<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 4, 1999
REGISTRATION NO. 333-70553
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
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: / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF SECURITIES AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED BE REGISTERED(1) PER SHARE OFFERING PRICE(2) FEE(3)
<S> <C> <C> <C> <C>
Common Stock, $.0001 par value............. 5,750,000 $7.00 $40,250,000 $11,190
</TABLE>
(1) Includes 750,000 shares of common stock issuable upon exercise of the
underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457(o) of the Securities Act of
1933.
(3) $9,730 of the Registration Fee was previously paid.
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>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED FEBRUARY 4, 1999
5,000,000 SHARES
[LOGO]
COMMON STOCK
-----------------
HEALTHEON CORPORATION IS OFFERING SHARES OF ITS COMMON STOCK. THIS IS OUR
INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR
SHARES. WE ANTICIPATE THAT THE INITIAL PUBLIC OFFERING
PRICE WILL BE BETWEEN $6 AND $7 PER SHARE.
-------------------
WE HAVE APPLIED TO LIST OUR COMMON STOCK ON THE NASDAQ NATIONAL MARKET UNDER THE
SYMBOL "HLTH."
-------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
-----------------
PRICE $ A SHARE
-----------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY
--------- ------------- -----------
<S> <C> <C> <C>
PER SHARE............................................. $ $ $
TOTAL................................................. $ $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT
APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
HEALTHEON HAS GRANTED THE UNDERWRITERS THE RIGHT TO PURCHASE UP TO AN ADDITIONAL
750,000 SHARES OF COMMON STOCK TO COVER OVER-ALLOTMENTS. MORGAN STANLEY & CO.
INCORPORATED EXPECTS TO DELIVER THE SHARES TO PURCHASERS ON , 1999.
-------------------
MORGAN STANLEY DEAN WITTER GOLDMAN, SACHS & CO.
HAMBRECHT & QUIST VOLPE BROWN WHELAN & COMPANY
, 1999
<PAGE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of the
prospectus or of any sale of the common stock. In this prospectus, unless the
context indicates otherwise, the "Company," "Healtheon," "we," "us" and "our"
refer to Healtheon Corporation and its consolidated subsidiaries.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 5
Use of Proceeds................................ 15
Dividend Policy................................ 15
Capitalization................................. 16
Dilution....................................... 17
Selected Consolidated Financial Data........... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 20
Business....................................... 31
Management..................................... 46
<CAPTION>
PAGE
-----------
<S> <C>
Certain Transactions........................... 59
Principal Stockholders......................... 64
Description of Capital Stock................... 66
Shares Eligible for Future Sale................ 69
Certain United States Tax Consequences to
Non-U.S. Holders of Common Stock............. 71
Underwriters................................... 74
Legal Matters.................................. 77
Experts........................................ 77
Where You Can Find More Information............ 78
Index to Consolidated Financial Statements..... F-1
</TABLE>
Until , 1999, all dealers that buy, sell or trade our common
stock, whether or not participating in this offering, may be required to deliver
a prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
-------------------
For investors outside the United States: Neither we nor any of the
underwriters have done anything that would permit this offering or possession or
distribution of this prospectus in any jurisdiction where action for that
purpose is required, other than in the United States. You are required to inform
yourselves about and to observe any restrictions relating to this offering and
the distribution of this prospectus.
-------------------
Healtheon, Healtheon's logo, Virtual Healthcare Network, VHN, Healtheon
ProviderWorks and ProviderLink are some of our trademarks. SBCL SCAN is a
trademark of SmithKline Beecham Clinical Laboratories, Inc. Each other
trademark, trade name or service mark of any other company appearing in this
prospectus is the property of its holder.
2
<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 "payers" 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," "Scalability," "Availability," "Extensibility,"
"Manageability," "Performance" and "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, payers, 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
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION REGARDING OUR COMPANY AND THE COMMON STOCK BEING SOLD IN THIS
OFFERING AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING
ELSEWHERE IN THIS PROSPECTUS.
Healtheon is pioneering the use of the Internet to simplify workflows,
decrease costs and improve the quality of patient care throughout the healthcare
industry. We designed and developed the Healtheon Platform, an Internet-based
information and transaction platform that allows us to create Virtual Healthcare
Networks, or "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 our
Internet-based platform. Our 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. We provide our own applications on the
Healtheon Platform and also enable third-party applications to operate on the
platform. In addition to VHNs, we provide comprehensive consulting, development,
implementation and network management services to enable our customers to take
full advantage of the capabilities of the Healtheon Platform. To date, our
revenue has been derived primarily from non-Internet network services,
development and consulting services and from management and operation of
customers' information technology infrastructure. We have established strategic
relationships with leading healthcare companies, including United HealthCare
Group, SmithKline Beecham Clinical Laboratories, Inc., Brown & Toland Physician
Services Organization and Beech Street Corporation. We believe that these
relationships will enhance our application portfolio, provide us with important
specialized industry expertise, increase our market penetration and generate
revenue. An investment in our common stock involves risks and uncertainties,
including the risks that the healthcare industry may be resistant to the
adoption of new information technology due to concerns about government
regulation, patient confidentiality and security. See "Risk Factors."
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. We believe 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. 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 with associated software to create
24-hour availability.
Our objective is to become the leading provider of Internet-based
transaction and information services to the healthcare industry. Our 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 our
platform through the development, acquisition or enabling of
Internet-based applications;
- forming additional strategic relationships to increase our
portfolio of applications and services, to increase the number of
connected healthcare participants and to provide specialized
industry expertise for our new applications;
- targeting regional markets where we can gain critical mass, thereby
expanding nationally region by region; and
- employing our 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.
We were incorporated in Delaware in December 1995 and commenced operations
in January 1996. In May 1998, we acquired ActaMed, a leading provider of network
services to the healthcare industry. In August 1998, we acquired Metis, LLC, a
leading consulting, design and development firm focused on Internet and
intranet-based solutions for medical centers and integrated delivery networks.
Our executive offices are located at 4600 Patrick Henry Drive, Santa Clara,
California 95054. Our telephone number is (408) 876-5000. Information contained
on our website is not part of this prospectus.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered:
U.S. offering................... 4,000,000 shares
International offering.......... 1,000,000 shares
Total......................... 5,000,000 shares
Common stock to be outstanding
after the offering.............. 59,422,868 shares(1)
Use of proceeds................... For general corporate purposes, including working capital
and capital expenditures. See "Use of Proceeds."
