. The
information for each of these quarters is unaudited and has been prepared on the
same basis as the audited consolidated financial statements appearing elsewhere
in this Prospectus. In the opinion of management, all necessary adjustments
(consisting only of normal recurring adjustments) have been included to present
fairly the unaudited quarterly results. This data should be read in conjunction
with the Consolidated Financial Statements and the Notes thereto appearing
elsewhere in this Prospectus. These operating results are not indicative of the
results of any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1997 1997 1997 1997 1998 1998
-------- -------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue....................................... $ 1,922 $ 2,364 $ 2,714 $ 6,390 $ 9,754 $ 10,899
Operating costs and expenses:
Cost of revenue............................. 1,411 1,446 1,567 4,384 7,513 9,704
Development and engineering................. 3,247 3,162 3,272 3,305 3,919 4,413
Sales, general and administrative........... 2,501 2,222 2,754 3,554 4,966 7,157
Amortization of intangible assets........... 1,062 1,062 1,063 1,062 1,949 1,975
-------- -------- --------- -------- -------- --------
Total operating expenses.................. 8,221 7,892 8,656 12,305 18,347 23,249
-------- -------- --------- -------- -------- --------
Loss from operations.......................... (6,299) (5,528) (5,942) (5,915) (8,593) (12,350)
Interest income............................... 146 108 105 252 358 279
Interest expense.............................. (50) (78) (49) (146) (116) (135)
Dividends on ActaMed's convertible redeemable
preferred stock............................. (783) (823) (776) (488) (890) --
-------- -------- --------- -------- -------- --------
Net loss...................................... $ (6,986) $ (6,321) $ (6,662) $ (6,297) $ (9,241) $(12,206)
-------- -------- --------- -------- -------- --------
-------- -------- --------- -------- -------- --------
AS A PERCENTAGE OF REVENUE:
Revenue....................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating costs and expenses:
Cost of revenue............................. 73.4 61.2 57.7 68.6 77.0 89.0
Development and engineering................. 168.9 133.7 120.6 51.7 40.2 40.5
Sales, general and administrative........... 130.1 94.0 101.5 55.6 50.9 65.7
Amortization of intangible assets........... 55.3 44.9 39.2 16.6 20.0 18.1
-------- -------- --------- -------- -------- --------
Total operating expenses.................. 427.7 333.8 319.0 192.5 188.1 213.3
-------- -------- --------- -------- -------- --------
Loss from operations.......................... (327.7) (233.8) (219.0) (92.5) (88.1) (113.3)
Interest income............................... 7.6 4.6 3.9 3.9 3.7 2.6
Interest expense.............................. (2.6) (3.3) (1.8) (2.3) (1.2) (1.2)
Dividends on ActaMed's convertible redeemable
preferred stock............................. (40.7) (34.8) (28.6) (7.6) (9.1) --
-------- -------- --------- -------- -------- --------
Net loss...................................... (363.4)% (267.3)% (245.5)% (98.5)% (94.7)% (111.9)%
-------- -------- --------- -------- -------- --------
-------- -------- --------- -------- -------- --------
</TABLE>
Revenue has grown each quarter as demand for the Company's services has
increased. Cost of revenue increased in the quarter ended December 31, 1997 due
primarily to expenses related to the Brown & Toland contract, and in the
quarters ended March 31, 1998 and June 30, 1998 due primarily to expenses
related to the Beech Street and SmithKline Labs contracts. In addition, in the
quarter ended June 30, 1998, total cost of revenue increased due in part to an
increase in amortization of capitalized internally developed software. This
increase was due to the fact that the Company evaluated the carrying
30
<PAGE>
value of the capitalized internally developed software in light of the changes
in operations resulting from the acquisition of ActaMed by Healtheon. The
Company determined that it expected no future cash flows to be generated by this
software and, accordingly, wrote off the remaining unamortized balance of $.6
million. Development and engineering expense increased in the quarters ended
March 31 and June 30, 1998 due to a significant increase in personnel engaged in
the development of the Company's applications and services. Sales, general and
administrative expenses increased in each of the quarters ended September 30,
1997 through June 30, 1998 due to increases in sales and executive personnel and
due to amortization of deferred compensation. In addition, the Company recorded
substantial professional fees related to the acquisition of ActaMed in the
quarter ended June 30, 1998.
The Company's quarterly revenue and operating results have varied in the
past and are likely to vary substantially in the future. The Company intends to
increase its marketing, sales, development and engineering, and administrative
activities and to increase other operating expenses as required to integrate the
operations, technologies and networks of recent and any future acquisitions and
expand its healthcare network infrastructure and operations. It is anticipated
that these expenses could significantly precede any revenue generated by such
increased spending. If the Company does not experience significantly increased
revenue from these efforts, the Company's business, financial condition and
results of operations could be materially and adversely affected. In addition,
the Company's expense levels are based in part on its expectations concerning
future revenue and are relatively fixed in the short-term. Consequently, if the
Company's revenue is below expectations in any period, the Company may not be
able to adjust its spending levels in a timely manner.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations since inception primarily through the
private placement of equity securities, through which it had raised net proceeds
of $59.6 million through June 30, 1998. The Company has also financed its
operations through equipment lease financing and bank borrowings. As of June 30,
1998, the Company had outstanding equipment lease financing and bank borrowings
of $6.5 million. As of June 30, 1998, the Company had approximately $12.8
million of cash, cash equivalents and short-term investments.
Cash used in operating activities was $1.3 million in 1995, $9.9 million in
1996 and $16.4 million in 1997. The cash used during these periods was primarily
attributable to net losses of $4.5 million, $22.5 million and $26.3 million in
1995, 1996, 1997, respectively, offset in part by depreciation and amortization,
the write-off of acquired in-process research and development, net of
acquisition costs, and dividends on ActaMed's Convertible Redeemable Preferred
Stock. These losses were principally related to increased development and
engineering expenses and sales, general and administrative expenses. Cash used
in operations in the first six months of 1998 was $9.1 million, reflecting a net
loss partially offset by depreciation and amortization expenses.
Investments in property and equipment (excluding equipment acquired under
capital leases) and internally developed software were $.5 million, $3.0
million, $3.1 million and $2.7 million in 1995, 1996 and 1997, and the first six
months of 1998, respectively. In 1997, the Company used $5.3 million of cash to
purchase short-term investments. During the first six months of 1998, the
Company purchased an additional $3.5 million of short-term investments and
realized $7.1 million in cash from maturities of its short-term investments. The
Company had no purchases or maturities of short-term investments in 1995, 1996,
or the six months ended June 30, 1997.
Cash provided by financing activities was $7.0 million, $11.1 million and
$34.6 million in 1995, 1996 and 1997, respectively, resulting primarily from net
proceeds from the sale of Preferred Stock and, to a lesser extent, from a bank
line and bridge note financing in 1997. Cash provided by financing activities
for the first six months of 1998 was $2.8 million, primarily from the net
proceeds from the sale of Preferred and Common Stock, partially offset by
payments on capital lease obligations.
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As of June 30, 1998, the Company did not have any material commitments for
capital expenditures. The Company's principal commitments on December 31, 1997
consisted of obligations under operating leases and capital leases of $14.4
million and $2.2 million, respectively. See Note 6 of Notes to Consolidated
Financial Statements.
The Company currently anticipates that the net proceeds from this offering,
together with its available cash resources and credit facilities, will be
sufficient to meet its presently anticipated working capital, capital
expenditure and business expansion requirements for at least the next 12 months.
However, the Company may need to raise additional funds prior to such time 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. The Company's future liquidity and
capital requirements will depend upon numerous factors, including the success of
the Company's existing and new application and service offerings and competing
technological and market developments. The Company may be required to raise
additional funds through public or private financing, strategic relationships or
other arrangements. There can be no assurance that such additional funding, if
needed, will be available on terms acceptable to the Company, or at all.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are unable
to distinguish between twentieth century dates and twenty-first century dates.
As a result, many companies' software and computer systems may need to be
upgraded or replaced to comply with such "Year 2000" requirements. The Company's
business is dependent on the operation of numerous systems that could
potentially be impacted by Year 2000 related problems. Those systems include,
among others: hardware and software systems used by the Company to deliver
services to its customers (including the Company's proprietary software systems
as well as hardware and software supplied by third parties); communications
networks, such as the Internet and private intranets, which the Company depends
on to provide electronic transactions to its customers; the internal systems of
the Company's customers and suppliers; the hardware and software systems used
internally by the Company in the management of its business; and non-information
technology systems and services used by the Company in its business, such as
telephone systems and building systems.
The Company has internally reviewed the proprietary software systems it uses
to deliver services to its customers. Although the Company believes that its
internally developed applications and systems are designed to be Year 2000
compliant, the Company utilizes third-party equipment and software that may not
be Year 2000 compliant. Also, two systems acquired by ActaMed, specifically SCAN
and ProviderLink, which together accounted for approximately 47% of the
Company's total revenue in the first six months of 1998, will require
modifications to become Year 2000 compliant. The Company plans to release Year
2000 upgrades to these systems in late 1998 or early 1999. The Company estimates
the cost of these Year 2000 upgrades to be less than $1.0 million. In addition,
the Company's SCAN product is installed on approximately 4,400 Company-owned
workstations located in provider offices. Many of these workstations are not
Year 2000 compliant and must be upgraded or replaced by the Company. The Company
expects the costs of such upgrades or replacements to be less than $1.0 million.
However, the Company could experience delays and cost overruns in the
development of these upgrades, such upgrades could contain defects and the
Company could experience difficulties in getting the Company's installed base of
physicians to implement these upgrades in a timely manner. If the Company
experiences these or other difficulties in developing and deploying its Year
2000 upgrades, revenues from SCAN and ProviderLink could be significantly
reduced, which could have a material adverse effect on the Company's business,
financial condition and results of operations. Failure of such third-party or
Healtheon equipment or software to operate properly with regard to the Year 2000
and thereafter could require the Company to incur unanticipated expenses to
remedy any problems, which could have a material adverse effect on the Company's
business, financial condition and results of operations. In certain of its
agreements, the
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Company warrants that its applications and services are Year 2000 compliant.
Failure of the Company's applications and services to be Year 2000 compliant
could result in the termination of these agreements or in liability for damages,
either of which could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company does not believe that
its expenditures to upgrade its internal systems and applications will have a
material adverse effect on its business, financial condition and results of
operations.
Furthermore, the success of the Company's efforts may depend on the success
of other healthcare participants in dealing with their Year 2000 issues. Many of
these organizations are not Year 2000 compliant, and the impact of widespread
customer failure on the Company's systems is difficult to determine. Customer
difficulties due to Year 2000 issues could interfere with healthcare
transactions or information, which might expose the Company to significant
potential liability. If client failures result in the failure of Healtheon
systems, the Company's business, financial condition and results of operations
would be materially adversely affected. Furthermore, the purchasing patterns of
these customers or potential customers may be affected by Year 2000 issues as
companies expend significant resources to become Year 2000 compliant. The costs
of becoming Year 2000 compliant for current or potential customers may result in
reduced funds being available to purchase and implement the Company's
applications and services.
The Company, with the assistance of an independent consulting firm
specializing in Year 2000 issues, is conducting a formal assessment of its Year
2000 exposure in order to determine what steps beyond those identified by the
Company's internal review may be advisable. The Company expects to complete such
assessment in the fourth quarter of 1998. The Company does not presently have a
contingency plan for handling Year 2000 problems that are not detected and
corrected prior to their occurrence. Any failure of the Company to address any
unforeseen Year 2000 issue could adversely affect the Company's business,
financial condition and results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Company is required to
adopt SFAS No. 131 for the year ending December 31, 1998. SFAS No. 131 requires
disclosure of certain information regarding operating segments, products and
services, geographic areas of operation and major customers. Adoption of SFAS
No. 131 is expected to have no material impact on the Company's business,
financial condition or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Company is required to adopt SFAS No.
133 for the year ending December 31, 2000. SFAS No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. Because the Company
currently holds no derivative financial instruments and does not currently
engage in hedging activities, adoption of SFAS No. 133 is expected to have no
material impact on the Company's business, financial condition or results of
operations.
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BUSINESS
INDUSTRY BACKGROUND
GROWTH OF INTERNET COMMERCE AND FUNCTIONALITY
The Internet's open architecture, universal accessibility and growing
acceptance make it an increasingly important environment for
business-to-business and business-to-consumer interaction. Use of the Internet
is rapidly expanding from simple information publishing, messaging, and data
gathering to critical business transactions and confidential communications. For
many industries, the Internet is connecting previously disconnected business
processes and allowing companies to automate workflows, lower distribution costs
and extend their market reach. The Company believes the healthcare industry,
because of its size, fragmentation and extreme dependence on information
exchange, is particularly well suited to benefit from greater use of the
Internet.
NEED FOR REDUCED HEALTHCARE COSTS AND IMPROVED QUALITY OF CARE
According to the Health Insurance Association of America, healthcare is the
largest single sector of the U.S. economy, consuming approximately $1 trillion
annually, or 14% of the country's gross domestic product. The healthcare
industry consists of a complex mix of participants, which includes physicians,
medical practice groups, hospitals and other organizations that deliver medical
care, referred to as "providers;" the government agencies, insurance companies,
managed care organizations and other enterprises that pay the bills for
healthcare, referred to as "payors;" clinical laboratories, pharmaceutical
companies, and other groups that provide tests, drugs, x-rays and other
services, referred to as "suppliers;" and, finally, individual patients who
receive medical care, and the government agencies, employers and other
organizations that represent groups of individuals, all referred to as
"consumers."
All healthcare participants rely heavily upon information to perform their
roles in the industry. Individuals compare medical plans, choose physicians and
submit claims for reimbursement. Employers select health plans, determine
benefit levels, enroll employees and maintain employee eligibility data.
Providers verify patient eligibility, collect patient histories, order
diagnostic tests and x-rays, receive and interpret test results, render
diagnoses, make referrals and submit claims to payors. Payors manage referrals,
establish medical care protocols and reimbursement policies and process claims.
Suppliers analyze and process patient samples or tests, provide results, fill
prescriptions and submit claims for reimbursement. These and many other
healthcare transactions are also highly dependent on information, and each
participant is dependent on the others for parts of that information. In sum,
the finance and delivery of healthcare requires that consistent, accurate
information be shared confidentially across a large and fragmented industry.
Inefficiencies within the healthcare system consume enormous amounts of
time, resources and dollars. It is estimated that over $250 billion (or 25% of
every healthcare dollar) are wasted through the delivery of unnecessary care,
performance of redundant tests and procedures, and excessive administrative
costs. The Company believes much of this inefficiency and waste is a direct
result of poor information exchange among healthcare participants. Consumers do
not have easy access to the detailed information they need to compare health
plans, select physicians, or manage their own healthcare and benefits. Providers
often lack timely access to relevant patient information, and this lack of
information causes them to prescribe unnecessary tests or procedures and hinders
their ability to diagnose and treat patients. Providers and suppliers often rely
on manual processes to share data, and errors and information bottlenecks
resulting from these manual processes cause delays in determining eligibility,
approving referrals, reporting test results and paying claims. These
inefficiencies contribute to the rising cost of healthcare. As a result, the
government and other purchasers of healthcare have increasingly placed pressure
on the healthcare industry to improve the cost-effectiveness of healthcare while
maintaining the quality of care.
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LIMITATIONS OF TRADITIONAL FUNCTIONAL APPROACH TO HEALTHCARE INFORMATION
MANAGEMENT
The unique characteristics of the healthcare industry have limited the scope
of previous technology solutions. The sheer number of participants, the
complexity of healthcare transactions, and pervasive concerns about
confidentiality have precluded any comprehensive solution that would deliver
connectivity and automated workflows across the entire industry. Healthcare
organizations and their traditional technology vendors have focused on
automating discrete business processes, such as billing and scheduling for
physicians, or claims processing for hospitals and payors. As a result, the
industry currently uses thousands of different mainframe and client/server
systems that lack cross-platform compatibility. While these legacy systems serve
the narrow functions for which they were designed, they have compounded the
industry's connectivity problems. Information the industry needs to share is
trapped in isolated, proprietary databases using non-standardized data formats.
In this environment, many physician offices, particularly those with limited
financial resources, have been reluctant to invest in information technology
solutions. Current solutions may provide connectivity to a single payor or
supplier, or to a limited subset of payors or suppliers, leaving the physician
office with its old manual processes for the majority of its transactions. The
following examples illustrate how poor information management and the lack of
connectivity result in costly, inefficient healthcare services:
ENROLLMENT AND ELIGIBILITY. The enrollment process typically begins with
employees choosing a health plan and completing paper forms; the employer
manually enters the employee information into its human resources information
system and subsequently sends the data (often via a paper report) to the
relevant health plan. The plan manually enters the information into its
membership system and sends the information, again often in paper form, to other
entities, such as provider groups, pharmacies, pharmacy benefit management
companies and diagnostic laboratories, which in turn must manually enter this
information into their own systems. By the time this process is complete, the
information may be months old and contain data entry errors, and the disparate
healthcare information systems of the various participants may contain
conflicting information about the same member. The participants must then expend
costly, time-consuming extra effort to correct these errors manually. In the
interim, patients may be denied treatment or providers may go unpaid for their
services.
REFERRALS AND AUTHORIZATIONS. Managed care organizations may require
physicians to obtain prior approval to refer patients to specialists or to
render certain treatments. The approval process often requires physicians to
mail, fax or telephone requests for authorization to the health plan. The plan
manually enters the data into its own system, checks its guidelines regarding
conditions of referral (which can involve multiple parties in different
organizations), and replies via mail, fax or telephone with an approval or
denial, a process that can take two days to a week or more. Next, the patient
must schedule an appointment if the request is approved, or seek alternative
care if the request is denied. This lengthy authorization process is costly,
wastes valuable physician time and delays patient care.
CLINICAL INFORMATION EXCHANGE. To diagnose and treat a patient properly,
physicians need access to clinical information, such as medical history data,
laboratory and x-ray results, and medication lists. However, this information
typically resides in proprietary databases or is stored in paper form.
Therefore, the physician must submit requests for information by phone or fax to
various hospitals, laboratories, outpatient diagnostic centers or provider
offices. Even when the data are stored at the physician's office, it can be
time-consuming to locate in the physician's paper-based medical record system.
As a result, significant delays can occur before the physician obtains the
information required to diagnose the patient's condition accurately. Often,
physicians will require patients to repeat tests for which data are missing,
leading to unnecessary expense. More important, the lack of timely access to
accurate clinical information in an urgent care situation may lead to inaccurate
diagnoses resulting in delayed or inappropriate care. The problem is therefore
not only costly, but also potentially harmful.
The limitations and inefficiencies of traditional healthcare information
management ultimately harm the individual consumer. Individual consumers have
little control or influence over how healthcare services
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are provided, in part because they lack easy access to information. It can be
difficult for consumers to perform simple tasks, such as changing primary care
providers, gaining access to their own medical records, or monitoring their own
care and compliance at home, because the information they need for these simple
tasks requires time-consuming phone calls or paper correspondence. Consumers,
frustrated by burdensome bureaucracy and lack of empowerment, often fail to take
ownership and control of their own treatment and recovery. The result is higher
costs of care and growing dissatisfaction with the healthcare experience.
HEALTHEON'S OPPORTUNITY
Healtheon believes a significant opportunity exists to leverage the power of
the Internet to provide secure, open, universally accessible network services
that connect participants and automate workflows throughout the healthcare
delivery process. The Company believes that such a solution has the potential to
create significant improvements in the way that information is used by the
healthcare system, enabling improved workflows, better decision-making and,
ultimately, higher quality care at a lower cost.
THE HEALTHEON VIRTUAL HEALTHCARE NETWORK
Healtheon is pioneering the use of the Internet to simplify workflows,
decrease costs and improve the quality of patient care throughout the healthcare
industry. Healtheon has designed an Internet-based information and transaction
platform that allows it to create Virtual Healthcare Networks that facilitate
and streamline interactions among the myriad participants in the healthcare
industry. The Healtheon VHN solution includes a suite of services delivered
through applications operating on its Internet-based platform. Healtheon VHNs
enable the secure exchange of information among disparate healthcare information
systems and support a broad range of healthcare transactions, including
enrollment, eligibility determination, referrals and authorizations, laboratory
and diagnostic test ordering, clinical data retrieval and claims processing.
Healtheon provides its own applications on the Healtheon Platform and also
enables third-party applications to operate on its platform. The Healtheon
Virtual Healthcare Network solution provides the following key benefits:
ELIMINATION OF UNNECESSARY OR REDUNDANT EFFORTS. The Healtheon VHN solution
is designed to reduce paper-based transactions, eliminate redundant data entry,
shorten cycle times and decrease the communication inefficiencies created by
isolated proprietary systems. Healtheon believes that by decreasing redundant
tasks, errors, delays, and unnecessary tests and procedures, it can create
efficiencies and reduce costs across the healthcare industry.
EXTENDIBILITY ACROSS THE CONTINUUM OF HEALTHCARE. The Company leverages the
Internet to provide an open, low-cost information and transaction platform
capable of extending across a wide range of healthcare market segments. The
Healtheon VHN solution is designed to interconnect a broad range of practice
management, managed care, human resources and laboratory information systems.
The Company expects the benefits of its solution to increase as it adds
customers, enabling each user to exchange more data and complete more
transactions with a greater number and broader range of other healthcare
industry participants.
SCALABILITY AND FLEXIBILITY. The Healtheon VHN solution is designed to
support the Company's customers as their businesses grow and evolve. The
Healtheon Platform is designed to scale to accommodate high volumes of
transactions and large numbers of simultaneous users. In addition, Healtheon's
object-oriented platform provides flexibility so that customers can add or
modify applications and transaction capabilities to react to changes in the
healthcare marketplace.
HIGH DEGREE OF SECURITY. To enable the use of the Internet for transmission
of highly sensitive and confidential data, Healtheon utilizes advanced
technology designed to ensure a high degree of security. This technology
includes strict authentication requirements, sophisticated data encryption
techniques,
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system-wide network security monitoring and tightly controlled physical security
systems. These safeguards are designed to provide a secure environment for the
exchange of confidential patient and customer data. The Healtheon Platform is
designed to enable compliance with proposed government standards under the
Health Insurance Portability and Accountability Act of 1996, which mandate the
acceptance by payors of electronic transactions as well as the use of standard
transactions, standard identifiers and security features by the year 2000.
INCREASED ACCURACY AND TIMELINESS OF INFORMATION. The Healtheon VHN
solution is designed to increase information flows among all healthcare
participants, which ultimately results in more timely and appropriate
treatments. For example, on-line access to accurate, up-to-date eligibility
information facilitates patients' access to care on a more timely basis, reduces
frustration and costs and increases the likelihood that providers will be
compensated for their services in a timely manner. Similarly, using Healtheon's
VHN solution, consumers will have greater access to their healthcare
information, thereby enabling them to become more active participants in the
provision of their own healthcare.
Healtheon believes that these and other benefits provided by its solution
will result in increased quality of care.
STRATEGY
Healtheon's objective is to become the leading provider of Internet-based
transaction and information services to the healthcare industry. The Company's
strategy includes the following key elements:
LEVERAGE INTERNET TECHNOLOGY. Healtheon leverages Internet technology to
create Virtual Healthcare Networks that provide secure transactions and
communications among a broad range of healthcare participants, regardless of
their legacy computing platforms. Unlike traditional proprietary solutions that
focus on point-to-point communications and narrowly defined transactions,
Internet technology allows the Company to integrate all categories of healthcare
participants--payors, providers, suppliers and consumers--to eliminate redundant
tasks and reduce costs. The Company believes that such connectivity will
optimize and simplify the flow of mission-critical information.
EXPAND FUNCTIONALITY AND TRANSACTION CAPABILITY. The Company seeks to
identify key functions that are critical to particular industry participants and
integrate applications supporting these functions into its VHN. The Company
plans to accomplish this by building native, Internet-based applications
encompassing the identified functionality, by acquiring businesses or
technologies, and by enabling industry-leading, third-party applications on its
platform. The Company has initially targeted those applications that are most
critical to each business segment of the healthcare industry, offer the highest
value to the participants, and are readily adaptable to a network computing
paradigm. For example, the Company developed its Benefits Administration
application suite to automate healthcare plan enrollment and is developing its
RACER application suite to manage eligibility, referrals, authorizations and
claims transactions between healthcare providers and payors.
FORM STRATEGIC RELATIONSHIPS WITH LEADING HEALTHCARE PARTICIPANTS. The
Company is aggressively pursuing strategic relationships with leaders in key
healthcare industry segments to increase its portfolio of applications and
services, increase the number of connected users and provide specialized
industry expertise for new applications. In addition, the Company plans to
acquire companies with strategic relationships with leading healthcare industry
participants. The Company believes this strategy also provides accelerated
market awareness and demand for Healtheon's services through the influence of
these partners both directly, through their use and sales efforts, and
indirectly, through their relationships with other potential customers. To date,
Healtheon has established strategic relationships with the following
organizations: United HealthCare, the largest health maintenance organization in
the United States; SmithKline Labs, one of the largest independent clinical
laboratory companies in the United States;
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Brown & Toland, a leading medical group in the San Francisco Bay Area; and Beech
Street, one of the largest preferred provider organizations in the United
States.
ESTABLISH A NATIONAL PRESENCE REGION BY REGION. The Company believes that
the value of its applications and services will grow as the number of connected
parties and the breadth of the transactions conducted on the Company's platform
increase. However, healthcare remains highly regional, driven by business
relationships and practices that are often unique to specific regions.
Therefore, the Company's approach is to target regional markets where it can
gain critical mass and to expand nationally region by region. The Company plans
to enter into, and to acquire companies with, strategic relationships with
national and regional healthcare participants that have significant market share
in specific regions. In addition, the Company intends to leverage its existing
relationships to penetrate new regions and markets.
PURSUE USAGE-BASED BUSINESS MODEL. The Company offers network-based
transaction and information services on a transaction or subscription fee basis.
This pricing model reduces the initial investment required to obtain the
benefits of high-end information technology systems, enabling physicians, small
organizations and individuals to gain access to such systems for the first time.
By enabling the shift from fixed information technology costs to variable costs,
the Company believes that it will be able to achieve a critical mass of users
and broad-based adoption of the Healtheon Virtual Healthcare Network solution.
PROVIDE A COMPLETE SOLUTION. In addition to its network-based transaction
and information services, the Company offers consulting, application
development, systems integration and network management services to provide
complete customer-specific solutions. By offering this range of services, the
Company can provide customers with a complete migration path from the customers'
legacy systems and processes to Healtheon's Internet-based model.
HEALTHEON'S SERVICES
Healtheon offers a suite of healthcare transaction and information services
delivered over the Internet or over private intranets and other networks. These
network-based services are provided by software applications operating on or
interfacing with the Healtheon Platform, which is designed to provide
connectivity across the healthcare industry and enable a broad array of secure,
mission-critical healthcare transactions. In addition to its platform and
Internet-based applications, Healtheon provides comprehensive consulting and
implementation services to enable its customers to take full advantage of the
capabilities of Healtheon's platform.
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Healtheon provides a broad range of applications and services that support
key healthcare transactions. The components of these application suites can be
combined and modified, or supplemented with new application components, to
provide custom solutions for large, complex, multi-entity business enterprises.
These applications and services are typically sold on a transaction or
subscription fee basis, which varies across customers and market segments. The
following chart summarizes the key transactions supported by Healtheon,
organized by business function.
<TABLE>
<CAPTION>
BUSINESS CUSTOMERS/
FUNCTION USERS TRANSACTIONS SUPPORTED APPLICATIONS
<S> <C> <C> <C>
Membership Services Consumers - Enrollment Benefits
Payors - Plan comparison/selection Administration
- Provider search, selection, change
- Benefits inquiry
- Messaging
Healthcare Administration Payors - Eligibility determination ProviderLink
and Financial Management Providers - Referrals* RACER*
- Authorization* PACER*
- Claims submission and status
- Remittance advice
- Provider directories*
- Provider files-management*
- Reporting
- Claims repricing*
Clinical Information Providers - Patient identification and SCAN+
Services Suppliers encounter history GMPI+
- Patient registration ActaLab*
- Lab orders and results
- Text document/transcription
distribution
</TABLE>
* Under development
+ Not Internet-enabled
The primary applications and services currently available or under
development are described in greater detail below. Certain of these applications
were acquired by the Company and are not yet Internet-enabled; the Company is
currently redeveloping or replacing these applications to integrate them with
the Healtheon Platform.
MEMBERSHIP SERVICES. Healtheon provides membership services through its
Benefits Administration application. The Benefits Administration application was
developed internally and operates on the Healtheon Platform. The application
provides Internet-based connectivity between healthcare payors and consumers and
supports transactions such as selection of health plans and providers,
enrollment for benefits and benefit inquiries. Benefits Administration users
also receive Healtheon's Health Risk Appraisal service, which provides consumer
education in wellness and health risks. Healtheon has deployed this application
directly and through aggregators to 25 companies, covering approximately 30,000
members.
HEALTHCARE ADMINISTRATION AND FINANCIAL MANAGEMENT. Healtheon supports or
will support healthcare administration and financial management transactions
through its ProviderLink, RACER and PACER applications. ProviderLink was
licensed by the Company's ActaMed subsidiary from United HealthCare Corporation.
The Company is currently developing a software interface between the Healtheon
Platform
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and ProviderLink to integrate ProviderLink with the Company's network-based
services. ProviderLink is used by providers to support transactions and
workflows with payors. ProviderLink supports transactions such as eligibility
determinations, claims submission and status, and remittance advice. For
example, physicians use ProviderLink to determine eligibility of patients to
receive care and to submit health claims to payors. ProviderLink is currently
deployed in over 4,000 active provider sites in more than 20 major markets, and
processes over 2.5 million transactions per month.
The Company is developing RACER, a new Internet-based provider application
with support from Brown & Toland, one of the Company's strategic partners. RACER
is designed to provide all of the functionality of ProviderLink and also support
referrals, authorization, and provider directories reporting. Providers using
the RACER service will be able to receive real-time patient eligibility
verifications and referral authorizations over the Healtheon VHN.
The Company is developing PACER, a new Internet-based payor application,
with support from Beech Street, one of the Company's strategic partners. PACER
is designed to support the creation and management of networks of providers.
PACER is designed to enable the management of large, complex provider
directories and files, manage provider relationships and contracts and perform
certain claim adjudication functions, such as claim repricing. See "-- Strategic
Relationships."
CLINICAL INFORMATION SERVICES. The Company's SCAN product supports ordering
and distribution of clinical tests and test results between SmithKline Labs and
providers using SmithKline Labs' services. ActaMed acquired the SCAN application
from SmithKline Labs. SCAN is deployed on approximately 4,400 installed
workstations serving physicians throughout the United States. SCAN is not
Internet-enabled; however, the Company is developing a new Internet-enabled
application called ActaLab that will combine the functionality of SCAN and
ProviderLink. See "-- Strategic Relationships."
The Company's Global Master Person Index ("GMPI") enables the unique
identification of a patient and reconciliation of multiple records for the same
patient contained on diverse information systems. GMPI also supports access to
patient data and registration information as well as clinical records. GMPI is
an object-oriented application developed by ActaMed and is not yet
Internet-enabled. Healtheon intends to adapt and implement GMPI functionality on
the Healtheon Platform.
OTHER SERVICES. Healtheon also provides professional services to its
customers to enable them to define, develop and implement network-based
information systems that leverage the capabilities of the Healtheon Platform.
These services are typically sold on a fixed fee or time and materials basis.
These services include consulting on information systems strategy related to the
use of the Internet and secure networks, including design of information systems
functional specifications, mapping and redesign of business processes and
identification of enterprise transformation and training requirements to take
advantage of increased connectivity. Healtheon also provides custom development
of applications and enables the deployment of Healtheon services and integration
with legacy information technology systems. In addition, Healtheon provides
transitional network management services of its customers' networks. The Company
believes that its success is partially dependent upon its ability to introduce
new applications in several healthcare markets in a relatively short period of
time. The Company currently offers a limited number of applications on its
platform.
CUSTOMERS AND MARKETS
Healtheon's target customers include providers, payors, suppliers and
consumers. Because the Company believes that the value and benefit of
Healtheon's services are directly related to both the number of participants
using Healtheon VHNs and the breadth of functionality supported, it intends
initially to focus on selected regions where it can quickly gain significant
market acceptance. Healtheon is presently targeting a number of regional markets
across the United States.
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PROVIDERS. Healtheon's target provider customers include aggregators of
individual physicians such as large medical groups, independent practice
associations, physician practice management companies and other large, organized
physician entities. In particular, the Company seeks to form strategic
relationships with providers with a high degree of involvement in managed care,
especially providers that are involved in activities such as capitation, which
require them to bear some level of insurance risk for each enrolled patient.
Healtheon's services for these providers include benefit eligibility
determinations, referrals and authorizations, claims processing, ordering of
clinical tests and delivery of results and maintenance of patient histories.
Healtheon also targets as potential customers large integrated delivery networks
that combine multiple healthcare facilities, such as hospitals, outpatient
facilities, labs and diagnostic centers, and affiliate with physicians and
physician groups to coordinate care, contract for managed care lives and manage
healthcare resource utilization. Healtheon offers these customers the following
services: patient identification, patient registration, ordering of clinical
tests and delivery of results and distribution of text documents across the
network. The Company's current customers in this category include Brown & Toland
and the Greater Dayton Area Hospital Association.
PAYORS. Healtheon's target payor customers include managed care
organizations, indemnity insurers, third-party administrators and federal and
state governmental agencies. Target managed care organization customers include
mid-sized to large HMOs and PPOs. Healtheon's services for these customers
include eligibility determination, member customer service functions, referral
and authorization management, coordination of provider files and directories,
and submission and tracking of claims and patient encounter reports. Target
indemnity insurer and third-party administrator customers include mid-sized to
large commercial entities, Medicare and other agencies of federal and state
government. The Company's current customers in this category consist of United
HealthCare, Beech Street, Sun Life of Canada, Blue Shield of California, CIGNA
HealthCare and the Health Care Financing Administration.
SUPPLIERS. Healtheon's target supplier customers include large national
laboratory companies, pharmaceutical companies and pharmacy benefit managers.
Healtheon's services for laboratory companies include ordering clinical tests
and reporting test results. The Company's principal customer in this category is
SmithKline Labs.
