<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 333-70553
HEALTHEON CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 94-3236644
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4600 PATRICK HENRY DRIVE
SANTA CLARA, CALIFORNIA 95054
(Address of principal executive offices)
(408) 876-5000
(Registrant's telephone number, including area code)
--------------------------
Check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES [ ] NO [X]
As of April 30, 1999, there were 70,976,757 shares of the Registrant's Common
Stock outstanding.
================================================================================
<PAGE> 2
HEALTHEON CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
PART I FINANCIAL INFORMATION NUMBER
<S> <C> <C>
ITEM 1. Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998....................................... 3
Condensed Consolidated Statements of Operations for the three
months ended March 31, 1999 and 1998........................ 4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 1999 and 1998........................ 5
Notes to Condensed Consolidated Financial Statements........... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 8
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk .... 19
PART II OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds...................... 20
ITEM 6. Exhibits and Reports on Form 8-K............................... 20
Signatures..................................................... 21
</TABLE>
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<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEALTHEON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------- ----------
(unaudited) (1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 38,389 $ 19,389
Short-term investments ............................. 24,786 17,428
Accounts receivable, net ........................... 10,424 7,954
Other current assets ............................... 1,561 706
---------- ----------
Total current assets ............................ 75,160 45,477
Property and equipment, net ........................... 17,410 12,285
Intangible assets, net ................................ 24,828 19,868
Other assets .......................................... 3,657 2,310
---------- ----------
$ 121,055 $ 79,940
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable ...................................... $ 1,054 $ 1,213
Accounts payable ................................... 4,017 5,178
Accrued liabilities ................................ 11,110 6,983
Current portion of capital lease obligations ....... 2,393 2,295
Deferred revenue ................................... 3,597 1,874
---------- ----------
Total current liabilities ....................... 22,171 17,543
Capital lease obligations, net of current portion ..... 3,153 2,984
Stockholders' equity:
Convertible preferred stock ........................ -- 46,101
Common stock ....................................... 7 5
Additional paid-in capital ......................... 228,833 123,670
Deferred stock compensation ........................ (11,112) (6,935)
Accumulated deficit ................................ (121,997) (103,428)
---------- ----------
Total stockholders' equity ...................... 95,731 59,413
---------- ----------
$ 121,055 $ 79,940
========== ==========
</TABLE>
(1) Derived from audited financial statements as of December 31, 1998.
See notes to condensed consolidated financial statements.
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HEALTHEON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Revenue(1) ............................................ $ 17,555 $ 9,754
Operating costs and expenses:
Cost of revenue(1) .................................. 16,860 7,948
Development and engineering ......................... 7,341 3,919
Sales, general and administrative ................... 9,022 4,966
Amortization of intangible assets ................... 3,459 1,949
-------- --------
Total operating costs and expenses ................ 36,682 18,782
-------- --------
Loss from operations .................................. (19,127) (9,028)
Interest income ....................................... 697 358
Interest expense ...................................... (139) (116)
Dividends on ActaMed's convertible
redeemable preferred stock .......................... -- (890)
-------- --------
Net loss .............................................. $(18,569) $ (9,676)
======== ========
Basic and diluted net loss per common share ........... $ (0.30) $ (1.19)
======== ========
Weighted average shares outstanding used in
computing basic and diluted net loss per
common share ........................................ 62,665 8,099
======== ========
</TABLE>
(1) Includes revenue to related parties of $9,521 and $4,656 and cost of
revenue of $8,643 and $2,860 for the three months ended March 31, 1999 and
1998. See note 3.
See notes to condensed consolidated financial statements.
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HEALTHEON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................................... $(18,569) $ (9,676)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization .............................. 8,030 4,021
Dividends on ActaMed's convertible redeemable
preferred stock ......................................... -- 890
Changes in operating assets and liabilities:
Accounts receivable ...................................... (2,470) (529)
Other assets ............................................. (3,069) (365)
Accounts payable ......................................... (1,161) 1,703
Accrued liabilities ...................................... 4,175 359
Deferred revenue ......................................... 1,723 624
-------- --------
Net cash used in operating activities .................. (11,341) (2,973)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments .......................... (15,148) (3,083)
Maturities of short-term investments ......................... 7,790 7,059
Decrease in restricted cash .................................. 867 --
Purchases of property and equipment .......................... (4,048) (2,021)
-------- --------
Net cash provided by (used in) investing
activities ............................................. (10,539) 1,955
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of notes payable .................................... (159) --
Proceeds from issuance of common stock, net of
issuance costs ......................................... 41,755 26
Payments on note receivable from officer ..................... -- 168
Principal payments of capital lease obligations .............. (716) (322)
-------- --------
Net cash provided by (used in) financing
activities ............................................. 40,880 (128)
-------- --------
Net increase (decrease) in cash and cash equivalents ............ 19,000 (1,146)
Cash and cash equivalents at beginning of period ................ 19,389 16,504
-------- --------
Cash and cash equivalents at end of period ...................... $ 38,389 $ 15,358
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ................................................ $ 139 $ 116
======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Equipment acquired under capital leases ...................... $ 983 $ 277
======== ========
Issuance of common stock for assets purchased ................ $ 11,000 $ 2,800
======== ========
Deferred compensation related to options granted ............. $ 6,261 $ 1,353
======== ========
Conversion of convertible preferred stock to common
stock ........................................................ $ 46,101 $ --
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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HEALTHEON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited condensed consolidated financial statements have been prepared
by Healtheon's management and reflect all adjustments that, in the opinion of
management, are necessary for a fair presentation of the interim periods
presented. The results of operations for the three months ended March 31, 1999
are not necessarily indicative of the results to be expected for any subsequent
quarter or for the entire year ending December 31, 1999. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted under the Securities and Exchange Commission's rules and regulations. A
condensed consolidated statement of comprehensive loss has not been presented
because the components of comprehensive loss are not material.
Healtheon derives its revenue from a single operating segment, healthcare
transaction and information services delivered over the Internet, private
intranets or other networks and from development and consulting contracts
related to these services. In addition, we manage the information technology
operations of some of our customers. Healtheon's operations outside of the
United States are not significant, and to date has derived all of its revenue
from within the United States. Assets located outside of the United States are
insignificant at March 31, 1999.