Dividend policy................... We do not anticipate paying any cash dividends in the
foreseeable future.
Proposed Nasdaq National Market
symbol.......................... "HLTH"
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The consolidated financial data in this prospectus reflect our acquisition
of ActaMed Corporation, or "ActaMed," on May 19, 1998, which was accounted for
as a pooling of interests. This means that for accounting and financial
reporting purposes, we treat the two companies as if they had always been
combined. The consolidated statement of operations and statement of cash flows
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 how we accounted for the acquisition of
ActaMed.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------- ----------------------
1995 1996 1997 1997 1998
--------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue...................................................... $ 2,175 $ 11,013 $ 13,390 $ 7,000 $ 33,231
Loss from operations......................................... (3,936) (16,541) (25,423) (19,073) (35,443)
Net loss applicable to common stockholders................... $ (4,458) $ (18,606) $ (28,005) $ (21,273) $ (35,860)
Basic and diluted net loss per common share(2)............... $ (.85) $ (2.83) $ (3.88) $ (3.03) $ (1.24)
Weighted-average shares outstanding used in computing basic
and diluted net loss per common share(2).................... 5,246 6,583 7,223 7,019 28,934
Pro forma basic and diluted net loss per common share
(unaudited)(2).............................................. $ (.56) $ (.74)
Shares used in computing pro forma basic and diluted net loss
per common share (unaudited)(2)............................. 44,715 47,263
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-------------------------
ACTUAL AS ADJUSTED(3)
--------- --------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments............................................ $ 5,392 $ 33,317
Working capital (deficit).................................................................... (6,055) 21,870
Total assets................................................................................. 50,271 78,196
Long-term obligations, net of current portion................................................ 1,714 1,714
Stockholders' equity......................................................................... 30,226 58,151
</TABLE>
- ---------
(1) Based on the number of shares outstanding at September 30, 1998. Excludes
the following:
- 15,979,566 shares subject to options and warrants outstanding or reserved
for issuance under our stock plans at September 30, 1998 and an additional
3,107,321 shares reserved for issuance under our 1996 Stock Plan as a
result of the annual increase in January 1999;
- 7,683,341 shares of Series A convertible preferred stock issued in
November 1998;
- a warrant to purchase 500,000 shares issued in December 1998; and
- 1,833,333 shares issued in connection with an asset purchase agreement
with SmithKline Beecham Clinical Laboratories, Inc., or "SmithKline Labs."
(2) 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.
(3) As adjusted to give effect to the sale of the shares at an assumed initial
public offering price of $6.50 per share, after deducting estimated
underwriting discounts and commissions and our estimated offering expenses.
See "Use of Proceeds" and "Capitalization."
4
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN
INVESTMENT DECISION. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE
ONLY ONES FACING OUR COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY
KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS
OPERATIONS OR FINANCIAL CONDITION.
IF ANY OF THE FOLLOWING RISKS OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR
RESULTS OF OPERATIONS COULD BE MATERIALLY HARMED. IN THAT CASE, THE TRADING
PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR
INVESTMENT.
THIS PROSPECTUS ALSO CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING THE RISKS FACED BY US DESCRIBED BELOW AND ELSEWHERE IN THIS
PROSPECTUS.
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE OUR OPERATING HISTORY IS LIMITED
AND OUR BUSINESS MODEL IS UNPROVEN
Because we have recently begun operations, it is difficult to evaluate our
business and our prospects. 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 began operations in January 1996 and until recently had not earned
significant revenue. We have lost money since we began operations and, as of
September 30, 1998, we had an accumulated deficit of $85.2 million. In May 1998,
we acquired ActaMed and in August 1998, we acquired Metis, LLC. We currently
derive our revenue primarily from proprietary non-Internet network services
offered by ActaMed, from development and consulting services and from managing
and operating our customers' information technology infrastructures. 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. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
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. See "Business -- Industry Background."
5
<PAGE>
WE RELY ON STRATEGIC RELATIONSHIPS
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;
- 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.
Once we have established 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. We may not experience
increased use of our platform, applications and services even if we establish
and maintain these strategic relationships. For additional information regarding
our strategic relationships, see "Business -- Strategy" and "-- Strategic
Relationships."
WE NEED TO 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 FACE RISKS WITH OUR ACQUISITION STRATEGY
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, and in August 1998 we acquired substantially all the assets of Metis,
LLC. 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
6
<PAGE>
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 any 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.
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 harm our results of operations.
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 September 30, 1998, we have grown to 613 employees and
independent contractors, from 176 employees and independent contractors on
December 31, 1997. 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 hire a significant number
of new employees to support our business.
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.
WE DEPEND ON THE ADOPTION OF 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.
7
<PAGE>
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.
WE RELY ON THE CONTINUED PERFORMANCE AND SECURITY OF OUR SYSTEMS
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 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.
OUR BUSINESS IS AFFECTED BY RAPIDLY CHANGING TECHNOLOGY
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. See "Business --
Development and Engineering."
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.
8
<PAGE>
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.
United HealthCare Group, SmithKline Beecham Clinical Laboratories, Inc., Brown &
Toland Physician Services Organization and Beech Street Corporation each
accounted for over 10% and together accounted for approximately 90% of our total
revenue for the nine months ended September 30, 1998. In addition, United
HealthCare and Brown & Toland each accounted for over 10% and together accounted
for approximately 70% of our total revenue for the year ended December 31, 1997.
Customers who also own shares of our stock, including United HealthCare and
SmithKline Labs, accounted for 55% of our total revenue in the year ended
December 31, 1997 and 43% of our total revenue for the nine months ended
September 30, 1998. United HealthCare will own approximately 13.3% of our stock
after this offering. Similarly, SmithKline Labs will own approximately 9.1% of
our stock after this offering. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business -- Strategic
Relationships."
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
- 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.
See "Business -- Competition."
CHANGES IN THE HEALTHCARE INDUSTRY COULD 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 enhancements 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.
9
<PAGE>
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 results would suffer. 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 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. See "Business -- Governmental Regulations."
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;
10
<PAGE>
- 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 for 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. See "Management's Discussion and Analysis
of Financial Condition and 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.
WE MAY FACE PRODUCT-RELATED LIABILITIES
While 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.