CONSUMERS. Healtheon's target consumer customers include employers, health
plans and health plan brokers. Healtheon's services for these consumer
representatives include health plan enrollment, benefits administration and
membership coordination. Healtheon's target employer group includes mid-sized
and large employers and, particularly, self-funded employers that have complex
benefits management needs. Healtheon's target health plan broker customers
include mid-sized to large brokers that aggregate small and medium employers and
administer healthcare benefits on their behalf. Healtheon services 25 employers
covering approximately 30,000 members.
STRATEGIC RELATIONSHIPS
The Company has entered into several strategic relationships that it
believes will enhance its application portfolio, provide important specialized
industry expertise, and increase its market penetration. Certain of these
relationships are described below:
UNITED HEALTHCARE CORPORATION. United HealthCare is the largest HMO in the
United States. United HealthCare is the Company's largest stockholder and will
own approximately % of the Company's Common Stock after this offering. In
March 1996, the Company acquired United HealthCare's ProviderLink network which
supports over 4,000 active provider sites in more than 20 major markets
servicing over 2.5 million transactions per month. The Company earns transaction
fee revenue by providing certain healthcare information services to United
HealthCare, members of United HealthCare's provider network and ProviderLink
subscribers. In April 1996, the Company and United HealthCare entered into a
Services and License Agreement (the "United HealthCare Agreement") under which
the Company, using ProviderLink, provides claims processing, referral,
eligibility and enrollment services, to United
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HealthCare's managed care providers and customers. Under the United HealthCare
Agreement, the Company currently receives a monthly fee for each user site
enrolled with United HealthCare and a fee per transaction. However, the United
HealthCare Agreement does not guarantee any minimum level of transactions or
payments to the Company. United HealthCare has also agreed during the term of
the United HealthCare Agreement not to promote or contract for services
providing the same functionality as that provided by the Company, although
United HealthCare is permitted to continue to utilize services it was utilizing
when it entered into the United HealthCare Agreement. In addition, through
ActaMed, the Company has developed PLNet, an Internet-based version of
ProviderLink, which the Company intends to integrate into the Healtheon Platform
and offer to other major healthcare payors and providers. The Company is working
with United HealthCare to expand the applications and content available to
United HealthCare's provider network, to increase the size and geographic reach
of its provider network, and to assimilate newly acquired health plans. William
McGuire, M.D., the Chairman and CEO of United HealthCare, is a member of the
Company's Board of Directors. The United HealthCare Agreement is effective
through March 2001, subject to earlier termination in the event the Company
fails to meet certain network performance standards or otherwise breaches its
material obligations under the United HealthCare Agreement.
SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC. SmithKline Beecham Clinical
Laboratories, Inc. ("SmithKline Labs"), a subsidiary of SmithKline Beecham, is
one of the largest independent clinical laboratories in the United States.
SmithKline is a stockholder of the Company and will own approximately % of the
Company's Common Stock after this offering. In December 1997, the Company and
SmithKline Labs entered into a Services Agreement (the "Services Agreement")
under which the Company provides lab orders and results to providers that use
SCAN. SmithKline Labs has also agreed to promote the Company as its preferred
vendor for laboratory electronic connectivity services. The Company acquired
SCAN-related assets from SmithKline Labs, including approximately 4,200
installed workstations in physicians' offices, hospitals and other provider
offices. The Company is currently developing ActaLab, an Internet-enabled
version of the SCAN system, which the Company plans to integrate into the
Healtheon Platform and to offer to physicians using SmithKline Labs' services or
to physicians using other laboratories. Tadataka Yamada, M.D., President of
SmithKline Beecham Healthcare Services, is a member of the Company's Board of
Directors. The Services Agreement is effective through December 2002, with
options for successive two-year renewals, subject to earlier termination in the
event the Company fails to meet certain network performance standards or if the
Company otherwise breaches its material obligations under the Services
Agreement.
BROWN & TOLAND PHYSICIAN SERVICES ORGANIZATION. Brown & Toland Medical
Group ("BTMG"), based in San Francisco, California, is a partnership of
approximately 2,000 physicians representing a merger of physicians from
California Pacific Medical Center, the University of California-San Francisco
and Stanford University. Brown & Toland Physician Services Organization ("Brown
& Toland"), a wholly owned subsidiary of BTMG, is the management company that
administers the managed care risk business on behalf of BTMG and other physician
organizations. In December 1997, the Company and Brown & Toland entered into an
agreement under which the Company is developing RACER, which the Company intends
to market to Brown & Toland and other payors and providers. The Company also
manages the information technology operations of Brown & Toland. Through its
relationship with Brown & Toland, the Company believes it is gaining valuable
industry-segment expertise from a leader in managed care and accelerating its
market presence in the San Francisco Bay Area. The Company's agreement with
Brown & Toland is effective through September 2000, although it may be
terminated by either party upon 120 days' notice.
BEECH STREET CORPORATION. Beech Street is one of the largest PPOs in the
United States. Beech Street's PPO network consists of approximately 4,300
hospitals and 320,000 physician locations serving 15 million individuals in 49
states, and its clients consist of major self-insured employers, insurance
companies and third-party administrators. In December 1997, the Company and
Beech Street have entered into an agreement under which the Company is
developing PACER, which the Company intends
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to offer to Beech Street and to other payors and providers. The Company also
manages the information technology operations of Beech Street. The relationship
with Beech Street provides the Company with important industry-segment expertise
and a strategic entry-point into the PPO market segment. The Company's agreement
with Beech Street is effective through December 2002, although it may be
terminated by either party upon 180 days' notice. See "Risk Factors -- Reliance
on Strategic Relationships."
THE HEALTHEON PLATFORM
The Healtheon Platform is a CORBA-based distributed application framework,
combined with software tools that ensure security, scalability, availability,
reliability and manageability, on which transaction intensive applications can
be delivered over the Internet or over other distributed environments. The
Healtheon Platform is deployed on a server complex at the Healtheon data center
in Santa Clara, California, which consists of SUN Solaris servers in a fault
tolerant configuration and redundant or fault tolerant network components. The
Healtheon Platform includes the following features:
SECURITY. The Healtheon Platform is designed to ensure the privacy and
integrity of data and communications by using a combination of security
methodologies to provide multiple lines of defense. All Internet communications
between Healtheon and its users employ the Secure Sockets Layer protocol. In
addition, Healtheon utilizes server digital certificates and username/password
schemes to authenticate users. Each user has a unique user ID and has one or
more roles that define the types of functionality and data access available. All
Healtheon's applications record logging information, creating an audit trail,
and protect privacy by encrypting sensitive data. The Company also uses a
multi-layered firewall complex to secure the Healtheon network infrastructure.
In addition, network vulnerability scanners are used on a regular basis to
actively monitor security status. Healtheon's physical security systems at its
Santa Clara facility consist of comprehensive physical controls and
multi-layered internal network and information system safeguards. The physical
controls include using fingerprint authentication, dual-level access points, and
multiple alarm systems.
SCALABILITY. The Healtheon Platform utilizes CORBA-based middleware, which
enables a highly scalable distributed applications infrastructure. The platform
enables an application to run simultaneously on multiple host systems, allowing
for large numbers of simultaneous users while at the same time optimizing
network performance and resource utilization. In addition, the Healtheon
Platform has been designed to transparently deploy new services and hardware
while existing applications remain operational. Finally, the Healtheon Platform
reduces communications bottlenecks resulting from limited numbers of connections
to database servers through intelligent management of database connections and
object caches that reduce the need to query database servers for frequently used
data. See "Risk Factors -- Unproven Platform Infrastructure and Scalability."
RAPID APPLICATION DEVELOPMENT AND INTEGRATION. The Healtheon Platform is
designed to enable rapid application development and integration. The platform
supports object-oriented programming, which accelerates the design process
through object reuse. The Company maintains a comprehensive set of object
libraries, called core services, that allows developers to build complex
applications rapidly. The platform is also designed for deploying applications
developed by third parties with relative ease. The platform interfaces with
legacy systems by accepting industry standard ANSI X.12 and HL7 electronic data
interchange formats.
HIGH AVAILABILITY. The Healtheon Platform architecture is designed to
ensure high availability through the replication of applications and other
software services, failure detection and automatic restart of failed services
and applications. Running multiple copies of a service or application removes
any single point of failure within the system and ensures that at least some
copies of a service will be available while others may have failed. In addition,
the servers that host Healtheon applications are duplicated to provide
redundancy. Healtheon uses duplicate fiber optic cable connections to Sprint and
WorldCom to ensure
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highly-available access to the Internet. The Company's platform uses a mix of
fault-tolerant hardware, redundant equipment and back-up power systems.
MANAGEABILITY. The Healtheon management framework provides a single image
view of all Healtheon services, thus simplifying administration in a distributed
environment. Healtheon services can be managed from a Web-based management
station. The Healtheon management and administration framework monitors service
performance and generates event notifications of system abnormalities.
DISASTER RECOVERY PLANS. Although the Company believes its operations
facilities are highly resistant to systems failure and sabotage, it has
developed, and is in the process of implementing, a disaster recovery and
contingency operations plan. In addition, all of the Company's services are
linked to advanced storage systems that provide data protection through
techniques such as replication. The Company also maintains on-site backup power
systems.
AUDITS. The Company's information technology department periodically
performs, and retains accredited third parties to perform, audits of its
operational procedures under both internally-developed audit procedures and
externally-recognized standards.
CUSTOMER SUPPORT
The Company believes that a high level of customer support is necessary to
achieve wide acceptance of its solution. The Company provides a wide range of
customer support services through a staff of customer service personnel,
multiple call centers and an e-mail help desk. The Company also offers Web-based
support services that are available 24 hours a day, seven days a week and are
frequently updated to improve existing information and to support new services.
The Company also employs technical support personnel who work directly with its
direct sales force, distributors and customers of its applications and services.
The Company provides its customers with the ability to purchase maintenance for
its applications and services, which includes technical support and upgrades.
The Company also provides training programs for its customers. As of June 30,
1998, the Company had 164 employees in customer support functions, including
network services, provider services and customer support services.
SALES AND MARKETING
Healtheon's sales and marketing efforts are organized according to its four
main customer segments: providers, payors, suppliers and consumers. Healtheon's
direct sales force targets significant potential customers in each market
segment by region. In certain instances, the Company's direct sales force works
with complementary brokers, value added resellers and systems integrators to
deliver complete solutions for major customers. In addition, senior management
plays an active role in the sales process by cultivating industry contacts. The
Company markets its applications and services through direct sales contacts,
strategic relationships, the sales and marketing organizations of its strategic
partners, participation in trade shows, articles in industry publications and by
leveraging its existing client base. Healtheon attends a number of major trade
shows each year and has begun to sponsor executive conferences, which feature
industry experts who address the information systems needs of large healthcare
organizations. The Company supports its sales force with technical personnel who
perform demonstrations of Healtheon's applications and assist clients in
determining the proper hardware and software configurations. The Company's
executive sales and marketing management is located in its Santa Clara,
California headquarters and in its Atlanta, Georgia and Minneapolis, Minnesota
facilities, while its account representatives are deployed across the United
States. As of June 30, 1998, the Company employed 44 sales executives, account
managers, direct sales representatives and sales support personnel.
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DEVELOPMENT AND ENGINEERING
The Company believes that its future success will depend in large part on
its ability to continue to maintain and enhance its platform, applications and
services. To this end, the Company leverages the modular nature of its platform
architecture to enable it to develop new applications and services rapidly. The
Company has developed applications and services both independently and through
acquisitions. The Company will continue to work closely with other companies in
its applications development efforts.
The Company has several significant projects currently in development. These
include the continued enhancement of the platform architecture, development of
new applications such as RACER, PACER and ActaLab, and integration of ActaMed's
platform, network and associated services. As of June 30, 1998, the Company
employed 144 people in the areas of applications design, research and
development, quality assurance and technical support.
In 1995, 1996, 1997 and the six months ended June 30, 1998, the Company's
development and engineering expense (which excludes development expenses
included in total cost of revenue) totaled $2.4 million, $8.6 million, $13.0
million and $8.3 million, respectively, representing 112%, 78%, 97% and 40%,
respectively, of its total revenue. The Company believes that timely development
of new and enhanced applications and technology is necessary to remain
competitive in the marketplace. Accordingly, the Company intends to continue
recruiting and hiring experienced development personnel and to make other
investments in development and engineering.
The emerging market for healthcare information exchange and transaction
processing is characterized by rapid technological developments, frequent new
application introductions and evolving industry standards. The emerging nature
of this market and its rapid evolution will require that the Company continually
improve the performance, features and reliability of its applications and
services, particularly in response to competing offerings, and that it introduce
new applications and services or enhancements to existing applications and
services as quickly as possible and prior to its competitors. The success of new
application and service introductions is dependent on several factors, including
proper definition of new applications or services, timely completion and
introduction of new applications and services, differentiation of new
applications and services from those of the Company's competitors and market
acceptance. There can be no assurance that the Company will be successful in
developing and marketing new applications and services that respond to
competitive and technological developments and changing customer needs. The
failure of the Company to develop and introduce new applications and services
successfully on a timely basis and to achieve market acceptance for such
applications and services could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
widespread adoption of new Internet, networking or telecommunication
technologies or standards or other technological changes could render its
applications and services obsolete or require substantial expenditures by the
Company to adapt its applications and services. Moreover, there is a risk that a
competitor's product might become the standard for healthcare information
services. See "Risk Factors -- Rapid Technological Change; New Application and
Services Introductions."
INTELLECTUAL PROPERTY
The Company relies upon a combination of trade secret, copyright and
trademark laws, license agreements, confidentiality procedures, employee
nondisclosure agreements and technical measures to maintain the secrecy of its
intellectual property. The Company believes that patent, trade secret and
copyright protection are less significant to the Company's success than its
ability to further develop applications. The Company has several trademarks in
the United States and internationally. See "Risk Factors -- Dependence on
Proprietary Technology; Potential Litigation."
COMPETITION
The market for healthcare information services is intensely competitive,
rapidly evolving and subject to rapid technological change. Many of the
Company's actual and potential competitors have announced
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or introduced Internet strategies. The Company's competitors can be divided into
several groups: healthcare information software vendors, including HBO & Company
and Shared Medical Systems Corporation; healthcare electronic data interchange
companies, including ENVOY Corporation and National Data Corporation; and large
information technology consulting service providers, including Andersen
Consulting, International Business Machines Corporation and Electronic Data
Systems Corporation. Each of these companies can be expected to compete with the
Company within certain segments of the healthcare information technology market.
Furthermore, major software information systems companies and others, including
those specializing in the healthcare industry that are not presently offering
applications that compete with those offered by the Company, may enter the
Company's markets. In some cases, large customers may have the ability to
compete directly with the Company as well. The Company also competes with
smaller regional competitors. Many of the Company's competitors and potential
competitors have significantly greater financial, technical, product
development, marketing and other resources and greater market recognition than
the Company. Many of the Company's competitors also currently have, or may
develop or acquire, substantial installed customer bases in the healthcare
industry. As a result of these factors, the Company's competitors may be able to
respond more quickly to new or emerging technologies and changes in customer
requirements or to devote greater resources to the development, promotion and
sale of their applications or services than the Company. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors or that competitive pressures faced by the Company will
not materially adversely affect its business, financial condition and results of
operations.
GOVERNMENT REGULATION AND HEALTHCARE REFORM
Laws and regulations may be adopted with respect to the Internet or other
on-line services covering issues such as user privacy, pricing, content,
copyrights, distribution and characteristics and quality of products and
services. The adoption of any additional laws or regulations may impede the
growth of the Internet or other on-line services, which could, in turn, decrease
the demand for the Company's applications and services and increase the
Company's cost of doing business, or otherwise have an adverse effect on the
Company's business, financial condition and results of operations. For example,
under current Health Care Financing Administration guidelines, Medicare
eligibility information cannot be transmitted over the Internet. Moreover, the
applicability to the Internet of existing laws in various jurisdictions
governing issues such as property ownership, sales and other taxes, libel and
personal privacy is uncertain and may take years to resolve. Any such new
legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to the Company's business, or
the application of existing laws and regulations to the Internet and other
online services could have a material adverse effect on the Company's business,
financial condition and results of operations.
The confidentiality of patient records and the circumstances under which
such records may be released for inclusion in the Company's databases are
subject to substantial regulation by state governments. These state laws and
regulations govern both the disclosure and the use of confidential patient
medical record information. Although compliance with these laws and regulations
is at present principally the responsibility of the hospital, physician or other
healthcare provider, regulations governing patient confidentiality rights are
evolving rapidly. Additional legislation governing the dissemination of medical
record information has been proposed at both the state and federal level. This
legislation may require holders of such information to implement security
measures that may require substantial expenditures by the Company. There can be
no assurance that changes to state or federal laws will not materially restrict
the ability of healthcare providers to submit information from patient records
using the Company's applications.
Legislation currently being considered at the federal level could impact the
manner in which the Company conducts its business. The Health Insurance
Portability and Accountability Act of 1996 mandates the use of standard
transactions, standard identifiers, security and other provisions by the year
2000. The Company is designing its Platform and applications to enable
compliance with the proposed regulations;
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however, until such regulations become final, they could change, which could
require the Company to expend additional resources to comply with the revised
standards. In addition, the success of the Company's compliance efforts may be
dependent on the success of healthcare participants in dealing with the
standards.
International regulations with respect to the Internet, privacy and
transborder data flows are considerably more developed than regulations in the
United States. The Company intends to develop applications and services to be
used on a worldwide basis and, consequently, will be required to comply with
international regulations regarding the Internet and electronic commerce, as
well as with U.S. regulations. The Company has not evaluated the effect that
these regulations would have on its business, and there can be no assurance that
such regulations will not have an adverse effect on the Company's ability to
compete internationally.
The United States Food and Drug Administration is responsible for assuring
the safety and effectiveness of medical devices under the Federal Food, Drug and
Cosmetic Act. Computer applications and software are considered medical devices
and subject to regulation by the FDA when they are indicated, labeled or
intended to be used in the diagnosis of disease or other conditions, or in the
cure, mitigation, treatment or prevention of disease, or are intended to affect
the structure or function of the body. The Company does not believe that any of
its current applications or services are subject to FDA jurisdiction or
regulation; however, the Company plans to expand its application and service
offerings into areas that may subject it to FDA regulation. The Company has no
experience in complying with FDA regulations. Healtheon's compliance with FDA
regulations could prove to be time consuming, burdensome and expensive, which
could have a material adverse effect on the Company's ability to introduce new
applications or services in a timely manner.
EMPLOYEES
As of June 30, 1998, the Company had a total of 379 employees, of whom 101
engaged in customer and network services, 144 in development and engineering, 8
in consulting services, 63 in provider services, 44 in sales and marketing and
19 in corporate finance and administration. None of the Company's employees is
represented by a labor union, and the Company has never experienced a work
stoppage. The Company believes its relationship with its employees to be good.
The Company's ability to achieve its financial and operational objectives
depends in large part upon its continuing ability to attract, integrate, retain
and motivate highly qualified sales, technical and managerial personnel, and
upon the continued service of its senior management and key sales and technical
personnel, most of whom are not bound by an employment agreement. Competition
for such qualified personnel in the Company's industry and geographical location
in the San Francisco Bay Area is intense, particularly in software development
and technical personnel. See "Risk Factors -- Dependence on Key Personnel."
FACILITIES
The Company's principal executive and corporate offices and development and
network operations are located in Santa Clara, California, in approximately
50,000 square feet of leased office space under a lease that expires in March
2008. The Company also maintains sales, development and network operations in
Atlanta, Georgia, in approximately 41,000 square feet of leased office space
under a lease that expires in July 2001; and sales, engineering and support
operations in Minneapolis, Minnesota, in approximately 16,500 square feet of
leased office space under a lease that expires in December 1999. The Company
believes that its facilities are adequate for its current operations and that
additional leased space can be obtained if needed.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the Company's
current executive officers and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- ----- -----------------------------------
<S> <C> <C>
James H. Clark(1)(2)............... 53 Chairman of the Board of Directors
W. Michael Long(3)................. 46 Chief Executive Officer and
Director
Michael K. Hoover.................. 43 President and Director
Ron Alvarez........................ 49 Vice President, Consumer Group
Mark Bailey........................ 39 Vice President, Business
Development
Kallen Chan........................ 43 Corporate Controller
Jack Dennison...................... 41 Vice President and General Counsel
Dennis Drislane.................... 49 Vice President, Customer and
Network Services
Edward Fotsch, M.D................. 41 Vice President, Physician and
Integrated Delivery Network Group
Piers G.D. Fox..................... 53 Vice President, Europe
Nancy Ham.......................... 37 Vice President, Laboratories and
Pharmaceuticals
J. Philip Hardin................... 35 Vice President, Managed Care Group
John R. Hughes, Jr................. 45 Vice President, Provider Services
Krishna Kolluri.................... 35 Vice President, Applications
Pavan Nigam........................ 39 Vice President, Engineering
Charles Saunders, M.D.............. 43 Vice President, Marketing and
Consulting Services and Medical
Director
John L. Westermann III............. 53 Vice President, Chief Financial
Officer, Secretary and Treasurer
L. John Doerr(1)(2)................ 46 Director
C. Richard Kramlich(1)(2).......... 63 Director
William W. McGuire, M.D.(1)(2)..... 50 Director
P. E. Sadler(1)(2)................. 63 Director
Tadataka Yamada, M.D.(1)(2)........ 53 Director
</TABLE>
- ---------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Stock Option Committee.
JAMES H. CLARK has served as Chairman of the Board of the Company since he
co-founded it in December 1995. Dr. Clark co-founded Netscape Communications
Corporation in April 1994 and has served as the Chairman of the Board of
Directors of Netscape since its inception. He served as President and Chief
Executive Officer of Netscape from its founding until December 1994. From 1981
until 1994, Dr. Clark served as Chairman of the board of directors of Silicon
Graphics, Inc., a company which he founded in 1981. Prior to founding Silicon
Graphics, Dr. Clark was an Associate Professor at Stanford University. He holds
a B.S. and an M.S. from the University of New Orleans and a Ph.D. from the
University of Utah.
W. MICHAEL LONG has served as Chief Executive Officer and a director of the
Company since joining the Company in July 1997. Prior to joining the Company,
Mr. Long was President and Chief Executive Officer of CSC Continuum, Inc.
("CSC"), a unit of Computer Sciences Corporation from August 1996 to
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July 1997. For more than five years prior to its acquisition by CSC, he was
President and Chief Executive Officer of The Continuum Company, Inc., a provider
of IT and consulting services to the financial industry. He holds a B.A. from
the University of North Carolina.
MICHAEL K. HOOVER has served as President and a director of the Company
since the Company acquired ActaMed Corporation in May 1998. Mr. Hoover
co-founded ActaMed in May 1992, and served as its President from its inception
to May 1998, and as its President and Chief Executive Officer from December 1995
to May 1998. From 1989 to 1992, Mr. Hoover served as the Executive Director of
Financial Services of the MicroBilt division of First Financial Management
Corporation. Prior to that, he founded FormMaker Software Corporation, a
producer of electronic forms automation systems, and served as its Chief
Executive Officer from 1982 to 1988 and as its Executive Vice President during
1988. Mr. Hoover holds a B.S. in engineering from the University of South
Alabama.
RON ALVAREZ has served as Vice President, Consumer Group of the Company
since June 1998, and prior to that served as Vice President, Sales since joining
the Company in July 1997. Prior to joining the Company, Mr. Alvarez spent ten
years at Informix Software, Inc. as Vice President of North American Sales and
as head of its Latin American operations. Prior to that time, he was District
Sales Manager at Metaphor Computer Systems. Mr. Alvarez has also held sales
positions at Storage Technology Corporation and Xerox Corporation. Mr. Alvarez
holds a B.S. from California State University in Sacramento and an M.B.A. from
the University of Missouri.
MARK BAILEY has served as Vice President, Business Development of the
Company since joining the Company in July 1998. Prior to joining the Company,
Mr. Bailey served as general partner at Venrock Associates, the venture capital
arm for the Rockefeller family, from October 1997 to April 1998. Prior to that
he was Senior Vice President Business Development at Symantec Corporation, a
provider of productivity and utilities software, where he directed mergers and
acquisitions efforts from December 1989 to October 1997. Before joining
Symantec, he was an associate with Kleiner Perkins Caufeld & Byers, a venture
capital firm, from June 1985 to December 1989. Mr. Bailey holds an MBA from
Harvard University and a BSE from Princeton University.
KALLEN CHAN has served as Corporate Controller of the Company since April
1996. Prior to joining the Company, Mr. Chan was the Director of Audit and Group
Controller for Worldwide Manufacturing at Cirrus Logic, Inc. since March 1995.
From January 1993 to February 1995, Mr. Chan was Vice President of Finance and
Chief Financial Officer of Comtech Labs Inc., a video imaging technology
company. From 1986 to 1992, Mr. Chan served as Chief Financial Officer for
various early stage companies, including Caeco Inc., Harmonic Lightwaves, Inc.
and Oasic Technology, Inc. Prior to 1986, Mr. Chan spent nine years at Philips
Semiconductor as a Division Controller. He holds a B.S. in commerce and an
M.B.A. from the University of Santa Clara.
JACK DENNISON has served as Vice President and General Counsel of the
Company since joining the Company in July 1998. Mr. Dennison served as Deputy
General Counsel of Computer Sciences Corporation from August 1996 to July 1998.
Prior to that time, Mr. Dennison served as Vice President and General Counsel of
The Continuum Company, Inc. Prior to joining Continuum in 1989, he was a partner
with Ford, Dennison & Byrne in Austin, Texas. Mr. Dennison holds a B.A. and a
J.D. from the University of Texas.
DENNIS DRISLANE has served as Vice President, Customer and Network Services
of the Company since joining the Company in July 1997. Mr. Drislane served as
Vice President, Communications Industry Group, at Electronic Data Systems
Corporation ("EDS") from June 1995 to July 1997. From October 1992 to June 1995,
he was President of EDS' Healthcare Division. Prior to October 1992, he held
various management positions for EDS. Mr. Drislane holds both a B.S. and an M.S.
in business administration from California State University in Sacramento.
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EDWARD FOTSCH, M.D. has served as the Vice President, Physician and
Integrated Delivery Network group of the Company since the Company acquired
Metis, LLC in August 1998. Dr. Fotsch served as President and Chief Executive
Officer of Metis, LLC from March 1997 to August 1998. Prior to working at Metis,
LLC, Dr. Fotsch served as Vice President of Healthcare for NetSource
Communications Inc., an Internet development and consulting organization, from
November 1994 to March 1997. Prior to working at NetSource, Dr. Fotsch was
President of Med-Tech Consulting, a healthcare consulting firm from October 1992
through November 1994. Dr. Fotsch practiced medicine as Chief of the Department
of Emergency Medicine at Doctors Hospital in Northern California for ten years
prior to 1994. He holds a Doctorate in Medicine from the Medical College of
Wisconsin and a B.S. from Marquette University.
PIERS G. D. FOX has served as Vice President, Europe of the Company since
joining the Company in May 1998. From September 1997 to May 1998, Mr. Fox was a
Principal of Fast Growth Practice, a business advisory consulting firm. From
August 1996 to September 1997, Mr. Fox served as Executive Vice President of
Computer Sciences Corporation's Integrated Business Services group. From April
1995 to July 1996, he served as Executive Vice President of Global Outsourcing
Sales for The Continuum Company, Inc., a provider of information technology and
consulting services to the financial industry. From September 1990 to April
1995, he served as Continuum's Senior Vice President, Europe, and from September
1984 to May 1990, as Continuum's Managing Director (Europe). Mr. Fox holds an MA
from Cambridge University.
NANCY HAM has served as Vice President, Laboratories and Pharmaceuticals
Group of the Company since the Company acquired ActaMed in May 1998. Ms. Ham
served as a Senior Vice President of ActaMed from June 1996 to May 1998. She
served as Chief Financial Officer and Secretary of ActaMed from 1993 to May
1996. From 1992 to 1993, she was a Corporate Finance Director for the Capital
Finance Group of Equifax, Inc. Prior to that, she was an Assistant Vice
President at G.E. Capital Corporation. Ms. Ham holds a B.A. in economics from
Duke University and a masters in international business studies from the
University of South Carolina.
J. PHILIP HARDIN has served as Vice President, Managed Care Group of the
Company since the Company acquired ActaMed in May 1998. Mr. Hardin served as
Vice President of Managed Care Operations of ActaMed from August 1997 until May
1998. He also served as Director of Payor Sponsorship for ActaMed from January
1997 to August 1997, and Project Executive from July 1995 to December 1996. From
August 1993 to June 1995, Mr. Hardin attended Stanford University and received
an MBA degree in June 1995. Prior to that, he served as Vice President, Finance,
Director of Finance and Controller of Melita International Corporation and held
various accounting positions at Arthur Andersen & Company. Mr. Hardin also holds
a B.B.A. in accounting from the University of Georgia.
JOHN R. HUGHES, JR. has served as Vice President, Provider Services of the
Company since the Company acquired ActaMed in May 1998. Mr. Hughes served as
Chief Operating Officer of ActaMed from March 1996 to May 1998. Prior to working
at ActaMed, Mr. Hughes served as General Manager of the EDI Services Group of
United HealthCare from August 1992 to March 1996. Mr. Hughes served as Vice
President of North American Sales for Revelation Technologies, a computer
software company, from 1990 to 1992. From 1980 to 1990, Mr. Hughes was Vice
President, Sales Manager and Product Marketing Manager at Harris Corporation.
Mr. Hughes holds a B.S. in business administration from the University of
Kansas.
KRISHNA KOLLURI has served as Vice President, Applications of the Company
since July 1998, and prior to that, as Senior Director of Development
Engineering of the Company since February 1996. Prior to joining the Company,
Mr. Kolluri spent six years at Silicon Graphics, Inc. From August 1993 to
February 1996, Mr. Kolluri served as Senior Engineering Manager of Applications
and Development Environments in the Interactive Media Group of Silicon Graphics,
Inc. From May 1992 to August 1993, he served as Senior Engineering Manager of
Programming Environments in Silicon Graphics' CASE group where he was involved
in the development and deployment of interactive TV projects in Orlando, Florida
and
50
<PAGE>
Urayasu, Japan. From March 1990 to May 1992, he was a Member of Silicon
Graphic's technical staff. Mr. Kolluri holds a B.S.M.E. from the Indian
Institute of Technology, Madras, India, an M.S. in Operations Research from
S.U.N.Y., Buffalo, and an M.S.C.S. from the University of California, Santa
Cruz.
PAVAN NIGAM co-founded the Company and has served as its Vice President,
Engineering since February 1996. Prior to joining the Company, Mr. Nigam worked
at Silicon Graphics from August 1989 to January 1996, where he was the division
manager for Silicon Graphic's Interactive Media Group and was responsible for
deploying Time Warner, Inc.'s Interactive TV project in Orlando, Florida. From
1989 to 1993, he was director of Silicon Graphics' Casevision products. Prior to
1989, Mr. Nigam was employed by Atherton Technologies and Intel Corporation. Mr.
Nigam holds a B.S.E.E. from the Indian Institute of Technology and an M.S.C.S.
from the University of Wisconsin-Madison.
CHARLES SAUNDERS, M.D. has served as Vice President, Marketing and
Consulting Services and Medical Director since joining the Company in September
1997. Prior to joining the Company, Dr. Saunders was a principal in the
consulting firm of A.T. Kearney, Inc./Electronic Data Systems Corporation from
September 1994 to August 1997. Prior to that time, Dr. Saunders was Executive
Director of managed care programs at San Francisco General Hospital, and served
as Medical Director of the San Francisco Department of Public Health, Paramedic
Division, from 1988 to 1994. He has conducted healthcare systems research for
and has served on the faculties of the University of California at San
Francisco, Vanderbilt University and the University of Colorado. Dr. Saunders
holds a B.S. in biology from the University of Southern California and an M.D.
from Johns Hopkins University.
JOHN L. WESTERMANN III has served as Vice President, Chief Financial
Officer, Secretary and Treasurer of the Company since joining the Company in
July 1998. From August 1996 to July 1998, Mr. Westermann was Chief Financial
Officer and Vice President of CSC Continuum, Inc., a unit of Computer Sciences
Corporation. For more than five years prior to its acquisition by CSC, Mr.
Westermann was Chief Financial Officer, Vice President, Secretary and Treasurer
of The Continuum Company, Inc., a provider of IT and consulting services to the
financial industry. Mr. Westermann holds a B.A. from Northwestern University and
an M.B.A. from the University of Chicago Graduate School of Business.
L. JOHN DOERR has served as a director of the Company since July 1997. He
has been a general partner at Kleiner Perkins Caufield & Byers ("KPCB"), a
venture capital firm, since 1980. Prior to joining KPCB, Mr. Doerr worked at
Intel Corporation for five years. He is a director of @Home Corporation,
Amazon.com, Inc., Netscape Communications Corporation, Intuit Inc., Platinum
Software Corporation and Sun Microsystems, Inc. He holds a B.S.E.E. and an
M.E.E. from Rice University and an M.B.A. from Harvard Business School.
C. RICHARD KRAMLICH has served as a director of the Company since July 1996.
Mr. Kramlich is the co-founder and has been a General Partner of New Enterprise
Associates, a venture capital firm, since 1978. He is a director of Ascend
Communications, Inc., Com 21, Inc., Lumisys, Inc., Silicon Graphics, Inc.,
Chalone Wine Group, Inc. and SyQuest Technology, Inc. Mr. Kramlich holds a B.A.
from Northwestern University and an M.B.A. from Harvard Business School.
WILLIAM W. MCGUIRE, M.D. has served as a director of the Company since the
Company acquired ActaMed in May 1998. He has been the President of United
HealthCare since 1989 and the Chief Executive Officer and Chairman of the Board
of Directors of United HealthCare since 1991. Prior to this, Dr. McGuire was
Executive Vice President and Chief Operating Officer of United HealthCare. Prior
to this time, he served as President and Chief Operating Officer ("COO") of Peak
Health Plan. Before becoming President and COO, he held a number of other
positions within that organization. Dr. McGuire practiced medicine in Colorado,
specializing in cardiopulmonary medicine. He holds a B.A. from the University of
Texas and an M.D. from the University of Texas Medical Branch.