These unaudited condensed consolidated financial statements and notes
included herein should be read in conjunction with Healtheon's audited
consolidated financial statements and notes for the year ended December 31, 1998
which were included in our Annual Report on Form 10-K filed with the Securities
and Exchange Commission.
Net Loss per Common Share
The following table presents the calculation of basic and diluted net loss per
common share (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Net loss .............................................................. $(18,569) $ (9,676)
======== ========
Basic and diluted:
Weighted-average shares of common stock outstanding ................. 63,789 9,498
Less: Weighted-average common shares subject to repurchase .......... (1,124) (1,399)
-------- --------
Weighted-average shares used in computing basic and diluted net
loss per common share ............................................... 62,665 8,099
======== ========
Basic and diluted net loss per common share ........................... $ (0.30) $ (1.19)
======== ========
</TABLE>
We have excluded all convertible redeemable preferred stock, convertible
preferred stock, warrants, outstanding stock options and shares subject to
repurchase by Healtheon from the calculation of diluted net loss per common
share because all such securities are anti-dilutive for the periods presented.
The total number of shares excluded from the calculation of diluted loss per
shares was 18,208,030 at March 31, 1999 and 52,570,914 at March 31, 1998.
2. SERVICES AGREEMENT WITH SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC.
In January 1999, Healtheon and SmithKline Beecham Clinical Laboratories,
Inc., or SmithKline Labs, entered into a services agreement under which
Healtheon will provide certain electronic laboratory results delivery services
to approximately 20,000 provider sites, in addition to the sites currently
served through the SCAN service. In addition, in January 1999, the two companies
completed an asset purchase agreement under which Healtheon purchased certain
assets currently used by SmithKline Labs to provide these laboratory results
delivery services in exchange for $2,000,000 in cash and 1,833,333 shares of
Healtheon's common stock with a value of $11,000,000.
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3. RELATED PARTY TRANSACTIONS
Revenue from services to related parties consists of services revenue
attributable to two customers who are significant stockholders of Healtheon.
Receivables due from these related parties included in accounts receivable on
the condensed consolidated balance sheets were $4,905,000 at March 31, 1999 and
$3,360,000 at December 31, 1998.
4. STOCKHOLDERS' EQUITY
From January 1, 1999 through February 10, 1999, the date of our initial
public offering, Healtheon granted to employees options to purchase common stock
equal to a total of 4,107,625 shares with exercise prices ranging from $3.55 to
$5.85 per share. We have recorded deferred stock compensation of $6,261,000
related to these grants.
On February 10, 1999, Healtheon completed its initial public offering. We
sold 5,750,000 shares of common stock to the public and realized net proceeds of
approximately $41,398,000.
5. SUBSEQUENT EVENT
On April 21, 1999 we announced that we have entered into an agreement to
acquire MedE America Corporation ("MedE"), a leading provider of healthcare
transaction solutions for pharmacies, hospitals, physicians, dentists, payers
and pharmacy benefits managers (PBMs). Under the terms of the agreement,
Healtheon will exchange 0.6593 shares of common stock, subject to adjustment if
the price of the Healtheon stock is greater than $63.99 or less than $38.39, for
each share of MedE stock. Based on Healtheon's closing price on April 20, 1999,
the transaction is preliminarily valued at approximately $460 million. The
acquisition, which is expected to be accounted for using the purchase method of
accounting, is anticipated to be completed in the third quarter of 1999. The
transaction is subject to customary closing conditions, including approval by
MedE stockholders, and is subject to regulatory review.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Except for historical information, this Report contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These forward-looking
statements involve risks and uncertainties, including, among other things,
statements regarding our anticipated costs and expenses, revenue mix, product
and service development, relationships with strategic partners and plans for
addressing Year 2000 issues. These forward-looking statements include, among
others, those statements including the words "expects," "anticipates,"
"intends," "believes" and similar language. Our actual results may differ
materially from those projected in the forward-looking statements. Factors that
might cause or contribute to such differences include, but are not limited to,
those discussed in the section "--Factors That May Affect Future Results of
Operations." You should carefully review the risks described in other documents
we file from time to time with the Securities and Exchange Commission, including
our Annual Report on Form 10-K for the year ended December 31, 1998. You are
cautioned not to place undue reliance on the forward-looking statements, which
speak only as of the date of this Quarterly Report on Form 10-Q. We undertake no
obligation to publicly release any revisions to the forward-looking statements
or reflect events or circumstances after the date of this document.
The following discussion also should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended December
31, 1998 included in our Annual Report on Form 10-K as filed with the Securities
and Exchange Commission.
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 Virtual Healthcare Network, or 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's revenue to date has been derived primarily from proprietary
non-Internet network-based services and from management and operation of
customers' information technology, or IT, infrastructure. Our revenue and
income potential is unproven and our business model is still emerging. Our
historical financial information is of limited value in projecting our future
operating results because of our limited operating history as a combined
organization and the emerging nature of our markets. We have lost money since
we began operations and, as of March 31, 1999, we had an accumulated deficit of
$122.0 million. We plan to invest heavily in acquisitions, infrastructure
development, applications development and sales and marketing. As a result, we
expect that we will continue to lose money through 1999 and we may never
achieve or sustain profitability.
RESULTS OF OPERATIONS
Revenue
We have developed strategic relationships with healthcare industry leaders,
including UnitedHealth Group, SmithKline Labs, Brown & Toland and Beech Street.
These four companies each accounted for over 10% of our total revenue in the
first quarter of 1999. We expect that a small number of customers will continue
to account for a substantial portion of our revenue for the foreseeable future.
The loss of one or more of our significant customers, or a decline in the volume
of business generated by these customers, could have a material adverse effect
on our business, financial condition and results of operations.
Healtheon earns revenue from services which include providing access to our
network-based services, including fixed fee and transaction based services, and
performing development and consulting services, and from licensing software.