WE DEPEND ON OUR PROPRIETARY TECHNOLOGY
Our intellectual property is important to our business. We expect that 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 noninfringing
technology, obtain a license or cease selling the applications that contain the
infringing intellectual property. We may be unable to develop noninfringing
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. See "Business -- Intellectual Property."
11
<PAGE>
THE SALES AND IMPLEMENTATION CYCLES FOR OUR SOLUTIONS CAN BE LENGTHY
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.
WE FACE RISKS RELATED TO THE YEAR 2000
Issues with respect to the Year 2000 could affect the performance of our or
our customers' computer systems. Two of our systems, SBCL SCAN, or "SCAN," and
ProviderLink, are not Year 2000 compliant. Our revenue from these systems
accounted for approximately 43% of our total revenue in the first nine months of
1998. We plan to release Year 2000 upgrades to these systems in early 1999. We
estimate the cost of these Year 2000 upgrades to SCAN and ProviderLink to be
less than $1.0 million. In addition, our SCAN product is installed on
approximately 4,650 workstations located in physician offices. Many of these
workstations are not Year 2000 compliant and we must upgrade or replace them. We
could experience delays and cost overruns in developing these upgrades. In
addition, it may be difficult to convince physicians to implement these
upgrades. Our revenue from SCAN and ProviderLink could decrease if we experience
delays in upgrading these applications and workstations. In addition, we may not
identify all of our applications and systems that must be modified to be Year
2000 compliant and may need to spend additional amounts to repair or modify our
applications and systems. In certain of our agreements, we warrant that our
applications and services are Year 2000 compliant. If they are not compliant,
our customers could terminate the agreements and we could be liable for damages.
We also depend on other healthcare participants to be Year 2000 compliant.
Many of these organizations are not Year 2000 compliant, and we do not know what
affect this would have on our systems. We could be liable for the failure of our
platform even if the failure was caused by someone else. Furthermore, the costs
to our customers of becoming Year 2000 compliant may result in reduced funds
being available to purchase and implement our applications and services. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Compliance."
WE MAY NEED TO OBTAIN FUTURE CAPITAL
We expect that the money generated from this offering, combined with our
current cash resources and credit facilities, will be sufficient to meet our
requirements for at least the next 12 months. However, we may need to raise
additional financing 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. We may need to
raise additional funds by selling debt or equity securities, by entering into
strategic relationships or through other arrangements. We may be unable to raise
any additional amounts on reasonable terms when they are needed.
12
<PAGE>
OUR COMMON STOCK PRICE MAY BE VOLATILE
You may not be able to resell your shares at or above the initial public
offering price due to a number of factors, including:
- actual or anticipated quarterly variations in our operating results;
- changes in expectations of future financial performance or changes in
estimates of securities analysts;
- announcements of technological innovations;
- announcements relating to strategic relationships;
- customer relationship developments; and
- conditions affecting the Internet or healthcare industries, in general.
The trading price of our common stock may be volatile. The stock market in
general, and the market for technology and Internet-related companies in
particular, has experienced extreme volatility that often has been unrelated to
the operating performance of particular companies. These broad market and
industry fluctuations may adversely affect the trading price of our common
stock, regardless of our actual operating performance.
In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
instituted. If this were to happen to Healtheon, litigation would be expensive
and would divert management's attention.
The initial public offering price will be established by negotiation between
the U.S. underwriters and Healtheon. You should read the "Underwriters" section
for a more complete discussion of the factors determining the initial public
offering price.
WE DEPEND ON OUR KEY PERSONNEL
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, including W. Michael Long, our Chief Executive
Officer, and Pavan Nigam, our Vice President, Engineering, is critical to our
success. We do not maintain key person life insurance for anyone.
WE HAVE CERTAIN ANTI-TAKEOVER DEFENSES
Certain provisions of our certificate of incorporation and bylaws and the
provisions of Delaware law could have the effect of delaying, deferring or
preventing an acquisition of Healtheon. For example, our board of directors is
divided into three classes to serve staggered three-year terms, our stockholders
may not take actions by written consent and our stockholders are limited in
their ability to make proposals at stockholder meetings. See "Description of
Capital Stock" for a further discussion of these provisions.
FUTURE SALES OF SHARES COULD AFFECT OUR STOCK PRICE
The market price for our common stock could fall dramatically if our
stockholders sell large amounts of our common stock in the public market
following this offering. These sales, or the possibility that these sales may
occur, could make it more difficult for us to sell equity or equity-related
securities in the future. The number of shares of common stock available for
sale in the public market is limited by restrictions under federal securities
law and by certain "lock-up" agreements that our stockholders have entered into
with the underwriters. The lock-up agreements restrict our stockholders from
selling or otherwise disposing of any of their shares for a period of 180 days
after the date of this prospectus without the prior written consent of Morgan
Stanley & Co. Incorporated. Morgan Stanley & Co. Incorporated may, however, in
its sole discretion and without notice, release all or any portion of the shares
from the restrictions in the lock-up agreements.
13
<PAGE>
After this offering, we will have outstanding 67,195,893 shares of common
stock, based upon shares outstanding as of November 30, 1998 and assuming no
exercise of the Underwriters' overallotment option and no exercise of
outstanding options or warrants. These shares will become eligible for sale in
the public market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE ELIGIBLE FOR PUBLIC RESALE
- ----------------------- ---------------------------------------------------------------------
<S> <C>
5,658,184............. Date of this prospectus (includes the 5,000,000 shares sold in this
offering)
52,254,368............. 180 days after the date of this prospectus
9,283,341............. At various times thereafter through November 6, 1999
</TABLE>
Any shares that may be purchased in this offering by our "affiliates," as
defined in Rule 144 of the Securities Act, will be subject to the volume and
other selling limitations under Rule 144 of the Securities Act. All but
10,437,264 of the shares eligible for sale at the 180th day after the date of
this prospectus or afterward will be subject initially to certain volume and
other limitations under Rule 144 of the Securities Act.
On or prior to the 180th day following the date of this prospectus, we
intend to register for resale an additional 13,811,659 shares of common stock
reserved for issuance under our employee stock plans based upon the number of
shares reserved for issuance as of November 30, 1998. In addition, the holders
of approximately 50,007,164 shares of our common stock have the right to require
us to register their shares for sale to the public. If these holders cause a
large number of shares to be registered and sold in the public market, our stock
price could fall materially. See "Shares Eligible for Future Sale."