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<PAGE>
P. E. SADLER has served as a director of the Company since the Company
acquired ActaMed in May 1998. He was Chairman of the Board of ActaMed from the
time that he helped co-found it in 1992 until it was acquired by the Company,
and served as its Chief Executive Officer from 1992 until May 1996. Prior to
founding ActaMed, Mr. Sadler founded MicroBilt Corporation, a computer
processing company, and served as its Chairman, Chief Executive Officer and
President from 1981 until MicroBilt was acquired by First Financial Management
Corporation ("FFMC") in 1989. Following the acquisition of MicroBilt, he served
as President of the MicroBilt division of FFMC until 1991. Mr. Sadler also
founded Agency Data Systems in 1972 and served as its President until the
company was acquired in 1975. Mr. Sadler also served on the board of
Knowledgeware, Inc. from 1990 to 1995 and currently serves on the Board of
Directors of Central Parking, Inc., an operator of parking lots. Mr. Sadler
holds a B.A. in business and economics from Vanderbilt University.
TADATAKA YAMADA, M.D. has served as a director of the Company since the
Company acquired ActaMed in May 1998. Dr. Yamada has been President and
Executive Director of SmithKline Beecham HealthCare Services since February 1996
and has been a non-executive director of SmithKline Beecham's Board of Directors
since February 1994. From June 1990 to February 1996, Dr. Yamada was Chairman of
the Internal Medicine department and Physician-in-Chief of the University of
Michigan Medical Center. Prior to that time, Dr. Yamada was a Professor and
Chief of the Gastroenterology Division at the University of Michigan Medical
School's Internal Medicine department. Prior to his work at the University of
Michigan, Dr. Yamada was an associate professor of medicine at the UCLA School
of Medicine. Dr. Yamada is also a director of Genevco, Inc. Dr. Yamada holds a
B.A. in history from Stanford University and an M.D. from the New York
University School of Medicine.
The Company's Bylaws authorize no fewer than six and no more than eight
directors. The size of the Board of Directors (the "Board") is currently set at
eight. The Certificate of Incorporation and the Bylaws of the Company also
provide for a staggered Board. Under this provision, the Board designates each
director position as one of three categories. Each year the directors' positions
in one of the categories are subject to election so that it would take up to
three years to replace the entire Board (absent resignation or premature
expiration of a director's term). Executive officers of the Company are
appointed by the Board and serve at the discretion of the Board. There are no
family relationships among any of the directors or executive officers of the
Company.
BOARD COMMITTEES
The Board currently has three committees: an Audit Committee, a Stock Option
Committee and a Compensation Committee.
The Audit Committee is currently comprised of Dr. Clark, Mr. Doerr, Mr.
Kramlich, Dr. McGuire, Mr. Sadler and Dr. Yamada. The Audit Committee reviews
and, as it deems appropriate, recommends to the Board the internal accounting
and financial controls for the Company and the accounting principles and
auditing practices and procedures to be employed in preparation and review of
the financial statements of the Company. The Audit Committee makes
recommendations to the Board concerning the engagement of independent public
accountants and the scope of the audit to be undertaken by such accountants.
The Stock Option Committee is currently comprised of Mr. Long and is charged
with overseeing the stock option plans as they relate to employees other than
officers and directors of the Company.
The Compensation Committee is currently comprised of Dr. Clark, Mr. Doerr,
Mr. Kramlich, Dr. McGuire, Mr. Sadler and Dr. Yamada. The Compensation Committee
reviews and, as it deems appropriate, recommends to the Board policies,
practices and procedures relating to the compensation of the officers and other
managerial employees and the establishment and administration of employee
benefit plans. The Committee exercises all authority under the Company's
employee equity incentive plans and advises and consults with the officers of
the Company regarding managerial personnel policies.
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<PAGE>
DIRECTOR COMPENSATION
Directors do not receive any cash fees for their service on the Board or any
Board committee, but they are entitled to reimbursement of all reasonable
out-of-pocket expenses incurred in connection with their attendance at Board and
Board committee meetings. Upon completion of this offering, all Board members
are eligible to receive stock options under the 1996 Plan, and outside directors
receive stock options pursuant to automatic grants of stock options under the
1996 Plan. In July 1998, the Company granted to each of Drs. McGuire and Yamada
an option to purchase 30,000 shares of its Common Stock under the 1996 Plan with
an exercise price equal to $7.00 per share, the fair market value of the
Company's Common Stock on that date as determined by the Board of Directors
after taking into account the Company's financial results and prospects. The
1996 Plan provides that each outside director will receive an option to purchase
5,000 shares of Common Stock annually.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Dr. Yamada, a member of the Compensation Committee, is a director and
executive officer of SmithKline Beecham, which, through its subsidiary
SmithKline Labs, beneficially owns 8.5% of the Company's Common Stock, and has
entered into the Services Agreement and certain other agreements with the
Company. Dr. McGuire, a member of the Compensation Committee, is the Chairman
and Chief Executive Officer of United HealthCare, which, with its subsidiaries
and affiliates, beneficially owns approximately 17.0% of the Company's Common
Stock, and has entered into the United HealthCare Agreement and certain other
agreements with the Company. See "Certain Transactions." No interlocking
relationship exists between the Board or Compensation Committee and the board of
directors or compensation committee of any other company, nor has any such
interlocking relationship existed in the past.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
Section 102 of the Delaware General Corporation Law ("DGCL") authorizes a
Delaware corporation to include a provision in its certificate of incorporation
limiting or eliminating the personal liability of its directors to the
corporation and its stockholders for monetary damages for breach of the
directors' fiduciary duty of care. The duty of care generally requires that,
when acting on behalf of the corporation, directors exercise an informed
business judgment based on all material information reasonably available to
them. Absent the limitations authorized by such provision, directors are
accountable to corporations and their stockholders for monetary damages for
conduct constituting gross negligence in the exercise of their duty of care.
Although Section 102 of the DGCL does not change a director's duty of care, it
enables corporations to limit available relief to equitable remedies such as
injunction or rescission. The Company's Certificate of Incorporation and Bylaws
include provisions that limit or eliminate the personal liability of its
directors to the fullest extent permitted by Section 102 of the DGCL.
Consequently, a director or officer will not be personally liable to the Company
or its stockholders for monetary damages for breach of fiduciary duty as a
director, except for (i) any breach of the director's duty of loyalty to the
Company or its stockholders, (ii) acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, (iii) unlawful
payments of dividends or unlawful stock repurchases, redemptions or other
distributions and (iv) any transaction from which the director derived an
improper personal benefit.
The Company's Certificate of Incorporation provides that the Company will
indemnify, to the fullest extent permitted by law any person made or threatened
to be made a party to any action or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that such person or such
person's testator or intestate is or was a director or officer of the Company or
any predecessor or serves or served at any other enterprise as a director,
officer or employee at the request of the Company.
The Company's Bylaws provide that the Company will, to the maximum extent
and in the manner permitted by the DGCL, indemnify each person who (i) is or was
a director or officer of the Company or
53
<PAGE>
any subsidiary of the Company, (ii) is or was serving at the request of the
Company as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) was a director or officer of a
corporation that was a predecessor corporation of the Company or any of its
subsidiaries or of another enterprise at the request of such predecessor
corporation or subsidiary, against expenses (including attorneys' fees),
judgments, fines, settlements, and other amounts actually and reasonably
incurred in connection with any proceeding arising by reason of the fact that
such person is or was an agent of the Company.
The Company intends to enter into agreements to indemnify its directors and
executive officers, in addition to indemnification provided for in the Company's
Certificate of Incorporation and Bylaws. These agreements, among other things,
indemnify the Company's directors and executive officers for certain expenses
(including attorneys' fees), judgments, fines, penalties and settlement amounts
incurred by any such person in any action or proceeding, including any action by
or in the right of the Company, arising out of such person's services as a
director, officer, employee, agent or fiduciary of the Company, any subsidiary
of the Company or any other company or enterprise to which the person provides
services at the request of the Company. In addition, the Company intends to
obtain directors' and officers' insurance providing indemnification for certain
of the Company's directors, officers and employees for certain liabilities. The
Company believes that these indemnification provisions and agreements are
necessary to attract and retain qualified directors and officers.
The limited liability and indemnification provisions in the Company's
Certificate of Incorporation and Bylaws may discourage stockholders from
bringing a lawsuit against directors for breach of their fiduciary duty
(including breaches resulting from grossly negligent conduct) and may have the
effect of reducing the likelihood of derivative litigation against directors and
officers, even though such an action, if successful, might otherwise benefit the
Company and it stockholders. Furthermore, a stockholder's investment in the
Company may be adversely affected to the extent the Company pays the costs of
settlement and damage awards against directors and officers of the Company
pursuant to the indemnification provisions in the Company's Certificate of
Incorporation and Bylaws.
At present, there is no pending or threatened litigation or proceeding
involving any director, officer or employee of the Company where indemnification
is expected to be required or permitted, and the Company is not aware of any
threatened litigation or proceeding that might result in a claim for such
indemnification.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
earned for services rendered to the Company in 1997 in all capacities by the
Company's Chief Executive Officer, the Company's former Chief Executive Officer
and the Company's four other most highly compensated executive officers who
earned more than $100,000 in 1997 and were serving as executive officers at the
end of 1997 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
ANNUAL COMPENSATION ------------
SECURITIES ALL OTHER
-------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#) ($)(1)
- -------------------------------------------------- --------- -------- ------------ ------------
<S> <C> <C> <C> <C>
W. Michael Long(2)
Chief Executive Officer......................... 234,849 -- 3,250,000(6) 2,766
Michael K. Hoover(3)
President....................................... 175,000 75,000 -- 6,664
David Schnell(4)
Former President and CEO........................ -- -- -- --
Pavan Nigam
Chief Technology Officer........................ 200,004 50,000 125,000 5,571
Denise Shea(5)
Former General Counsel.......................... 135,312 -- 55,000 2,268
Kallen Chan
Controller...................................... 118,750 -- 20,000 4,073
</TABLE>
- ---------
(1) Represents life, medical and long-term disability insurance premiums paid by
the Company.
(2) Mr. Long joined the Company as Chief Executive Officer in July 1997, and was
paid at a rate of $500,000 per year.
(3) Mr. Hoover served as President and Chief Executive Officer of ActaMed
Corporation until it was acquired by the Company in May 1998.
(4) Mr. Schnell, a former general partner of Kleiner Perkins Caufield & Byers,
served on an interim basis as President and Chief Executive Officer of the
Company from February 1996 to July 1997. In exchange for Mr. Schnell's
services and other services provided by KPCB, KPCB received a warrant to
purchase 1,000,000 shares of Series B Preferred Stock of the Company which
has been converted into a warrant to purchase 1,000,000 shares of Common
Stock.
(5) Ms. Shea became Assistant General Counsel of the Company on July 8, 1998.
(6) Includes 750,000 shares of Common Stock subject to a warrant granted to Mr.
Long upon the commencement of his employment with the Company. See "--
Employment Agreements."
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<PAGE>
OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1997
The following table sets forth certain information for the year ended
December 31, 1997 with respect to grants of stock options to each of the Named
Executive Officers:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE
-------------------------------------------------- AT ASSUMED ANNUAL RATES
NUMBER OF % OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(4)
OPTIONS EMPLOYEES PRICE PER EXPIRATION -------------------------
NAME GRANTED(1) IN 1997(2) SHARE(3) DATE 5% 10%
- ------------------------------------ ----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
W. Michael Long..................... 2,500,000 45.3% $ 0.25 07/22/07 $ 393,059 $ 996,089
750,000(5) 13.6 2.00 7/10/00 943,342 2,390,614
Michael K. Hoover................... -- -- -- -- -- --
David Schnell....................... -- -- -- -- -- --
Pavan Nigam......................... 125,000 2.3 1.00 10/14/07 78,611 199,218
Denise Shea......................... 55,000 1.0 0.20 02/18/07 6,917 17,531
Kallen Chan......................... 20,000 0.4 0.20 02/18/07 2,515 6,375
</TABLE>
- ---------
(1) Options granted in 1997 were granted under the Company's 1996 Stock Plan.
With respect to the options granted to Mr. Nigam, Ms. Shea and Mr. Chan, 25%
of the shares vest on the first anniversary of the date of grant and 1/48 of
the shares vest each month thereafter. With respect to the options granted
to Mr. Long, 25% of the shares vested immediately upon grant and, beginning
on the first anniversary of the date of grant, 1/48 of the shares vest each
month thereafter. These options have a term of 10 years. See "-- Employee
Benefit Plans" for a description of the material terms of these options.
(2) The Company granted options or warrants to purchase 5,510,850 shares of
Common Stock to employees during 1997.
(3) Options were granted at an exercise price equal to the fair market value of
the Company's Common Stock, as determined in good faith by the Board of
Directors. The Board of Directors determined the fair market value based on
the Company's financial results and prospects, the share price derived for
arms-length transactions, and independent evaluations conducted by valuation
experts.
(4) Potential realizable values are net of exercise price before taxes, and are
based on the assumption that the Common Stock of the Company appreciates at
the annual rate shown (compounded annually) from the date of grant until the
expiration of the ten-year term. These numbers are calculated based on
Securities and Exchange Commission requirements and do not reflect the
Company's projection or estimate of future stock price growth.
(5) The Company issued Mr. Long a warrant to purchase 750,000 shares of the
Company's Series B Preferred Stock upon the commencement of his employment
with the Company. This warrant is currently exercisable for 750,000 shares
of Common Stock. Shares issuable upon exercise of this warrant are subject
to a two-year right of repurchase held by the Company that lapses ratably
through July 1999. See "-- Employment Agreements."
56
<PAGE>
YEAR-END OPTION VALUES
The following table sets forth information with respect to the Named
Executive Officers concerning exercisable and unexercisable options held as of
December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 31, 1997(1) AT DECEMBER 31, 1997(2)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
W. Michael Long........................................... 625,000 1,875,000 $ 468,750 $1,406,250
750,000(3) -- -- --
Michael K. Hoover......................................... 893,268 -- 561,119 --
David Schnell............................................. -- -- -- --
Pavan Nigam............................................... -- 125,000 -- --
Denise Shea............................................... -- 55,000 -- $44,000
Kallen Chan............................................... -- 20,000 -- $16,000
</TABLE>
- ---------
(1) Except in the case of Mr. Hoover, options shown were granted under the 1996
Stock Plan and are subject to vesting as described in footnote (1) to the
option grant table above. Options held by Mr. Hoover were granted under the
ActaMed 1992, 1993 Class B Common and 1994 Stock Option Plans, which were
assumed by the Company upon the consummation of the acquisition of ActaMed.
All of Mr. Hoover's shares are fully vested.
(2) Based on an assumed value of $1.00 per share, the deemed fair market value
as of December 31, 1997 as determined by the Board, and net of the option
exercise price.
(3) Represents shares issuable upon exercise of a warrant issued to Mr. Long
upon commencement of his employment with the Company. See "-- Employment
Agreements."
EMPLOYMENT AGREEMENTS
The Company's ActaMed subsidiary has an employment agreement with Michael K.
Hoover, Healtheon's President. The agreement provides for a base salary of
$85,000, and imposes a covenant not to compete upon Mr. Hoover for a period of
one year following the termination of his employment.
In July 1997, the Company and Mr. Long entered into an employment agreement
pursuant to which Mr. Long became the President and Chief Executive Officer of
the Company. The Company granted Mr. Long an option to purchase 2,500,000 shares
of Common Stock, 25% of which vested immediately, and the remainder of which
vests ratably each month during the second through the fourth year. In addition,
Mr. Long purchased 250,000 shares for $500,000, $499,750 of which was
represented by a promissory note to the Company, and was issued a warrant to
purchase an additional 750,000 shares at an exercise price of $2.00 per share.
The shares issuable upon exercise of this warrant are subject to a right of
repurchase commencing on Mr. Long's employment start date and lapsing as to
31,250 shares each month. The employment agreement provides that should Mr. Long
leave the Company because he is no longer offered a position with similar
responsibility due to a change of control of the Company, Mr. Long's option
vests immediately as to 625,000 shares and the Company's repurchase right
lapses. Additionally, if the Company terminates Mr. Long's employment without
cause, he will receive six months' salary in installments, his option will vest
immediately as to 625,000 shares and the Company's repurchase right will lapse.
EMPLOYEE BENEFIT PLANS
1996 STOCK PLAN. In February 1996 the Board adopted, and the Company's
stockholders approved, the 1996 Plan. The Company initially reserved for
issuance 9,000,000 shares of Common Stock under the 1996 Plan. In March 1998,
the Board and the stockholders each approved an amendment to the 1996 Plan
57
<PAGE>
to increase the number of shares of Common Stock issuable thereunder to
10,000,000 shares. In July 1998, the Board approved an amendment to increase the
number of shares of Common Stock issuable under the 1996 Plan to 15,000,000
shares plus annual increases equal to the lesser of (i) 5% of the outstanding
shares or (ii) a lesser amount determined by the Board. Unless terminated
sooner, the 1996 Plan will terminate automatically in February 2006. The 1996
Plan provides for the discretionary grant of incentive stock options, within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), to employees and for the grant of nonstatutory stock options and stock
purchase rights ("SPRs") to employees, directors and consultants. The 1996 Plan
also provides for annual grants of options to purchase 5,000 shares of Common
Stock to each of the outside directors.
The 1996 Plan may be administered by the Board or a committee thereof (as
applicable, the "Administrator"). The Administrator has the power to determine
the terms of the options or SPRs granted, including the exercise price of the
options or SPRs, the number of shares subject to each option or SPR, the
exercisability thereof, and the form of consideration payable upon such
exercise. In addition, the Administrator has the authority to amend, suspend or
terminate the 1996 Plan, provided that no such action may affect any share of
Common Stock previously issued and sold or any option previously granted under
the 1996 Plan.
The exercise price of all incentive stock options granted under the 1996
Plan must be at least equal to the fair market value of the Common Stock on the
date of grant. The exercise price of nonstatutory stock options and SPRs granted
under the 1996 Plan is determined by the Administrator, but with respect to
nonstatutory stock options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the exercise
price must be at least equal to the fair market value of the Common Stock on the
date of grant. With respect to any participant who owns stock possessing more
than 10% of the voting power of all classes of the Company's outstanding capital
stock, the exercise price of any incentive stock option granted must be at least
equal 110% of the fair market value on the grant date and the term of such
incentive stock option must not exceed five years. The term of all other options
granted under the 1996 Plan may not exceed ten years. Options generally vest as
to 25% at the end of the first year and monthly thereafter over a period of
three years so that the entire option is vested after four years, based upon the
optionee's continued employment or consulting relationship with the Company.
In the case of SPRs, unless the Administrator determines otherwise, the
restricted stock purchase agreement will grant the Company a repurchase option
exercisable upon the voluntary or involuntary termination of the purchaser's
employment or consulting relationship with the Company for any reason (including
death or disability). The purchase price for shares repurchased pursuant to a
restricted stock purchase agreement must be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option will lapse at a rate determined by the
Administrator.
Options and SPRs granted under the 1996 Plan are generally not transferable
by the optionee, and each option and SPR is exercisable during the lifetime of
the optionee only by such optionee. Options granted under the 1996 Plan must
generally be exercised within 30 days after the end of optionee's status as an
employee, director or consultant of the Company, or within one year after such
optionee's termination by disability or death, respectively, but in no event
later than the expiration of the option's term.
The 1996 Plan provides that, in the event of a merger of the Company with or
into another corporation, each outstanding option and SPR must be assumed or an
equivalent option substituted by the successor corporation. If the outstanding
options and SPRs are not assumed or substituted by the successor corporation,
such outstanding options and SPRs will terminate.
ACTAMED STOCK OPTION PLANS. In connection with its acquisition of ActaMed
(the "Merger"), the Company assumed the outstanding options of ActaMed under the
following ActaMed stock option plans (collectively, the "ActaMed Plans"):
ActaMed Corp. 1992 Stock Option Plan, ActaMed Corp. 1993 Class B
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Common Stock Option Plan, ActaMed Corp. 1994 Stock Option Plan, ActaMed Corp.
1995 Stock Option Plan, ActaMed Corp. 1996 Stock Option Plan, ActaMed Corp. 1997
Stock Option Plan and ActaMed Corp. 1996 Director Stock Option Plan. The
following directors and executive officers of the Company held ActaMed options
that were assumed by the Company: Michael Hoover (options to purchase 1,424,216
shares of ActaMed common stock), Nancy Ham (options to purchase 250,000 shares
of ActaMed common stock), J. Philip Hardin (options to purchase 80,000 shares of
ActaMed common stock), and John R. Hughes, Jr. (options to purchase 220,000
shares of ActaMed common stock). As a result of the merger, each option to
purchase shares of ActaMed common stock now represents an option to purchase a
number of shares of Healtheon Common Stock equal to .6272 times the number of
shares of ActaMed common stock originally subject to the option at the per share
exercise price equal to the original per share exercise price divided by .6272.
The Company will make no further grants under the ActaMed Plans. However, each
assumed ActaMed option continues to have and remains subject to substantially
the terms and conditions of the applicable ActaMed Plan under which such option
was originally granted as in effect immediately prior to the Merger. Generally,
options granted under the ActaMed Plans will automatically terminate ten years
following their adoption, and may be administered by the Board of Directors or a
committee of the Board (as applicable, the "Administrator"). Options granted
under the ActaMed Plans generally are not transferrable by the optionee, and
must generally be exercised within 30 days after the end of the optionee's
status as an employee or consultant of the Company or within 90 days after such
optionee's termination by disability or death, respectively, but in no event
later than the expiration of the option's term. Generally, in the event of any
merger, sale of stock, consolidation, liquidation, recapitalization,
reclassification, stock split up, combination of shares, share exchange, stock
dividend, or transaction having a similar effect, where the Company does not
remain in existence, the Administrator may (i) to the extent such options have
not previously been accelerated, declare that all ActaMed options shall vest in
full and be exercisable for a period of thirty (30) days following written
notice from the Administrator, after which all ActaMed options shall terminate,
(ii) provide that all ActaMed options shall be assumed by the successor
corporation, or (iii) a combination of (i) and (ii).
1998 EMPLOYEE STOCK PURCHASE PLAN. The Company's 1998 Employee Stock
Purchase Plan (the "1998 Purchase Plan") was adopted by the Board and approved
by the stockholders in September 1998. A total of 1,000,000 shares of Common
Stock has been reserved for issuance under the 1998 Purchase Plan, plus annual
increases equal to the least of (i) 500,000 shares, (ii) 0.5% of the outstanding
shares on such date or (iii) a lesser amount determined by the Board.
The 1998 Purchase Plan, which is intended to qualify under Section 423 of
the Code, contains consecutive, overlapping, twenty-four month offering periods.
Each offering period includes four six-month purchase periods. The offering
periods generally start on the first trading day on or after May 1 and November
1 of each year, except for the first such offering period which commences on the
first trading day on or after the effective date of this offering and ends on
the last trading day on or before April 30, 2000.
Employees are eligible to participate if they are customarily employed by
the Company or any participating subsidiary for at least 20 hours per week and
more than five months in any calendar year. However, any employee who (i)
immediately after grant would own stock possessing 5% or more of the total
combined voting power or value of all classes of the capital stock of the
Company, or (ii) whose rights to purchase stock under all employee stock
purchase plans of the Company accrues at a rate which exceeds $25,000 worth of
stock for each calendar year may not be granted an option to purchase stock
under the 1998 Purchase Plan. The 1998 Purchase Plan permits each participant to
purchase Common Stock through payroll deductions of up to 15% of the
participant's "compensation." Compensation is defined as the participant's base
straight time gross earnings and commissions but excludes payments for overtime,
shift premium, incentive compensation, incentive payments, bonuses and other
compensation. The maximum number of shares a participant may purchase during a
single purchase period is 5,000 shares.
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Amounts deducted and accumulated by the participant are used to purchase
shares of Common Stock at the end of each purchase period. The price of stock
purchased under the 1998 Purchase Plan is 85% of the lower of the fair market
value of the Common Stock (i) at the beginning of the offering period or (ii) at
the end of the purchase period. In the event the fair market value at the end of
a purchase period is less than the fair market value at the beginning of the
offering period, the participants will be withdrawn from the current offering
period following exercise and automatically re-enrolled in a new offering
period. The new offering period will use the lower fair market value as of the
first date of the new offering period to determine the purchase price for future
purchase periods. Participants may end their participation at any time during an
offering period, and they will be paid their payroll deductions to date.
Participation ends automatically upon termination of employment with the
Company.
Rights granted under the 1998 Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the 1998 Purchase Plan. The 1998 Purchase Plan provides
that, in the event of a merger of the Company with or into another corporation
or a sale of substantially all of the Company's assets, each outstanding option
may be assumed or substituted for by the successor corporation. If the successor
corporation refuses to assume or substitute for the outstanding options, the
offering period then in progress will be shortened and a new exercise date will
be set. The 1998 Purchase Plan will terminate in 2008. The Board has the
authority to amend or terminate the 1998 Purchase Plan, except that no such
action may adversely affect any outstanding options under the 1998 Purchase
Plan. Notwithstanding anything to the contrary, the Board may alter the purchase
price for any offering period or shorten an offering period at any time without
consent of the stockholders or of any participants.
401(k) PLAN. The Company participates in a tax-qualified employee savings
and retirement plan (the "401(k) Plan") which covers all of the Company's
full-time employees who have completed three months of service. Pursuant to the
401(k) Plan, eligible employees may defer up to 20% of their pre-tax earnings,
subject to the Internal Revenue Service's annual contribution limit. The 401(k)
Plan permits additional discretionary matching contributions by the Company on
behalf of all participants in the 401(k) Plan in such a percentage amount as may
be determined annually by the Board. To date, the Company has made no such
matching contributions. The 401(k) Plan is intended to qualify under Section 401
of the Code, as amended, so that contributions by employees or by the Company to
the 401(k) Plan, and income earned on plan contributions, are not taxable to
employees until withdrawn from the 401(k) Plan, and income earned on plan
contributions, are not taxable to employees until withdrawn from the 401(k)
Plan, and so that contributions by the Company, if any, will be deductible by
the Company when made. The trustee under the 401(k) Plan, at the direction of
each participant, invests the assets of the 401(k) Plan in any of a number of
investment options.
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CERTAIN TRANSACTIONS
Since December 26, 1995, the Company's inception date, there has not been
nor is there currently proposed any transaction or series of similar
transactions to which the Company or any of its subsidiaries was or is to be a
party in which the amount involved exceeds $60,000 and in which any director,
executive officer, holder of more than 5% of the Common Stock of the Company or
any member of the immediate family of any of the foregoing persons had or will
have a direct or indirect material interest other than (i) compensation
agreements and other arrangements, which are described where required in
"Management," and (ii) the transactions described below.
ACTAMED CORPORATION ACQUISITION
On May 19, 1998, the Company completed the acquisition of ActaMed by means
of a merger of a wholly-owned subsidiary of the Company with and into ActaMed,
with ActaMed surviving as a wholly owned subsidiary of the Company (the
"Merger"). Pursuant to the Merger, 23,271,355 shares of the Company's Common
Stock were issued in exchange for all of the issued and outstanding capital
stock of ActaMed, and all options to purchase ActaMed Common Stock were assumed
by the Company. The Merger was treated as a tax-free reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1996, as amended, and
as a "pooling-of-interests" transaction for accounting and financial reporting
purposes. All of the then outstanding shares of Preferred Stock of the Company
were converted into shares of Common Stock of the Company upon the consummation
of the Merger.
The Company and certain stockholders of the Company who together hold a
majority of the outstanding shares of Common Stock of the Company entered into a
Voting Agreement in connection with the Merger (the "Voting Agreement"). Among
other things, the Voting Agreement requires each of the signatories thereto to
vote its shares in favor of the election of four directors nominated by those
signatories who were ActaMed shareholders prior to the Merger and four directors
nominated by those signatories who were Healtheon stockholders prior to the
Merger. The Voting Agreement terminates upon the consummation of this offering.
TRANSACTIONS WITH DIRECTORS, EXECUTIVE OFFICERS AND 5% STOCKHOLDERS
On January 26, 1996, the Company sold 10,285,000 shares of its Series A
Preferred Stock for $0.50 per share. The purchasers of the Series A Preferred
Stock included, among others, Dr. James H. Clark (3,500,000 shares for a
purchase price of $1.75 million), Kleiner Perkins Caufield & Byers VII
(2,999,500 shares for a purchase price of $1.5 million), KPCB VII Founders Fund
(325,500 shares for a purchase price of $162,750), KPCB Life Sciences Zaibatsu
Fund II (175,000 shares for a purchase price of $87,500) and New Enterprise
Associates VI, Limited Partnership ("New Enterprise Associates VI") (2,000,000
shares for a purchase price of $1.0 million). KPCB VII Founders Fund, KPCB Life
Sciences Zaibatsu Fund II and Kleiner Perkins Caufield & Byers VII, along with
KPCB VII Associates and KPCB Java Fund, are affiliated entities. L. John Doerr,
a director of the Company, is a general partner of KPCB VII Associates and the
general partner of KPCB Life Sciences Zaibatsu Fund II. Mr. Doerr disclaims
beneficial ownership of the securities held by such entities except for his
proportional interest therein. C. Richard Kramlich, a director of the Company,
is a general partner of New Enterprise Associates VI. Mr. Kramlich disclaims
beneficial ownership of the securities held by such entity except for his
proportional interest therein.
On January 26, 1996, the Company sold 1,000,000 shares of its Common Stock
for $0.05 per share. The purchasers of the Common Stock included Dr. Clark
(500,000 shares for a purchase price of $25,000), Kleiner Perkins Caufield &
Byers VII (428,500 shares for a purchase price of $21,425), KPCB VII Founders
Fund (46,500 shares for a purchase price of $2,325) and KPCB Life Sciences
Zaibatsu Fund II (25,000 shares for a purchase price of $1,250).
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On October 1, 1996, the Company sold 3,000,000 shares of its Series B
Preferred Stock for $2.00 per share. The purchasers of the Series B Preferred
Stock included, among others, Dr. Clark (1,125,000 shares for a purchase price
of $2.3 million), Kleiner Perkins Caufield & Byers VII (1,068,750 shares for a
purchase price of $2.1 million), KPCB Life Sciences Zaibatsu Fund II (56,250
shares for a purchase price of $112,500) and New Enterprise Associates VI
(500,000 shares for a purchase price of $1.0 million).
In related transactions, on November 1, 1996, the Company issued a warrant
to purchase 1,000,000 shares of Series B Preferred Stock with an exercise price
of $2.00 per share to each of Clark Ventures, as an incentive for Dr. Clark to
continue to provide services to the Company, and KPCB VII Associates, in
consideration for services provided to the Company by David Schnell, a former
general partner of KPCB, in his capacity as President and CEO. The warrant
issued to KPCB VII Associates was valued at $504,900. Clark Ventures
subsequently exercised its warrant on May 1, 1998 for an aggregate purchase
price of $2.0 million. Clark Ventures is controlled by Dr. Clark. On July 11,
1997 the Company issued 250,000 shares of Series B Preferred Stock for a
purchase price of $500,000 and a warrant to purchase 750,000 shares of Series B
Stock with an exercise price of $2.00 per share to W. Michael Long. See "--
Employment Agreements." In order to purchase the 250,000 shares of Preferred
Stock, Dr. Long borrowed $499,750 from the Company pursuant to a one-year
interest-free full recourse promissory note. The note was paid in full on June
30, 1998.
Between April 15, 1997 and May 6, 1997, the Company borrowed an aggregate of
$2.0 million at an annual interest rate of 6% pursuant to promissory notes (each
of which included a right to receive certain Series B Preferred Stock warrants
at the time of repayment or upon cancellation of such note) in a bridge
financing transaction (the "Bridge Financing"). The lenders in the Bridge
Financing included, among others, Dr. Clark (who lent $765,750), Kleiner Perkins
Caufield & Byers VII (which lent an aggregate of $727,463), KPCB Life Sciences
Zaibatsu Fund II (which lent an aggregate of $38,288) and New Enterprise
Associates VI (which lent $312,500). On July 1, 1997 the promissory notes were
cancelled in consideration for the issuance of Series C Preferred Stock (as
described below), and the Series B Preferred Stock warrants were issued as
follows: Dr. Clark received a warrant to purchase 17,229 shares, Kleiner Perkins
Caufield & Byers VII received a warrant to purchase 27,891 shares, KPCB Life
Sciences Zaibatsu Fund II received a warrant to purchase 1,468 and New
Enterprise Associates VI received a warrant to purchase 11,979 shares. All of
the Series B Warrants have an exercise price of $2.00 per share. Dr. Clark
subsequently exercised his warrant on May 1, 1998 for an aggregate purchase
price of $34,458.
On July 1, 1997, the Company sold 2,400,000 shares of its Series C Preferred
Stock for $2.50 per share. The purchasers of the Series C Preferred Stock
included, among others, Dr. Clark (612,600 shares for a purchase price of $1.5
million, including cancellation of the $765,750 promissory note given in the
Bridge Financing discussed above), Kleiner Perkins Caufield & Byers VII (290,985
shares for cancellation of the $727,463 in promissory notes given in the Bridge
Financing discussed above), KPCB Java Fund (306,300 shares for a purchase price
of $765,750), KPCB Life Sciences Zaibatsu Fund II (15,315 shares for
cancellation of the $38,288 in promissory note given in the Bridge Financing
discussed above) and New Enterprise Associates VI (250,000 shares for a purchase
price of $625,000 including cancellation of the $312,500 promissory note given
in the Bridge Financing discussed above).
Between October 17, 1997 and December 19, 1997, the Company sold 4,807,692
shares of its Series D Preferred Stock for $5.20 per share. The purchasers of
the Series D Preferred Stock included, among others, Clark Ventures (1,730,769
shares for a purchase price of $9.0 million), Kleiner Perkins Caufield & Byers
VII (432,693 shares for a purchase price of $2.3 million), KPCB Java Fund
(480,769 shares for a purchase price of $2.5 million), KPCB Life Sciences
Zaibatsu Fund II (48,077 shares for a purchase price of $250,000), Kathy Clark
(96,154 shares for a purchase price of $500,000), Michael James Clark Trust
(96,154 shares for a purchase price of $500,000) and New Enterprise Associates
VI, Limited Partnership (576,923 shares for a purchase price of $3.0 million).
Kathy Clark and Michael James Clark are adult children of Dr. Clark.
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On May 19, 1998, in connection with the ActaMed Merger, each share of
Preferred Stock of the Company converted into one share of Common Stock and each
outstanding warrant to purchase shares of the Company's Preferred Stock
converted into a warrant to purchase shares of the Company's Common Stock.