Services revenue also includes revenue from the management and operation of
customers' IT infrastructure. Customers may purchase some or all of Healtheon's
applications and services and
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<PAGE> 9
the customer relationship may evolve from utilizing development and consulting
services to utilizing transaction and subscription-based services. Healtheon
earns network-based services revenue from fixed fee subscription arrangements,
which revenue 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 revenue is recognized as the services are performed. Revenue from
development projects is recognized on a percentage-of-completion basis or as the
services are performed, depending on the terms of the contract. Revenue from
consulting services and revenue from the management and operation of customers'
IT infrastructure is recognized as the services are performed. Cash received in
excess of revenue recognized relating to these services has been recorded as
deferred revenue. At March 31, 1999, we had deferred revenue of approximately
$3.6 million.
Total revenue increased to $17.6 million in the first quarter of 1999 from
$9.8 million in the first quarter of 1998. Revenue from the Service Agreements
with UnitedHealth and SmithKline Labs increased to $9.5 million from the first
quarter of 1999 from $4.7 million in the first quarter of 1998. Increased
transaction based services under the UnitedHealth Group Agreement, and
additional revenue from the January 1999 Services Agreement with SmithKline
Labs, which was phased in during the first quarter of 1999 contributed to the
significant increases in revenue.
In addition, our revenue increased due to contracts with new customers and
increased revenue from existing customers, Brown & Toland and Beech Street. We
recognized revenue for IT services of $4.9 million in the first quarter of 1999
and $3.8 million in the first quarter of 1998. In addition, we recognized
revenue related to IT development services of $0.5 million in the 1999 period
and $0.8 million in the 1998 period.
The UnitedHealth Group Agreement has a five-year term. However, the
agreement provides that two years after the date of the agreement, which was
signed on April 4, 1996, the parties will agree on new prices that are
competitive with the marketplace. Healtheon and UnitedHealth Group are
negotiating the new prices and we anticipate that the new prices will reduce the
rates paid by UnitedHealth Group, on a prospective basis. The Services
Agreements with SmithKline Labs also each have a five-year term. However, the
December 1997 Services Agreement provides that the parties will negotiate new
rates as of January 1, 2001 and every two years thereafter. Under the terms of
the Services Agreement, the renegotiated rates must be competitive with the
marketplace and must be no higher than the lowest fees charged by Healtheon to
similar customers.
Cost of Revenue
Cost of revenue consists of costs related to services Healtheon provides to
customers and costs associated with the operation and maintenance of our
networks. These costs include salaries and related expenses for consulting and
development personnel, network operations personnel and customer support
personnel; telecommunication costs; depreciation and maintenance of network
equipment; amortization of certain intangible assets; a portion of facilities
expenses; and leased personnel and facilities costs. Given Healtheon'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, we believe that analysis
of historical cost of revenue as a percentage of revenue is not meaningful. We
anticipate that our total cost of revenue will increase in absolute dollars in
the future.
Cost of revenue was $16.9 million in the first quarter of 1999 and $7.9
million in the first quarter of 1998. These increases resulted mainly from
higher personnel and network operation costs required to support our increased
service revenues.
Development and Engineering
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. Expenses
include compensation paid to engineering personnel, fees to outside contractors
and consultants, a portion of facilities expenses and the depreciation and
maintenance of capital equipment used in the development process. We believe our
success is partially dependent upon our ability to introduce new applications in
several healthcare markets in a relatively short period of time. Accordingly,
Healtheon intends to continue recruiting and hiring experienced engineering
personnel and to continue making other investments
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<PAGE> 10
in development and engineering. We expect that development and engineering
expenses will continue to increase in absolute dollars. Currently, all
development and engineering expenses are expensed as incurred.
Development and engineering expense was $7.3 million in the first quarter of
1999 and $3.9 million in the first quarter of 1998. The increase was the result
of a significant increase in the number of engineers engaged in the development
of our applications and services.
Sales, General and Administrative
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 our operations.
We anticipate that sales, general and administrative expense will continue to
increase in absolute dollars as we add sales, marketing and administrative
personnel, increase our marketing and promotional activities and incur costs
related to being a public company, such as directors' and officers' liability
insurance premiums and professional fees.
Sales, general and administrative expense increased to $9.0 million in the
first quarter of 1999 from $5.0 million in the first quarter of 1998. The
amortization of deferred stock compensation accounted for $1.6 million of the
increase. The remainder of the increase resulted from salaries and related
costs of added sales personnel and executive management.
Deferred stock compensation represents the difference between the purchase
or exercise price of certain restricted stock and stock option grants and the
deemed fair value of Healtheon's common stock at the time of those grants.
Healtheon recorded deferred stock compensation of $6.3 million in the first
quarter of 1999, $8.2 million in the full year of 1998 and $2.7 million in the
full year of 1997. The deferred stock compensation balance at March 31, 1999 was
$11.1 million. The deferred stock compensation balance is being amortized based
on a graded vesting method over the vesting period, generally four years, of the
option or restricted stock grants. Amortization is estimated to total $7.8
million in 1999, $3.5 million in 2000, $1.5 million in 2001 and $.4 million for
2002.
Amortization of Intangible Assets
Amortization of intangible assets was $4.2 million in the first quarter of
1999 and $1.9 million in the first quarter of 1998. All of the intangible assets
are being amortized over expected lives of three to five years. The increase is
due primarily to the January 1999 Services Agreement with SmithKline Labs and
the acquisition of Metis LLC in August 1998. Amortization charges are estimated
to be $11.8 million in 1999, $10.0 million in 2000, $3.4 million in 2001, $1.8
million in both 2002 and 2003 and $.2 million in 2004 assuming no impairment of
the remaining unamortized intangible asset balances and no additional
acquisitions of intangible assets.
Interest Income and Expense
Interest income has been derived primarily from cash investments. Interest
expense results primarily from our borrowings and from capitalized lease
obligations for equipment purchases. Net interest income was $0.6 million in the
first quarter of 1999 and $0.2 million in the first quarter of 1998. The
increase for the 1999 period was due to higher average cash balances resulting
from the proceeds of our $46.1 million preferred stock financing in October 1998
and the net proceeds of $41.4 million from our initial public offering in
February 1999.