OUR OFFICERS, DIRECTORS AND AFFILIATED ENTITIES WILL HAVE SIGNIFICANT CONTROL OF
HEALTHEON
After this offering, our directors and management will own or control
approximately 68.1% of our common stock. If these people act together, they will
be able to significantly influence the management and affairs of Healtheon and
will have the ability to control all matters requiring stockholder approval.
This concentration of ownership may have the effect of delaying, deferring or
preventing an acquisition of Healtheon and may adversely affect the market price
of our common stock.
OUR CURRENT STOCKHOLDERS WILL BENEFIT FROM THIS OFFERING
Based on the number of shares of common stock outstanding as of September
30, 1998, existing stockholders have paid an average of $2.06 per share for
their common stock, which is considerably less than the amount to be paid by
investors who purchase in this offering. New investors in this offering will
experience an immediate dilution of $5.92 per share, also based on the number of
outstanding shares as of September 30, 1998. This offering will also create a
public market for the resale of shares held by existing investors, and
substantially increase the market value of those shares. See "Dilution" and
"Principal Stockholders."
14
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the 5,000,000 shares of common stock in
this offering are estimated to be approximately $27.9 million, at an assumed
initial public offering price of $6.50 per share and after deducting estimated
underwriting discounts and commissions and our estimated offering expenses. If
the U.S. underwriters' over-allotment option is exercised in full, the net
proceeds would be approximately $32.5 million. The principal purposes of this
offering are to obtain additional capital, to create a public market for
Healtheon's common stock, to enhance the ability of Healtheon to acquire other
businesses, products or technologies, and to facilitate future access by
Healtheon to public equity markets.
Healtheon currently expects to use the net proceeds of this offering for
general corporate purposes, including working capital and capital expenditures.
Healtheon may also use a portion of the net proceeds of this offering to acquire
or invest in complementary businesses or technologies, although Healtheon has no
present commitments or agreements with respect to any acquisition or investment.
However, Healtheon from time to time enters into nondisclosure agreements with
third parties for the purpose of evaluating strategic transactions involving
complementary businesses or technologies. Healtheon intends to invest the
proceeds of this offering in short-term, interest-bearing, investment grade
securities pending use of the proceeds.
DIVIDEND POLICY
Healtheon 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. Healtheon intends to retain any
earnings for use in the operation of its business and to fund future growth. In
addition, the terms of Healtheon's credit agreement prohibit the payment of cash
dividends on its capital stock.
15
<PAGE>
CAPITALIZATION
The following table sets forth the total capitalization of Healtheon as of
September 30, 1998 on an actual basis and on an as adjusted basis to reflect the
receipt by Healtheon of the estimated net proceeds from the sale of the
5,000,000 shares of common stock in this offering at an assumed initial public
offering price of $6.50 per share after deducting estimated underwriting
discounts and commissions and our estimated offering expenses.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Capital lease obligations, net of current portion.............................................. $ 1,714 $ 1,714
--------- -----------
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, 54,422,868 shares issued and
outstanding, actual; 150,000,000 shares authorized, 59,422,868 shares issued and
outstanding, as adjusted.................................................................... 5 6
Additional paid-in capital..................................................................... 119,645 147,569
Deferred stock compensation.................................................................... (4,184) (4,184)
Accumulated deficit............................................................................ (85,240) (85,240)
--------- -----------
Total stockholders' equity................................................................. 30,226 58,151
--------- -----------
Total capitalization..................................................................... $ 31,940 $ 59,865
--------- -----------
--------- -----------
</TABLE>
The share numbers above exclude:
- 11,186,473 shares of common stock issuable upon the exercise of options
outstanding at September 30, 1998, with a weighted average exercise price
of $2.33 per share;
- 2,715,853 shares reserved for issuance under our 1996 Stock Plan and our
1998 Purchase Plan at September 30, 1998 and an additional 3,107,321
shares reserved for issuance under our 1996 Stock Plan as a result of the
annual increase in January 1999;
- 2,077,240 shares of common stock issuable upon the exercise of warrants
outstanding at September 30, 1998, with a weighted average exercise price
of $2.81 per share;
- 500,000 shares of common stock subject to a warrant with an exercise price
of $10.40 per share issued to a customer in December 1998;
- 7,683,341 shares of Series A convertible preferred stock issued in
November 1998 for $46.1 million in cash proceeds;
- options to purchase common stock granted and shares of common stock issued
under restricted stock purchase agreements equal to a total of 1,518,257
shares from October to December 1998 with a weighted-average exercise or
purchase price of $3.55 per share; and
- 1,833,333 shares of common stock issued in connection with a December 1998
Asset Purchase Agreement with SmithKline Beecham Clinical Laboratories,
Inc.
On October 20, 1998, Healtheon offered to reprice options granted from July
1998 through October 1998. Under this repricing, option holders could
surrender their original option in exchange for a new option with a new
vesting start date and an exercise price of $3.55 per share. Options for a
total of 2,057,950 shares were canceled and reissued. On December 14, 1998,
455,000 shares of common stock issued in July 1998 pursuant to restricted
stock purchase agreements were repurchased.
See "Management--Employee Benefit Plans," "Description of Capital Stock" and
Notes 10, 11 and 14 of Notes to Consolidated Financial Statements.
16
<PAGE>
DILUTION
The net tangible book value of Healtheon as of September 30, 1998 was
approximately $6.5 million, or $0.12 per share. Net tangible book value per
share is determined by dividing our total net tangible book value, which is
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 this offering
and the net tangible book value per share of common stock immediately after
completion of this offering. After giving effect to the sale of 5,000,000 shares
of common stock offered by Healtheon, at an assumed initial public offering
price of $6.50 per share and after deducting estimated underwriting discounts
and commissions and estimated offering expenses payable by Healtheon, and the
application of the estimated net proceeds, our net tangible book value at
September 30, 1998 would have been $34.4 million, or $0.58 per share. This
represents an immediate increase in pro forma net tangible book value to
existing stockholders of $0.46 per share and an immediate dilution to new
investors of $5.92 per share. The following table illustrates the per share
dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share.................................. $ 6.50
Net tangible book value per share as of September 30, 1998..................... .12
Increase per share attributable to new investors............................... .46
-----
Net tangible book value per share after this offering............................ $ .58
-----
Dilution per share to new public investors....................................... $ 5.92
-----
-----
</TABLE>
The following table sets forth, on a pro forma basis, as of September 30,
1998, the difference between the number of shares of common stock purchased from
Healtheon, the total consideration paid and the average price per share paid by
existing stockholders and by the new investors. Amounts in the table are
calculated at an assumed initial public offering price of $6.50 per share and
before deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by Healtheon:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- --------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- -------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............... 54,422,868 91.6% $ 112,287,000 77.6% $ 2.06
New public investors................ 5,000,000 8.4 32,500,000 22.4 6.50
------------ ----- -------------- -----
Total........................... 59,422,868 100.0% $ 144,787,000 100.0% 2.44
------------ ----- -------------- -----
------------ ----- -------------- -----
</TABLE>
As of September 30, 1998, there were options outstanding to purchase a total
of 11,186,473 shares of common stock, with a weighted average exercise price of
$2.33 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. From October
through December 1998, Healtheon granted options to purchase common stock and
issued shares of common stock under restricted stock purchase agreements equal
to a total of 1,518,257 shares, with a weighted average exercise or purchase
price of $3.55 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 December 31, 1998, were
exercised, the dilution per share to new public investors would be $5.47.