On November 21, 1996, ActaMed entered into an Amended and Restated
Development Agreement with The SFA Limited Partnership ("SFA") under which
ActaMed granted SFA a license to ActaMed's object broker technology that
supports the GMPI functionality. SFA is controlled by P. E. Sadler, a director
of the Company. SFA was given the right to use such technology outside the
healthcare industry and must pay royalties on any revenues that would be derived
from such use. This agreement expires in November 2001. To date, no royalties
have become payable to the Company or ActaMed as a result of this agreement.
In September 1997, ActaMed received a loan from NationsBank, N.A. in the
aggregate principal amount of $2.1 million, all of which was personally
guaranteed by P. E. Sadler, a director of the Company. As a result of ActaMed's
pledging a note receivable from IBM to NationsBank, N.A. in November 1997, Mr.
Sadler was released from the guarantee. In December 1997, ActaMed obtained a
line of credit in the aggregate principal amount of $2.3 million from
NationsBank, N.A. In exchange for a personal guarantee of this line of credit by
Mr. Sadler, ActaMed granted to Mr. Sadler a security interest in all of its
tangible assets other than the IBM note receivable. Upon the completion of the
acquisition of ActaMed by the Company, Mr. Sadler's guarantee was released. This
line of credit was repaid by the Company on July 31, 1998.
From 1995 through June 1998, up to three companies affiliated with Mr.
Sadler had agreements with ActaMed whereby ActaMed provided office space, phone
facilities and computer network support. In 1995, 1996, 1997 and 1998 the
Company was paid approximately $256,000, $215,000, $137,000 and $32,000,
respectively, under such agreements.
CERTAIN BUSINESS RELATIONSHIPS
Prior to the acquisition of ActaMed by the Company, ActaMed entered into a
series of agreements (the "SmithKline Agreements") with SmithKline Labs, which
agreements were assumed by the Company in the ActaMed Merger. Pursuant to the
SmithKline Agreements, ActaMed agreed to purchase certain intangible assets (the
"SmithKline Assets") located in four geographic regions, received a technology
license relating to the SmithKline Assets and agreed to provide certain
continuing development and network services to SmithKline Labs. In December
1997, SmithKline Labs transferred a portion of the SmithKline Assets from the
first region to ActaMed in exchange for $2.0 million in cash and 3,695,652
shares of ActaMed Preferred Stock (which shares were converted into 2,317,913
shares of the Company's Common Stock in connection with the ActaMed Merger). In
March 1998, SmithKline Labs transferred the SmithKline Assets from the second
region to ActaMed in exchange for 1,217,391 shares of ActaMed Preferred Stock
(which shares were converted into 763,548 shares of the Company's Common Stock
in connection with the ActaMed Merger). In June 1998, SmithKline Labs
transferred SmithKline Assets from the remaining two regions to the Company in
exchange for 1,336,209 shares of Common Stock.
Also pursuant to one of the SmithKline Agreements (the "Services
Agreement"), the Company will perform laboratory test order and results services
to providers utilizing SmithKline Labs' laboratory services through SCAN.
SmithKline Labs is obligated to pay the Company a minimum of approximately $10.0
million in 1998 for laboratory test orders and results transactions. SmithKline
Labs may be required to pay the Company certain additional fees for transactions
processed by the Company in the event the number of providers accessing
SmithKline Labs' laboratory services through SCAN increases. SmithKline Labs
paid the Company $4.8 million in service and transaction fees during the first
six months of 1998 under the Services Agreement. The Services Agreement is
effective through December 2002, and provides for automatic successive two-year
renewals, subject to each party's right to elect not to renew the agreement no
later than 180 days (in the case of SmithKline Labs) or 360 days (in the case of
the
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Company) prior to the end of a term. In the event that the Company gives notice
of non-renewal, SmithKline Labs will be entitled to continued to receive
long-term order entry and results reporting services from the Company on a per
transaction pricing basis or, in the alternative, may require the Company to
develop a service for SmithKline that duplicates the services the Company had
been providing under the Services Agreement. Also under the Services Agreement,
SmithKline Labs is entitled, no more than once in any three consecutive month
periods, to request that the Company engage in certain exclusive development
work for SmithKline Labs. SmithKline Labs has agreed to use reasonable efforts
to use the Company as its "preferred provider" of electronic eligibility
verification and claims processing services.
In May 1998, the Company and SmithKline Labs entered into a letter agreement
under which the Company is obligated not to compete with SmithKline Labs in the
business of disease management, and has agreed to exclusively promote SmithKline
Labs' disease management products and services so long as SmithKline continues
to promote the Company as its preferred vendor. The Company also agreed that, in
the event it performs development work related to a disease management program
for one of its customers or itself, it will pay 50% of the profits from that
development work to SmithKline Labs.
In March 1996, ActaMed acquired EDI Services, a wholly owned subsidiary of
United HealthCare, which had been formed by United HealthCare to deliver the
ProviderLink service to United HealthCare's provider network. In exchange for
EDI, ActaMed issued United HealthCare 10,344,828 shares of ActaMed Preferred
Stock valued at $21.0 million (which were converted into 6,488,276 shares of the
Company's Common Stock in connection with the Merger). In April 1996, ActaMed
also entered into a Services and License Agreement with United HealthCare that
granted United HealthCare a license to certain ActaMed technology and granted
ActaMed the responsibilities of managing the ProviderLink service and of
providing other information technology services to United HealthCare. United
HealthCare pays the Company fees based on the number of ProviderLink sites in
use and transactions processed. In 1996 and 1997, United HealthCare paid ActaMed
approximately $4.8 million and $7.3 million, respectively, related to services,
transaction and license fees. In the first six months of 1998, ActaMed (prior to
the Merger) and the Company were paid an aggregate of $4.6 million. The Company
is also obligated to provide certain support and maintenance services to United
HealthCare. The Services and License Agreement is effective through March 2001
subject to earlier termination in the event the Company fails to meet certain
network performance standards or otherwise breaches its material obligations
under the United HealthCare Agreement. United HealthCare is a principal
stockholder of the Company and Dr. William McGuire, Chief Executive Officer and
Chairman of United HealthCare, is a director of the Company.
In February 1998, ActaMed issued a one-year promissory note in the aggregate
principal amount of $2.0 million to HLM Partners VII, L.P. ("HLM"), which bore
interest at a rate of 10% per annum. United HealthCare was a limited partner of
HLM and a director of United HealthCare, was a partner of HLM. HLM was also a
stockholder of ActaMed. Both UHC and HLM are stockholders of the Company. This
note was repaid at the time of the Merger.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of August 31, 1998 and as
adjusted to reflect the sale of the shares of Common Stock offered hereby by:
(i) each person who is known by the Company to beneficially own more than 5% of
the Company's Common Stock, (ii) each director of the Company, (iii) each of the
Named Executive Officers and (iv) all directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF SHARES
SHARES BENEFICIALLY OWNED(1)
BENEFICIALLY ----------------------------------
NAME OF BENEFICIAL OWNER OWNED BEFORE OFFERING AFTER OFFERING(2)
- ----------------------------------------------------------------- ------------- --------------- -----------------
<S> <C> <C> <C>
United HealthCare Corporation(3) ................................ 8,770,020 16.2%
William W. McGuire, M.D.(3) ..................................... 8,770,020 16.2
James H. Clark(4) ............................................... 8,485,598 15.6
Clark Ventures(4) ............................................... 8,485,598 15.6
Kleiner Perkins Caufield & Byers(5) ............................. 7,253,498 13.1
L. John Doerr(5) ................................................ 7,253,498 13.1
P. E. Sadler(6) ................................................. 5,001,993 9.2
SmithKline Beecham Clinical Laboratories, Inc.(7) ............... 4,417,670 8.1
Tadataka Yamada(7) .............................................. 4,417,670 8.1
New Enterprise Associates VI, L.P.(8) ........................... 3,338,902 6.2
C. Richard Kramlich(8) .......................................... 3,338,902 6.2
W. Michael Long(9)............................................... 1,781,250 3.2
Michael K. Hoover(10)............................................ 893,268 1.6
Pavan Nigam(11).................................................. 501,250 * *
David Schnell ................................................... 495,000 * *
Denise Shea(12).................................................. 147,917 * *
Kallen Chan(13).................................................. 58,333 * *
All officers and directors as a group (23 persons)(14)........... 43,012,879 78.9
</TABLE>
- ---------
* Less than one percent
(1) The number and percentage of shares beneficially owned are based on
54,317,201 shares of Common Stock outstanding as of August 31, 1998, and
shares outstanding after the offering. Beneficial ownership is
determined in accordance with the rules and regulations of the Securities
and Exchange Commission. Shares of Common Stock subject to options or
warrants that are currently exercisable or exercisable within 60 days of
August 31, 1998 are deemed to be outstanding and beneficially owned by the
person holding such options or warrants for the purpose of computing the
number of shares beneficially owned and the percentage ownership of such
person, but are not deemed to be outstanding for the purpose of computing
the percentage ownership of any other person. Except as indicated in the
footnotes to this table, and subject to applicable community property laws,
such persons have sole voting and investment power with respect to all
shares of the Company's Common Stock shown as beneficially owned by them.
(2) Assumes the Underwriters' over-allotment option to purchase
shares of Common Stock is not exercised.
(3) Represents 6,488,276 shares held of record by United HealthCare, 502,069
shares held of record by United HealthCare Services, Inc., a subsidiary
thereof, 509,595 shares held of record by HLM Partners VII, L.P., of which
United HealthCare is a limited partner and 1,270,080 shares held of record
by Validus, L.P., of which United HealthCare is the sole limited partner.
United HealthCare disclaims beneficial ownership of shares held by both
limited partnerships except for its
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proportionate interest therein. Dr. McGuire, a director of the Company, is
the President, Chief Executive Officer and Chairman of United HealthCare.
Dr. McGuire disclaims beneficial ownership of all shares held by United
HealthCare. United HealthCare's address is 9900 Bren Road East, 300 Opus
Center, Minnetonka, MN 55343.
(4) Represents 4,612,600 shares held of record directly by Dr. Clark, 2,747,998
shares held of record by Clark Ventures and 1,125,000 shares held of record
by Monaco Partners, LP, a Nevada limited partnership. Dr. Clark is a
partner of both Clark Ventures and Monaco Partners. Dr. Clark disclaims
beneficial ownership of shares in Monaco Partners and Clark Ventures except
for his proportional interest therein. Dr. Clark is a director of the
Company. Dr. Clark's and Clark Ventures' addresses are c/o Healtheon
Corporation, 4600 Patrick Henry Drive, Santa Clara, CA 95054.
(5) Represents 5,125,863 shares held of record directly by Kleiner Perkins
Caufield & Byers VII ("KPCB VII"), 787,069 shares held of record by KPCB
Java Fund, and 311,207 shares held of record by KPCB Life Sciences Zaibatsu
Fund II. Also represents 976,423 shares subject to warrants held of record
by Kleiner Perkins Caufield & Byers VII, and 52,936 shares subject to
warrants held of record by KPCB Life Sciences Zaibatsu Fund II, all of
which are exercisable within 60 days of August 31, 1998. KPCB Life Sciences
Zaibatsu Fund II and KPCB VII are wholly controlled by KPCB Associates, a
partnership. KPCB Java Fund is controlled by KPCB VII Associates. L. John
Doerr, a general partner of KPCB VII Associates, KPCB VII and KPCB Life
Sciences Zaibatsu Fund II, is a director of the Company. Mr. Doerr
disclaims beneficial ownership of shares in such entities except for his
proportional interests therein. Kleiner Perkins Caufield & Byers' address
is 2750 Sand Hill Road, Menlo Park, CA 94025.
(6) Represents 2,975,140 shares held of record by P. E. Sadler and 2,026,853
shares held of record by SFA Limited Partnership, of which P. E. Sadler is
a general partner. Mr. Sadler is a director of the Company. Mr. Sadler's
address is c/o Healtheon Corporation, 4600 Patrick Henry Drive, Santa
Clara, CA 95054.
(7) Dr. Yamada, a director of the Company, is President and Executive Director
of SmithKline Beecham HealthCare Services and a director of SmithKline
Beecham. SmithKline Labs' address is 1201 South Collegeville Road,
Collegeville, PA 19426. Dr. Yamada disclaims beneficial ownership of all
shares held by SmithKline Labs.
(8) Represents 3,306,923 shares held of record directly by New Enterprise
Associates VI, L.P. ("New Enterprise Associates VI"), 11,979 shares subject
to warrants held of record by New Enterprise Associates VI exercisable
within 60 days of August 31, 1998, and 20,000 shares held of record by NEA
Ventures 1996, L.P., which is controlled by New Enterprise Associates VI.
Mr. Kramlich is a partner of New Enterprise Associates VI. Mr. Kramlich
disclaims beneficial ownership of shares held by such entities except for
his proportional interest therein. New Enterprise Associates VI's address
is 1119 St. Paul Street, Baltimore, MD 21202.
(9) Includes 650,000 shares held of record by Mr. Long. Also includes 750,000
shares subject to a warrant held of record by Mr. Long and 381,250 shares
subject to options held of record by Mr. Long, in each case exercisable
within 60 days of August 31, 1998. 315,000 shares underlying the warrant
held by Mr. Long will remain subject to a right of repurchase by the
Company 60 days after August 31, 1998. Mr. Long is the Chief Executive
Officer and a director of the Company.
(10) Includes 793,268 shares subject to options held of record by Mr. Hoover
that are exercisable within 60 days of August 31, 1998. Mr. Hoover is the
President and a director of the Company.
(11) Includes 31,250 shares subject to options held of record by Mr. Nigam that
are exercisable within 60 days of August 31, 1998. Also includes 187,500
shares that will remain subject to a right of repurchase by the Company 60
days after August 31, 1998. Mr. Nigam is the Vice President, Engineering
of the Company.
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(12) Includes 2,292 shares subject to options held of record by Ms. Shea that
are exercisable within 60 days of August 31, 1998. Also includes 57,291
shares that will remain subject to a right of repurchase by the Company 60
days after August 31, 1998.
(13) Includes 833 shares subject to options held of record by Mr. Chan that are
exercisable within 60 days of August 31, 1998. Also includes 16,750 shares
held by Mr. Chan that will remain subject to a right of repurchase held by
the Company 60 days after August 31, 1998. Mr. Chan is the Controller of
the Company.
(14) Includes all shares described in the above footnotes and includes an
additional 2,363,180 shares held by other executive officers, of which
2,038,428 shares were outstanding as of August 31, 1998 and 324,752 shares
are subject to options or warrants that are exercisable within 60 days of
August 31, 1998.
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DESCRIPTION OF CAPITAL STOCK
The following summary of certain provisions of the Company's capital stock
describes all material provisions of the Company's Certificate of Incorporation
and Bylaws. This summary, however, does not purport to be complete and is
subject to, and qualified in its entirety by, the Certificate of Incorporation
and Bylaws, copies of which have been filed as exhibits to the Registration
Statement of which this Prospectus is a part and by the provisions of applicable
law.
As of August 31, 1998, there were 54,317,201 shares of Common Stock
outstanding, par value $0.0001 per share. In addition, approximately 15,000,000
shares of Common Stock issuable upon exercise of outstanding stock options or
have been reserved for future grants under the 1996 Stock Plan and the 1998
Purchase Plan. Upon consummation of this offering, 150,000,000 shares of Common
Stock and 5,000,000 shares of Preferred Stock will be authorized, and
shares of Common Stock and no shares of Preferred Stock will be issued and
outstanding.
COMMON STOCK
The issued and outstanding shares of Common Stock are, and the shares of
Common Stock being offered by the Company will be upon payment therefor, validly
issued, fully paid and nonassessable. The holders of outstanding shares of
Common Stock are entitled to receive dividends out of assets legally available
therefor at such time and in such amounts as the Board may from time to time
determine. See "Dividend Policy." The shares of Common Stock are not convertible
and the holders thereof have no preemptive or subscription rights to purchase
any securities of the Company. Upon liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to receive pro rata the
assets of the Company that are legally available for distribution, after payment
of all debts and other liabilities. Each outstanding share of Common Stock is
entitled to one vote on all matters submitted to a vote of the stockholders,
including election of directors. There is no cumulative voting in the election
of directors.
PREFERRED STOCK
The Company's Certificate of Incorporation provides that the Preferred Stock
may be issued by the Company in one or more series and that the Board has the
authority, without further action by the stockholders, to fix the rights,
preferences and privileges thereof, including dividend rights, conversion
rights, voting rights, rights and terms of redemption, liquidation preferences
and sinking fund terms, any or all of which may be greater than the rights of
the Common Stock. The issuance of Preferred Stock could adversely affect the
voting power of holders of Common Stock and the likelihood that such holders
would receive dividend payments and payments upon liquidation. Such issuance
could have the effect of decreasing the market price of the Common Stock. The
issuance of Preferred Stock may also have the effect of delaying, deterring or
preventing a change in control of the Company. The Company has no present plans
to issue any shares of Preferred Stock.
WARRANTS
The Company has outstanding warrants for the purchase of 2,077,240 shares of
Common Stock. Of these, warrants to purchase 1,794,718 shares of Common Stock
have an exercise price of $2.00 and warrants to purchase 282,522 shares of
Common Stock have an exercise price of $7.97. These warrants expire either three
years or five years after the date of issuance. In addition, as part of a
service agreement with a customer, the Company will issue to the customer a
warrant to purchase 500,000 shares of Common Stock with an exercise price of
$10.40 per share.
REGISTRATION RIGHTS
The holders of approximately 43,159,170 shares of Common Stock (representing
shares held by the purchasers of Common Stock at the founding of the Company in
December 1995, the purchasers of
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Preferred Stock of the Company prior to its conversion in connection with the
acquisition of ActaMed, and shares held by certain former shareholders of
ActaMed who received shares of the Company's Common Stock pursuant to the
Company's acquisition of ActaMed and who had registration rights with respect to
their shares of ActaMed capital stock) or their permitted transferees are
entitled to certain rights with respect to registration of such shares (the
"Registrable Securities") under the Securities Act pursuant to an Amended and
Restated Investors' Rights Agreement. At any time after 12 months following the
effective date of this offering, the holders of at least 40% of the Registrable
Securities then outstanding may require the Company to file a registration
statement covering Registrable Securities with an aggregate gross offering price
of at least $10.0 million. In addition, two years after this offering, holders
of registrable securities may require, on up to four separate occasions, that
the Company register their shares for public resale on Form S-3 or any successor
form, provided the Company is eligible to use Form S-3 or any such successor
form and provided further that the value of the securities to be registered is
at least $1.0 million. Furthermore, in the event the Company elects to register
any of its shares of Common Stock or other securities for purposes of effecting
any public offering, the holders of registrable securities are entitled to
include their Registrable Securities in the registration, subject however to the
right of the Company to reduce the number of shares proposed to be registered in
view of market conditions. All expenses in connection with any registration
(other than underwriting discounts and commissions) will be borne by the
Company. Registration rights, other than the right to require the Company to
register shares on Form S-3 or any successor form, will terminate at such time
as the Company's shares are publicly traded and the holder is entitled to sell
all of its shares in any three-month period under Rule 144 of the Securities
Act. If such holders, by exercising their registration rights, cause a large
number of securities to be registered and sold in the public market, such sales
could have an adverse effect on the market price for the Company's Common Stock.
If the Company were to initiate a registration and include Registrable
Securities pursuant to the exercise of registration rights, the sale of such
Registrable Securities could have an adverse effect on the Company's ability to
raise capital.
CERTAIN ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE COMPANY'S CERTIFICATE OF
INCORPORATION AND BYLAWS AND OF DELAWARE LAW
GENERAL. Certain provisions of the DGCL and the Company's Certificate of
Incorporation and Bylaws could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from acquiring, control
of the Company. Such provisions could limit the price that certain investors
might be willing to pay in the future for shares of the Company's Common Stock.
These provisions of Delaware law and the Certificate of Incorporation and Bylaws
may also have the effect of discouraging or preventing certain types of
transactions involving an actual or threatened change of control of the Company
(including unsolicited takeover attempts), even though such a transaction may
offer the Company's stockholders the opportunity to sell their stock at a price
above the prevailing market price.
DELAWARE TAKEOVER STATUTE. Following consummation of this offering, the
Company will be subject to the "business combination" provisions of Section 203
of the DGCL. In general, such provisions prohibit a publicly held Delaware
corporation from engaging in various "business combination" transactions with
any interested stockholder for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless (i) the
transaction is approved by the board of directors prior to the date the
interested stockholder obtained such status; (ii) upon consummation of the
transaction that resulted in the stockholder's becoming an interested
stockholder, the stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced, excluding for
purposes of determining the number of shares outstanding those shares owned by
(a) persons who are directors and also officers and (b) employee stock plans in
which employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer; or (iii) on or subsequent to such date the business combination is
approved by the board of directors and authorized at an annual or special
meeting of stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested stockholder. A
"business combination" is defined to include mergers, asset sales and other
transactions resulting in financial benefit
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to a stockholder. In general, an "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years, did own)
15% or more of a corporation's voting stock. The statute could prohibit or delay
mergers or other takeover or change in control attempts with respect to the
Company and, accordingly, may discourage attempts to acquire the Company.
CERTIFICATE OF INCORPORATION AND BYLAWS. The Company's Certificate of
Incorporation provides that any action required or permitted to be taken by the
stockholders of the Company must be effected at a duly called annual or special
meeting of the stockholders and may not be taken by a consent in writing by
stockholders. The Company's Bylaws provide that special meetings of the
stockholders of the Company may be called by the Board or by the President of
the Company, or by one or more stockholders holding at least 10% of the voting
power of the Company's outstanding capital stock, or any such person or persons
as may be authorized by the Certificate of Incorporation or the Bylaws (which
currently only give this authority to the Board). The Company's Bylaws also
require advance written notice by a stockholder of a proposal or director
nomination that such stockholder desires to present at an annual or special
meeting of stockholders. No business other than that stated in the notice may be
transacted at any special meeting. These provisions will have the effect of
delaying consideration of a stockholder proposal until the next annual meeting
unless a special meeting is called by the Board.
The Company's Bylaws provide that the authorized number of directors may be
changed by an amendment to the Bylaws adopted by the Board or by the
stockholders. Vacancies on the Board may be filled either by holders of a
majority of the Company's voting stock or a majority of directors in office,
although less than a quorum. The Certificate of Incorporation and the Bylaws of
the Company also provide for a classified Board. Under this provision, the Board
designates each director position as one of three categories. Each year the
directors' positions in one of the categories are subject to election so that it
would take three years to replace the entire board (absent resignation or
premature expiration of a director's term), which may have the effect of
deterring a hostile takeover or delaying or preventing changes in control or
management of the Company.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's Certificate of Incorporation limits the liability of directors
to the fullest extent permitted by the DGCL. In addition, the Certificate of
Incorporation and Bylaws provide that the Company will indemnify directors and
officers of the Company to the fullest extent permitted by Delaware law. The
Company intends to enter into separate indemnification agreements with its
directors and executive officers that provide such persons indemnification
protection in the event the Certificate of Incorporation is subsequently
amended. See "Risk Factors -- Certain Anti-Takeover Provisions."
TRANSFER AGENT AND REGISTRAR
American Stock Transfer Trust Company has been appointed as transfer agent
and registrar for the Company's Common Stock.
LISTING
Application has been made to have the Common Stock accepted for quotation on
the Nasdaq National Market under the symbol "HLTH."
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common Stock
of the Company. The Company cannot predict the effect, if any, that sales of
shares of Common Stock or the availability of shares for sale will have on the
market price of the Common Stock prevailing from time to time. Nevertheless,
sales of a significant number of shares of Common Stock in the public market, or
the perception that such sales may occur, could adversely affect the prevailing
market price of the Common Stock.
Upon consummation of this offering, the Company will have shares of
Common Stock outstanding, based on the number of shares of Common Stock
outstanding as of August 31, 1998, assuming (i) the issuance by the Company of
shares of Common Stock offered hereby and (ii) no exercise of options or
warrants after August 31, 1998. Of the shares outstanding after the offering,
the shares of Common Stock ( shares if the U.S. Underwriters'
over-allotment is exercised in full) sold in the offering will be freely
tradeable without restriction under the Securities Act, except for any such
shares that may be acquired by an "affiliate" of the Company (an "affiliate"),
which shares will be subject to the volume limitations of Rule 144 promulgated
under the Securities Act ("Rule 144"). As defined in Rule 144, an "affiliate" of
an issuer is a person who, directly or indirectly, through one or more
intermediaries, controls or is controlled by, or is under common control with,
such issuer. Of the remaining 54,317,201 shares of Common Stock, (i) 47,534,750
shares will be restricted securities (as that phrase is defined in Rule 144)
(the "Restricted Shares") and may not be resold in the absence of registration
under the Securities Act or pursuant to an exemption from such registration,
including the exemption provided by Rule 144 under the Securities Act and (ii)
6,782,451 shares may be resold pursuant to an exemption from registration under
Section 3(a)(10) of the Securities Act (the "3(a)(10) Shares"), subject to the
lock-up agreements discussed below. Each of the Company's directors and officers
and certain other stockholders of the Company has agreed that, subject to
certain exceptions, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the Underwriters, during the period ending 180 days
after the date of this Prospectus, he will not (i) offer, pledge, sell, contract
to sell, sell any option or contract to purchase, purchase any option or
contract to sell, grant any option, right or warrant to purchase, lend, or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock or (ii) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
the Common Stock, whether any such transaction described in clause (i) or (ii)
above is to be settled by delivery of Common Stock or such other securities, in
cash or otherwise.
On the date of this Prospectus, 689,609 of the 3(a)(10) Shares (in addition
to the shares offered hereby) will be eligible for immediate sale. Upon
the expiration of lock-up agreements on , 1999, an additional
6,092,842 of the 3(a)(10) Shares and 43,581,312 of the Restricted Shares will
become eligible for sale in the public market. Of the shares eligible for sale
in the public market on , all but 8,660,434 shares will be subject to
the volume limitations and other conditions of Rule 144. The holders of
approximately 42,785,650 shares of Common Stock are also entitled to certain
rights with respect to registration of such shares of Common Stock for offer or
sale to the public. If such holders, by exercising their registration rights,
cause a large number of shares to be registered and sold in the public market,
such sales could have a material adverse effect on the market price for the
Company's Common Stock.
Under Rule 144 as currently in effect, beginning 90 days after the date of
this Prospectus, a person (or persons whose shares are aggregated) who has
beneficially owned restricted securities for at least one year would be entitled
to sell a number of shares of Common Stock within any three-month period equal
to the greater of 1% of the then outstanding shares of the Common Stock
(approximately shares immediately after the offering) or the average
weekly reported volume of trading of the Common Stock on the Nasdaq National
Market during the four calendar weeks preceding such sale, provided that certain
manner of sale and notice requirements and requirements as to the availability
of current public
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information concerning the Company are satisfied. Under Rule 144(k), a person
who is not deemed to have been an affiliate of the Company at any time during
the 90 days preceding a sale, and who has beneficially owned the shares proposed
to be sold for at least two years (including the holding period of any prior
owner except an affiliate), is entitled to sell such shares without complying
with the manner of sale, public information, volume limitation or notice
provisions of Rule 144; therefore, unless otherwise restricted, "144(k) shares"
may be sold immediately upon the completion of this offering.
Immediately after the offering, there will be options to purchase
approximately 14,410,763 shares of Common Stock outstanding. Subject to the
provisions of the lock-up agreements described above, holders of these options
may rely on the resale provisions of Rule 701 under the Securities Act, which
permits nonaffiliates to sell their shares without having to comply with the
current public information, holding period, volume limitation or notice
provisions of Rule 144 and permits affiliates to sell their shares without
having to comply with the holding period provision of Rule 144, in each case
beginning 90 days after the consummation of this offering. In addition, shortly
after this offering, the Company intends to file a registration statement on
Form S-8 covering shares of Common Stock reserved for issuance under the 1996
Plan and the 1998 Purchase Plan. Shares of Common Stock registered under such
registration statement will, subject to Rule 144 volume limitations applicable
to affiliates, be available for sale in the open market, unless such shares are
subject to vesting restriction with the Company or the lock-up agreements
described below. See "Management -- Employee Benefit Plans."
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CERTAIN UNITED STATES TAX CONSEQUENCES
TO NON-U.S. HOLDERS OF COMMON STOCK
The following is a general discussion of certain United States federal
income and estate tax consequences relevant to holders of Common Stock that are
non-U.S. Holders. A non-U.S. Holder is a holder of Common Stock that is not, for
United States federal income tax purposes, any of the following: (i) a citizen
or resident of the United States, (ii) a corporation, partnership or other
entity created or organized in or under the laws of the United States or any
state thereof, (iii) an estate, the income of which is subject to U.S. federal
income taxation regardless of its source, or (iv) a trust that meets the
following two tests: (A) a U.S. court is able to exercise primary supervision
over the administration of the trust, and (B) one or more U.S. persons have the
authority to control all substantial decisions of the trust. This discussion
does not consider the specific facts and circumstances that may be relevant to
particular non-U.S. Holders in light of their personal circumstances and does
not address the treatment of such holders under the laws of any state, local or
foreign taxing jurisdiction. Further, the discussion is based on provisions of
the United States Internal Revenue Code of 1986, as amended (the "Code"),
Treasury regulations thereunder, and administrative and judicial interpretations
thereof, all as in effect on the date hereof and all of which are subject to
change or different interpretation on a possibly retroactive basis. THIS
DISCUSSION IS LIMITED TO NON-U.S. HOLDERS WHO HOLD THE COMMON STOCK AS A CAPITAL
ASSET. EACH PROSPECTIVE HOLDER IS URGED TO CONSULT ITS TAX ADVISOR WITH RESPECT
TO THE UNITED STATES FEDERAL TAX CONSEQUENCES OF ACQUIRING, HOLDING AND
DISPOSING OF COMMON STOCK, AS WELL AS ANY TAX CONSEQUENCES THAT MAY ARISE UNDER
THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION.
DIVIDENDS
Dividends paid to a non-U.S. Holder of Common Stock will be subject to
United States federal withholding tax at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty, unless the dividends are
effectively connected with the conduct of a trade or business within the United
States (and are attributable to a United States permanent establishment of such
holder, if an applicable income tax treaty so requires as a condition for the
non-U.S. holder to be subject to United States income tax on a net income basis
in respect of such dividends). Such "effectively connected" dividends are
subject to tax at rates applicable to United States citizens, resident aliens
and domestic United States corporations, and are not generally subject to
withholding. Any such effectively connected dividends received by a corporate
non-U.S. Holder may also, under certain circumstances, be subject to an
additional "branch profits tax" at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty.
Under currently effective United States Treasury regulations, dividends paid
prior to January 1, 2000 to an address in a foreign country are presumed to be
paid to a resident of that country (unless the payor has knowledge to the
contrary) for purposes of the withholding discussed above and, under the current
interpretation of United States Treasury regulations, for purposes of
determining the applicability of a tax treaty rate. Under recently finalized
United States Treasury regulations that will generally be effective for
distributions after December 31, 1999 (the "Final Withholding Regulations"),
however, a non-U.S. Holder of Common Stock who wishes to claim the benefit of an
applicable treaty rate would be required to satisfy applicable certification
requirements. In addition, under the Final Withholding Regulations, in the case
of Common Stock held by a foreign partnership, (i) the certification requirement
would generally be applied to the partners of the partnership and (ii) the
partnership would be required to provide certain information, including a United
States taxpayer identification number. The Final Withholding Regulations provide
look-through rules for tiered partnerships.
A non-U.S. Holder of Common Stock that is eligible for a reduced rate of
United States withholding tax pursuant to a tax treaty may obtain a refund of
any excess amounts currently withheld by filing an appropriate claim for refund
with the United States Internal Revenue Service.
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GAIN ON DISPOSITION OF COMMON STOCK
A non-U.S. holder generally will not be subject to United States federal
income tax in respect of gain recognized on a disposition of Common Stock
unless: (i) the gain is effectively connected with a trade or business conducted
by the non-U.S. Holder in the United States (and is attributable to a permanent
establishment maintained in the United States by such non-U.S. Holder if an
applicable income tax treaty so requires as a condition for such non-U.S. Holder
to be subject to United States taxation on a net income basis in respect of gain
from the sale or other disposition of the Common Stock); (ii) in the case of a
non-U.S. Holder who is an individual and holds the Common Stock as a capital
asset, such holder is present in the United States for 183 or more days in the
taxable year of the sale and certain other conditions exist; (iii) the Company
is or has been a "United States real property holding corporation" for federal
income tax purposes and, in the event that the Common Stock is considered
"regularly traded on an established securities market," the non-U.S. Holder
held, directly or indirectly at any time during the five-year period ending on
the date of disposition, more than 5% of the Common Stock (and is not eligible
for any treaty exemption); or (iv) the non-U.S. Holder is subject to tax
pursuant to certain provisions of the Code applicable to U.S. expatriates.
Effectively connected gains realized by a corporate non-U.S. Holder may also,
under certain circumstances, be subject to an additional "branch profits tax" at
a 30% rate or such lower rate as may be specified by an applicable income tax
treaty.
The Company believes it is not currently, and does not anticipate becoming,
a "United States real property holding corporation" for federal income tax
purposes.
FEDERAL ESTATE TAXES
Common Stock held by a non-U.S. Holder at the time of death will be included
in such holder's gross estate for United States federal estate tax purposes,
unless an applicable estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Under current law, United States information reporting requirements (other
than reporting of dividend payments for purposes of the withholding tax noted
above) and backup withholding tax generally will not apply to dividends paid to
non-U.S. Holders that are either subject to the 30% withholding discussed above
or that are not so subject because an applicable tax treaty reduces such
withholding. Otherwise, backup withholding of United States federal income tax
at a rate of 31% may apply to dividends paid with respect to Common Stock to
holders that are not "exempt recipients" and that fail to provide certain
information (including the holder's United States taxpayer identification
number). Generally, unless the payor of dividends has actual knowledge that the
payee is a United States person, the payor may treat dividend payments to a
payee with a foreign address as exempt from information reporting and backup
withholding. However, under the Final Withholding Regulations, dividend payments
generally will be subject to information reporting and backup withholding unless
applicable certification requirements are satisfied. See the discussion above
with respect to the rules applicable to foreign partnerships under the Final
Withholding Regulations.