Dividends on ActaMed's Convertible Redeemable Preferred Stock
Healtheon acquired ActaMed in a transaction accounted for as a
pooling-of-interests in May 1998. Because dividends on ActaMed's convertible
redeemable preferred stock were cumulative whether declared or not, ActaMed
accrued the dividends on a quarterly basis. Dividends of $.9 million were
charged against income in the consolidated statements of operations in the first
quarter of 1998. None of the dividends were paid, and, in conjunction with
approving the acquisition of ActaMed by Healtheon, ActaMed's preferred
stockholders waived their right to receive the dividends, which totaled $7.5
million at the time of the acquisition. The ActaMed preferred stockholders
received an aggregate of 17.3 million shares of Healtheon common stock in
exchange for their ActaMed convertible redeemable preferred stock.
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<PAGE> 11
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Our quarterly operating results may vary.
Fluctuations in our quarterly results could affect the market price of our
common stock in a manner unrelated to our long-term operating performance. We
expect that our quarterly revenue and operating results may fluctuate as a
result of a number of factors, including:
- changes in our strategic relationships;
- future acquisitions;
- our entry into new healthcare markets;
- new customers;
- new application and service offerings;
- software defects, delays in development and other quality factors;
- customer demand for our applications and services;
- our ability to meet project milestones or customer expectations;
- our mix of consulting and transaction fee revenue;
- variability in demand of Internet-based healthcare solutions;
- changes within the healthcare industry; and
- seasonality of demand.
We expect to increase activities and spending in substantially all of our
operational areas. We base our expense levels in part upon our expectations
concerning future revenue and these expense levels are relatively fixed in the
short-term. If we have lower revenue, we may not be able to reduce our spending
in the short-term in response. Any shortfall in revenue would have a direct
impact on our results of operations. For these and other reasons, we may not
meet the earnings estimates of securities analysts or investors and our stock
price could suffer.
The healthcare industry may not accept our solutions.
To be successful, we must attract a significant number of customers
throughout the healthcare industry. To date, the healthcare industry has been
resistant to adopting new information technology solutions. Electronic
information exchange and transaction processing by the healthcare industry is
still developing. We believe that complexities in the nature of the healthcare
transactions that must be processed have hindered the development and acceptance
of information technology solutions by the industry. Conversion from traditional
methods to electronic information exchange may not occur as rapidly as we expect
it will. Even if the conversion does occur as rapidly as we expect, healthcare
industry participants may use applications and services offered by others.
We believe that we must gain significant market share with our applications
and services before our competitors introduce alternative products, applications
or services with features similar to our current or proposed offerings. Our
business plan is based on our belief that the value and market appeal of our
solution will grow as the number of participants and the scope of the
transaction services available on our platform increase. We may not achieve the
critical mass of users we believe is necessary to become successful. In
addition, we expect to generate a significant portion of our revenue from
subscription and transaction-based fees. Consequently, any significant shortfall
in the number of users or transactions occurring over our platform would
adversely affect our financial results.
We rely on strategic relationships to generate revenue.
To be successful, we must establish and maintain strategic relationships
with leaders in a number of healthcare industry segments. This is critical to
our success because we believe that these relationships will enable us to:
- extend the reach of our applications and services to the various
participants in the healthcare industry;
- obtain specialized healthcare expertise;
- develop and deploy new applications;
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<PAGE> 12
- further enhance the Healtheon brand; and
- generate revenue.
Entering into strategic relationships is complicated because some of our
current and future partners may decide to compete with us. In addition, we may
not be able to establish relationships with key participants in the healthcare
industry if we have established relationships with competitors of these key
participants. Consequently, it is important that we are perceived as independent
of any particular customer or partner. Moreover, many potential partners may
resist working with us until our applications and services have been
successfully introduced and have achieved market acceptance.
As we establish strategic relationships, we will depend on our partners'
ability to generate increased acceptance and use of our platform, applications
and services. To date, we have established only a limited number of strategic
relationships and these relationships are in the early stages of development. We
have limited experience in establishing and maintaining strategic relationships
with healthcare industry participants. If we lose any of these strategic
relationships or fail to establish additional relationships, or if our strategic
partners fail to actively pursue additional business relationships and
partnerships, we would not be able to execute our business plans and our
business would suffer significantly. On February 9, 1999, SmithKline Beecham
announced that it has agreed to sell SmithKline Labs to Quest Diagnostics,
Incorporated. SmithKline Labs has been one of our strategic partners since
December 1997, and our relationship with them has been beneficial. Our
agreements with SmithKline Labs will remain in effect as a result of the
acquisition. However, we will need to work with a new business partner, which
involves risks such as different customer requirements and working
relationships. At this time, we are not aware of Quest's intentions regarding
our relationship with SmithKline Labs. Our business could be adversely affected
if Quest does not pursue the relationship to the same extent as SmithKline Labs.
In addition, our ability to take advantage of our relationship with SmithKline
Labs may be impaired because the attention of management of the combining
companies may be diverted during and after the acquisition. We may not
experience increased use of our platform, applications and services even if we
establish and maintain these strategic relationships.
Our business will suffer if we do not expand our suite of applications.
Our business will suffer if we do not expand the breadth of our applications
quickly. We currently offer a limited number of applications on our platform and
our future success depends on quickly introducing new applications in several
healthcare segments. We do not have the internal resources and specialized
healthcare expertise to develop all these applications independently.
Consequently, we must rely on a combination of internal development, strategic
relationships, licensing and acquisitions to develop these applications. Each of
our applications, regardless of how it was developed, must be integrated and
customized to operate with existing customer legacy computer systems and our
platform. Developing, integrating and customizing these applications will be
expensive and time consuming. Even if we are successful, these applications may
never achieve market acceptance, which could also cause our business to suffer.
We must acquire technologies and companies to increase our customer base.