In November 1998, Healtheon issued 7,683,341 shares of Series A convertible
preferred stock for $46.1 million in cash proceeds at a purchase price of $6.00
per share. In December 1998, Healtheon issued to a customer a warrant to
purchase 500,000 shares of common stock with an exercise price of $10.40 per
share. In January 1999, Healtheon issued 1,833,333 shares of common stock to
SmithKline Labs in connection with a December 1998 asset purchase agreement.
On October 20, 1998, Healtheon offered to reprice options granted from July
1998 through October 1998. Under this repricing, option holders could surrender
their original option in exchange for a new option with a new vesting start date
and an exercise price of $3.55 per share. Options for a total of 2,057,950
shares were canceled and reissued. On December 14, 1998, 455,000 shares of
common stock issued in July 1998 pursuant to restricted stock purchase
agreements were repurchased.
17
<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. In May 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 Healtheon 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 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. The
statements of operations data for the nine-month period ended September 30, 1997
and 1998 and the balance sheet data as of September 30, 1998 are derived from
unaudited financial statements included elsewhere in this prospectus and, in the
opinion of Healtheon's management, include all adjustments, consisting only of
normal recurring adjustments, which are necessary for a fair presentation of the
results of operations for this period. 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>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue:
Services.................................... $ -- $ 190 $ 458 $ 1,795 $ 4,301 $ 1,216 $ 18,326
Services to related parties(1).............. -- -- -- 4,237 7,309 5,199 14,320
Software licenses........................... -- -- 1,717 4,981 1,780 585 585
--------- --------- --------- --------- --------- --------- ---------
Total revenue............................... -- 190 2,175 11,013 13,390 7,000 33,231
Operating costs and expenses:
Cost of revenue:
Cost of services.......................... -- 507 1,573 1,648 4,011 1,080 18,688
Cost of services to related parties....... -- -- -- 4,919 6,536 4,648 13,206
Cost of software licenses................. -- -- 343 160 -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total cost of revenue....................... -- 507 1,916 6,727 10,547 5,728 31,894
Development and engineering expense......... 1,002 1,863 2,446 8,596 12,986 9,681 13,036
Sales, general and administrative expense... 769 938 1,749 9,042 11,031 7,477 17,041
Amortization of intangible assets........... -- -- -- 3,189 4,249 3,187 6,703
--------- --------- --------- --------- --------- --------- ---------
Total operating costs and expenses.......... 1,771 3,308 6,111 27,554 38,813 26,073 68,674
--------- --------- --------- --------- --------- --------- ---------
Loss from operations.......................... (1,771) (3,118) (3,936) (16,541) (25,423) (19,073) (35,443)
Interest income............................... 5 172 208 539 611 359 834
Interest expense.............................. (117) (57) (6) (56) (323) (177) (361)
Dividends on ActaMed's convertible redeemable
preferred stock............................. -- -- -- (2,548) (2,870) (2,382) (890)
--------- --------- --------- --------- --------- --------- ---------
Net loss...................................... (1,883) (3,003) (3,734) (18,606) (28,005) (21,273) (35,860)
Dividends on ActaMed's convertible redeemable
preferred stock............................. -- (423) (724) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net loss applicable to common stockholders.... $ (1,883) $ (3,426) $ (4,458) $ (18,606) $ (28,005) $ (21,273) $ (35,860)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Basic and diluted net loss per common share... $ (.85) $ (2.83) $ (3.88) $ (3.03) $ (1.24)
Weighted-average shares outstanding used in
computing basic and diluted net loss per
common share(2)............................. 5,246 6,583 7,223 7,019 28,934
Pro forma basic and diluted net loss per
common share (unaudited).................... $ (.56) $ (.74)
Shares used in computing pro forma basic and
diluted net loss per common share
(unaudited)(2)............................. 44,715 47,263
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- -------- -------
SEPTEMBER 30,
1998
-------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments..................... $ 74 $ 4,186 $ 9,386 $ 7,539 $21,804 $ 5,392
Working capital (deficit)............................................. (1,737) 4,226 7,244 2,505 14,790 (6,055)
Total assets.......................................................... 899 5,379 10,801 34,407 53,747 50,271
Long-term obligations, net of current portion......................... 159 63 -- 1,210 932 1,714
Convertible redeemable preferred stock................................ -- 7,919 16,029 39,578 50,948 --
Stockholders' equity (net capital deficiency)......................... (1,335) (2,838) (7,697) (14,553) (9,930) 30,226
</TABLE>
- ------------
(1) Revenue from services to related parties consists of revenue from United
HealthCare and SmithKline Labs, customers that are also significant
stockholders of Healtheon.
(2) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of the shares used in computing basic and diluted net
loss per common share.
19
<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. HEALTHEON'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. Healtheon'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,
or "IT," infrastructure. In March 1996, ActaMed acquired EDI Services, Inc., or
"EDI," a wholly-owned subsidiary of United HealthCare, in a transaction
accounted for as a purchase. Accordingly, the operations of EDI are included in
Healtheon's consolidated statements of operations beginning in March 1996. In
August 1998, Healtheon 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, Healtheon issued 1,600,000 shares of its
common stock, of which 476,548 shares will be issued to certain employees under
restricted stock purchase agreements subject to a lapsing right of repurchase,
at Healtheon's option, over the agreements' respective vesting periods. Of these
shares, 200,000 shares are held in escrow to secure certain indemnification
obligations. The Metis acquisition was treated as a tax-free reorganization and
accounted for as a purchase.