In general, United States information reporting and backup withholding
requirements also will not apply to a payment made outside the United States of
the proceeds of a sale of Common Stock through an office outside the United
States of a non-United States broker. However, United States information
reporting (but not backup withholding) requirements will apply to a payment made
outside the United States of the proceeds of a sale of Common Stock through an
office outside the United States of a broker that is a United States person,
that derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the United States, that is a "controlled
foreign corporation" as to the United States, or, in the case of payments made
after December 31, 1999, a foreign partnership with certain connections to the
United States, unless the broker has documentary evidence in its records that
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the holder or beneficial owner is a non-United States person or the holder or
beneficial owner otherwise establishes an exemption. Payment of the proceeds of
the sale of Common Stock to or through a United States office of a broker is
currently subject to both United States backup withholding and information
reporting unless the holder certifies its non-United States status under
penalties of perjury or otherwise establishes an exemption.
A non-U.S. Holder generally may obtain a refund of any excess amounts
withheld under the backup withholding rules by filing the appropriate claim for
refund with the United States Internal Revenue Service.
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UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the U.S.
Underwriters named below, for whom Morgan Stanley & Co. Incorporated, Goldman,
Sachs & Co., Hambrecht & Quist LLC and Volpe Brown Whelan & Company, LLC are
acting as U.S. Representatives, and the International Underwriters named below
for whom Morgan Stanley & Co. International Limited, Goldman Sachs
International, Hambrecht & Quist LLC & Volpe Brown Whelan & Company, LLC are
acting as International Representatives, have severally agreed to purchase, and
the Company has agreed to sell to them, severally, the respective number of
shares of Common Stock set forth opposite the names of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated..............................................
Goldman, Sachs & Co............................................................
Hambrecht & Quist LLC..........................................................
Volpe Brown Whelan & Company, LLC..............................................
----------
Subtotal.....................................................................
----------
International Underwriters:
Morgan Stanley & Co. International Limited.....................................
Goldman Sachs International....................................................
Hambrecht & Quist LLC..........................................................
Volpe Brown Whelan & Company, LLC..............................................
----------
Subtotal.....................................................................
----------
Total....................................................................
----------
----------
</TABLE>
The U.S. Underwriters and the International Underwriters, and the U.S.
Representatives and the International Representatives, are collectively referred
to as the "Underwriters" and the "Representatives," respectively. The
Underwriting Agreement provides that the obligations of the several Underwriters
to pay for and accept delivery of the shares of Common Stock offered hereby are
subject to the approval of certain legal matters by their counsel and to certain
other conditions. The Underwriters are obligated to take and pay for all of the
shares of Common Stock offered hereby (other than those covered by the U.S.
Underwriters' over-allotment option described below) if any such shares are
taken.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions: (i)
it is not purchasing any Shares (as defined herein) for the account of anyone
other than a United States or Canadian Person (as defined herein) and (ii) it
has not offered or sold, and will not offer or sell, directly or indirectly, any
Shares or distribute any prospectus relating to the Shares outside the United
States or Canada or to anyone other than a United States or Canadian Person.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has represented and agreed that, with certain
exceptions: (i) it is not purchasing any Shares for the account of any United
States or Canadian Person and (ii) it has not offered or sold, and
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will not offer or sell, directly or indirectly, any Shares or distribute any
prospectus relating to the Shares in the United States or Canada or to any
United States or Canadian Person. With respect to any Underwriter that is a U.S.
Underwriter and an International Underwriter, the foregoing representations and
agreements (i) made by it in its capacity as a U.S. Underwriter apply only to it
in its capacity as a U.S. Underwriter and (ii) made by it in its capacity as an
International Underwriter apply only to it in its capacity as an International
Underwriter. The foregoing limitations do not apply to stabilization
transactions or to certain other transactions specified in the Agreement between
U.S. and International Underwriters. As used herein, "United States or Canadian
Person" means any national or resident of the United States or Canada, or any
corporation, pension, profit-sharing or other trust or other entity organized
under the laws of the United States or Canada or of any political subdivision
thereof (other than a branch located outside the United States and Canada of any
United States or Canadian Person), and includes any United States or Canadian
branch of a person who is otherwise not a United States or Canadian Person. All
shares of Common Stock to be purchased by the Underwriters under the
Underwriting Agreement are referred to herein as the "Shares."
Pursuant to the Agreement between U.S. and International Underwriters, sales
may be made between the U.S. Underwriters and International Underwriters of any
number of Shares as may be mutually agreed. The per share price of any Shares
sold shall be the public offering price set forth on the cover page hereof, in
United States dollars, less an amount not greater than the per share amount of
the concession to dealers set forth below.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any Shares, directly or indirectly, in any province or
territory of Canada or to, or for the benefit of, any resident of any province
or territory of Canada in contravention of the securities laws thereof and has
represented that any offer or sale of Shares in Canada will be made only
pursuant to an exemption from the requirement to file a prospectus in the
province or territory of Canada in which such offer or sale is made. Each U.S.
Underwriter has further agreed to send to any dealer who purchases from it any
of the Shares a notice stating in substance that, by purchasing such Shares,
such dealer represents and agrees that it has not offered or sold, and will not
offer or sell, directly or indirectly, any of such Shares in any province or
territory of Canada or to, or for the benefit of, any resident of any province
or territory of Canada in contravention of the securities laws thereof and that
any offer or sale of Shares in Canada will be made only pursuant to an exemption
from the requirement to file a prospectus in the province or territory of Canada
in which such offer or sale is made, and that such dealer will deliver to any
other dealer to whom it sells any of such Shares a notice containing
substantially the same statement as is contained in this sentence.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (i) it has not offered
or sold and, prior to the date six months after the closing date for the sale of
the Shares to the International Underwriters, will not offer or sell any Shares
to persons in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses or otherwise in
circumstances which have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995; (ii) it has complied and will comply with all
applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the Shares in, from or otherwise involving
the United Kingdom; and (iii) it has only issued or passed on and will only
issue or pass on in the United Kingdom any document received by it in connection
with the offering of the Shares to a person who is of a kind described in
Article 11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1996 or is a person to whom such document may otherwise
lawfully be issued or passed on.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has further represented that it has not offered or
sold, and has agreed not to offer or sell, directly or indirectly, in Japan or
to or for the account of any resident thereof, any of the Shares acquired
77
<PAGE>
in connection with the distribution contemplated hereby, except for offers or
sales to Japanese International Underwriters or dealers and except pursuant to
any exemption from the registration requirements of the Securities and Exchange
Law and otherwise in compliance with applicable provisions of Japanese law. Each
International Underwriter has further agreed to send to any dealer who purchases
from it any of the Shares a notice stating in substance that, by purchasing such
Shares, such dealer represents and agrees that it has not offered or sold, and
will not offer or sell, any of such Shares, directly or indirectly, in Japan or
to or for the account of any resident thereof except for offers or sales to
Japanese International Underwriters or dealers and except pursuant to an
exemption from the registration requirements of the Securities and Exchange Law
and otherwise in compliance with applicable provisions of Japanese law, and that
such dealer will send to any other dealer to whom it sells any of such Shares a
notice containing substantially the same statement as is contained in this
sentence.
The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the public offering price set forth on the cover
page hereof and part to certain dealers at a price that represents a concession
not in excess of $ a share under the public offering price. Any Underwriter
may allow, and such dealers may reallow, a concession not in excess of $ a
share to other Underwriters or to certain other dealers. After the initial
offering of the shares of Common Stock, the offering price and other selling
terms may from time to time be varied by the Representatives.
The Company has granted to the U.S. Underwriters an option, exercisable for
30 days from the date of this Prospectus, to purchase up to an aggregate of
additional shares of Common Stock at the public offering price set forth
on the cover page hereof, less underwriting discounts and commissions. The U.S.
Underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, made in connection with the offering of the shares of
Common Stock offered hereby. To the extent such option is exercised, each U.S.
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares of Common Stock as
the number set forth next to such U.S. Underwriter's name in the preceding table
bears to the total number of shares of Common Stock set forth next to the names
of all U.S. Underwriters in the preceding table.
The Underwriters have informed the Company that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
Common Stock offered by them.
At the request of the Company, the U.S. Underwriters have reserved up to
shares of Common Stock to be issued by the Company and offered hereby
for sale, at the initial public offering price, to directors, officers,
employees, business associates and related persons of the Company. The number of
shares of Common Stock available for sale to the general public will be reduced
to the extent such individuals purchase such reserved shares. Any reserved
shares which are not so purchased will be offered by the U.S. Underwriters to
the general public on the same basis as the other shares offered hereby.
Each of the Company and the directors, officers and certain other
stockholders of the Company has agreed that, without the prior written consent
of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not,
during the period ending 180 days after the date of this Prospectus, (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, lend or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or (ii) enter into any swap or other arrangement
that transfers to another, in whole or in part, any of the economic consequences
of ownership of the Common Stock, whether any such transaction described in
clause (i) or (ii) above is to be settled by delivery of Common Stock or such
other securities, in cash or otherwise. The restrictions described in this
paragraph do not apply to (x) the sale of Shares to the Underwriters, (y) the
issuance by the Company of shares of Common Stock upon the exercise of an option
or a warrant or the conversion of a security outstanding on the date of this
Prospectus of which the Underwriters have been advised in writing or (z)
transactions by any person other than the
78
<PAGE>
Company relating to shares of Common Stock or other securities acquired in open
market transactions after the completion of the offering of the Shares.
In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may over-allot in
connection with the offering, creating a short position in the Common Stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the Common Stock, the Underwriters may bid for, and purchase, shares of
Common Stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an Underwriter or a dealer for distributing the
Common Stock in the offering, if the syndicate repurchases previously
distributed Common Stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Common Stock above independent market
levels. The Underwriters are not required to engage in these activities, and may
end any of these activities at any time.
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
Certain of the Underwriters from time to time perform various investment
banking services for the Company, for which such Underwriters receive
compensation.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price will be determined by negotiations
between the Company and the U.S. Representatives. Among the factors to be
considered in determining the initial public offering price will be the future
prospects of the Company and its industry in general, sales, earnings and
certain other financial and operating information of the Company in recent
periods, and the price-earnings ratios, price-sales ratios, market prices of
securities and certain financial and operating information of companies engaged
in activities similar to those of the Company. The estimated initial public
offering price range set forth on the cover page of this Preliminary Prospectus
is subject to change as a result of market conditions and other factors.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California. Certain legal matters in
connection with this offering will be passed upon for the Underwriters by
Fenwick & West LLP, Palo Alto, California.
EXPERTS
Healtheon was incorporated in December 1995 and did not commence operations
until January 1996. Thus, the financial statements of ActaMed for the year ended
December 31, 1995 also represent the financial statements of Healtheon on a
pooled basis for that period.
The consolidated financial statements of Healtheon Corporation at December
31, 1996 and 1997, and for the two years in the period ended December 31, 1997,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein which, as to the year ended December 31, 1996, is
based in part on the report of Deloitte & Touche LLP, independent auditors. The
consolidated financial statements referred to above are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
The consolidated financial statements of ActaMed Corporation for the year
ended December 31, 1995, included in this Prospectus and Registration Statement
have been audited by Deloitte & Touche LLP,
79
<PAGE>
independent auditors, as stated in their report appearing herein, and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
The consolidated financial statements of ActaMed Corporation as of December
31, 1996 and for the year then ended, not separately presented in this
Prospectus and Registration Statement have been audited by Deloitte and Touche
LLP, independent auditors, as stated in their report appearing herein, and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
The statements of divisional net loss and United HealthCare Corporation's
net investment and of divisional cash flows of EDI Services Group (a division of
United HealthCare Corporation) included in this Prospectus and Registration
Statement have been audited by Deloitte and Touche LLP, independent auditors, as
stated in their report appearing herein, and are included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act, and
the rules and regulations promulgated thereunder, with respect to the Common
Stock offered hereby. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits thereto. Statements contained in this
Prospectus as to the contents of any contract or other document that is filed as
an exhibit to the Registration Statement are not necessarily complete and each
such statement is qualified in all respects by reference to the full text of
such contract or document. For further information with respect to the Company
and the Common Stock, reference is hereby made to the Registration Statement and
the exhibits thereto, which may be inspected and copied at the principal office
of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission located at Seven World Trade Center, Suite
1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661, and copies of all or any part thereof may
be obtained at prescribed rates from the Commission's Public Reference Section
at such addresses. Also, the Commission maintains a World Wide Web site on the
Internet at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission.
Upon completion of this offering, the Company will become subject to the
information and periodic reporting requirements of the Exchange Act and, in
accordance therewith, will file periodic reports, proxy and information
statements and other information with the Commission. Such periodic reports,
proxy and information statements and other information will be available for
inspection and copying at the regional offices, public reference facilities and
Web site of the Commission referred to above.
80
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF HEALTHEON CORPORATION:
Report of Ernst & Young LLP, Independent Auditors.................................... F-2
Report of Deloitte & Touche LLP, Independent Auditors................................ F-3
Consolidated Balance Sheets.......................................................... F-4
Consolidated Statements of Operations................................................ F-5
Consolidated Statement of Convertible Redeemable Preferred Stock and Stockholders'
Equity (Net Capital Deficiency).................................................... F-6
Consolidated Statements of Cash Flows................................................ F-8
Notes to Consolidated Financial Statements........................................... F-9
FINANCIAL STATEMENTS OF EDI SERVICES, INC.:
Report of Deloitte and Touche LLP, Independent Auditors.............................. F-30
Statement of Divisional Net Loss and United's Net Investment......................... F-31
Statement of Divisional Cash Flows................................................... F-32
Notes to Financial Statements........................................................ F-33
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Healtheon Corporation
We have audited the accompanying consolidated balance sheets of Healtheon as
of December 31, 1996 and 1997, and the related consolidated statements of
operations, convertible redeemable preferred stock and stockholders' equity (net
capital deficiency), and cash flows for each of the two years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. In May 1998, the Company acquired
ActaMed in a transaction that was accounted for as a pooling of interests. We
did not audit the financial statements of ActaMed for the year ended December
31, 1996, which statements reflect total assets constituting approximately 79%
of the related consolidated financial statement totals at December 31, 1996 and
revenues and a net loss constituting approximately 89% and 57%, respectively, of
the related consolidated financial statement totals for the year ended December
31, 1996. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to data included for
ActaMed, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Healtheon Corporation at
December 31, 1996 and 1997, and the consolidated results of its operations and
its cash flows for each of the two years in the period ended December 31, 1997,
in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Palo Alto, California
February 27, 1998,
except for Notes 1 and 2, as to which the date is July 24, 1998
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors of ActaMed Corporation
We have audited the consolidated balance sheet of ActaMed Corporation and
subsidiary (the "Company") as of December 31, 1996 and the related consolidated
statements of operations, convertible redeemable preferred stock and
stockholders' equity (net capital deficiency), and cash flows for each of the
two years in the period ended December 31, 1996 (the consolidated financial
statements for 1996 are not presented herein.) These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1996 and the results of its operations and its cash flows for each of the two
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Atlanta, Georgia
June 20, 1997
F-3
<PAGE>
HEALTHEON CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1996 1997 1998
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 7,539 $ 16,504 $ 11,075
Short-term investments.................................................................. -- 5,300 1,726
Accounts receivable, net of allowance for doubtful accounts of $41, $71 and $135 in
1996, 1997 and 1998, respectively..................................................... 959 2,723 3,726
Due from related parties................................................................ 1,742 1,533 1,916
Other current assets.................................................................... 437 527 353
-------- -------- -----------
Total current assets.................................................................... 10,677 26,587 18,796
Property and equipment, net............................................................... 4,534 5,500 9,960
Intangible assets, net.................................................................... 12,644 16,596 16,895
Other assets.............................................................................. 2,641 2,892 2,471
-------- -------- -----------
$ 30,496 $ 51,575 $ 48,122
-------- -------- -----------
-------- -------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Borrowings under line of credit......................................................... $ 30 $ 3,425 $ 3,473
Accounts payable........................................................................ 1,359 2,225 3,133
Accrued compensation.................................................................... 242 448 1,853
Other accrued liabilities............................................................... 1,097 1,265 2,765
Current portion of capital lease obligations............................................ 763 1,038 1,555
Deferred revenue........................................................................ 4,681 3,396 3,457
-------- -------- -----------
Total current liabilities............................................................... 8,172 11,797 16,236
Capital lease obligations, net of current portion......................................... 1,210 932 1,459
Commitments
Convertible redeemable preferred stock, $.016 par value, issuable in series: 16,488,860
shares authorized in 1996 and 1997, none in 1998; 14,170,947, 16,488,860 and no shares
issued and outstanding in 1996, 1997 and 1998, respectively; at amounts paid in......... 39,578 50,948 --
Stockholders' equity (net capital deficiency):
Convertible preferred stock, $.0001 par value, issuable in series: 48,020,000 shares
authorized in 1996 and 1997, none in 1998; 13,285,000, 21,002,692 and no shares issued
and outstanding in 1996, 1997 and 1998, respectively; at amounts paid in.............. 11,607 43,756 --
Common stock, $.0001 par value, 75,000,000 shares authorized; 8,652,422, 9,436,724 and
51,704,947 shares issued and outstanding in 1996, 1997 and 1998, respectively......... 1 1 5
Additional paid-in capital.............................................................. 1,523 4,502 106,832
Note receivable from officer............................................................ -- (349) --
Deferred stock compensation............................................................. -- (2,151) (3,411)
Accumulated deficit..................................................................... (31,595) (57,861) (72,999)
-------- -------- -----------
Total stockholders' equity (net capital deficiency)..................................... (18,464) (12,102) 30,427
-------- -------- -----------
$ 30,496 $ 51,575 $ 48,122
-------- -------- -----------
-------- -------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HEALTHEON CORPORATION
ACTAMED ----------------------------------------------
CORPORATION
------------ YEARS ENDED SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
DECEMBER 31, ---------------------- ----------------------
1995 1996 1997 1997 1998
------------ ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Services........................................... $ 458 $ 1,795 $ 4,301 $ 656 $ 10,893
Services to related parties(2)..................... -- 4,237 7,309 3,240 9,370
Software licenses.................................. 1,717 4,981 1,780 390 390
------------ ---------- ---------- ---------- ----------
Total revenue...................................... 2,175 11,013 13,390 4,286 20,653
Operating costs and expenses:
Cost of revenue:
Cost of services................................. 1,573 1,487 3,792 518 10,739
Cost of services to related parties.............. -- 3,776 5,016 2,339 6,478
Cost of software licenses........................ 343 160 -- -- --
------------ ---------- ---------- ---------- ----------
Total cost of revenue............................ 1,916 5,423 8,808 2,857 17,217
Development and engineering........................ 2,446 8,596 12,986 6,409 8,332
Sales, general and administrative.................. 1,749 9,042 11,031 4,723 12,123
Amortization of intangible assets.................. -- 3,189 4,249 2,124 3,924
Write-off of acquired in-process research and
development costs................................ -- 5,215 -- -- --
------------ ---------- ---------- ---------- ----------
Total operating costs and expenses................. 6,111 31,465 37,074 16,113 41,596
------------ ---------- ---------- ---------- ----------
Loss from operations................................. (3,936) (20,452) (23,684) (11,827) (20,943)
Interest income...................................... 208 539 611 254 637
Interest expense..................................... (6) (56) (323) (128) (251)
Dividends on ActaMed's convertible redeemable
preferred stock.................................... -- (2,548) (2,870) (1,606) (890)
------------ ---------- ---------- ---------- ----------
Net loss............................................. (3,734) (22,517) (26,266) (13,307) (21,447)
Dividends on ActaMed's convertible redeemable
preferred stock.................................... (724) -- -- -- --
------------ ---------- ---------- ---------- ----------
Net loss applicable to common stockholders........... $ (4,458) $ (22,517) $ (26,266) $ (13,307) $ (21,447)
------------ ---------- ---------- ---------- ----------
------------ ---------- ---------- ---------- ----------
Basic and diluted net loss per common share
(unaudited as to the year ended December 31,
1995).............................................. $ (.85) $ (3.42) $ (3.64) $ (1.85) $ (1.22)
------------ ---------- ---------- ---------- ----------
------------ ---------- ---------- ---------- ----------
Weighted-average shares outstanding used in computing
basic and diluted net loss per common share
(unaudited as to the year ended December 31,
1995).............................................. 5,246 6,583 7,223 7,193 17,632
------------ ---------- ---------- ---------- ----------
------------ ---------- ---------- ---------- ----------
Pro forma basic and diluted net loss per common share
(unaudited)........................................ $ (.59) $ (.46)
---------- ----------
---------- ----------
Shares used in computing pro forma basic and diluted
net loss per common share (unaudited).............. 44,715 46,631
---------- ----------
---------- ----------
</TABLE>
- ---------
(1) Because Healtheon did not commence operations until January 1996, the
ActaMed statement of operations presented for the year ended December 31,
1995 represents the statement of operations of Healtheon for that period on
a pooled basis.
(2) Revenue from services to related parties consists of revenue from United
HealthCare and SmithKline Labs, customers that are also significant
stockholders of the Company.
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
CONSOLIDATED STATEMENT OF CONVERTIBLE REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)(1)
(IN THOUSANDS, EXCEPT SHARE DATA)
ACTAMED CORPORATION
<TABLE>
<CAPTION>
CONVERTIBLE
REDEEMABLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
--------------------- --------------------- ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- -------- ----------- -------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1994........... 8,800,880 $ 8,343 -- $ -- 8,250,000 $200
Net loss................................ -- -- -- -- -- --
Issuance of common stock pursuant to
option exercises by employees......... -- -- -- -- 1,071,250 21
Issuance of Series B convertible
redeemable preferred stock for cash
(less issuance costs of $36).......... 3,448,276 6,963 -- -- -- --
Dividends accrued on convertible
redeemable preferred stock............ -- 724 -- -- -- --
----------- -------- ----------- -------- ---------- ------
BALANCES AT DECEMBER 31, 1995........... 12,249,156 $ 16,030 -- $ -- 9,321,250 $221
----------- -------- ----------- -------- ---------- ------
----------- -------- ----------- -------- ---------- ------
<CAPTION>
TOTAL
NOTE STOCKHOLDERS'
ADDITIONAL RECEIVABLE DEFERRED EQUITY (NET
PAID-IN FROM STOCK ACCUMULATED CAPITAL
CAPITAL OFFICER COMPENSATION DEFICIT DEFICIENCY)
---------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1994........... $ 1,883 $ -- $ -- $ (5,344) $ (3,261)
Net loss................................ -- -- -- (3,734) (3,734)
Issuance of common stock pursuant to
option exercises by employees......... -- -- -- -- 21
Issuance of Series B convertible
redeemable preferred stock for cash
(less issuance costs of $36).......... -- -- -- -- --
Dividends accrued on convertible
redeemable preferred stock............ (724) -- -- -- (724)
---------- ----- ------------ ----------- -------------
BALANCES AT DECEMBER 31, 1995........... $ 1,159 $ -- $ -- $ (9,078) $ (7,698)
---------- ----- ------------ ----------- -------------
---------- ----- ------------ ----------- -------------
</TABLE>
HEALTHEON CORPORATION
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1995
(REFLECTING THE CONVERSION RATIO OF
.6272)................................ 7,682,671 $ 16,030 -- $ -- 5,846,288 $ 1
Net loss................................ -- -- -- -- -- --
Issuance of common stock to founders and
employees for cash.................... -- -- -- -- 2,806,134 --
Issuance of Series A convertible pre-
ferred stock for cash (less issuance
costs of $27)......................... -- -- 10,285,000 5,115 -- --
Issuance of Series B convertible pre-
ferred stock for cash (less issuance
costs of $8).......................... -- -- 3,000,000 5,992 -- --
Issuance of Series B convertible pre-
ferred stock warrant to investor for
services.............................. -- -- -- 500 -- --
Issuance of Series C convertible
redeemable preferred stock for
acquisition........................... 6,488,276 21,000 -- -- -- --
Issuance of common stock warrants....... -- -- -- -- -- --
Dividends accrued on convertible
redeemable preferred stock............ -- 2,548 -- -- -- --
----------- -------- ----------- -------- ---------- ------
BALANCES AT DECEMBER 31, 1996........... 14,170,947 39,578 13,285,000 11,607 8,652,422 1
<CAPTION>
BALANCES AT DECEMBER 31, 1995
(REFLECTING THE CONVERSION RATIO OF
.6272)................................ $ 1,379 $ -- $ -- $ (9,078) $ (7,698)
Net loss................................ -- -- -- (22,517) (22,517)
Issuance of common stock to founders and
employees for cash.................... 140 -- -- -- 140
Issuance of Series A convertible pre-
ferred stock for cash (less issuance
costs of $27)......................... -- -- -- -- 5,115
Issuance of Series B convertible pre-
ferred stock for cash (less issuance
costs of $8).......................... -- -- -- -- 5,992
Issuance of Series B convertible pre-
ferred stock warrant to investor for
services.............................. -- -- -- -- 500
Issuance of Series C convertible
redeemable preferred stock for
acquisition........................... -- -- -- -- --
Issuance of common stock warrants....... 4 -- -- -- 4
Dividends accrued on convertible
redeemable preferred stock............ -- -- -- -- --
---------- ----- ------------ ----------- -------------
BALANCES AT DECEMBER 31, 1996........... 1,523 -- -- (31,595) (18,464)
</TABLE>
- ------------
(1) Because Healtheon did not commence operations until January 1996, the
ActaMed statement of stockholders' equity presented for the year ended
December 31, 1995 represents the statement of stockholders' equity of
Healtheon for that period on a pooled basis.
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
CONSOLIDATED STATEMENT OF CONVERTIBLE REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)(1) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
HEALTHEON CORPORATION
<TABLE>
<CAPTION>
CONVERTIBLE
REDEEMABLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
--------------------- --------------------- ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- -------- ----------- -------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1996 (CONT.)... 14,170,947 $ 39,578 13,285,000 $ 11,607 8,652,422 $ 1
Net loss................................ -- -- -- -- -- --
Issuance of common stock pursuant to
option and restricted stock exercises
by employees.......................... -- -- -- -- 1,397,844 --
Repurchase of employee common stock..... -- -- -- -- (613,542) --
Issuance of Series A and Series B
convertible preferred stock for
services.............................. -- -- 45,000 55 -- --
Issuance of Series B convertible
preferred stock for cash.............. -- -- 15,000 30 -- --
Issuance of Series B convertible
preferred stock to officer for note
receivable............................ -- -- 250,000 500 -- --
Issuance of Series B convertible
preferred stock warrants in connection
with bridge financing................. -- -- -- 64 -- --
Issuance of Series C convertible
preferred stock for cash and
conversion of bridge note............. -- -- 2,600,000 6,500 -- --
Issuance of Series D convertible
preferred stock for cash.............. -- -- 4,807,692 25,000 -- --
Issuance of Series D convertible
redeemable preferred stock for asset
purchase.............................. 2,317,913 8,500 -- -- -- --
Repayment of note receivable from
officer............................... -- -- -- -- -- --
Dividends accrued on convertible
redeemable preferred stock............ -- 2,870 -- -- -- --
Deferred stock compensation............. -- -- -- -- -- --
Amortization of deferred stock
compensation.......................... -- -- -- -- -- --
----------- -------- ----------- -------- ---------- ------
BALANCES AT DECEMBER 31, 1997........... 16,488,860 50,948 21,002,692 43,756 9,436,724 1
Net loss (unaudited).................... -- -- -- -- -- --
Issuance of common stock pursuant to
option exercises by employees
(unaudited)........................... -- -- -- -- 1,659,685 --
Issuance of Series B convertible
preferred stock pursuant to warrant
exercises (unaudited)................. -- -- 1,017,229 2,034 -- --
Issuance of Series D convertible
redeemable preferred stock for asset
purchase (unaudited).................. 763,548 2,800 -- -- -- --
Dividends accrued on convertible
redeemable preferred stock
(unaudited)........................... -- 890 -- -- -- --
Conversion of redeemable preferred and
preferred stock to common stock
(unaudited)........................... (17,252,408) (54,638) (22,019,921) (45,790) 39,272,329 4
Issuance of common stock for asset
purchase (unaudited).................. -- -- -- -- 1,336,209 --
Repayment of note receivable from
officer (unaudited)................... -- -- -- -- -- --
Deferred stock compensation
(unaudited)........................... -- -- -- -- -- --
Amortization of deferred stock
compensation (unaudited).............. -- -- -- -- -- --
----------- -------- ----------- -------- ---------- ------
BALANCES, JUNE 30, 1998 (UNAUDITED)..... -- $ -- -- $ -- 51,704,947 $ 5
----------- -------- ----------- -------- ---------- ------
----------- -------- ----------- -------- ---------- ------
<CAPTION>
TOTAL
NOTE STOCKHOLDERS'
ADDITIONAL RECEIVABLE DEFERRED EQUITY (NET
PAID-IN FROM STOCK ACCUMULATED CAPITAL
CAPITAL OFFICER COMPENSATION DEFICIT DEFICIENCY)
---------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1996 (CONT.)... $ 1,523 -- -- $(31,595) $(18,464)
Net loss................................ -- -- -- (26,266) (26,266)
Issuance of common stock pursuant to
option and restricted stock exercises
by employees.......................... 297 -- -- -- 297
Repurchase of employee common stock..... (31) -- -- -- (31)
Issuance of Series A and Series B
convertible preferred stock for
services.............................. -- -- -- -- 55
Issuance of Series B convertible
preferred stock for cash.............. -- -- -- -- 30
Issuance of Series B convertible
preferred stock to officer for note
receivable............................ -- (500) -- -- --
Issuance of Series B convertible
preferred stock warrants in connection
with bridge financing................. -- -- -- -- 64
Issuance of Series C convertible
preferred stock for cash and
conversion of bridge note............. -- -- -- -- 6,500
Issuance of Series D convertible
preferred stock for cash.............. -- -- -- -- 25,000
Issuance of Series D convertible
redeemable preferred stock for asset
purchase.............................. -- -- -- -- --
Repayment of note receivable from
officer............................... -- 151 -- -- 151
Dividends accrued on convertible
redeemable preferred stock............ -- -- -- -- --
Deferred stock compensation............. 2,713 -- (2,713) -- --
Amortization of deferred stock
compensation.......................... -- -- 562 -- 562
---------- ----- ------------ ----------- -------------
BALANCES AT DECEMBER 31, 1997........... 4,502 (349) (2,151) (57,861) (12,102)
Net loss (unaudited).................... -- -- -- (21,447) (21,447)
Issuance of common stock pursuant to
option exercises by employees
(unaudited)........................... 913 -- -- -- 913
Issuance of Series B convertible
preferred stock pursuant to warrant
exercises (unaudited)................. -- -- -- -- 2,034
Issuance of Series D convertible
redeemable preferred stock for asset
purchase (unaudited).................. -- -- -- -- --
Dividends accrued on convertible
redeemable preferred stock
(unaudited)........................... -- -- -- -- --
Conversion of redeemable preferred and
preferred stock to common stock
(unaudited)........................... 94,115 -- -- 6,309 54,638
Issuance of common stock for asset
purchase (unaudited).................. 4,900 -- -- -- 4,900
Repayment of note receivable from
officer (unaudited)................... -- 349 -- -- 349
Deferred stock compensation
(unaudited)........................... 2,402 -- (2,402) -- --
Amortization of deferred stock
compensation (unaudited).............. -- -- 1,142 -- 1,142
---------- ----- ------------ ----------- -------------
BALANCES, JUNE 30, 1998 (UNAUDITED)..... $ 106,832 $ -- $(3,411) $(72,999) $ 30,427
---------- ----- ------------ ----------- -------------
---------- ----- ------------ ----------- -------------
</TABLE>
- ------------
(1) Because Healtheon did not commence operations until January 1996, the
ActaMed statement of stockholders' equity presented for the year ended
December 31, 1995 represents the statement of stockholders' equity of
Healtheon for that period on a pooled basis.
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS(1)
(IN THOUSANDS)
<TABLE>
<CAPTION>
HEALTHEON CORPORATION
ACTAMED ------------------------------------------
CORPORATION
------------- YEARS ENDED DECEMBER SIX MONTHS ENDED
YEAR ENDED 31, JUNE 30,
DECEMBER 31, -------------------- --------------------
1995 1996 1997 1997 1998
------------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................................... $ (3,734) $ (22,517) $ (26,266) $ (13,307) $ (21,447)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization................................ 359 5,062 7,580 3,739 7,209
Amortization of deferred stock compensation.................. -- -- 562 -- 1,142
Warrants and preferred stock issued for services............. -- 500 119 56 --
Writeoff of acquired in-process research and development, net
of acquisition costs....................................... -- 4,899 -- -- --
Dividends on ActaMed's convertible redeemable preferred
stock...................................................... -- 2,548 2,870 1,606 890
Changes in operating assets and liabilities:
Accounts receivable........................................ (36) (5,066) (806) 132 (988)
Other assets............................................... (77) (325) (224) (242) 197
Accounts payable........................................... 49 1,139 751 (263) 908
Accrued compensation and other liabilities................. 515 800 346 572 2,905
Deferred revenue........................................... 1,603 3,078 (1,285) (205) 61
------------- --------- --------- --------- ---------
Net cash used in operating activities.......................... (1,321) (9,882) (16,353) (7,912) (9,123)
------------- --------- --------- --------- ---------
Cash flows from investing activities:
Purchase of short-term investments............................. -- -- (5,300) -- (3,483)
Maturities of short-term investments........................... -- -- -- -- 7,057
Increase in restricted cash.................................... -- -- (867) -- --
Purchases of property and equipment............................ (464) (2,027) (2,817) (293) (2,664)
Internally developed software.................................. -- (1,001) (291) (165) --
------------- --------- --------- --------- ---------
Net cash from (used in) investing activities................... (464) (3,028) (9,275) (458) 910
------------- --------- --------- --------- ---------
Cash flows from financing activities:
Proceeds from line of credit borrowings and bridge note........ -- 30 5,395 2,765 48
Proceeds from line of credit borrowings from related party..... -- -- -- -- 1,000
Payments of line of credit borrowings from related party....... -- -- -- -- (1,000)
Proceeds from issuance of preferred stock...................... 6,963 11,107 29,530 96 2,034
Proceeds from issuance of common stock, net of repurchases..... 22 144 265 (10) 913
Payments on note receivable from officer....................... -- -- 151 -- 349
Principal payments of capital lease obligations................ -- (218) (748) (363) (560)
------------- --------- --------- --------- ---------
Net cash from financing activities............................. 6,985 11,063 34,593 2,488 2,784
------------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents........... 5,200 (1,847) 8,965 (5,882) (5,429)
Cash and cash equivalents at beginning of period............... 4,186 9,386 7,539 7,539 16,504
------------- --------- --------- --------- ---------
Cash and cash equivalents at end of period..................... $ 9,386 $ 7,539 $ 16,504 $ 1,657 $ 11,075
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
Supplemental disclosure of cash flow information:
Interest paid.................................................. $ 5 $ 56 $ 252 $ 128 $ 269
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
Supplemental schedule of noncash investing and financing
activities:
Equipment acquired under capital lease obligations............. $ -- $ 2,083 $ 774 $ 356 $ 1,604
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
Issuance of note receivable from officer for preferred stock... $ -- $ -- $ 500 $ -- $ --
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
Conversion of bridge notes to preferred stock.................. $ -- $ -- $ 2,000 $ -- $ --
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
Dividends on ActaMed's convertible redeemable preferred
stock........................................................ $ 724 $ -- $ -- $ -- $ --
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
Issuance of convertible redeemable preferred stock for business
combination.................................................. $ -- $ 21,000 $ -- $ -- $ --
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
Issuance of convertible redeemable preferred stock for assets
purchased.................................................... $ -- $ -- $ 8,500 $ -- $ 2,800
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
Issuance of common stock for assets purchased.................. $ -- $ -- $ -- $ -- $ 4,900
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
Deferred stock compensation related to options granted......... $ -- $ -- $ 2,713 $ -- $ 2,402
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
Conversion of convertible redeemable preferred and convertible
preferred stock to common stock.............................. $ -- $ -- $ -- $ -- $ 92,972
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
</TABLE>
- ------------
(1) Because Healtheon did not commence operations until January 1996, the
statement of cash flows presented for the year ended December 31, 1995
represents the statements of cash flows of Healtheon for that period on a
pooled basis.