We expect to continue to acquire technologies and other healthcare
technology companies to increase the number and variety of applications on our
platform and to increase our customer base. For example, in May 1998 we acquired
ActaMed, in August 1998 we acquired substantially all the assets of Metis, LLC,
and in April 1999 we announced that we have entered into an agreement to acquire
MedE America Corporation, or MedE. See Note 5 of "Notes to Condensed
Consolidated Financial Statements." To be successful, we will need to identify
applications, technologies and businesses that are complementary to ours,
integrate disparate technologies and corporate cultures and manage a
geographically dispersed company. Acquisitions could divert our attention from
other business concerns and expose us to unforeseen liabilities or risks
associated with entering new markets. Finally, we may lose key employees while
integrating these new companies.
Integrating newly acquired organizations and technologies into our company
could be expensive, time consuming and may strain our resources. In addition, we
may lose our current customers if any acquired companies have relationships with
competitors of our customers. Consequently, we may not be successful in
integrating acquired businesses or technologies and may not achieve anticipated
revenue and cost benefits. The healthcare industry is consolidating and we
expect that we will face intensified competition for acquisitions, especially
from larger, better-funded organizations. If we fail to execute our acquisition
strategy successfully for any reason, our business will suffer significantly.
12
<PAGE> 13
We intend to pay for some of our acquisitions by issuing additional common
stock and this could dilute our stockholders. We may also use cash to buy
companies or technologies in the future. If we do use cash, we may need to incur
debt to pay for these acquisitions. Acquisition financing may not be available
on favorable terms or at all. In addition, we may be required to amortize
significant amounts of goodwill and other intangible assets in connection with
future acquisitions, which would materially increase our operating expenses.
We must manage our growth.
We have rapidly and significantly expanded our operations and expect to
continue to do so. This growth has placed, and is expected to continue to place,
a significant strain on our managerial, operational, financial and other
resources. As of March 31, 1999, we have grown our headcount significantly over
the prior year. A large portion of this increase resulted from our acquisitions
of ActaMed in May 1998 and Metis, LLC in August 1998, which increased our
payroll by 230 employees. We expect to continue to hire a significant number of
new employees to support our business. In addition, the proposed acquisition of
MedE will increase our headcount by approximately 450 employees.
Our current information systems, procedures and controls may not continue to
support our operations and may hinder our ability to exploit the market for
healthcare applications and services. We are in the process of evaluating our
accounting and management information systems and anticipate that we may
implement new systems within the next twelve months. We could experience
interruptions to our business while we transition to new systems.
Our business will suffer if commercial users do not accept Internet solutions.
Our business model depends on the adoption of Internet solutions by
commercial users. Our business could suffer dramatically if Internet solutions
are not accepted or not perceived to be effective. The Internet may not prove to
be a viable commercial marketplace for a number of reasons, including:
- inadequate development of the necessary infrastructure for communication
speed, access and server reliability;
- security and confidentiality 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 Internet activity; and
- governmental regulation.
We expect Internet use to grow in number of users and volume of traffic. The
Internet infrastructure may be unable to support the demands placed on it by
this continued growth.
Growth in the demand for our applications and services depends on the
adoption of Internet solutions by healthcare participants, which 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 our Internet-based platform. To maximize the benefits of our
platform, healthcare participants must be willing to allow sensitive information
to be stored in our databases. We can process transactions for healthcare
participants that maintain information on their own proprietary databases.
However, the benefits of our connectivity and sophisticated information
management solution are limited under these circumstances. Customers using
legacy and client-server systems may refuse to adopt new systems when they have
made extensive investment in hardware, software and training for older systems.
Performance or security problems with our systems could damage our business.
Our customer satisfaction and our business could be harmed if we or our
customers experience any system delays, failures or loss of data. We currently
process substantially all our customer transactions and data at our facilities
in Santa Clara, California and Atlanta, Georgia. Although we have safeguards for
emergencies, we do not have backup facilities to process information if either
of these facilities is not functioning. The occurrence of a major catastrophic
event or other system failure at either the Santa Clara or the Atlanta facility
could interrupt
13
<PAGE> 14
data processing or result in the loss of stored data. In addition, we depend on
the efficient operation of Internet connections from customers to our systems.
These connections, in turn, depend on the efficient operation of Web browsers,
Internet service providers and Internet backbone service providers, all of which
have had periodic operational problems or experienced outages.
A material security breach could damage our reputation or result in
liability to us. We retain confidential customer and patient information in our
processing centers. Therefore, it is critical that our facilities and
infrastructure remain secure and that our facilities and infrastructure are
perceived by the marketplace to be secure. Despite the implementation of
security measures, our infrastructure may be vulnerable to physical break-ins,
computer viruses, programming errors, attacks by third parties or similar
disruptive problems.
Technology may change faster than we can update our applications and services.
Healthcare information exchange and transaction processing is a relatively
new and evolving market. The pace of change in our markets is rapid and there
are frequent new product introductions and evolving industry standards. We may
be unsuccessful in responding to technological developments and changing
customer needs. In addition, our applications and services offerings may become
obsolete due to the adoption of new technologies or standards.
Our platform infrastructure and its scalability are not proven.
So far, we have processed a limited number and variety of transactions over
our platform. Similarly, a limited number of healthcare participants use our
platform. Our systems may not accommodate increased use while maintaining
acceptable overall performance. We must continue to expand and adapt our network
infrastructure to accommodate additional users, increased transaction volumes
and changing customer requirements. This expansion and adaptation will be
expensive and will divert our attention from other activities.
Many of our service agreements contain performance standards. If we fail to
meet these standards, our customers could terminate their agreements with us.
The loss of any of our service agreements would directly and significantly
impact our business. We may be unable to expand or adapt our network
infrastructure to meet additional demand or our customers' changing needs on a
timely basis and at a commercially reasonable cost, or at all.
Our revenues are concentrated in a few customers.
We expect that we will generate a significant portion of our revenue from a
small number of customers for the next few years. If we do not generate as much
revenue from these customers as we expect, or if we lose any of these customers,
our revenue will be significantly reduced which would harm our business. For
example, we receive a substantial majority of our revenue from four customers.