Healtheon 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 under a Services and License Agreement
between ActaMed and United HealthCare dated April 4, 1996, or the "United
HealthCare Agreement," and services provided to SmithKline Labs under a Services
Agreement between ActaMed and SmithKline Labs dated December 31, 1997, or the
"Services Agreement." Customers may purchase some or all of the Healtheon's
applications and services and 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, 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 services are performed, depending on the
terms of the contract. Revenue from consulting services is recognized as the
services are performed. Cash received in excess of revenue recognized relating
to these services has been recorded as deferred revenue. As of September 30,
1998, Healtheon had deferred revenue of approximately $4.4 million.
The United HealthCare Agreement has a five year term; however, the agreement
provides that two years after the date of the agreement, April 4, 1998, the
parties will agree on new prices that they agree are
20
<PAGE>
competitive with the marketplace. Healtheon and United HealthCare are
negotiating such new prices, and Healtheon anticipates that the new prices will
reduce the rates paid by United HealthCare. The Services Agreement with
SmithKline Labs also has a five year term, but provides that the parties will
negotiate new rates as of January 1, 2001 and each two year period after that
date. Under 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 similarly situated customers.
In January 1999, Healtheon purchased certain assets used by SmithKline Labs
to provide laboratory results delivery services in exchange for $2.0 million in
cash and 1,833,333 shares of Healtheon's common stock. Healtheon and SmithKline
Labs entered into a related 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. The services agreement has a five year term.
Healtheon 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 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 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 nine months
ended September 30, 1997 or 1998.
In December 1996, ActaMed entered into a new agreement, or 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, $1.0 million in December 1996
and the remaining balance in 48 equal monthly installments commencing in January
1997. Additionally, in conjunction with the License, IBM received a five-year
warrant to purchase 282,522 shares of Healtheon's common stock at a price of
$7.97 per share. Because of the extended payment terms and ActaMed's contentious
relationship with IBM, ActaMed 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 nine months
ended September 30, 1997 and 1998, Healtheon recognized revenue from the License
of $1.0 million, $.8 million, $.6 million and $.6 million. At December 31, 1997,
amounts due from IBM of $.7 million and $1.7 million were included in accounts
receivable and other assets. At September 30, 1998, amounts due from IBM of $.8
million and $1.1 million were included in accounts receivable and other assets.
Deferred revenue at December 31, 1996 and 1997 and September 30, 1998 included
$3.1 million, $2.3 million and $1.8 million related to the License.
Healtheon does not expect that it will earn a material amount of revenue
from software licenses in the foreseeable future.
Healtheon 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 approximately 90%, of Healtheon's total revenue for the nine months ended
September 30, 1998 and United HealthCare and SmithKline Labs accounted for all
of Healtheon's revenue from services to related parties. Healtheon expects that
a small number of customers will continue to account for a substantial portion
of Healtheon's revenue for the foreseeable future. The loss of one or more of
Healtheon's significant customers, or a decline in volume of business generated
by such customers, could have a material adverse effect on Healtheon's business,
financial condition and results of operations.
Cost of services and cost of services to related parties consist of costs
related to services Healtheon 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, amortization of certain
intangible assets, a portion of facilities expenses and leased personnel and
facilities costs. Cost of software licenses consists primarily of expenses
related to royalties and
21
<PAGE>
sublicensing fees. 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, Healtheon believes that analysis of historical cost of
revenue as a percentage of revenue is not meaningful. Healtheon 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. Healtheon
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, Healtheon intends to continue recruiting and hiring experienced
engineering personnel and to continue making other investments in development
and engineering. Healtheon expects that development and engineering expenses
will continue to increase in absolute dollars. Currently, all development and
engineering costs 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 Healtheon's
operations. Healtheon 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.
Healtheon's business model is still in an emerging stage, and revenue and
income potential from Healtheon's business is unproven. Moreover, Healtheon's
limited operating history under its current business model makes an evaluation
of Healtheon and its prospects difficult; investors should not use Healtheon's
past results as a basis to predict future performance. Healtheon has incurred
net losses since inception and, as of September 30, 1998, had an accumulated
deficit of $85.2 million. Healtheon intends to continue investing heavily in
acquisitions, infrastructure development, application development and sales and
marketing. As a result, Healtheon expects to incur substantial operating losses
at least through 1999. There can be no assurance that Healtheon will achieve
significant revenue or profitability or, if significant revenue or profitability
are achieved, that they can be sustained.
22
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain data expressed as a percentage of
total revenue for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Services................................................................... 21.1% 16.3% 32.1% 17.4% 55.1%
Services to related parties(1)............................................. -- 38.5 54.6 74.3 43.1
Software licenses.......................................................... 78.9 45.2 13.3 8.3 1.8
-------- -------- -------- -------- --------
Total revenue.............................................................. 100.0 100.0 100.0 100.0 100.0
Operating costs and expenses:
Cost of revenue:
Cost of services......................................................... 72.3 15.0 30.0 15.4 56.2
Cost of services to related parties...................................... -- 44.7 48.8 66.4 39.8
Cost of software licenses................................................ 15.8 1.5 -- -- --
-------- -------- -------- -------- --------
Total cost of revenue.................................................... 88.1 61.2 78.8 81.8 96.0
Development and engineering................................................ 112.5 78.0 97.0 138.4 39.2
Sales, general and administrative.......................................... 80.4 82.1 82.4 106.8 51.3
Amortization of intangible assets.......................................... -- 29.0 31.7 45.5 20.2
-------- -------- -------- -------- --------
Total operating costs and expenses......................................... 281.0 250.3 289.9 372.5 206.7
-------- -------- -------- -------- --------
Loss from operations......................................................... (181.0) (150.3) (189.9) (272.5) (106.7)
Interest income.............................................................. 9.6 4.9 4.6 5.1 2.5
Interest expense............................................................. (0.3) (0.5) (2.4) (2.5) (1.1)
Dividends on ActaMed's convertible redeemable preferred stock................ -- (23.1) (21.4) (34.0) (2.7)
-------- -------- -------- -------- --------
Net loss..................................................................... (171.7) (169.0) (209.1) (303.9) (108.0)
Dividends on ActaMed's convertible redeemable preferred stock................ (33.3) -- -- -- --
-------- -------- -------- -------- --------
Net loss applicable to common stockholders................................... (205.0)% (169.0)% (209.1)% (303.9)% (108.0)%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
- ---------
(1) Revenue from services to related parties consists of revenue from United
HealthCare and SmithKline Labs, customers that are also significant
stockholders of Healtheon.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
REVENUE. Total revenue increased to $33.2 million in the first nine months
of 1998 from $7.0 million in the same period of 1997. Revenue from services
increased to $18.3 million in the first nine months of 1998 from $1.2 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, Healtheon utilizes its own personnel, certain outside contractors and
certain personnel and facilities of the customers that are leased to Healtheon.