SEE ACCOMPANYING NOTES.
F-8
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
In May 1998, Healtheon Corporation ("Healtheon") acquired ActaMed
Corporation ("ActaMed") in a merger transaction accounted for as a pooling of
interests (see Note 2). ActaMed was incorporated in 1992. Healtheon was
incorporated on December 26, 1995 and was considered to be in the development
stage through late 1997. All financial information has been restated to reflect
the combined operations of Healtheon and ActaMed. All 1995 financial statement
information represents that of ActaMed. Because Healtheon did not commence
operations until January 1996, the financial statements of ActaMed for the year
ended December 31, 1995 also represent the financial statements of Healtheon on
a pooled basis for that period. As used herein, the "Company" refers to the
combined companies and "Healtheon" or "ActaMed" is used to refer to the
individual pre-merger company where required for clarity of presentation.
NATURE OF OPERATIONS
The Company is pioneering the use of the Internet to simplify workflows,
decrease costs and improve the quality of patient care throughout the healthcare
industry. The Company has designed and developed an Internet-based information
and transaction platform (the "Healtheon Platform") that allows it to create
Virtual Healthcare Networks ("VHNs") that facilitate and streamline interactions
among the myriad participants in the healthcare industry. The Company's VHN
solution includes a suite of services delivered through applications operating
on its Internet-based platform. The Company's solution enables the secure
exchange of information among disparate healthcare information systems and
supports a broad range of healthcare transactions, including enrollment,
eligibility determination, referrals and authorization, laboratory and
diagnostic test ordering, clinical data retrieval and claims processing.
Healtheon provides its own applications on the Healtheon Platform and also
enables third-party applications to operate on the platform. In addition to
VHNs, Healtheon provides consulting, implementation and network management
services to enable its customers to take advantage of the capabilities of the
Healtheon Platform.
The Company has incurred operating losses to date and had an accumulated
deficit of $72,999,000 at June 30, 1998. Company activities have been primarily
financed through private placements of equity securities. The Company had cash,
cash equivalents and short-term investments totaling approximately $12,801,000
at June 30, 1998. As noted above and as further discussed in Note 2, Healtheon
merged with ActaMed in May 1998. This merger may significantly affect the
Company's operating cash needs. The Company may need to raise additional capital
through the issuance of debt or equity securities. There can be no assurance
that the Company will be able to raise additional financing, or that such
financing will be available on terms satisfactory to the Company, if at all.
INTERIM FINANCIAL INFORMATION
The financial information as of June 30, 1998 and for the six months ended
June 30, 1997 and 1998 is unaudited but includes all adjustments, consisting
only of normal recurring adjustments, that the Company considers necessary for a
fair presentation of the Company's operating results and cash flows for such
periods. Results for the six months ended June 30, 1998 are not necessarily
indicative of results to be expected for the full fiscal year of 1998 or for any
future period.
F-9
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements. Actual
results could differ materially from these estimates.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
All highly liquid investments with an original maturity from date of
purchase of three months or less are considered to be cash equivalents. The
Company's cash, cash equivalents and short-term investments are invested in
various investment-grade commercial paper, money market accounts and
certificates of deposit. All of the Company's short-term investments mature
within six months. The fair value of the Company's cash equivalents and
short-term investments is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------- -----------
1996 1997 1998
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Cash equivalents:
Corporate and other nongovernment debt securities......... $ -- $ 12,704 $ 10,380
Money market funds........................................ 5,603 3,429 864
--------- --------- -----------
5,603 16,133 11,244
Short-term investments:
Corporate and other nongovernment debt securities......... -- 5,300 --
U.S. government securities................................ -- -- 1,726
--------- --------- -----------
$ 5,603 $ 21,433 $ 12,970
--------- --------- -----------
--------- --------- -----------
</TABLE>
Net unrealized gains (losses) were immaterial at December 31, 1996 and 1997
and June 30, 1998.
Management determines the appropriate classification of debt and equity
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. Marketable debt and equity securities are classified as
available-for-sale, and are carried at their fair value, with the unrealized
gains and losses, when material, reported net-of-tax in a separate component of
stockholders' equity. Realized gains and losses and declines in value judged to
be other-than-temporary on available-for-sale securities are included in
interest income. The cost of securities sold is based on specific
identification. Interest and dividends on securities classified as
available-for-sale are included in investment income.
Additionally, at December 31, 1997 and June 30, 1998, the Company had
restricted cash of $867,000, related to a letter of credit invested in a
certificate of deposit at a financial institution as a security deposit for its
office facilities (see Note 6). Such amount is included in other assets in the
accompanying consolidated balance sheets.
F-10
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated amortization
and depreciation. Depreciation is computed using the straight-line method over
the estimated useful life of the related asset, generally three to seven years.
Leasehold improvements and equipment acquired under capital leases are amortized
over the shorter of the lease term or the estimated useful life of the related
asset.
INTANGIBLE ASSETS
All intangible assets, which consist primarily of software licenses,
intangibles related to services agreements and goodwill, are amortized on a
straight-line basis over three years.
SOFTWARE DEVELOPMENT COSTS
Software development costs are incurred in the development or enhancement of
software utilized in providing the Company's business management systems and
services. Software development costs incurred after the establishment of
technological feasibilty for each product or process are capitalized and
capitalization ceases when the product or process is available for general
release to customers or is put into service. Capitalized internally developed
software costs were approximately $1,001,000, $291,000 and $165,000 for the
years ended December 31, 1996 and 1997 and the six months ended June 30, 1997,
respectively. There were no internally developed software costs capitalized for
the year ended December 31, 1995 or for the six months ended June 30, 1998.
Capitalized internally developed software costs are amortized based on the
greater of the amount determined using the straight line method over the
estimated useful economic life of the software or the ratio of remaining
unamortized costs to current and expected future revenue from the software.
Amortization expense related to the Company's capitalized internally developed
software costs included in cost of revenue were approximately $134,000,
$376,000, $173,000 and $782,000 for the years ended December 31, 1996 and 1997
and the six months ended June 30, 1997 and 1998, respectively. There was no
amortization expense related to ActaMed's capitalized internally developed
software costs for the year ended December 31, 1995.
LONG-LIVED ASSETS
The Company continually monitors events and changes in circumstances that
could indicate carrying amounts of long-lived assets, including intangible
assets, may not be recoverable. When such events or changes in circumstances are
present, the Company assesses the recoverability of long-lived assets by
determining whether the carrying value of such assets will be recovered through
undiscounted expected future cash flows. In June 1998, the Company evaluated the
carrying value of the capitalized internally developed software in light of the
changes in operations resulting from the acquisition of ActaMed by Healtheon.
The Company determined that it expected no future cash flows to be generated by
this software and, accordingly, wrote off the remaining unamortized balance of
$603,000 related to capitalized internally developed software. Such amount is
included in the $782,000 amortization expense for the six months ended June 30,
1998 noted above. No impairment losses were recorded for the years ended
December 31, 1995, 1996 and 1997 or for the six months ended June 30, 1997.
F-11
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company earns revenue from services and services to related parties,
both of which include providing access to its network-based services and
performing development and consulting services, and from licensing software. The
Company earns network-based services revenue from fixed fee subscription
arrangements, which is recognized ratably over the term of the applicable
agreement, and from arrangements that are priced on a per-transaction or
per-user basis, which is recognized as the services are performed. Revenue from
development projects is recognized on a percentage-of-completion basis or as
such services are performed, depending on the terms of the contract. Revenue
from consulting services is recognized as such services are performed. Cash
received in excess of revenue recognized relating to such services has been
recorded as deferred revenue in the accompanying consolidated balance sheets.
Revenue from services to related parties consists of services revenue
attributable to United HealthCare and SmithKline Labs. To date, the Company has
derived no significant revenue from brokers, value-added resellers or systems
integrators.
During the year ended December 31, 1997, the Company entered into agreements
with two customers to manage and operate their current and expanding information
technology ("IT") operations, to develop a suite of specific Internet-based
commercial software applications and to assist these customers in migrating from
their current IT operating environment to these new applications. The Company
utilizes its own personnel, certain outside contractors and certain personnel
and facilities of the customers that are leased under contract terms to the
Company for these services. The cost of these leased customer personnel and
facilities is included as part of the total costs of the IT and development
services billed to the customers by the Company. For the year ended December 31,
1997 and the six months ended June 30, 1998, the Company recognized revenue of
approximately $2,100,000 and $7,304,000, respectively, for the IT services and
approximately $200,000 and $2,497,000, respectively, for the development
services. Included in the revenue recognized for IT services for the year ended
December 31, 1997 and the six months ended June 30, 1998 were amounts related to
leased personnel and facilities of $1,909,000 and $6,088,000, respectively,
which amounts were also included in cost of revenue for the respective periods.
The Company recognizes revenue from license fees when a noncancelable
license agreement has been signed with a customer, the software product covered
by the license agreement has been delivered, there are no uncertainties
surrounding product acceptance, there are no significant future performance
obligations, the license fees are fixed and determinable and collection of the
license fees is considered probable. The Company's products do not require
significant customization. Revenue from software licensing fees was $1,717,000,
$4,981,000, $1,780,000, $390,000 and $390,000, respectively, for the years ended
December 31, 1995, 1996 and 1997 and the six months ended June 30, 1997 and
1998.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition." SOP
97-2 is effective January 1, 1998 and generally requires revenue earned on
software arrangements involving multiple elements such as software products,
upgrades, enhancements, postcontract customer support, installation and training
to be allocated to each element based on the relative fair values of the
elements. There was no material change to the Company's accounting for revenue
as a result of the adoption of SOP 97-2.
F-12
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ActaMed entered into a national marketing and licensing agreement (the
"Agreement") with International Business Machines Corporation ("IBM") in 1995
that granted IBM a nonexclusive, nontransferable right to market ActaMed's
software and services for a total of $6,300,000. For the years ended December
31, 1995, 1996 and 1997, approximately $1,700,000, $3,400,000 and $1,200,000,
respectively, of this amount was recognized as software license revenue upon
delivery of the software. No software license revenue was recognized under this
agreement for the six months ended June 30, 1997 or 1998.
In December 1996, the Company entered into a new agreement (the "License")
to license its newly granted patent to IBM. As part of the License, IBM agreed
to pay ActaMed $4,800,000 over a four-year period. Additionally, in conjunction
with the License, the Company issued IBM a five-year warrant to purchase 282,522
shares of the Company's common stock at a price of $7.97 per share. Because of
the extended payment terms and issues related to the previous Agreement, the
Company concluded that the license fee was not assured of collection and,
accordingly, is recognizing this revenue as the proceeds are collected. For the
years ended December 31, 1996 and 1997 and the six months ended June 30, 1997
and 1998, the Company recognized revenue from the License of $995,000, $780,000,
$390,000 and $390,000, respectively. At December 31, 1997, amounts due from IBM
of $738,000 and $1,715,000 were included in accounts receivable and other
assets, respectively. At June 30, 1998, amounts due from IBM of $776,000 and
$1,318,000 were included in accounts receivable and other assets, respectively.
Deferred revenue at December 31, 1996 and 1997 and June 30, 1998 included
$3,121,000, $2,341,000 and $1,951,000, respectively, related to the License.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value for marketable debt securities is based on quoted market
prices. The carrying value of these securities approximates their fair value.
The fair value of notes is estimated by discounting the future cash flows
using the current interest rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities. The
carrying value of the note receivable from an officer approximated its fair
value.
The fair value of short-term and long-term capital lease obligations is
estimated based on current interest rates available to the Company for debt
instruments with similar terms, degrees of risk and remaining maturities. The
carrying values of these obligations approximate their respective fair values.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company currently derives a substantial portion of its consolidated
revenue from a few large customers two of which are related parties. Two
customers represented 35% and 17% of the total balance of trade accounts
receivable and amounts due from related parties at December 31, 1997, and three
customers represented 31%, 19% and 15% of the total balance of trade accounts
receivable and amounts due from related parties at June 30, 1998. The Company
believes that the concentration of credit risk in its trade receivables, with
respect to its limited customer base, is substantially mitigated by the
Company's credit evaluation process. The Company does not require collateral. To
date, the Company's bad debt write-offs have not been significant. During the
years ended December 31, 1996 and 1997 and the six
F-13
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
months ended June 30, 1998, respectively, the Company added approximately
$41,000, $35,000 and $66,000 to its bad debt reserves. Total write-offs of
uncollectible amounts were zero, $5,000 and $2,000 in these periods,
respectively.
For the year ended December 31, 1995, one customer accounted for 85% of
consolidated revenue. For the year ended December 31, 1996, two customers
accounted for 46% and 38% of consolidated revenue. For the year ended December
31, 1997, two customers accounted for 55% and 15% of consolidated revenue. For
the six months ended June 30, 1998, four customers accounted for 28%, 23%, 22%
and 20% of consolidated revenue.
The Company operates solely within one business segment, the development and
marketing of healthcare transaction and information services delivered over the
Internet, private intranets or other networks. Through June 30, 1998, the
Company had no export sales.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair market value of the shares at the date
of grant. As permitted under Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," the Company
accounts for stock option grants to employees and directors in accordance with
APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25").
NET LOSS PER COMMON SHARE
Basic net loss per common share and diluted net loss per common share are
presented in conformity with SFAS No. 128, "Earnings Per Share," for all periods
presented. Pursuant to the Securities and Exchange Commission Staff Accounting
Bulletin No. 98, common stock and convertible preferred stock issued or granted
for nominal consideration prior to the anticipated effective date of the
Company's initial public offering must be included in the calculation of basic
and diluted net loss per common share as if they had been outstanding for all
periods presented. To date, the Company has not had any issuances or grants for
nominal consideration.
In accordance with SFAS No. 128, basic net loss per common share has been
computed using the weighted-average number of shares of common stock outstanding
during the period, less shares subject to repurchase. Basic pro forma net loss
per common share, as presented in the statements of operations, has been
computed as described above and also gives effect, under Securities and Exchange
Commission guidance, to the conversion of the convertible and convertible
redeemable preferred stock (using the if-converted method) from the original
date of issuance. On May 19, 1998, in connection with Healtheon's acquisition of
ActaMed, all outstanding shares of Healtheon's convertible preferred stock and
ActaMed's convertible redeemable preferred stock were converted into an
aggregate of 39,272,329 shares of common stock. There were no shares of
convertible or convertible redeemable preferred stock outstanding at June 30,
1998.
F-14
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table presents the calculation of basic and diluted and pro
forma basic and diluted net loss per common share follows (in thousands, except
per share data):
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
--------------------------------- ----------------------
1995 1996 1997 1997 1998
--------- ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss applicable to common stockholders................ $ (4,458) $ (22,517) $ (26,266) $ (13,307) $ (21,447)
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
Basic and diluted:
Weighted-average shares of common stock outstanding..... 5,246 7,398 8,621 8,469 18,999
Less: Weighted-average shares subject to repurchase..... -- (815) (1,398) (1,276) (1,367)
--------- ---------- ---------- ---------- ----------
Weighted-average shares used in computing basic and
diluted net loss per common share....................... 5,246 6,583 7,223 7,193 17,632
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
Basic and diluted net loss per common share............... $ (.85) $ (3.42) $ (3.64) $ (1.85) $ (1.22)
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
Pro forma:
Shares used above......................................... 7,223 17,632
Pro forma adjustment to reflect weighted effect of assumed
conversion of convertible preferred stock............... 37,492 28,999
---------- ----------
Shares used in computing pro forma basic and diluted net
loss per common share (unaudited)....................... 44,715 46,631
---------- ----------
---------- ----------
Pro forma basic and diluted net loss per common share
(unaudited)............................................. $ (.59) $ (.46)
---------- ----------
---------- ----------
</TABLE>
The Company has excluded all convertible redeemable preferred stock,
convertible preferred stock, warrants, outstanding stock options and shares
subject to repurchase by the Company from the calculation of diluted loss per
common share because all such securities are anti-dilutive for all periods
presented. The total numbers of shares excluded from the calculations of diluted
loss per share were 10,157,109 (unaudited), 36,643,084, 51,216,689, 36,450,074
and 12,379,402 for the years ended December 31, 1995 (unaudited), 1996 and 1997
and the six months ended June 30, 1997 and 1998, respectively. See Notes 9, 10
and 11 for further information on these securities.
In addition, subsequent to June 30, 1998, the Company granted options and
restricted stock agreements to purchase 3,433,500 shares of common stock and
issued 1,600,000 shares of common stock in August 1998 in connection with the
acquisition of Metis, LLC of which 476,548 shares will be issued to employees
pursuant to restricted stock purchase agreements subject to a lapsing right of
repurchase at the option of the Company, over the agreements' respective vesting
periods. See Notes 14 and 15.
COMPREHENSIVE LOSS
The Company has no material components of other comprehensive loss.
F-15
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
The Company is required to adopt SFAS No. 131 for the year ending December 31,
1998. SFAS No. 131 requires disclosure of certain information regarding
operating segments, products and services, geographic areas of operation and
major customers. Adoption of SFAS No. 131 is expected to have no material impact
on the Company's financial position, results of operations or cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Company is required to adopt SFAS No.
133 for the year ending December 31, 2000. SFAS No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. Because the Company
currently holds no derivative financial instruments and does not currently
engage in hedging activities, adoption of SFAS No. 133 is expected to have no
material impact on the Company's financial position, results of operations or
cash flows.
2. BUSINESS COMBINATIONS
ACQUISITION OF EDI SERVICES, INC.
Effective March 31, 1996, ActaMed acquired EDI Services Inc. ("EDI"), a
wholly-owned subsidiary of United HealthCare Corporation ("United HealthCare"),
in a transaction pursuant to which EDI became a wholly-owned subsidiary of
ActaMed. ActaMed issued 6,488,276 shares of Series C convertible redeemable
preferred stock with a fair value of $21,000,000 and incurred
acquisition-related costs of approximately $316,000 in connection with the
acquisition. EDI is a provider of electronic data interchange services to health
care providers and has marketed its health care network product, ProviderLink,
to providers of United HealthCare's local health plans since 1992.
In connection with the acquisition, United HealthCare and ActaMed entered
into a five-year Services and License Agreement pursuant to which the Company
earns transaction fee revenue by providing certain health care information
services to United HealthCare and its provider network and ProviderLink
subscribers.
The acquisition was accounted for as a purchase. Accordingly, the operations
of EDI were included in the Company's consolidated statements of operations only
after March 31, 1996. Assets and liabilities acquired in connection with this
acquisition were recorded at their estimated fair market values. Approximately
$359,000 of the purchase price was allocated to certain equipment and the
remaining approximately $20,957,000 of the purchase price was allocated to
intangible assets, consisting principally of in-process research and
development, software, the Services and License Agreement, trademarks and
goodwill. Purchased in-process research and development costs of approximately
$5,215,000 were written off by the Company at the time the acquisition was
consummated. Consistent with the Company's tests for internally developed
software, the Company determined the amounts to be allocated to developed
software and in-process research and development based on whether technological
feasibility had been achieved and whether there was any alternative future use
for the technology. At the date of the acquisition of EDI, the Company concluded
that the in-process research and development had no
F-16
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
2. BUSINESS COMBINATIONS (CONTINUED)
alternative future use after taking into consideration the potential for usage
of the software in different products, resale of the software and internal
usage, and accordingly charged such amounts to the Company's operations.
Intangible assets arising from the acquisition of EDI at March 31, 1996 is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
AMORTIZATION PERIOD
-------------------
<S> <C> <C>
Goodwill....................................................... 3 years $ 8,012
Software....................................................... 3 years 3,118
Service and License Agreement.................................. 3 years 2,855
Trademarks..................................................... 3 years 216
Other intangibles.............................................. 3 years 1,541
---------
$ 15,742
---------
---------
</TABLE>
The following pro forma information gives effect to the acquisition of EDI
as if such transaction had occurred as of the beginning of each respective year
(in thousands, except per share data):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
---------- ----------
(UNAUDITED)
<S> <C> <C>
Net revenue........................................................... $ 6,330 $ 12,031
---------- ----------
---------- ----------
Net loss applicable to common stockholders............................ $ (11,475) $ (19,188)
---------- ----------
---------- ----------
Basic and diluted net loss per common share........................... $ (2.91)
----------
----------
</TABLE>
The pro forma net loss information excludes the $5,215,000 write-off of
acquired in-process research and development as it represents a nonrecurring
charge.
ACQUISITION OF ACTAMED CORPORATION
On May 19, 1998, the Company completed its acquisition of ActaMed, a Georgia
corporation that develops and markets an integrated health care network, in a
transaction that has been accounted for as a pooling of interests. Accordingly,
the financial information presented reflects the combined financial position and
operations of the Company and ActaMed for all dates and periods presented. The
Company issued 23,271,355 shares of its common stock in exchange for all of the
outstanding shares of common and convertible redeemable preferred stock of
ActaMed. The Company also assumed all outstanding stock options and warrants to
acquire 3,383,011 shares of ActaMed capital stock, after giving effect to the
exchange ratio.
F-17
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
2. BUSINESS COMBINATIONS (CONTINUED)
Separate results of the combined entities for the years ended December 31,
1995, 1996 and 1997 and the four months ended April 30, 1998 (period ended
immediately prior to the acquisition) were as follows (in thousands, unaudited):
<TABLE>
<CAPTION>
FOUR MONTHS
YEARS ENDED DECEMBER 31, ENDED
--------------------------------- APRIL 30,
1995 1996 1997 1998
--------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Revenue:
Healtheon...................................................... $ -- $ 1,200 $ 3,199 $ 6,405
ActaMed........................................................ 2,175 9,813 10,191 6,690
--------- ---------- ---------- ------------
$ 2,175 $ 11,013 $ 13,390 $ 13,095
--------- ---------- ---------- ------------
--------- ---------- ---------- ------------
Net loss:
Healtheon...................................................... $ -- $ (8,543) $ (13,979) $ (6,664)
ActaMed........................................................ (3,734) (13,974) (12,287) (5,601)
--------- ---------- ---------- ------------
$ (3,734) $ (22,517) $ (26,266) $ (12,265)
--------- ---------- ---------- ------------
--------- ---------- ---------- ------------
</TABLE>
There were no significant intercompany transactions between the two
companies or significant conforming accounting adjustments.
3. SERVICES AGREEMENT WITH SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC.
Effective December 31, 1997, the Company entered into a series of agreements
with SmithKline Beecham Clinical Laboratories, Inc. ("SmithKline") to outsource
the network connection between their customers and SmithKline laboratories. In
connection with this transaction, SmithKline and the Company entered into a
five-year Services Agreement pursuant to which the Company will earn transaction
fee revenue by providing certain health care information services to SmithKline
and its provider customers.
As part of that transaction, the Company acquired a license to SBCL SCAN
software and computer workstations that reside in various medical providers'
offices. At December 31, 1997, the SCAN license and the assets from one region
of the country were transferred to the Company for $2,000,000 in cash and
2,317,913 shares of Series D convertible redeemable preferred stock valued at
$8,500,000. In March and June 1998, the assets for the remaining regions of the
country were transferred to the Company and the Company paid the remaining
purchase price of $7,700,000 through the issuance of 763,548 shares of the
Company's Series D convertible redeemable preferred stock in March and 1,336,209
shares of the Company's common stock in June. The value of the services
agreement and the SCAN software license totaled $14,774,000, and the value of
the computer workstations totaled $3,426,000.
SmithKline determined there was substantial benefit to their existing
customers and potential marketing advantages in attracting new customers, if the
SCAN software was upgraded to a new technology platform. Accordingly, in 1998
SmithKline entered into a development agreement with the Company to upgrade the
technology. Payments to the Company are based upon achieving certain milestones
in the development effort. At June 30, 1998 the Company has not achieved any
milestones and
F-18
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
3. SERVICES AGREEMENT WITH SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC.
(CONTINUED)
has not received any payments from SmithKline. Accordingly, no development
revenue had been recognized by the Company under this development agreement.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1996 1997 1998
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment........................................... $ 3,677 $ 6,238 $ 10,584
Office equipment, furniture and fixtures..................... 1,185 1,237 2,330
Purchased software for internal use.......................... 1,001 1,240 1,393
Leasehold improvements....................................... 303 328 1,255
--------- --------- -----------
6,166 9,043 15,562
Less accumulated depreciation and amortization............... (1,632) (3,543) (5,602)
--------- --------- -----------
Property and equipment, net.................................. $ 4,534 $ 5,500 $ 9,960
--------- --------- -----------
--------- --------- -----------
</TABLE>
Included in property and equipment at December 31, 1996 and 1997 and June
30, 1998 were assets acquired under capital lease obligations with a cost of
approximately $2,302,000, $3,075,000 and $4,603,000, respectively. Accumulated
depreciation related to the assets acquired under capital leases totaled
$319,000, $1,174,000 and $1,613,000 at December 31, 1996 and 1997 and June 30,
1998, respectively.
5. INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
AMORTIZATION PERIOD 1996 1997
------------------- --------- --------- JUNE 30,
1998
-----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Services agreements................... 3 years $ 2,855 $ 2,855 $ 2,855
Software technology rights............ 3 years 3,118 12,449 17,892
Internally developed software......... 3 years 1,001 1,292 --
Trademarks............................ 3 years 216 216 216
Goodwill.............................. 3 years 8,012 8,012 8,012
Other................................. 3 years 1,561 1,561 1,561
--------- --------- -----------
16,763 26,385 30,536
Less accumulated amortization......... (4,119) (9,789) (13,641)
--------- --------- -----------
$ 12,644 $ 16,596 $ 16,895
--------- --------- -----------
--------- --------- -----------
</TABLE>
F-19
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
6. COMMITMENTS
The Company has entered into several lease lines of credit. Lease lines
totaling $3,500,000 and $2,000,000 were entered into during the years ended
December 31, 1996 and 1997, respectively. Approximately $2,900,000 and
$4,461,000 had been utilized under these lease lines through December 31, 1997
and June 30, 1998, respectively. At June 30, 1998, approximately $1,750,000 was
available for future utilization under these lease lines. This amount included
approximately $711,000 that was repaid under the terms of a revolving lease line
and is thus again available for future utilization. The arrangements are secured
by the property and equipment subject to the leases. The term of the leases is
generally three years and the interest rates implicit in the leases range from
16.9% to 20.2% per annum. Information on payments due under these lease lines is
included in the table below under "Capital Leases."
The Company leases its headquarters and other office facilities under
operating lease agreements that expire at various dates through 2008. Total rent
expense for all operating leases was approximately $391,000, $953,000,
$1,646,000, $756,000 and $1,052,000 for the years ended December 31, 1995, 1996
and 1997 and the six months ended June 30, 1997 and 1998, respectively, net of
sublease income from a related party of approximately $30,000, $68,000, $27,000,
$27,000 and $32,000, respectively. Future minimum lease commitments under
noncancelable lease agreements at December 31, 1997 were as follows (in
thousands):
<TABLE>
<CAPTION>
CAPITAL
OPERATING LEASES LEASES
---------------- -------------
<S> <C> <C>
Year ending December 31,
1998...................................................... $ 2,444 $ 1,167
1999...................................................... 2,423 858
2000...................................................... 2,077 164
2001...................................................... 1,506 --
2002...................................................... 963 --
Thereafter................................................ 4,978 --
------- -------------
Total minimum lease payments................................ $ 14,391 2,189
-------
-------
Amount representing interest................................ (219)
-------------
Present value of minimum lease payments under capital lease
obligations............................................... 1,970
Less current portion........................................ (1,038)
-------------
Non-current portion......................................... $ 932
-------------
-------------
</TABLE>
7. BRIDGE LOANS AND NOTE RECEIVABLE FROM OFFICER
In 1997, the Company borrowed $2,000,000 from certain stockholders in the
form of 6% convertible promissory notes (the "Notes") in contemplation of the
Series C convertible preferred stock offering. The Notes were converted into
800,000 shares of Series C convertible preferred stock upon the closing of that
offering. Warrants to purchase 61,947 shares of Series B convertible preferred
stock were issued in connection with the Notes (see Note 10).
In July 1997, in consideration of 250,000 shares of the Company's Series B
convertible preferred stock issued to an officer, the Company received a
one-year, full-recourse, noninterest-bearing promissory note
F-20
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
7. BRIDGE LOANS AND NOTE RECEIVABLE FROM OFFICER (CONTINUED)
for $500,000. At December 31, 1997, $349,000 remained outstanding under the
note. At June 30, 1998, the note had been paid in full.
In February 1998, the Company entered into a $2,000,000 line of credit
agreement with a stockholder. The Company borrowed $1,000,000 under the
agreement, which was repaid with interest at 10% per annum in May 1998.
8. LINES OF CREDIT
In September 1997, the Company entered into a line of credit agreement with
a bank that allows the Company to borrow up to $2,101,000. Amounts borrowed
under this agreement bear interest at the bank's prime rate (8.5% at December
31, 1997 and June 30, 1998). Interest is payable monthly with payments
commencing on September 30, 1997. The line of credit availability declines over
the term to $1,821,000, $1,215,000 and $547,000 at December 31, 1997, 1998 and
1999, respectively, and expires on September 5, 2000. The amount outstanding is
collateralized by certain assets. At December 31, 1997 and June 30, 1998,
$1,425,000 was outstanding under the agreement.
In December 1997, the Company entered into a loan agreement with a bank that
allows the Company to borrow up to $2,250,000. Amounts borrowed under this loan
agreement bear interest at the bank's prime rate (8.5% at December 31, 1997).
The loan was personally guaranteed by one of the Company's stockholders until
the acquisition of ActaMed in May 1998. In May 1998, concurrent with the removal
of the stockholder guarantee, the interest rate was increased to the bank's
prime rate plus 1.5% (10% at June 30, 1998). Interest is payable monthly with
payments commencing on January 31, 1998. The principal balance of the loan is
due on December 31, 1998. At December 31, 1997 and June 30, 1998, $2,000,000 was
outstanding under the loan agreement.
9. CONVERTIBLE REDEEMABLE PREFERRED STOCK
A summary of ActaMed's 8% cumulative convertible redeemable preferred stock
is as follows.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1996 1997
--------------------------- ---------------------------
ISSUED ISSUED
SHARES AND LIQUIDATION AND LIQUIDATION
AUTHORIZED OUTSTANDING PREFERENCE OUTSTANDING PREFERENCE
------------ ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Series A............. 5,519,912 5,519,912 $ 9,825,000 5,519,912 $ 10,458,000
Series B............. 2,162,759 2,162,759 7,614,000 2,162,759 8,171,000
Series C............. 6,488,276 6,488,276 22,257,000 6,488,276 23,936,000
Series D............. 2,317,913 -- -- 2,317,913 8,500,000
------------ ------------ ------------- ------------ -------------
16,488,860 14,170,947 $ 39,696,000 16,488,860 $ 51,065,000
------------ ------------ ------------- ------------ -------------
------------ ------------ ------------- ------------ -------------
</TABLE>
In March 1998, an additional 763,548 shares of Series D convertible
redeemable preferred stock were issued in connection with the asset acquisition
from SmithKline Labs (see Note 3).
F-21
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
9. CONVERTIBLE REDEEMABLE PREFERRED STOCK (CONTINUED)
Dividends on each Series were cumulative whether or not declared and are
shown as a charge against income in the accompanying financial statements. On
May 19, 1998, in connection with the acquisition of ActaMed by Healtheon, the
convertible redeemable preferred stockholders waived payment of all accrued and
unpaid dividends.
Preferred holders voted generally on an as-if converted basis. In addition,
a majority approval of the four Series was required to approve certain
transactions.
The Series A, B, C and D cumulative convertible redeemable preferred
stockholders were entitled to receive, upon liquidation, an amount per share
equal to the issuance price, plus all accrued but unpaid dividends. Common
stockholders would then have received $5,000,000. Any remaining proceeds would
then have been distributed pro rata to the stockholders, subject only to the
Series A holders' right to receive sufficient funds to provide a 20% return on
their original investment.
Each Series was redeemable at up to one-third of the originally issued
shares per year commencing in years six, seven and eight after the issue date at
a redemption price equal to the issue price plus all accrued but unpaid
dividends. On May 19, 1998, all outstanding shares of convertible redeemable
preferred stock were converted into 17,252,408 shares of common stock in
connection with the acquisition of ActaMed by the Company.
10. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
The Company was authorized to issue 48,020,000 shares of convertible
preferred stock, designated in series. A summary of convertible preferred stock
was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1996 1997
--------------------------- ---------------------------
ISSUED ISSUED
SHARES AND LIQUIDATION AND LIQUIDATION
DESIGNATED OUTSTANDING PREFERENCE OUTSTANDING PREFERENCE
------------ ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Series A............. 10,305,000 10,285,000 $ 5,143,000 10,305,000 $ 5,153,000
Series B............. 6,105,000 3,000,000 6,000,000 3,290,000 6,580,000
Series C............. 2,600,000 -- -- 2,600,000 6,500,000
Series D............. 5,000,000 -- -- 4,807,692 25,000,000
------------ ------------ ------------- ------------ -------------
24,010,000 13,285,000 $ 11,143,000 21,002,692 $ 43,233,000
------------ ------------ ------------- ------------ -------------
------------ ------------ ------------- ------------ -------------
</TABLE>
Series A and Series B convertible preferred shares included 20,000 and
25,000 shares, respectively, that were issued for services rendered.