UnitedHealth Group, SmithKline Labs, Brown & Toland and Beech Street each
accounted for over 10% of our total revenue in the first quarter of 1999. As of
April 28, 1999, UnitedHealth Group owned approximately 12.7% of our stock and
SmithKline Labs owned approximately 8.8% of our stock.
We face significant competition.
The market for healthcare information services is intensely competitive,
rapidly evolving and subject to rapid technological change. Many of our
competitors have greater financial, technical, product development, marketing
and other resources than we have. These organizations may be better known and
have more customers than us. We may be unable to compete successfully against
these organizations.
Many of our competitors have announced or introduced Internet strategies
that will compete with our applications and services. We have many competitors,
including:
- healthcare information software vendors, including HBO & Company and
Shared Medical Systems Corporation;
- healthcare electronic data interchange companies, including ENVOY
Corporation and National Data Corporation;
- large information technology consulting service providers, including
Andersen Consulting, International Business Machines Corporation and
Electronic Data Systems Corporation; and
14
<PAGE> 15
- small regional organizations.
In addition, we expect that major software information systems companies and
others specializing in the healthcare industry will offer competitive
applications or services. Some of our large customers may also compete with us.
Changes in the healthcare industry could adversely affect our business.
The healthcare industry is highly regulated and is subject to changing
political, economic and regulatory influences. These factors affect the
purchasing practices and operation of healthcare organizations. Changes in
current healthcare financing and reimbursement systems could cause us to make
unplanned modifications of applications or services, or result in delays or
cancellations of orders or in the revocation of endorsement of our applications
and services by healthcare participants. 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 respond by reducing their
investments or postponing investment decisions, including investments in our
applications and services. We do not know what effect any proposals would have
on our business.
Many healthcare providers are consolidating to create integrated healthcare
delivery systems with greater market power. These providers may try to use their
market power to negotiate price reductions for our applications and services. If
we were forced to reduce our prices, our operating margins would decrease. As
the healthcare industry consolidates, competition for customers will become more
intense and the importance of acquiring each customer will become greater.
Government regulation could adversely affect our business.
Our business is subject to government regulation. Existing as well as new
laws and regulations could adversely affect our business. 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.
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.
Demand for our applications and services may be affected by additional
regulation of the Internet. For example, until recently current Health Care
Financing Administration guidelines prohibited transmission of Medicare
eligibility information over the Internet.
We are subject to extensive regulation relating to the confidentiality and
release of patient records. Additional legislation governing the distribution of
medical records has been proposed at both the state and federal level. It may be
expensive to implement security or other measures designed to comply with any
new legislation. Moreover, we may be restricted or prevented from delivering
patient records electronically.
Legislation currently being considered at the federal level could affect our
business. For example, 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. We are designing our platform
and applications to comply with these proposed regulations; however, until these
regulations become final, they could change, which could cause us to use
additional resources and lead to delays in order to revise our platform and
applications. In addition, our success depends on other healthcare participants
complying with these regulations.
Some computer applications and software are considered medical devices and
are subject to regulation by the United States Food and Drug Administration, or
the FDA. We do not believe that our current applications
15
<PAGE> 16
or services are subject to FDA regulation. We may expand our application and
service offerings into areas that subject us to FDA regulation. We have no
experience in complying with FDA regulations. We believe that complying with FDA
regulations would be time consuming, burdensome and expensive and could delay
our introduction of new applications or services.
We may face product-related liabilities.
Although we and our customers test our applications, they may contain
defects or result in system failures. In addition, our platform may experience
problems in security, availability, scalability or other critical features.
These defects or problems could result in the loss of or delay in generating
revenue, loss of market share, failure to achieve market acceptance, diversion
of development resources, injury to our reputation or increased insurance costs.
Many of our strategic relationships and services agreements involve
providing critical information technology services to our clients' businesses.
Providing these services is complex because our clients have complex computing
system environments. If we fail to meet our clients' expectations, our
reputation could suffer and we could be liable for damages. In addition, patient
care could suffer and we could be liable if our systems fail to deliver correct
information in a timely manner. Our insurance may not protect us from this risk.
Finally, we could become liable if confidential information is disclosed
inappropriately.
Our contracts limit our liability arising from our errors; however, these
provisions may not be enforceable and may not protect us from liability. While
we have general liability insurance that we believe is adequate, including
coverage for errors and omissions, we may not be able to maintain this insurance
on reasonable terms in the future. In addition, our insurance may not be
sufficient to cover large claims and our insurer could disclaim coverage on
claims. If we are liable for an uninsured or underinsured claim or if our
premiums increase significantly, our financial condition could be materially
harmed.
Our proprietary technology may be subjected to infringement claims or may be
infringed upon.
Our intellectual property is important to our business. We could be subject
to intellectual property infringement claims as the number of our competitors
grows and the functionality of our applications overlaps with competitive
offerings. These claims, even if not meritorious, could be expensive and divert
our attention from operating our company. If we become liable to third parties
for infringing their intellectual property rights, we would be required to pay a
substantial damage award and to develop non-infringing technology, obtain a
license or cease selling the applications that contain the infringing
intellectual property. We may be unable to develop non-infringing technology or
obtain a license on commercially reasonable terms, or at all. In addition, we
may not be able to protect against misappropriation of our intellectual
property. Third parties may infringe upon our intellectual property rights, we
may not detect this unauthorized use and we may be unable to enforce our rights.
Lengthy sales and implementation cycles for our solutions could adversely
affect our revenue growth.
A key element of our strategy is to market our solutions directly to large
healthcare organizations. We are unable to control many of the factors that will
influence our customers' buying decisions. We expect that the sales and
implementation process will be lengthy and will involve a significant technical
evaluation and commitment of capital and other resources by our customers. The
sale and implementation of our solutions are subject to delays due to our
customers' internal budgets and procedures for approving large capital
expenditures and deploying new technologies within their networks.
We will need to expend substantial resources to integrate our applications
with the existing legacy and client-server architectures of large healthcare
organizations. We have limited experience in integrating our applications with
large, complex architectures, and we may experience delays in the integration
process. These delays would, in turn, delay our ability to generate revenue from
these applications and could adversely affect our results of operations.