The cost of these leased customer personnel and facilities are included as part
of the total costs of the IT and development services that Healtheon billed to
the customers. In the first nine months of 1998, Healtheon recognized revenue
for IT services of $10.9 million, which included Healtheon's costs of leased
personnel and facilities of $8.8 million. In addition, Healtheon recognized
revenue of approximately $4.8 million for development services in the same
period.
23
<PAGE>
Revenue from services to related parties increased to $14.3 million in the
first nine months of 1998 from $5.2 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 nine months of 1998 from the same period in 1997.
Healtheon 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 $31.9 million in the
first nine months of 1998 from $5.7 million in the same period of 1997. Cost of
services increased to $18.7 million in the first nine months of 1998 from $1.1
million in the same period in 1997. This increase includes $8.8 million related
to costs of leased personnel and facilities utilized to provide IT services and
$4.8 million related to development services to support the Brown & Toland and
Beech Street contracts. The remaining increase resulted from increased personnel
and expansion of our network infrastructure to support current customers and
future business activities. Healtheon believes its margin on services revenue
will continue to be negative until its revenue from other than IT and
development services increases. Healtheon had no cost of software licenses
revenue in the first nine months of 1998 or in the comparable period of 1997.
Cost of services to related parties increased to $13.2 million in the first
nine months of 1998 from $4.6 million in the same period of 1997. This increase
resulted from higher personnel and network operations costs necessary to support
increased transactions from Healtheon's SCAN services.
DEVELOPMENT AND ENGINEERING. Development and engineering expense, which
excludes development expenses that are included in cost of revenue, increased to
$13.0 million in the first nine months of 1998 from $9.7 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 Healtheon's applications and services.
SALES, GENERAL AND ADMINISTRATIVE. Sales, general and administrative
expense increased to $17.0 million in the first nine months of 1998 from $7.5
million in the same period of 1997. The increase resulted primarily from
approximately $6.7 million in salaries and related support costs for added sales
personnel and executive management, approximately $.8 million of costs related
to the merger with ActaMed and from the amortization of deferred compensation.
Healtheon recorded deferred compensation of $4.1 million during the first nine
months of 1998, and recorded $2.1 million of amortization of deferred
compensation in this period. 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 Healtheon's common stock at the time
of those grants. The deferred compensation balance of $4.2 million at September
30, 1998 will be amortized over the vesting period, generally four years, of the
option or restricted stock grants. Amortization is estimated to total $0.8
million for the last three months of 1998, $2.1 million for 1999, $.9 million
for 2000, and $0.3 million for 2001. From October through December 1998,
Healtheon repriced certain stock options and restricted stock purchases and
granted additional stock options. Healtheon estimates that it will record
approximately $4.1 million of additional deferred compensation as a result of
the repricing and additional grants.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets was
$6.7 million in the first nine months of 1998 and $3.2 million in the same
period of 1997. This amortization relates to the acquisition of EDI in March
1996 from United HealthCare and certain intangible assets related to SCAN
acquired from SmithKline Labs in December 1997 and acquisition of Metis, LLC in
August 1998. Although the Services and License Agreement entered into with
United HealthCare in connection with the acquisition of EDI has a five year
term, Healtheon determined that a three year amortization period was appropriate
for the EDI-related assets due to the price renegotiation required by such
agreement, the probability that the purchased technology and software would be
replaced within three years and the uncertain profitability of the agreement
after the price renegotiation. Similarly, although the Services Agreement
entered into with SmithKline Labs in connection with the acquisition of the
SCAN-related assets has a five year term,
24
<PAGE>
Healtheon determined that a three year amortization period was appropriate for
the SCAN related assets due to the price renegotiation required by such
agreement, the probability that the purchased technology and software would be
replaced within three years and the uncertain profitability of the agreement
after the price renegotiation. There can be no assurance that Healtheon's
services to United HealthCare and SmithKline Labs will be profitable after the
price renegotiations required by the agreements, particularly given the
uncertainty of future rates and volumes under those agreements. Healtheon
determined that the acquisition of Metis, LLC included the value of an assembled
workforce, which will be amortized over two years. The other intangible assets
related to the acquisition of Metis, LLC were determined to have a three-year
life. At September 30, 1998, a total of $23.7 million remained to be amortized,
and the amortization charges for the three months ending December 31, 1998 and
for the years ending 1999 and 2000 are estimated to be $3.9 million, $10.1
million and $8.2 million, respectively, assuming no impairment of the remaining
unamortized intangible asset balances. See Notes 2 and 3 of Notes to
Consolidated Financial Statements.
INTEREST INCOME AND EXPENSE. Interest income has been derived primarily
from cash investments, and increased to $.8 million in the first nine months of
1998 compared to $.4 million in the same period of 1997. The increase resulted
from Healtheon's $25.0 million preferred stock financing in October 1997.
Interest expense results from Healtheon'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, ActaMed accrued such dividends on a quarterly basis. Dividends
of $2.4 million and $.9 million are shown as a charge against income in the
consolidated statement of operations for the first nine months of 1997 and 1998,
respectively. None of the dividends were paid, and, in conjunction with
approving the acquisition of ActaMed by Healtheon, 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.
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, Healtheon 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. Healtheon'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. 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 $4.0 million, $1.6 million and $1.6
million in 1997, 1996 and 1995. 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
$6.5 million in
25
<PAGE>
1997 from $4.9 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 Healtheon.
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 Healtheon's
applications and services.
SALES, GENERAL AND ADMINISTRATIVE. Sales, general and administrative
expense was $11.0 million in 1997, compared to $9.0 million in 1996 and $1.7
million in 1995. The increase resulted primarily from the addition of sales
personnel and executive management, which caused related salaries to increase by
approximately $1.4 million in 1997 from 1996, and from the amortization of
deferred compensation. Healtheon 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.