On May 19, 1998, all outstanding shares of convertible preferred stock were
converted into shares of common stock on a one-for-one basis at the election of
the holders in connection with the Company's acquisition of ActaMed.
Concurrently with the conversion, all outstanding warrants to purchase Series B
preferred stock were converted into warrants to purchase the same number of
shares of the Company's common stock. At June 30, 1998, the Company had no
preferred stock authorized.
F-22
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
Series A, B, C and D convertible preferred stockholders were entitled to
noncumulative dividends of $0.03375, $0.135, $0.16875 and $0.351, respectively,
per share per annum. No dividends were declared through the date of conversion.
The Series A, B, C and D convertible preferred stockholders were entitled to
receive, upon liquidation, an amount per share equal to the issuance price, plus
all declared but unpaid dividends. The Series A, B, C and D convertible
preferred stockholders had voting rights equal to the common shares issuable
upon conversion.
WARRANTS
In November 1996, the Company issued a warrant to a venture capital investor
to purchase 1,000,000 shares of Series B convertible preferred stock at an
exercise price of $2.00 per share for services rendered by the investor on
behalf of the Company. A then partner of the venture capital firm assumed the
role of President and Chief Executive Officer for the Company from the Company's
inception through June 1997. The warrant was immediately exercisable and expires
three years from the date of issuance. The Company has recorded a charge of
$500,000 representing the fair value of the warrant issued and services received
based on a valuation obtained by the Company from an independent appraiser
utilizing a modified Black-Scholes option pricing model. This warrant was
outstanding at December 31, 1997 and in May 1998 was converted to a warrant to
purchase common stock. It remained outstanding at June 30, 1998.
In November 1996, the Company granted a warrant to a director of the Company
to purchase 1,000,000 shares of Series B convertible preferred stock at an
exercise price of $2.00 per share, the fair value of Series B convertible
preferred stock at the date of issuance. The warrant vests over a period of 18
months from the date of issuance. The term of the warrant is three years. This
warrant was outstanding at December 31, 1997 and was exercised in full in May
1998.
In December 1996, the Company issued a warrant to a customer to purchase
282,522 shares of the Company's common stock at a price of $7.97 per share. The
warrant expires in December 2001. This warrant was outstanding at June 30, 1998.
In July 1997, the Company issued a warrant to an officer of the Company, in
connection with his employment, to purchase 750,000 shares of Series B
convertible preferred stock at an exercise price of $2.00 per share, the fair
value of Series B convertible preferred stock at the date of issuance. The
warrant expires three years from issuance, and shares purchased under the
warrant are subject to repurchase by the Company, at the Company's option, upon
termination of employment. Shares under the warrant vest ratably over a period
of two years from the date of grant. This warrant was outstanding at December
31, 1997 and in May 1998 was converted to a warrant to purchase common stock. It
remained outstanding at June 30, 1998.
In July 1997, the Company issued warrants to purchase a total of 61,947
shares of Series B convertible preferred stock to certain investors in
connection with a bridge financing. The warrants expire four years from issuance
and are exercisable at $2.00 per share. The value of these warrants,
approximately $64,000, was expensed as a cost of financing. All of these
warrants were outstanding at December 31, 1997. In May 1998, warrants to
purchase 17,229 shares of Series B convertible preferred stock were exercised
and the remainder of the warrants, which were outstanding at June 30, 1998, were
converted to warrants to purchase 44,718 shares of common stock.
F-23
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
At December 31, 1997 the Company had reserved 2,811,947 and 282,522 shares
of its Series B preferred stock and common stock, respectively, for issuance
upon exercise of outstanding warrants. In conjunction with the acquisition of
ActaMed in May 1998, all outstanding warrants to purchase Series B preferred
stock were converted into warrants to purchase common stock. At June 30, 1998,
the Company had reserved 2,077,240 shares of its common stock for issuance upon
exercise of the outstanding warrants for common stock.
In addition, as part of a service agreement with a customer, the Company
will issue to the customer a warrant to purchase 500,000 shares of the Company's
Common Stock with an exercise price of $10.40 per share. The terms and
conditions of the warrant are currently being negotiated.
11. STOCK-BASED COMPENSATION
STOCK OPTION PLANS
Under the 1996 Stock Plan (the "1996 Plan"), which was adopted in February
1996, the Board of Directors may grant options to purchase common stock or issue
common stock subject to a restricted stock purchase agreement to eligible
participants. At December 31, 1997, a total of 9,000,000 shares had been
reserved under the Plan. In March 1998, the Board of Directors and the
stockholders approved an increase in the reserve of 1,000,000 shares and in July
1998, the Board of Directors approved an additional increase in the reserve of
5,000,000 shares to a total of 15,000,000 shares reserved. Options granted may
be either incentive stock options or nonstatutory stock options and are
exercisable within the times or upon the events determined by the Board of
Directors as specified in each option agreement. Options vest over a period of
time as determined by the Board of Directors, generally four years. The term of
the 1996 Plan is ten years. At December 31, 1997 and June 30, 1998, 274,166 and
22,523 shares, respectively, remain available for future grant under the 1996
Plan.
In connection with the acquisition of ActaMed, the Company assumed all the
outstanding options issued under the ActaMed stock option plans, after the
application of the exchange ratio, and reserved 3,100,489 shares of the
Company's common stock for issuance upon exercise of the assumed options. No
further options can be granted under these plans. At the time of the
acquisition, options for 2,717,269 shares were fully vested. The remainder of
the shares vest based upon annual cliffs over a five-year period from the date
of grant.
During the years ended December 31, 1996 and 1997, the Company issued
approximately 1,806,000 and 850,000 shares, respectively, of common stock
subject to restricted stock purchase agreements to employees for cash. No such
shares were issued during the six months ended June 30, 1998. The common stock
is subject to repurchase at the original exercise price until vested, at the
option of the Company, and approximately 614,000 shares were repurchased from
terminated employees during the year ended December 31, 1997. The shares vest
over a period of time as determined by the Board of Directors for each
individual purchase agreement, generally four years. At December 31, 1996 and
1997 and June 30, 1998, approximately 1,660,000, 1,430,000 and 1,304,000 shares,
respectively, were subject to repurchase.
F-24
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
11. STOCK-BASED COMPENSATION (CONTINUED)
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
----------- -----------------
<S> <C> <C>
ACTAMED CORPORATION
Outstanding at January 1, 1995.................................................... 4,223,214 $ .34
Granted......................................................................... 856,000 .91
Exercised....................................................................... (1,071,250) .02
Canceled........................................................................ (62,750) .83
-----------
Options outstanding at December 31, 1995.......................................... 3,945,214 $ .55
-----------
-----------
HEALTHEON CORPORATION (REFLECTING THE CONVERSION RATIO OF .6272)
Options outstanding at December 31, 1995.......................................... 2,474,438 $ .88
Granted......................................................................... 3,004,384 .54
Exercised....................................................................... (300) .05
Canceled........................................................................ (233,907) .78
-----------
Options outstanding at December 31, 1996.......................................... 5,244,615 .68
Granted......................................................................... 5,394,008 .73
Exercised....................................................................... (547,844) .16
Canceled........................................................................ (890,528) .49
-----------
Options outstanding at December 31, 1997.......................................... 9,200,251 .72
Granted (unaudited)............................................................. 1,917,806 2.76
Exercised (unaudited)........................................................... (1,659,684) .59
Canceled (unaudited)............................................................ (460,378) .86
-----------
Options outstanding at June 30, 1998 (unaudited).................................. 8,997,995 $ 1.17
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
HEALTHEON CORPORATION
ACTAMED -----------------------------------------
CORPORATION
--------------- YEARS ENDED
YEAR ENDED DECEMBER 31,
DECEMBER 31, --------------------
1995 1996 1997
--------------- --------- --------- SIX MONTHS ENDED
JUNE 30,
1998
-------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Weighted-average fair value of options granted................ $ .28 $ .15 $ .18 $ .50
----- --------- --------- -----
----- --------- --------- -----
</TABLE>
F-25
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
11. STOCK-BASED COMPENSATION (CONTINUED)
The following table summarizes information regarding options outstanding and
exercisable at December 31, 1997.
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
WEIGHTED- REMAINING WEIGHTED-
NUMBER AVERAGE CONTRACTUAL NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE LIFE (IN YEARS) EXERCISABLE EXERCISE PRICE
- ------------------------------------------- ----------- --------------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
$.03-$.08.................................. 2,490,007 $ .05 6.98 1,679,870 $ .04
$.20-$.25.................................. 3,693,879 .24 9.53 682,500 .20
$1.00-$1.50................................ 2,092,187 1.24 9.69 794,213 1.45
$3.24-$3.67................................ 924,178 3.24 7.94 76,644 3.24
----------- ----------
9,200,251 $ .72 8.63 3,233,227 $ .50
----------- ----------
----------- ----------
</TABLE>
The Company recorded deferred stock compensation of approximately $2,713,000
and $2,402,000 during the year ended December 31, 1997 and the six months ended
June 30, 1998, respectively. These amounts represented the difference between
the exercise price and the deemed fair value of the Company's common stock on
the date such stock options were granted. The Company recorded amortization of
deferred stock compensation of approximately $562,000 and $1,142,000,
respectively, during these periods. At June 30, 1998, the Company had a total of
approximately $3,411,000 remaining to be amortized over the corresponding
vesting period of each respective option, generally four years.
PRO FORMA INFORMATION
The Company has elected to follow APB No. 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS No. 123 requires use
of option valuation models that were not developed for use in valuing employee
stock options. Under APB No. 25, no compensation expense is recognized when the
exercise price of stock options granted to the Company's employees equals the
market price of the underlying stock on the date of grant.
Pro forma information regarding net loss is required by SFAS No. 123 and has
been determined as if its employee stock options granted subsequent to December
31, 1994 were accounted for under the fair value method of SFAS No. 123. The
fair value for these options was estimated at the date of grant using the
minimum value method with the following weighted-average assumptions for the
years ended December 31, 1995, 1996 and 1997 and the six months ended June 30,
1998: risk-free interest rate of
F-26
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
11. STOCK-BASED COMPENSATION (CONTINUED)
approximately 6.2%, 6.0%, 6.0% and 5.5%, respectively; a weighted-average
expected life of the option of 5.0 years, 4.3 years, 4.2 years and 3.6 years,
respectively, and a dividend yield of zero for all periods.
<TABLE>
<CAPTION>
HEALTHEON CORPORATION
ACTAMED -----------------------------------
CORPORATION
-------------- YEARS ENDED
YEAR ENDED DECEMBER 31,
DECEMBER 31, ----------------------
1995 1996 1997
-------------- ---------- ---------- SIX MONTHS
ENDED JUNE
30, 1998
-----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net loss applicable to common stockholders (in thousands):
As reported............................................... $ (4,458) $ (22,517) $ (26,266) $ (21,447)
------- ---------- ---------- -----------
------- ---------- ---------- -----------
Pro forma................................................. $ (4,488) $ (22,606) $ (26,434) $ (22,260)
------- ---------- ---------- -----------
------- ---------- ---------- -----------
Basic and diluted net loss per common share:
As reported............................................... $ (3.42) $ (3.64) $ (1.22)
---------- ---------- -----------
---------- ---------- -----------
Pro forma................................................. $ (3.43) $ (3.66) $ (1.26)
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
12. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets (liabilities) were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ---------- JUNE 30,
1998
-----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................................... $ 7,537 $ 14,263 $ 18,878
Intangible assets.......................................................... 3,067 4,564 5,944
Research and development tax credit........................................ 561 1,014 1,383
Reserves and accruals not currently deductible............................. 227 308 1,177
---------- ---------- -----------
Total deferred tax assets.................................................... 11,392 20,149 27,382
Valuation allowance.......................................................... (11,032) (19,807) (27,337)
---------- ---------- -----------
Net deferred tax assets...................................................... 360 342 45
---------- ---------- -----------
Deferred tax liabilities:
Depreciation............................................................... (31) (45) (45)
Capitalized software development costs..................................... (329) (297) --
---------- ---------- -----------
Total deferred tax liabilities............................................... (360) (342) (45)
---------- ---------- -----------
Net deferred tax assets and liabilities...................................... $ -- $ -- $ --
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
F-27
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
12. INCOME TAXES (CONTINUED)
A valuation allowance equal to 100% of the net deferred tax assets has been
established because of the uncertainty of realization of the deferred tax assets
due to the Company's lack of earnings history. The valuation allowance for
deferred tax assets increased by $4,477,000, $8,775,000 and $7,530,000 during
the years ended December 31, 1996 and 1997 and the six months ended June 30,
1998, respectively.
At December 31, 1997, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $37,575,000, which expire in 2009
through 2012, and federal tax credits of approximately $800,000, which expire in
2009 through 2012.
Approximately $16,675,000 of the net operating loss at December 31, 1997
related to a consolidated subsidiary. This loss carryforward is only available
to offset future taxable income of that subsidiary.
Because of the "change of ownership" provisions of the Internal Revenue
Code, a portion of the Company's net operating loss carryforwards and tax credit
carryforwards may be subject to an annual limitation regarding their utilization
against taxable income in future periods. A portion of these carryforwards may
expire before becoming available to reduce future income tax liabilities.
13. RELATED PARTY TRANSACTIONS
The Company has two customers that are significant stockholders of the
Company.
The Company entered into a Development Agreement with a partnership
controlled by the former Chairman of the Board of Directors of ActaMed. Pursuant
to this agreement, the Company granted the partnership exclusive licenses to use
ActaMed's technology for industries other than the health care industry. Under
the agreement, the Company will receive a commercial royalty on the
partnership's gross receipts. If the Company desires in the future to expand to
other industries, the partnership must either develop that industry in a defined
time period or rights to that industry revert to the Company. The agreement
expires December 3, 1998 and to date no fees have been paid to the Company
thereunder.
The Company shares office space and provides administrative support and
network resources to a company controlled by a member of the Board of Directors.
Amounts reimbursed for the shared facilities and administrative support totaled
approximately $45,000, $28,000, $59,000, $27,000 and $32,000 for the years ended
December 31, 1995, 1996, and 1997 and the six months ended June 30, 1997 and
1998, respectively. Approximately $211,000, $187,000, $78,000 and $27,000 was
reimbursed during the years ended December 31, 1995, 1996 and 1997 and the six
months ended June 30, 1997, respectively, for the use of the network maintained
by the Company. No income for the use of the network by the related party was
recognized for the six months ended June 30, 1998. All such amounts are included
as an offset to general and administrative expenses in the accompanying
consolidated statements of operations. Amounts due from the related party of
$33,000 and $72,000 at December 31, 1996 and 1997, respectively, were included
in other current assets in the accompanying consolidated balance sheets. There
were no amounts due from the related party at June 30, 1998.
14. ACQUISITION OF METIS, LLC (UNAUDITED)
On August 25, 1998, the Company acquired Metis, LLC ("Metis"), a provider of
Internet/intranet strategic consulting, design and development of Internet-based
applications and content for the healthcare
F-28
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
14. ACQUISITION OF METIS, LLC (UNAUDITED) (CONTINUED)
industry enabling clinical integration and managed care process improvement. The
acquisition will be accounted for using the purchase method of accounting and,
accordingly, the purchase price will be allocated to the tangible and intangible
assets acquired and the liabilities assumed on the basis of their respective
fair values on the acquisition date.
The total purchase price of approximately $10.0 million consists of
1,123,452 shares of the Company's Common Stock with an estimated fair market
value of approximately $9.0 million, a cash payment of approximately $.6
million, liabilities assumed of approximately $.3 million and other estimated
acquisition related expenses, consisting primarily of legal and other
professional fees, of approximately $.1 million. The Company is currently
determining the fair values of the assets acquired and the liabilities assumed,
including the fair values of any identifiable intangible assets acquired.
15. SUBSEQUENT EVENTS (UNAUDITED)
In July and September 1998, the Company granted to employees options to
purchase common stock and issued shares of common stock pursuant to restricted
stock agreements equal to a total of 3,433,500 shares of the Company's common
stock at exercise prices ranging from $4.50 to $8.00 per share. The Company
estimates that it will record deferred stock compensation of approximately
$6,000,000 with regard to these grants.
In July 1998, the Board of Directors approved a resolution authorizing the
Company to issue up to 5,000,000 shares of preferred stock. To date, no
preferred shares have been issued. Also, in July 1998, the Board of Directors
approved a 5,000,000 increase in the common shares reserved for issuance under
the Company's 1996 Stock Plan.
In September 1998, the Board of Directors approved the adoption of the
Company's 1998 Employee Stock Purchase Plan (the "1998 Purchase Plan"). A total
of 1,000,000 shares of common stock has been reserved for issuance under the
1998 Purchase Plan, plus annual increases equal to the lesser of 500,000 shares,
0.5% of the outstanding common shares on such date or a lesser amount determined
by the Board of Directors.
F-29
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors of United HealthCare Corporation:
We have audited the accompanying statements of divisional net loss and
United HealthCare Corporation's ("United's") net investment and of divisional
cash flows for the year ended December 31, 1995 of EDI Services Group ("EDI") (a
Division of United.) These statements of divisional net loss and United's net
investment and of divisional cash flows are the responsibility of United's
management. Our responsibility is to express an opinion on these statements of
divisional net loss and United's net investment and of divisional cash flows
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements of divisional net loss and
United's net investment and of divisional cash flows are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statements of divisional net loss and
United's net investment and of divisional cash flows. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall statements of divisional net loss
and United's net investment and of divisional cash flows presentation. We
believe that our audit provides a reasonable basis for our opinion.
The accompanying statements of divisional net loss and United's net
investment and of divisional cash flows reflect a component of a business
enterprise that was derived from a consolidated group of companies rather than a
complete legal entity. See Note 1 to the statements of divisional net loss and
United's net investment and of divisional cash flows for a description of the
basis of presentation.
In our opinion, the statements of divisional net loss and United's net
investment and of divisional cash flows present fairly, in all material
respects, the results of its divisional net loss and United's net investment and
of divisional cash flows for the year ended December 31, 1995, in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
April 4, 1996
F-30
<PAGE>
EDI SERVICES GROUP
(A DIVISION OF UNITED HEALTHCARE CORPORATION)
STATEMENT OF DIVISIONAL NET LOSS AND UNITED'S NET INVESTMENT
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Revenue:
Related-party processing revenue.................................. $2,900,448
Related-party site revenue........................................ 1,155,300
Other processing revenue.......................................... 100,013
----------
Total revenue................................................... 4,155,761
Operating costs and expenses:
Cost of revenues.................................................. 1,646,039
Sales and marketing............................................... 302,145
Research and development.......................................... 1,604,897
General and administrative........................................ 642,980
----------
Total operating costs and expenses.............................. 4,196,061
----------
Loss before income taxes............................................ (40,300)
Income taxes........................................................ 48,177
----------
Net loss........................................................ (88,477)
United's net investment -- Beginning of period...................... 124,393
Net cash flows to EDI division...................................... 417,213
----------
United's net investment -- end of period............................ $ 453,129
----------
----------
</TABLE>
See notes to financial statements.
F-31
<PAGE>
EDI SERVICES GROUP
(A DIVISION OF UNITED HEALTHCARE CORPORATION)
STATEMENT OF DIVISIONAL CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Operating activities:
Net loss....................................................................... $ (88,477)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization................................................ 285,613
Increase in deferred income taxes............................................ 48,177
Changes in assets and liabilities:
Accounts receivable........................................................ (13,347)
Accounts payable........................................................... (58,612)
Accrued expenses........................................................... (46,083)
---------
Net cash provided by operating activities................................ 127,271
Investing activities:
Purchase of property........................................................... (190,375)
Software development costs..................................................... (354,109)
---------
Net cash used in investing activities.................................... (544,484)
---------
Net cash flows of division which were provided by United......................... $(417,213)
---------
---------
</TABLE>
See notes to financial statements.
F-32
<PAGE>
EDI SERVICES GROUP
(A DIVISION OF UNITED HEALTHCARE CORPORATION)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS -- EDI Services Group ("EDI") is an operating division of
United HealthCare Corporation ("United"). EDI was established to develop and
market software to control a network that facilitates the exchange of health
care information among managed care organizations, insurance carriers,
hospitals, physicians, and other health care industry participants. On December
15, 1995, United transferred EDI and its ProviderLink operations to a holding
company, UHC Green Acquisition Inc. ("UHC Green") (a wholly owned subsidiary of
United).
BASIS OF PRESENTATION -- The accompanying statements of divisional net loss
and United's net investment and divisional cash flows have been prepared from
the books and records maintained by EDI and United. The statement of divisional
net loss may not necessarily be indicative of the results of operations that
would have been obtained if EDI had been operated as an independent entity. The
statement of divisional net loss includes allocation of certain expenses that
are material in amount. Such expenses are allocations for corporate services and
overhead.
Intercompany revenue results from network services provided to health plans
owned or managed by United.
The accompanying financial statements have been prepared on a going-concern
basis, which contemplates the realization of assets and liabilities in the
normal course of business. As shown in the financial statements, during the year
ended December 31, 1995, EDI incurred a net loss of approximately $88,000 and a
cash flow deficit of approximately $417,000.
As discussed in Note 5, EDI was acquired by ActaMed Corporation ("ActaMed")
effective March 31, 1996. EDI's continued existence is dependent on funding of
its cash flow deficit by ActaMed and on its relationship and service agreement
with United. The service agreement states that the combined entities will be the
primary provider of electronic data interchange services for United for a period
of five years.
The nature of EDI's operations exposes EDI to certain business risks. Such
business risks include EDI's concentration of sales transactions with United,
which accounted for 98% of EDI's 1995 revenues (see Note 4). The market for
health care information services is highly competitive and subject to rapid
technological change, evolving industry standards, and regulatory developments
and influences that may affect both the operations of EDI and its customers. In
addition, significant demands may be placed on EDI's management as a result of
EDI's merger with ActaMed (see Note 5). Other significant business risks faced
by EDI include a dependence on key employees and the risk of liability
associated with unforeseen software product errors.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
SIGNIFICANT ACCOUNTING POLICIES
INCOME TAXES -- United provides for income taxes under the provisions of
SFAS No. 109, "Accounting for Income Taxes," which requires deferred income tax
balances to be computed annually for differences between financial statement and
tax bases of assets and liabilities based on enacted tax rates. An income tax
provision has been allocated to EDI as if EDI filed on a separate return basis;
however, under the
F-33
<PAGE>
EDI SERVICES GROUP
(A DIVISION OF UNITED HEALTHCARE CORPORATION)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1995 (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
income tax allocation agreement policy with United, no benefit is allocated for
losses incurred which are utilized in the consolidated income tax return (see
Note 2).
UNITED'S NET INVESTMENT -- United's net investment, as shown in the
accompanying statement of divisional net loss and United's net investment,
represents losses incurred by EDI since inception and the intercompany account
with United that consists of transactions with United and the net cash flows of
EDI, which have been funded by United.
REVENUE RECOGNITION -- EDI earns revenue from providing access to its
network services, including fixed fee and transaction-based services. EDI
recognizes revenue from network services over the period the services are
provided.
2. INCOME TAXES
Components of income tax expense for the year ended December 31, 1995 were:
<TABLE>
<CAPTION>
<S> <C>
Deferred:
State.................................................................. $11,666
Federal................................................................ 36,511
-------
$48,177
-------
-------
</TABLE>
Differences between the provision for income taxes at the federal statutory
rate and the recorded provision for the year ended December 31, 1995 are
summarized as follows:
<TABLE>
<S> <C>
Benefit at statutory rate............................................... $ (13,610)
State income taxes...................................................... (2,590)
Net operating loss carryforward for which no benefit could be recognized
under United's tax allocation policy.................................. 60,368
Other................................................................... 4,009
-----------
$ 48,177
-----------
-----------
</TABLE>
As of December 31, 1995, EDI had no federal and state tax loss
carryforwards. Under a tax sharing agreement, tax loss carryforwards are not
available to EDI because United has already realized these tax benefits in its
prior years, consolidated federal and state returns.
3. EMPLOYEE STOCK OWNERSHIP PLAN
EDI employees participate in United's unleveraged Employee Stock Ownership
Plan ("ESOP") maintained for the benefit of all eligible employees. United
contributions are made at the discretion of the Board of Directors.
Contributions totaling $3,700 for the year ended December 31, 1995, have been
made to the ESOP for EDI employees.
F-34
<PAGE>
EDI SERVICES GROUP
(A DIVISION OF UNITED HEALTHCARE CORPORATION)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1995 (CONTINUED)
4. RELATED PARTIES
Revenue from processing transactions and site licensing for United and its
affiliates comprises approximately 98% of total revenue for the year ended
December 31, 1995, and was approximately $4,056,000 for the year then ended.
EDI utilizes various common corporate systems and support maintained by
United. The related costs are charged to EDI based on specific allocation
methods, if applicable, and are based on employee headcount. These functions
include human resources, accounting, legal, other processing and administrative
services, and building rent. The total amounts allocated to EDI were
approximately $438,000 for the year ended December 31, 1995. United's management
believes that these allocations are reasonable; however, these allocations would
not necessarily represent the amounts that would have been incurred on a
separate company basis.
5. SUBSEQUENT EVENTS
On March 1, 1996, United and UHC Green (renamed "EDI Services, Inc.")
entered into an agreement with ActaMed and EDI Acquisition, Inc. (a
subcorporation of ActaMed). This agreement allows for the acquisition of EDI
Services, Inc. by ActaMed pursuant to the merger of EDI Acquisition, Inc. with
and into EDI Services, Inc. effective March 31, 1996. The outstanding shares of
capital stock of EDI Services, Inc. were converted into 10,344,828 shares of
ActaMed's Series C Convertible Redeemable Preferred Stock.
F-35
<PAGE>
[LOGO]
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL
PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
JURISDICTION.
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED SEPTEMBER 15, 1998
SHARES
[LOGO]
COMMON STOCK
-----------------
OF THE SHARES OF COMMON STOCK OFFERED HEREBY, SHARES ARE BEING
OFFERED INITIALLY OUTSIDE OF THE UNITED STATES AND CANADA BY THE
INTERNATIONAL UNDERWRITERS AND SHARES ARE BEING OFFERED INITIALLY
IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS. SEE
"UNDERWRITERS." ALL OF THE SHARES OF COMMON STOCK BEING OFFERED HEREBY
ARE BEING SOLD BY THE COMPANY. PRIOR TO THIS OFFERING, THERE HAS
BEEN NO PUBLIC MARKET FOR THE COMMON STOCK OF THE COMPANY. IT IS
CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE WILL
BE BETWEEN $ AND $ PER SHARE. SEE "UNDERWRITERS" FOR A
DISCUSSION OF THE FACTORS TO BE CONSIDERED IN DETERMINING
THE INITIAL PUBLIC OFFERING PRICE. APPLICATION HAS BEEN
MADE TO LIST THE COMMON STOCK FOR QUOTATION ON THE
NASDAQ NATIONAL MARKET UNDER THE SYMBOL "HLTH."
---------------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
COMMENCING ON PAGE 4 HEREOF.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
PRICE $ A SHARE
-------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
--------------------- ----------------------- -----------------------
<S> <C> <C> <C>
PER SHARE.................................... $ $ $
TOTAL (3).................................... $ $ $
</TABLE>
- -------------
(1) THE COMPANY HAS AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST CERTAIN
LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. SEE "UNDERWRITERS."
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $ .
(3) THE COMPANY HAS GRANTED THE U.S. UNDERWRITERS AN OPTION, EXERCISABLE
WITHIN 30 DAYS OF THE DATE HEREOF, TO PURCHASE UP TO AN AGGREGATE OF
ADDITIONAL SHARES AT THE PRICE TO PUBLIC, LESS UNDERWRITING
DISCOUNTS AND COMMISSIONS FOR THE PURPOSE OF COVERING OVER-ALLOTMENTS,
IF ANY. IF THE U.S. UNDERWRITERS EXERCISE SUCH OPTION IN FULL, THE TOTAL
PRICE TO PUBLIC, UNDERWRITING DISCOUNTS AND COMMISSIONS AND PROCEEDS TO
COMPANY WILL BE $ , $ AND $ , RESPECTIVELY. SEE
"UNDERWRITERS."
---------------------------
THE SHARES ARE OFFERED, SUBJECT TO PRIOR SALE, WHEN, AS AND IF ACCEPTED BY
THE UNDERWRITERS NAMED HEREIN AND SUBJECT TO APPROVAL OF CERTAIN LEGAL MATTERS
BY FENWICK & WEST LLP, COUNSEL FOR THE UNDERWRITERS. IT IS EXPECTED THAT
DELIVERY OF THE SHARES WILL BE MADE ON OR ABOUT , 1998 AT THE OFFICE OF
MORGAN STANLEY & CO. INCORPORATED, NEW YORK, N.Y., AGAINST PAYMENT THEREFOR IN
IMMEDIATELY AVAILABLE FUNDS.
---------------------
MORGAN STANLEY DEAN WITTER GOLDMAN SACHS INTERNATIONAL
HAMBRECHT & QUIST VOLPE BROWN WHELAN & COMPANY
, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of Common Stock being registered. All amounts are estimates except
the Securities and Exchange Commission registration fee, the NASD filing fee and
the Nasdaq National Market listing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
-------------
<S> <C>
Securities and Exchange Commission registration fee............................ $ 22,125
NASD filing fee................................................................ 8,000
Nasdaq National Market listing fee............................................. 50,000
Printing and engraving expenses................................................ *
Legal fees and expenses........................................................ *
Accounting fees and expenses................................................... *
Blue Sky fees and expenses..................................................... *
Transfer agent fees............................................................ *
Miscellaneous.................................................................. *
-------------
Total...................................................................... $ *
-------------
-------------
</TABLE>
- ---------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
Article V of the Registrant's Restated Certificate of Incorporation provides
for the indemnification of directors to the fullest extent permissible under
Delaware law.
Article VI of the Registrant's Bylaws provides for the indemnification of
officers and directors (and allows the Registrant to indemnify other employees
and third parties) acting on behalf of the Registrant if such person acted in
good faith and in a manner reasonably believed to be in and not opposed to the
best interest of the Registrant, and, with respect to any criminal action or
proceeding, the indemnified party had no reason to believe his or her conduct
was unlawful.
The Registrant intends to enter into indemnification agreements with its
directors and executive officers, in addition to indemnification provided for in
the Registrant's Bylaws, and intends to enter into indemnification agreements
with any new directors and executive officers in the future.
The Registrant intends to obtain directors' and officers' insurance
providing indemnification for certain of the Registrant's directors, officers
and employees for certain liabilities.
Reference is also made to Section 7 of the Underwriting Agreement to be
filed as Exhibit 1.1 to the Registration Statement for information concerning
the Underwriters' obligation to indemnify the Registrant and its officers and
directors in certain circumstances.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) From its founding in December 1995, through September , 1998, the
Registrant has issued and sold the following unregistered securities:
(1) Between January 26 and August 15, 1996, the Registrant sold an
aggregate of 10,285,000 shares of Series A Preferred Stock to 22 investors
at a purchase price of $.50 per share, which was paid in cash.
(2) On January 26, 1996, the Registrant sold 1,000,000 shares of Common
Stock to four investors at a purchase price of $.05 per share, which was
paid in cash.
(3) On July 8, 1996, the Registrant sold 10,000 shares of Series A
Preferred Stock valued at $5,000 to a consulting firm for services rendered.
(4) Between October 1 and November 27, 1996, the Registrant sold an
aggregate of 3,000,000 shares of Series B Preferred Stock to five investors
at a purchase price of $2.00 per share, which was paid in cash.
(5) On November 1, 1996, the Registrant issued warrants to purchase (i)
1,000,000 shares of Series B Preferred Stock with an exercise price of $2.00
per share to KPCB VII Associates, L.P., in consideration of services
rendered by David Schnell as President and Chief Executive Officer with a
value of $504,900 and (ii) 1,000,000 shares of Series B Preferred Stock with
an exercise price of $2.00 per share to Clark Ventures as an incentive for
James H. Clark to continue to provide services.
(6) On July 1, 1997, the Registrant issued warrants to purchase a total
of 61,947 shares of Series B Preferred Stock with an exercise price of $2.00
per share to five investors pursuant to a bridge loan financing.
(7) Between July 1 and July 27, 1997, the Registrant sold an aggregate
of 2,600,000 shares of Series C Preferred Stock to nine investors at a
purchase price of $2.50 per share, in consideration of cash and cancellation
of indebtedness incurred in connection with a bridge loan financing.
(8) Between July 7 and July 16, 1997, the Registrant sold 25,000 shares
of Series B Preferred Stock to the same consulting firm referred to in (3)
above at a purchase price of $2.00 per share for services rendered.
(9) On July 11, 1997, the Registrant sold 10,000 shares of Series A
Preferred Stock valued at $5,000 to the same consulting firm referred to in
(3) above for services rendered.
(10) On July 11, 1997, the Registrant sold 250,000 shares of Series B
Preferred Stock to W. Michael Long at a purchase price of $2.00 per share,
paid with an amount of cash equal to the par value of the purchased shares
and with a promissory note that has subsequently been paid in full for the
remainder.
(11) On July 11, 1997, the Registrant issued a warrant to purchase
750,000 shares of Series B Preferred Stock with an exercise price of $2.00
per share to W. Michael Long as an incentive to continue to provide
services.
(12) On July 22, 1997, the Registrant sold 15,000 shares of Series B
Preferred Stock to Hugh Reinhuff, a former Director, at a purchase price of
$2.00 per share, which was paid in cash.
(13) Between October 17 and December 19, 1997, the Registrant sold an
aggregate of 4,807,692 shares of Series D Preferred Stock to 13 investors at
a purchase price of $5.20 per share, which was paid in cash.
II-2
<PAGE>
(14) On May 1, 1998, the Registrant issued 1,000,000 shares of Series B
Preferred Stock to Clark Ventures and 17,229 shares of Series B Preferred
Stock to James H. Clark upon the exercise of warrants with exercise prices
of $2.00 per share which were paid in cash.
(15) On May 19, 1998, in connection with the acquisition of ActaMed
Corporation, 22,019,921 shares of the Registrant's Preferred Stock were
converted into Common Stock on a one-for-one basis and warrants to purchase
1,794,718 shares of the Registrant's Preferred Stock were exchanged for
warrants to purchase an equal number of shares of Common Stock.