Our business will be adversely affected if we cannot attract and retain key
personnel.
16
<PAGE> 17
Our success will depend significantly on our senior management team and
other key employees. We need to attract, integrate, motivate and retain
additional highly skilled technical people. In particular, we need to attract
experienced professionals capable of developing, selling and installing complex
healthcare information systems. We face intense competition for these people.
Our executive management team is critical to our success. We do not maintain key
person life insurance for anyone.
LIQUIDITY AND CAPITAL RESOURCES
In February 1999, Healtheon completed the initial public offering of its
common stock and realized net proceeds from the offering of approximately $41.4
million. Prior to the offering, Healtheon had funded its operations since
inception primarily through the private placement of equity securities, through
which we had raised net proceeds of $106.2 million through December 31, 1998. We
have also financed our operations through equipment lease financing and bank
borrowings. As of March 31, 1999, we had outstanding equipment lease liabilities
of $5.5 million and borrowings against a line of credit of $1.1 million. As of
March 31, 1999, we had approximately $63.2 million of cash, cash equivalents and
short-term investments.
Cash used in operating activities was $11.3 million in the first quarter of
1999 and $3.0 million in the first quarter of 1998. The cash used during these
periods was primarily attributable to net losses. These losses were principally
related to increased development and engineering expenses and sales, general and
administrative expenses.
Investments in property and equipment, excluding equipment acquired under
capital leases or through the issuance of common stock, were $4.0 million in the
first quarter of 1999 and $2.0 million in the first quarter of 1998. In the
first quarter of 1999, Healtheon used $15.1 million of cash to purchase
short-term investments and realized $7.8 million in cash from maturities of its
short-term investments. In the first quarter of 1998, Healtheon used $3.1
million of cash to purchase short-term investments and realized $7.1 million in
cash from maturities of its short-term investments.
Cash provided by financing activities was $40.9 million in the first quarter
of 1999, primarily from the net proceeds of our initial public offering of $41.4
million, as well as proceeds from exercises of employee stock options, offset
slightly by payments totaling $0.9 million on capital lease obligations and line
of credit borrowings. Financing activities used $0.1 million of cash in the
first quarter of 1998, resulting primarily from payments of capital lease
obligations.
As of March 31, 1999, we did not have any material commitments for capital
expenditures. Our principal commitments at March 31, 1999 consisted of
obligations under operating leases and capital leases and our line of credit.
We currently anticipate that our available cash resources and credit
facilities will be sufficient to meet our presently anticipated working capital,
capital expenditure and business expansion requirements for at least the next 12
months. However, we may need to raise additional funds within the next 12 months
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. Our future liquidity and capital
requirements will depend upon numerous factors, including the success of our
existing and new application and service offerings and competing technological
and market developments. We may be required to raise additional funds through
public or private financing, strategic relationships or other arrangements.
There can be no assurance that additional funding, if needed, will be available
on terms acceptable to us, 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 these "Year 2000" requirements. Healtheon'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 Healtheon to deliver
services to its customers, including our proprietary software systems as well as
hardware and software supplied by third parties; communications networks, such
as the Internet and private intranets, which we depend on to provide electronic
transactions to our customers; the internal systems of our customers and
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<PAGE> 18
suppliers; the hardware and software systems we use internally in the management
of our business; and non-information technology systems and services we use in
our business, such as telephone systems and building systems.
Healtheon has reviewed the proprietary software systems we use to deliver
services to our customers. Although we believe that our internally developed
applications and systems are designed to be Year 2000 compliant, we utilize
third-party equipment and software that may not be Year 2000 compliant. In
January 1999, we acquired certain electronic laboratory connectivity devices
from SmithKline Labs. SmithKline has warranted these services to be Year 2000
compliant. Also, two systems acquired by ActaMed, specifically SCAN and
ProviderLink, which together accounted for approximately 42% of our total
revenue in 1998, will require modifications to become Year 2000 compliant. We
have released an updated version of SCAN which is Year 2000 compliant and we are
in the process of deploying the updated version of SCAN to our customers.
ProviderLink has two versions. The DOS version was made Year 2000 compliant and
is currently being deployed to our DOS-based customers. The Internet version is
being modified to be Year 2000 compliant and we expect to begin deployment over
the Internet in mid-1999. We estimate the cost of these Year 2000 upgrades to be
less than $1.0 million. In addition, our SCAN product is installed on
approximately 4,650 Healtheon-owned workstations located in provider offices.
Many of these workstations are not Year 2000 compliant and we must upgrade or
replace them. We expect the costs of such upgrades or replacements to be less
than $1.0 million. However, we could experience delays and cost overruns in the
development of these upgrades, the upgrades could contain defects and we could
experience difficulties in getting our installed base of physicians to implement
these upgrades in a timely manner. If we experience these or other difficulties
in developing and deploying our Year 2000 upgrades, our revenues from SCAN,
ProviderLink and electronic laboratory delivery could be significantly reduced,
which could have a material adverse effect on our business, financial condition
and results of operations. Failure of third-party or of our equipment or
software to operate properly with regard to the Year 2000 and thereafter could
require us to incur unanticipated expenses to remedy any problems, which could
have a material adverse effect on our business, financial condition and results
of operations. In certain of our agreements, we warrant that our applications
and services are Year 2000 compliant. Failure of our 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 our business, financial condition and results of operations. We do not
believe that the expenditures to upgrade our internal systems and applications
will have a material adverse effect on our business, financial condition and
results of operations.
Furthermore, the success of our 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 Healtheon's systems is difficult to determine. Customer difficulties
due to Year 2000 issues could interfere with healthcare transactions or
information, which might expose us to significant potential liability. If client
failures result in the failure of our systems, Healtheon'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 Healtheon's applications and services.
Healtheon, with the assistance of an independent consulting firm
specializing in Year 2000 issues, has completed a formal assessment of our Year
2000 exposure and is taking steps to address the identified points of exposure.
We expect to complete our Year 2000 remediation efforts by mid-1999. We are in
the process of developing a contingency plan for handling Year 2000 problems
that are not detected and corrected prior to their occurrence. However, we are
unable to make contingency plans if any significant number of the computers
constituting the Internet fail to properly process dates for the year 2000 and
there is a system-wide slowdown or breakdown. Any failure by us to address any
unforeseen Year 2000 issue could adversely affect our business, financial
condition and results of operations. Any interruption or significant degradation
of Internet operations, whether due to Year 2000 problems or otherwise, could
harm our business.
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<PAGE> 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
The primary objective of Healtheon's investment activities is to preserve
principal while at the same time maximizing the income we receive from our
investments without significantly increasing risk. Some of the securities that
we have invested in may be subject to market risk. This means that a change in
prevailing interest rates may cause the principal amount of the investment to
fluctuate. For example, if we hold a security that was issued with a fixed
interest rate at the then-prevailing rate and the prevailing interest rate later
rises, the principal amount of our investment will probably decline. To minimize
this risk, we maintain our portfolio of cash equivalents and short-term
investments in a variety of securities, including commercial paper, other
non-government debt securities and money market funds. In general, money market
funds are not subject to market risk because the interest paid on such funds
fluctuates with the prevailing interest rate. In addition, we invest in
relatively short-term securities. As of March 31, 1999, all of our investments
mature in less than one year.
The following table presents the amounts of our cash equivalents and
short-term investments that are subject to market risk by range of expected
maturity and weighted-average interest rates as of March 31, 1999. This table
does not include money market funds because those funds are not subject to
market risk.
<TABLE>
<CAPTION>
MATURING IN
---------------------------------------------------
THREE
THREE MONTHS
MONTHS TO FAIR
OR LESS ONE YEAR TOTAL VALUE
------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Included in cash and cash equivalents $35,339 NA $35,339 $35,339
Weighted-average interest rate ..... 4.87%
Included in short-term investments ... $15,011 $9,762 $24,773 $24,773
Weighted-average interest rates .... 4.97% 4.92%
</TABLE>
EXCHANGE RATE SENSITIVITY
Currently the majority of Healtheon's sales and expenses are denominated in
U.S. dollars and as a result we have experienced no significant foreign exchange
gains and losses to date. While we are conducting some transactions in foreign
currencies during 1999, we do not anticipate that foreign exchange gains or
losses will be significant. We have not engaged in foreign currency hedging
activities to date.
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<PAGE> 20
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(d) Use of Proceeds.
On February 11, 1999, Healtheon completed the initial public offering,
or the offering, of its common stock. The managing underwriters in the
offering were Morgan Stanley & Co. Incorporated, Goldman, Sachs & Co.,
Hambrecht & Quist LLC and Volpe Brown Whelan & Company. The shares of common
stock sold in the offering were registered under the Securities Act of 1933,
as amended, on a Registration Statement on Form S-1 (No. 333-70553). The
Registration Statement was declared effective by the Securities and Exchange
Commission on February 10, 1999.
The offering commenced on February 11, 1999. The offering terminated on
February 11, 1999 after we had sold all of the 5,750,000 shares of common
stock registered under the Registration Statement (including 750,000 shares
sold in connection with the exercise of the underwriters' over-allotment
option). The initial public offering price was $8 per share for an aggregate
initial public offering of $46,000,000.
We paid a total of $3,220,000 in underwriting discounts and commissions.
In addition, the following table itemizes the estimated expenses incurred in
connection with the offering, other than underwriting discounts and
commissions. None of the amounts shown was paid directly or indirectly to
any director, officer, general partner of Healtheon or their associates,
persons owning 10 percent or more of any class of equity securities of
Healtheon or an affiliate of Healtheon.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee........ $ 13,900
NASD filing fee............................................ 5,500
Nasdaq National Market listing fee......................... 94,000
Printing and engraving expenses............................ 260,000
Professional fees and expenses............................. 815,100
Blue Sky fees and expenses................................. 9,000
Transfer agent fees........................................ 17,500
Miscellaneous.............................................. 167,000
----------
Total...................................................... $1,382,000
==========
</TABLE>
After deducting the underwriting discounts and commissions and the
offering expenses, the net proceeds to Healtheon from the offering were
approximately $41.4 million, which has been invested in short-term,
interest-bearing, investment grade securities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The Exhibits listed in the accompanying Exhibit Index on page 6 are
filed as part of this report.
(b) No reports on Form 8-K were filed during the quarter ended March 31,
1999.
The Company filed a report on Form 8-K on April 23, 1999 regarding the
proposed acquisition of MedE America Corporation.
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<PAGE> 21
SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
HEALTHEON CORPORATION
Date: May 17, 1999 By: /s/ John L. Westermann III
----------------------------------------
John L. Westermann III
Vice President, Chief Financial Officer,
Secretary and Treasurer
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<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.01 Agreement and Plan of Reorganization dated April 20, 1999 by
and among Healtheon Corporation, Merc Acquisition Corp. and
MedE America Corporation. (Incorporated by reference from
Healtheon's report on Form 8-K filed on April 23, 1999.)
27.01 Financial data schedule (EDGAR only)
</TABLE>
22
dead monkeys
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HEALTHEON'S
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 38,389 15,358
<SECURITIES> 24,786 1,324
<RECEIVABLES> 10,424 4,785
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 75,160 22,545
<PP&E> 28,920 12,223
<DEPRECIATION> 11,510 4,442
<TOTAL-ASSETS> 121,055 51,075
<CURRENT-LIABILITIES> 22,171 14,531
<BONDS> 0 0
0 54,638
0 43,756
<COMMON> 7 1
<OTHER-SE> 95,724 (62,690)
<TOTAL-LIABILITY-AND-EQUITY> 121,055 51,075
<SALES> 0 0
<TOTAL-REVENUES> 17,555 9,754
<CGS> 0 0
<TOTAL-COSTS> 16,860 7,948
<OTHER-EXPENSES> 19,822 10,834
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 139 116
<INCOME-PRETAX> (18,569) (9,676)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (18,569) (9,676)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (18,569) (9,676)
<EPS-PRIMARY> (0.30) (1.19)
<EPS-DILUTED> (0.30) (1.19)
</TABLE>