(16) On May 19, 1998, in connection with the ActaMed acquisition, the
Registrant assumed options to purchase ActaMed Common Stock which were held
by former ActaMed employees which are now exercisable for an aggregate of
3,100,489 shares of Registrant's Common Stock.
(17) On May 19, 1998, the Registrant issued 23,271,355 shares of its
Common Stock to former shareholders of ActaMed in connection with the
acquisition of ActaMed Corporation ("ActaMed") in exchange for all of the
issued and outstanding shares of capital stock of ActaMed.
(18) On May 19, 1998, in connection with the acquisition of ActaMed, the
Registrant assumed a warrant held by IBM to purchase shares of ActaMed
capital stock which is now exercisable for an aggregate of 282,522 shares of
Healtheon Common Stock with an exercise price of $7.97 per share.
(19) On June 26, 1998, the Registrant sold 1,336,209 shares of Common
Stock valued at $3.67 to SmithKline Labs in consideration for certain assets
and licenses relating to SmithKline Labs.
(20) Since January 1996, the Registrant has granted options to purchase
14,387,534 shares of Registrant's Common Stock to employees pursuant to the
Company's 1996 Stock Plan.
(21) From July 6, 1996 through August 31, 1998, the Company issued an
aggregate of 5,190,302 shares of Common Stock as the result of exercises of
options or stock purchase rights for aggregate consideration, in the form of
cash and promissory notes, of approximately $3.9 million.
(22) On August 25, 1998, the Registrant issued 1,600,000 shares of Common
Stock valued at $12.8 million to Metis, LLC in connection with acquisition
of certain assets of Metis, LLC of which 476,548 shares will be issued to
employees pursuant to restricted stock purchase agreements subject to a
lapsing right of repurchase, at the option of the Company, over the
agreements' respective vesting periods.
(b) There were no underwriters, brokers or finders employed in connection
with any of the transactions set forth above.
(c) The transactions referred to in numbers 16-18 and 22 were exempt from
registration pursuant to the provisions of Section 3(a)(10) of the Securities
Act. The sales of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder, or, with respect to
issuances to employees, Rule 701 promulgated under Section 3(b) of the
Securities Act as transactions by an issuer not involving a public offering or
transactions pursuant to compensatory benefit plans and contracts relating to
compensation as provided under such Rule 701. The recipients of securities in
each such transaction represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the instruments
representing such securities issued in such transactions. All recipients had
adequate access, through their relationships with the Company, to information
about the Registrant.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<S> <C>
1.1* Form of Underwriting Agreement.
2.0** Agreement and Plan of Reorganization, dated as of February 24, 1998, by
and among the Registrant, MedNet Acquisition Corp. and ActaMed
Corporation.
2.1** Agreement and Plan of Merger, dated as of March 1, 1996, by and among
ActaMed Corporation, EDI Acquisition, Inc., UHC Green Acquisition, Inc.
and United HealthCare Corporation.
3.1** Amended and Restated Certificate of Incorporation of the Registrant, as
currently in effect.
3.2** Form of Amended and Restated Certificate of Incorporation, to be filed
prior to the closing of the offering made under this Registration
Statement.
3.3** Bylaws of the Registrant, as currently in effect.
3.4** Form of Bylaws of the Registrant, to be adopted prior to the closing of
the offering made under this Registration Statement.
4.1* Specimen Common Stock certificate.
5.1* Form of Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, regarding the legality of the securities being issued.
10.1** Form of Indemnification Agreement entered into by the Registrant with each
of its directors and executive officers.
10.2** 1996 Stock Plan and form of Stock Option Agreement thereunder.
10.3** ActaMed Corp. 1997 Stock Option Plan
10.4** ActaMed Corp. 1996 Stock Option Plan
10.5** ActaMed Corp. 1995 Stock Option Plan
10.6** ActaMed Corp. 1994 Stock Option Plan.
10.7** ActaMed Corp. 1993 Class B Common Stock Option Plan.
10.8** ActaMed Corp. 1992 Stock Option Plan.
10.9** ActaMed Corp. 1996 Director Stock Option Plan, as amended.
10.10** Amended and Restated Investors' Rights Agreement dated as of May 19, 1998
among the Registrant and certain of the Registrant's securityholders.
10.11** Lease Agreement, dated December 2, 1997, between Larvan Properties and
Registrant.
10.12** Lease Agreement, dated November 6, 1995, as amended, between ActaMed
Corporation and ZML-Central Park, L.L.C.
10.13+** Services and License Agreement, dated as of April 4, 1996, between ActaMed
Corporation and United HealthCare Corporation.
10.14+** Services Agreement, dated as of December 31, 1997, as amended, between
ActaMed Corporation and SmithKline Beecham Clinical Laboratories, Inc.
10.15+** Assets Purchase Agreement, dated as of December 31, 1997, as amended,
between ActaMed Corporation and SmithKline Beecham Clinical
Laboratories, Inc.
10.16+** License Agreement, dated as of December 31, 1997, between ActaMed
Corporation and SmithKline Beecham Clinical Laboratories, Inc.
10.17+** Development Agreement, dated as of October 31, 1997, between ActaMed
Corporation and SmithKline Beecham Clinical Laboratories, Inc.
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C>
10.18+** Services, Development and License Agreement, dated as of December 15,
1997, between the Registrant and Beech Street Corporation.
10.19+** Services, Development and License Agreement, dated as of September 30,
1997, between the Registrant and Brown & Toland Physician Services
Organization.
10.20** Amended and Restated Securities Purchase Agreement, dated as of January
26, 1996, between the Registrant and investors.
10.21** Amended and Restated Series B Preferred Stock Purchase Agreement dated
October 31, 1996, between Registrant and investors.
10.22** Form of Series B Preferred Stock Purchase Warrant between the Registrant
and certain of the Registrant's investors.
10.23** Series C Preferred Stock Purchase Agreement dated July 25, 1997, between
the Registrant and investors.
10.24** Series D Preferred Stock Purchase Agreement dated October 13, 1997,
between the Registrant and investors.
10.25** Full Recourse Promissory Note dated as of July 11, 1997, between the
Registrant and W. Michael Long.
10.26** Form of Promissory Note for Bridge Financing
10.27** W. Michael Long Employment Agreement
10.28** Michael Hoover Employment Agreement
10.29 1998 Employee Stock Purchase Plan
21.1** Subsidiaries of the Registrant.
23.1* Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(included in Exhibit 5.1).
23.2 Consent of Ernst & Young LLP, independent auditors (see page II-8).
23.3 Consent of Deloitte & Touche LLP, independent auditors (see page II-9).
23.4 Consent of Deloitte & Touche LLP, independent auditors (see page II-10).
24.1** Power of Attorney.
27.1** Financial Data Schedule.
</TABLE>
- ---------
* To be supplied by amendment.
** Previously filed.
+ Confidential treatment requested as to portions of this exhibit.
(b) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the consolidated financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
(a) The undersigned hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referenced in Item 14 of this Registration
Statement or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act, and is, therefore, unenforceable. In
the event that a claim for indemnification against such
II-5
<PAGE>
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial BONA FIDE offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Santa Clara, State of
California, on this 14th day of September, 1998.
<TABLE>
<S> <C> <C>
HEALTHEON CORPORATION
By: /s/ JOHN L. WESTERMANN III
-----------------------------------------
John L. Westermann III
CHIEF FINANCIAL OFFICER
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ W. MICHAEL LONG* Chief Executive Officer
- ------------------------------ and Director (Principal September 14, 1998
W. Michael Long Executive Officer)
/s/ JOHN L. WESTERMANN III Chief Financial Officer
- ------------------------------ (Principal Financial and September 14, 1998
John L. Westermann III Accounting Officer)
- ------------------------------ Chairman of the Board September , 1998
James H. Clark
/s/ L. JOHN DOERR*
- ------------------------------ Director September 14, 1998
L. John Doerr
/s/ MICHAEL HOOVER*
- ------------------------------ President and Director September 14, 1998
Michael Hoover
/s/ C. RICHARD KRAMLICH*
- ------------------------------ Director September 14, 1998
C. Richard Kramlich
/s/ WILLIAM W. MCGUIRE,
M.D.*
- ------------------------------ Director September 14, 1998
William W. McGuire, M.D.
/s/ P. E. SADLER*
- ------------------------------ Director September 14, 1998
P. E. Sadler
/s/ TADATAKA YAMADA*
- ------------------------------ Director September 14, 1998
Tadataka Yamada
</TABLE>
<TABLE>
<S> <C> <C>
*By: /s/ JOHN L. WESTERMANN III /s/ JACK DENNISON
------------------------------------ --------------------------------------
John L. Westermann III Jack Dennison
ATTORNEY-IN-FACT ATTORNEY-IN-FACT
</TABLE>
II-7
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 27, 1998 (except Notes 1 and 2 as to which
the date is July 24, 1998) in Amendment No. 2 to the Registration Statement on
Form S-1 and related Prospectus of Healtheon Corporation for the registration of
shares of its Common Stock.
/s/ Ernst & Young LLP
Palo Alto, California
September 11, 1998
II-8
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-60427 of Healtheon Corporation on Form S-1 of our report dated June 20,
1997, relating to the consolidated financial statements of ActaMed Corporation
as of December 31, 1996 and for the two years then ended (the consolidated
financial statements for 1996 are not presented herein) appearing in the
Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ DELOITTE & TOUCHE LLP
Atlanta, Georgia
September 14, 1998
II-9
<PAGE>
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-60427 of Healtheon Corporation on Form S-1 of our report dated April 4,
1996, relating to the statements of divisional net loss and United's net
investment and of divisional cash flows for the year ended December 31, 1995 of
EDI Services Group (a Division of United HealthCare Corporation) appearing in
the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
September 14, 1998
II-10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
- ---------- ------------------------------------------------------------------------------------------ -----------
<S> <C> <C>
1.1* Form of Underwriting Agreement.
2.0** Agreement and Plan of Reorganization, dated as of February 24, 1998, by and among the
Registrant, MedNet Acquisition Corp. and ActaMed Corporation.
2.1** Agreement and Plan of Merger, dated as of March 1, 1996, by and among ActaMed Corporation,
EDI Acquisition, Inc., UHC Green Acquisition, Inc. and United HealthCare Corporation.
3.1** Amended and Restated Certificate of Incorporation of the Registrant, as currently in
effect.
3.2** Form of Amended and Restated Certificate of Incorporation, to be filed prior to the
closing of the offering made under this Registration Statement.
3.3** Bylaws of the Registrant, as currently in effect.
3.4** Form of Bylaws of the Registrant, to be adopted prior to the closing of the offering made
under this Registration Statement.
4.1* Specimen Common Stock certificate.
5.1* Form of Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation, regarding
the legality of the securities being issued.
10.1** Form of Indemnification Agreement entered into by the Registrant with each of its
directors and executive officers.
10.2** 1996 Stock Plan and form of Stock Option Agreement thereunder.
10.3** ActaMed Corp. 1997 Stock Option Plan
10.4** ActaMed Corp. 1996 Stock Option Plan
10.5** ActaMed Corp. 1995 Stock Option Plan
10.6** ActaMed Corp. 1994 Stock Option Plan.
10.7** ActaMed Corp. 1993 Class B Common Stock Option Plan.
10.8** ActaMed Corp. 1992 Stock Option Plan.
10.9** ActaMed Corp. 1996 Director Stock Option Plan, as amended.
10.10** Amended and Restated Investors' Rights Agreement dated as of May 19, 1998 among the
Registrant and certain of the Registrant's securityholders.
10.11** Lease Agreement, dated December 2, 1997, between Larvan Properties and Registrant.
10.12** Lease Agreement, dated November 6, 1995, as amended, between ActaMed Corporation and
ZML-Central Park, L.L.C.
10.13+** Services and License Agreement, dated as of April 4, 1996, between ActaMed Corporation and
United HealthCare Corporation.
10.14+** Services Agreement, dated as of December 31, 1997, as amended, between ActaMed Corporation
and SmithKline Beecham Clinical Laboratories, Inc.
10.15+** Assets Purchase Agreement, dated as of December 31, 1997, as amended, between ActaMed
Corporation and SmithKline Beecham Clinical Laboratories, Inc.
10.16+** License Agreement, dated as of December 31, 1997, between ActaMed Corporation and
SmithKline Beecham Clinical Laboratories, Inc.
10.17+** Development Agreement, dated as of October 31, 1997, between ActaMed Corporation and
SmithKline Beecham Clinical Laboratories, Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
- ---------- ------------------------------------------------------------------------------------------ -----------
<S> <C> <C>
10.18+** Services, Development and License Agreement, dated as of December 15, 1997, between the
Registrant and Beech Street Corporation.
10.19+** Services, Development and License Agreement, dated as of September 30, 1997, between the
Registrant and Brown & Toland Physician Services Organization.
10.20** Amended and Restated Securities Purchase Agreement, dated as of January 26, 1996, between
the Registrant and investors.
10.21** Amended and Restated Series B Preferred Stock Purchase Agreement dated October 31, 1996,
between Registrant and investors.
10.22** Form of Series B Preferred Stock Purchase Warrant between the Registrant and certain of
the Registrant's investors.
10.23** Series C Preferred Stock Purchase Agreement dated July 25, 1997, between the Registrant
and investors.
10.24** Series D Preferred Stock Purchase Agreement dated October 13, 1997, between the Registrant
and investors.
10.25** Full Recourse Promissory Note dated as of July 11, 1997, between the Registrant and W.
Michael Long.
10.26** Form of Promissory Note for Bridge Financing
10.27** W. Michael Long Employment Agreement
10.28** Michael Hoover Employment Agreement
10.29 1998 Employee Stock Purchase Plan
21.1** Subsidiaries of the Registrant.
23.1* Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (included in Exhibit
5.1).
23.2 Consent of Ernst & Young LLP, independent auditors (see page II-8).
23.3 Consent of Deloitte & Touche LLP, independent auditors (see page II-9).
23.4 Consent of Deloitte & Touche LLP, independent auditors (see page II-10).
24.1** Power of Attorney.
27.1** Financial Data Schedule.
</TABLE>
- ---------
* To be supplied by amendment.
** Previously filed.
+ Confidential treatment requested as to portions of this exhibit.
<PAGE>
HEALTHEON CORPORATION
1998 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 1998 Employee Stock Purchase
Plan of Healtheon Corporation.
1. PURPOSE. The purpose of the Plan is to provide employees of the
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the
intention of the Company to have the Plan qualify as an "Employee Stock Purchase
Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. DEFINITIONS.
(a) "BOARD" shall mean the Board of Directors of the Company.
(b) "CODE" shall mean the Internal Revenue Code of 1986, as amended.
(c) "COMMON STOCK" shall mean the common stock of the Company.
(d) "COMPANY" shall mean Healtheon Corporation and any Designated
Subsidiary of the Company.
(e) "COMPENSATION" shall mean all base straight time gross earnings
and commissions, but exclusive of payments for overtime, shift premium,
incentive compensation, incentive payments, bonuses and other compensation.
(f) "DESIGNATED SUBSIDIARY" shall mean any Subsidiary which has been
designated by the Board from time to time in its sole discretion as eligible to
participate in the Plan.
(g) "EMPLOYEE" shall mean any individual who is an Employee of the
Company for tax purposes whose customary employment with the Company is at least
twenty (20) hours per week and more than five (5) months in any calendar year.
For purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship shall be deemed to have terminated on the
91st day of such leave.
(h) "ENROLLMENT DATE" shall mean the first Trading Day of each
Offering Period.
(i) "EXERCISE DATE" shall mean the last Trading Day of each Purchase
Period.
<PAGE>
(j) "FAIR MARKET VALUE" shall mean, as of any date, the value of
Common Stock determined as follows:
(1) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day on the date of such determination, as reported in
THE WALL STREET JOURNAL or such other source as the Board deems reliable;
(2) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean of the closing bid and asked prices for the Common Stock on
the date of such determination, as reported in THE WALL STREET JOURNAL or such
other source as the Board deems reliable;
(3) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board; or
(4) For purposes of the Enrollment Date of the first Offering
Period under the Plan, the Fair Market Value shall be the initial price to the
public as set forth in the final prospectus included within the registration
statement in Form S-1 filed with the Securities and Exchange Commission for the
initial public offering of the Company's Common Stock (the "Registration
Statement").
(k) "OFFERING PERIODS" shall mean the periods of approximately
twenty-four (24) months during which an option granted pursuant to the Plan may
be exercised, commencing on the first Trading Day on or after May 1 and November
1 of each year and terminating on the last Trading Day in the periods ending
twenty-four months later; provided, however, that the first Offering Period
under the Plan shall commence with the first Trading Day on or after the date on
which the Securities and Exchange Commission declares the Company's Registration
Statement effective and ending on the last Trading Day on or before April 30,
2000. The duration and timing of Offering Periods may be changed pursuant to
Section 4 of this Plan.
(l) "PLAN" shall mean this 1998 Employee Stock Purchase Plan.
(m) "PURCHASE PERIOD" shall mean the approximately six month period
commencing after one Exercise Date and ending with the next Exercise Date,
provided, that the first Purchase Period of any Offering Period shall commence
on the Enrollment Date and end with the next Exercise Date; provided further,
that the first Purchase Period under the Plan shall commence with the first
Trading Day on or after the date on which the Securities and Exchange Commission
declares the Company's Registration Statement effective and shall end on the
last Trading Day on or before April 30, 1999.
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<PAGE>
(n) "PURCHASE PRICE" shall mean 85% of the Fair Market Value of a
share of Common Stock on the Enrollment Date or on the Exercise Date, whichever
is lower; provided however, that the Purchase Price may be adjusted by the Board
pursuant to Section 20.
(o) "RESERVES" shall mean the number of shares of Common Stock
covered by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under option.
(p) "SUBSIDIARY" shall mean a corporation, domestic or foreign, of
which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
(q) "TRADING DAY" shall mean a day on which national stock exchanges
and the Nasdaq System are open for trading.
3. ELIGIBILITY.
(a) Any Employee who shall be employed by the Company on a given
Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase such stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries
accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of
stock (determined at the fair market value of the shares at the time such option
is granted) for each calendar year in which such option is outstanding at any
time.
4. OFFERING PERIODS. The Plan shall be implemented by consecutive,
overlapping Offering Periods with a new Offering Period commencing on the first
Trading Day on or after May 1 and November 1 of each year, or on such other date
as the Board shall determine, and continuing thereafter until terminated in
accordance with Section 20 hereof; provided, however, that the first Offering
Period under the Plan shall commence with the first Trading Day on or after the
date on which the Securities and Exchange Commission declares the Company's
Registration Statement effective and ending on the last Trading Day on or before
April 30, 2000. The Board shall have the power to change the duration of
Offering Periods (including the commencement dates thereof) with respect to
future offerings without stockholder approval if such change is announced prior
to the scheduled beginning of the first Offering Period to be affected
thereafter.
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<PAGE>
5. PARTICIPATION.
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the Company's payroll office prior
to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the first
payroll following the Enrollment Date and shall end on the last payroll in the
Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
6. PAYROLL DEDUCTIONS.
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount not exceeding 15% of the Compensation
which he or she receives on each pay day during the Offering Period.
(b) All payroll deductions made for a participant shall be credited
to his or her account under the Plan and shall be withheld in whole percentages
only. A participant may not make any additional payments into such account.
(c) A participant may discontinue his or her participation in the
Plan as provided in Section 10 hereof, or may increase or decrease the rate of
his or her payroll deductions during the Offering Period by completing or filing
with the Company a new subscription agreement authorizing a change in payroll
deduction rate. The Board may, in its discretion, limit the number of
participation rate changes during any Offering Period. The change in rate shall
be effective with the first full payroll period following five (5) business days
after the Company's receipt of the new subscription agreement unless the Company
elects to process a given change in participation more quickly. A participant's
subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's
payroll deductions may be decreased to zero percent (0%) at any time during a
Purchase Period. Payroll deductions shall recommence at the rate provided in
such participant's subscription agreement at the beginning of the first Purchase
Period which is scheduled to end in the following calendar year, unless
terminated by the participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part, or at
the time some or all of the Company's Common Stock issued under the Plan is
disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any,
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<PAGE>
which arise upon the exercise of the option or the disposition of the Common
Stock. At any time, the Company may, but shall not be obligated to, withhold
from the participant's compensation the amount necessary for the Company to
meet applicable withholding obligations, including any withholding required
to make available to the Company any tax deductions or benefits attributable
to sale or early disposition of Common Stock by the Employee.
7. GRANT OF OPTION. On the Enrollment Date of each Offering Period, each
eligible Employee participating in such Offering Period shall be granted an
option to purchase on each Exercise Date during such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that in no event shall
an Employee be permitted to purchase during each Purchase Period more than 5,000
shares of the Company's Common Stock (subject to any adjustment pursuant to
Section 19), and provided further that such purchase shall be subject to the
limitations set forth in Sections 3(b) and 12 hereof. The Board may, for future
Offering Periods, increase or decrease, in its absolute discretion, the maximum
number of shares of the Company's Common Stock an Employee may purchase during
each Purchase Period of such Offering Period. Exercise of the option shall
occur as provided in Section 8 hereof, unless the participant has withdrawn
pursuant to Section 10 hereof. The option shall expire on the last day of the
Offering Period.
8. EXERCISE OF OPTION.
(a) Unless a participant withdraws from the Plan as provided in
Section 10 hereof, his or her option for the purchase of shares shall be
exercised automatically on the Exercise Date, and the maximum number of full
shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional shares shall be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Purchase Period or Offering Period, subject to earlier withdrawal by the
participant as provided in Section 10 hereof. Any other monies left over in a
participant's account after the Exercise Date shall be returned to the
participant. During a participant's lifetime, a participant's option to
purchase shares hereunder is exercisable only by him or her.
(b) If the Board determines that, on a given Exercise Date, the
number of shares with respect to which options are to be exercised may exceed
(i) the number of shares of Common Stock that were available for sale under the
Plan on the Enrollment Date of the applicable Offering Period, or (ii) the
number of shares available for sale under the Plan on such Exercise Date, the
Board may in its sole discretion (x) provide that the Company shall make a pro
rata allocation of the shares of Common Stock available for purchase on such
Enrollment Date or Exercise Date, as applicable, in as uniform a manner as shall
be practicable and as it shall determine in its sole discretion to be equitable
among all participants exercising options to purchase Common Stock on
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<PAGE>
such Exercise Date, and continue all Offering Periods then in effect, or (y)
provide that the Company shall make a pro rata allocation of the shares
available for purchase on such Enrollment Date or Exercise Date, as
applicable, in as uniform a manner as shall be practicable and as it shall
determine in its sole discretion to be equitable among all participants
exercising options to purchase Common Stock on such Exercise Date, and
terminate any or all Offering Periods then in effect pursuant to Section 20
hereof. The Company may make pro rata allocation of the shares available on
the Enrollment Date of any applicable Offering Period pursuant to the
preceding sentence, notwithstanding any authorization of additional shares
for issuance under the Plan by the Company's stockholders subsequent to such
Enrollment Date.
9. DELIVERY. As promptly as practicable after each Exercise Date on
which a purchase of shares occurs, the Company shall arrange the delivery to
each participant, as appropriate, of a certificate representing the shares
purchased upon exercise of his or her option.
10. WITHDRAWAL.
(a) A participant may withdraw all but not less than all the payroll
deductions credited to his or her account and not yet used to exercise his or
her option under the Plan at any time by giving written notice to the Company in
the form of Exhibit B to this Plan. All of the participant's payroll deductions
credited to his or her account shall be paid to such participant promptly after
receipt of notice of withdrawal and such participant's option for the Offering
Period shall be automatically terminated, and no further payroll deductions for
the purchase of shares shall be made for such Offering Period. If a participant
withdraws from an Offering Period, payroll deductions shall not resume at the
beginning of the succeeding Offering Period unless the participant delivers to
the Company a new subscription agreement.
(b) A participant's withdrawal from an Offering Period shall not have
any effect upon his or her eligibility to participate in any similar plan which
may hereafter be adopted by the Company or in succeeding Offering Periods which
commence after the termination of the Offering Period from which the participant
withdraws.
11. TERMINATION OF EMPLOYMENT.
Upon a participant's ceasing to be an Employee, for any reason, he or
she shall be deemed to have elected to withdraw from the Plan and the payroll
deductions credited to such participant's account during the Offering Period but
not yet used to exercise the option shall be returned to such participant or, in
the case of his or her death, to the person or persons entitled thereto under
Section 15 hereof, and such participant's option shall be automatically
terminated. The preceding sentence notwithstanding, a participant who receives
payment in lieu of notice of termination of employment shall be treated as
continuing to be an Employee for the participant's customary number of hours per
week of employment during the period in which the participant is subject to such
payment in lieu of notice.
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<PAGE>
12. INTEREST. No interest shall accrue on the payroll deductions of a
participant in the Plan.
13. STOCK.
(a) Subject to adjustment upon changes in capitalization of the
Company as provided in Section 19 hereof, the maximum number of shares of the
Company's Common Stock which shall be made available for sale under the Plan
shall be 1,000,000 shares, plus an annual increase to be added on the first day
of the Company's fiscal year beginning in 1999 equal to the lesser of (i)
500,000 shares, (ii) 0.5% of the outstanding shares on such date or (iii) a
lesser amount determined by the Board.
(b) The participant shall have no interest or voting right in shares
covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan shall be
registered in the name of the participant or in the name of the participant and
his or her spouse.
14. ADMINISTRATION. The Plan shall be administered by the Board or a
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision
and determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
15. DESIGNATION OF BENEFICIARY.
(a) A participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the participant's account under
the Plan in the event of such participant's death subsequent to an Exercise Date
on which the option is exercised but prior to delivery to such participant of
such shares and cash. In addition, a participant may file a written designation
of a beneficiary who is to receive any cash from the participant's account under
the Plan in the event of such participant's death prior to exercise of the
option. If a participant is married and the designated beneficiary is not the
spouse, spousal consent shall be required for such designation to be effective.
(b) Such designation of beneficiary may be changed by the participant
at any time by written notice. In the event of the death of a participant and
in the absence of a beneficiary validly designated under the Plan who is living
at the time of such participant's death, the Company shall deliver such shares
and/or cash to the executor or administrator of the estate of the participant,
or if no such executor or administrator has been appointed (to the knowledge of
the Company), the Company, in its discretion, may deliver such shares and/or
cash to the spouse or to any one or more
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<PAGE>
dependents or relatives of the participant, or if no spouse, dependent or
relative is known to the Company, then to such other person as the Company
may designate.
16. TRANSFERABILITY. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 15 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
17. USE OF FUNDS. All payroll deductions received or held by the Company
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
18. REPORTS. Individual accounts shall be maintained for each participant
in the Plan. Statements of account shall be given to participating Employees at
least annually, which statements shall set forth the amounts of payroll
deductions, the Purchase Price, the number of shares purchased and the remaining
cash balance, if any.
19. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, LIQUIDATION,
MERGER OR ASSET SALE.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by the
stockholders of the Company, the Reserves, the maximum number of shares each
participant may purchase each Purchase Period (pursuant to Section 7), as well
as the price per share and the number of shares of Common Stock covered by each
option under the Plan which has not yet been exercised shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration". Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an option.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Offering Period then in progress
shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and
shall terminate immediately prior to the consummation of such proposed
dissolution or liquidation, unless provided otherwise by the Board. The New
Exercise Date shall be before the date of the Company's proposed dissolution or
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<PAGE>
liquidation. The Board shall notify each participant in writing, at least
ten (10) business days prior to the New Exercise Date, that the Exercise Date
for the participant's option has been changed to the New Exercise Date and
that the participant's option shall be exercised automatically on the New
Exercise Date, unless prior to such date the participant has withdrawn from
the Offering Period as provided in Section 10 hereof.
(c) MERGER OR ASSET SALE. In the event of a proposed sale of all or
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, each outstanding option shall be assumed or an
equivalent option substituted by the successor corporation or a Parent or
Subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the option, any Purchase Periods
then in progress shall be shortened by setting a new Exercise Date (the "New
Exercise Date") and any Offering Periods then in progress shall end on the New
Exercise Date. The New Exercise Date shall be before the date of the Company's
proposed sale or merger. The Board shall notify each participant in writing, at
least ten (10) business days prior to the New Exercise Date, that the Exercise
Date for the participant's option has been changed to the New Exercise Date and
that the participant's option shall be exercised automatically on the New
Exercise Date, unless prior to such date the participant has withdrawn from the
Offering Period as provided in Section 10 hereof.
20. AMENDMENT OR TERMINATION.
(a) The Board of Directors of the Company may at any time and for any
reason terminate or amend the Plan. Except as provided in Section 19 hereof, no
such termination can affect options previously granted, provided that an
Offering Period may be terminated by the Board of Directors on any Exercise Date
if the Board determines that the termination of the Offering Period or the Plan
is in the best interests of the Company and its stockholders. Except as
provided in Section 19 and this Section 20 hereof, no amendment may make any
change in any option theretofore granted which adversely affects the rights of
any participant. To the extent necessary to comply with Section 423 of the Code
(or any successor rule or provision or any other applicable law, regulation or
stock exchange rule), the Company shall obtain stockholder approval in such a
manner and to such a degree as required.
(b) Without stockholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's
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<PAGE>
Compensation, and establish such other limitations or procedures as the Board
(or its committee) determines in its sole discretion advisable which are
consistent with the Plan.
(c) In the event the Board determines that the ongoing operation of
the Plan may result in unfavorable financial accounting consequences, the Board
may, in its discretion and, to the extent necessary or desirable, modify or
amend the Plan to reduce or eliminate such accounting consequence including, but
not limited to:
(1) altering the Purchase Price for any Offering Period
including an Offering Period underway at the time of the change in Purchase
Price;
(2) shortening any Offering Period so that Offering Period ends
on a new Exercise Date, including an Offering Period underway at the time of the
Board action; and
(3) allocating shares.
Such modifications or amendments shall not require stockholder
approval or the consent of any Plan participants.
21. NOTICES. All notices or other communications by a participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued with
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require
the person exercising such option to represent and warrant at the time of any
such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
23. TERM OF PLAN. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
stockholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 20 hereof.
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<PAGE>
24. AUTOMATIC TRANSFER TO LOW PRICE OFFERING PERIOD. To the extent
permitted by any applicable laws, regulations, or stock exchange rules if the
Fair Market Value of the Common Stock on any Exercise Date in an Offering Period
is lower than the Fair Market Value of the Common Stock on the Enrollment Date
of such Offering Period, then all participants in such Offering Period shall be
automatically withdrawn from such Offering Period immediately after the exercise
of their option on such Exercise Date and automatically re-enrolled in the
immediately following Offering Period as of the first day thereof.
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<PAGE>
EXHIBIT A
HEALTHEON CORPORATION
1998 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
_____ Original Application Enrollment Date: ___________
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary(ies)
1. _________________________________ hereby elects to participate in the
Healtheon Corporation 1998 Employee Stock Purchase Plan (the "Employee
Stock Purchase Plan") and subscribes to purchase shares of the Company's
Common Stock in accordance with this Subscription Agreement and the
Employee Stock Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount of
____% of my Compensation on each payday (not to exceed [__]%) during the
Offering Period in accordance with the Employee Stock Purchase Plan.
(Please note that no fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Employee Stock Purchase Plan. I
understand that if I do not withdraw from an Offering Period, any
accumulated payroll deductions will be used to automatically exercise my
option.
4. I have received a copy of the complete Employee Stock Purchase Plan. I
understand that my participation in the Employee Stock Purchase Plan is in
all respects subject to the terms of the Plan. I understand that my
ability to exercise the option under this Subscription Agreement is subject
to stockholder approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should be
issued in the name(s) of (Employee or Employee and Spouse only):__________
___________________________________.
6. I understand that if I dispose of any shares received by me pursuant to the
Plan within 2 years after the Enrollment Date (the first day of the
Offering Period during which I purchased such shares) or one year after the
Exercise Date, I will be treated for federal income tax purposes as having
received ordinary income at the time of such disposition in an amount equal
to the excess of the fair market value of the shares at the time such
shares were purchased by me
<PAGE>
over the price which I paid for the shares. I HEREBY AGREE TO NOTIFY THE
COMPANY IN WRITING WITHIN 30 DAYS AFTER THE DATE OF ANY DISPOSITION OF MY
SHARES AND I WILL MAKE ADEQUATE PROVISION FOR FEDERAL, STATE OR OTHER TAX
WITHHOLDING OBLIGATIONS, IF ANY, WHICH ARISE UPON THE DISPOSITION OF THE
COMMON STOCK. The Company may, but will not be obligated to, withhold from
my compensation the amount necessary to meet any applicable withholding
obligation including any withholding necessary to make available to the
Company any tax deductions or benefits attributable to sale or early
disposition of Common Stock by me. If I dispose of such shares at any
time after the expiration of the 2-year and 1-year holding periods, I
understand that I will be treated for federal income tax purposes as
having received income only at the time of such disposition, and that
such income will be taxed as ordinary income only to the extent of an
amount equal to the lesser of (1) the excess of the fair market value of
the shares at the time of such disposition over the purchase price which I
paid for the shares, or (2) 15% of the fair market value of the shares on
the first day of the Offering Period. The remainder of the gain, if any,
recognized on such disposition will be taxed as capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent upon
my eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan:
NAME: (Please print)______________________________________________
(First) (Middle) (Last)
_______________________________ ____________________________________________
Relationship
____________________________________________
(Address)
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<PAGE>
Employee's Social
Security Number: ____________________________________
Employee's Address: ____________________________________
____________________________________
____________________________________
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated:_________________________ ________________________________________
Signature of Employee
________________________________________
Spouse's Signature
(If beneficiary other than spouse)
<PAGE>
EXHIBIT B
HEALTHEON CORPORATION
1998 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the Healtheon
Corporation 1998 Employee Stock Purchase Plan which began on ____________,
19____ (the "Enrollment Date") hereby notifies the Company that he or she hereby
withdraws from the Offering Period. He or she hereby directs the Company to pay
to the undersigned as promptly as practicable all the payroll deductions
credited to his or her account with respect to such Offering Period. The
undersigned understands and agrees that his or her option for such Offering
Period will be automatically terminated. The undersigned understands further
that no further payroll deductions will be made for the purchase of shares in
the current Offering Period and the undersigned shall be eligible to participate
in succeeding Offering Periods only by delivering to the Company a new
Subscription Agreement.
Name and Address of Participant:
________________________________
________________________________
________________________________
Signature:
________________________________
Date:___________________________