INTEREST INCOME AND EXPENSE. Interest income was derived from cash
investments following Healtheon'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
Healtheon and from capitalized lease obligations for equipment purchases.
INCOME TAXES. At December 31, 1997, Healtheon had net operating loss
carryforwards for federal income tax purposes of $37.6 million and federal tax
credits of $.8 million, both expiring from 2009 through 2012. Of these net
operating losses, $16.7 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 Healtheon'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.
QUARTERLY FINANCIAL RESULTS
The following table presents Healtheon's operating results for each of the
seven quarters in the period ended September 30, 1998, as well as such data
expressed as a percentage of Healtheon'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.
26
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1997 1997 1997 1997 1998 1998 1998
----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED, IN THOUSANDS EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenue:
Services................ $ 239 $ 417 $ 560 $ 3,085 $ 4,903 $ 5,990 $ 7,433
Services to related
parties................ 1,488 1,752 1,959 2,110 4,656 4,714 4,950
Software licenses....... 195 195 195 1,195 195 195 195
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenue....... 1,922 2,364 2,714 6,390 9,754 10,899 12,578
Operating costs and
expenses:
Cost of revenue:
Cost of services...... 213 385 482 2,931 5,088 5,682 7,918
Cost of services to
related parties...... 1,633 1,496 1,519 1,888 2,860 4,457 5,889
Cost of software
licenses............. -- -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total cost of
revenue............ 1,846 1,881 2,001 4,819 7,948 10,139 13,807
Development and
engineering............ 3,247 3,162 3,272 3,305 3,919 4,413 4,704
Sales, general and
administrative......... 2,501 2,222 2,754 3,554 4,966 7,157 4,918
Amortization of
intangible assets...... 1,062 1,062 1,063 1,062 1,949 1,989 2,765
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating
costs and
expenses........... 8,656 8,327 9,090 12,740 18,782 23,698 26,194
----------- ----------- ----------- ----------- ----------- ----------- -----------
Loss from operations...... (6,734) (5,963) (6,376) (6,350) (9,028) (12,799) (13,616)
Interest income........... 146 108 105 252 358 279 197
Interest expense.......... (50) (78) (49) (146) (116) (135) (110)
Dividends on ActaMed's
convertible redeemable
preferred stock......... (783) (823) (776) (488) (890) -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss.................. $(7,421) $(6,756) $(7,096) $(6,732) $(9,676) $(12,655) $(13,529)
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
AS A PERCENTAGE OF
REVENUE:
Revenue:
Services................ 12.4% 17.6% 20.6% 48.3% 50.3% 55.0% 59.1%
Services to related
parties................ 77.4 74.1 72.2 33.0 47.7 43.3 39.4
Software licenses....... 10.2 8.3 7.2 18.7 2.0 1.7 1.5
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenue....... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Operating costs and
expenses:
Cost of revenue:
Cost of services...... 11.1 16.3 17.8 45.9 52.2 52.1 63.0
Cost of services to
related parties...... 85.0 63.3 56.0 29.5 29.3 40.9 46.8
Cost of software
licenses............. -- -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total cost of
revenue............ 96.1 79.6 73.8 75.4 81.5 93.0 109.8
Development and
engineering............ 168.9 133.7 120.6 51.7 40.2 40.5 37.4
Sales, general and
administrative......... 130.1 94.0 101.5 55.6 50.9 65.7 39.1
Amortization of
intangible assets...... 55.3 44.9 39.2 16.6 20.0 18.2 22.0
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating
costs and
expenses........... 450.4 352.2 335.1 199.3 192.6 217.4 208.3
----------- ----------- ----------- ----------- ----------- ----------- -----------
Loss from operations...... (350.4) (252.2) (235.1) (99.3) (92.6) (117.4) (108.3)
Interest income........... 7.6 4.6 3.9 3.9 3.7 2.6 1.6
Interest expense.......... (2.6) (3.3) (1.8) (2.3) (1.2) (1.2) (0.9)
Dividends on ActaMed's
convertible redeemable
preferred stock......... (40.7) (34.8) (28.6) (7.6) (9.1) -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss.................. (386.1)% (285.7)% (261.6)% (105.3)% (99.2)% (116.0)% (107.6)%
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
Revenue has grown each quarter as demand for Healtheon'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, June 30 and September 30, 1998 due primarily to
expenses related to the Beech Street and SmithKline Labs contracts. In addition,
in the quarter ended June 30, 1998,
27
<PAGE>
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 Healtheon 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. Healtheon 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, June 30 and September 30, 1998
due to a significant increase in personnel engaged in the development of
Healtheon's applications and services. Sales, general and administrative
expenses increased in each of the quarters ended September 30, 1997 through
September 30, 1998 due to increases in sales and executive personnel and due to
amortization of deferred compensation. In addition, Healtheon recorded
substantial professional fees related to the acquisition of ActaMed in the
quarter ended June 30, 1998.
Healtheon's quarterly revenue and operating results have varied in the past
and are likely to vary substantially in the future. Healtheon 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 the
increased spending. If Healtheon does not experience significantly increased
revenue from these efforts, Healtheon's business, financial condition and
results of operations could be materially and adversely affected. In addition,
Healtheon's expense levels are based in part on its expectations concerning
future revenue and are relatively fixed in the short-term. Consequently, if
Healtheon's revenue is below expectations in any period, Healtheon may not be
able to adjust its spending levels in a timely manner.
LIQUIDITY AND CAPITAL RESOURCES
Healtheon 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 September 30, 1998. Healtheon has also financed its
operations through equipment lease financing and bank borrowings. As of
September 30, 1998, Healtheon had outstanding equipment lease financing and bank
borrowings of $4.8 million. As of September 30, 1998, Healtheon had
approximately $5.4 million of cash, cash equivalents and short-term investments.
Cash used in operating activities was $1.3 million in 1995, $9.6 million in
1996 and $16.4 million in 1997. The cash used during these periods was primarily
attributable to net losses of $3.7 million in 1995, $18.6 million in 1996 and
$28.0 million in 1997 offset in part by depreciation and amortization 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 nine
months of 1998 was $13.9 million, reflecting a net loss partially offset by
depreciation and amortization expenses and increases in liabilities.
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 $5.1 million in 1995, 1996 and 1997, and the first
nine months of 1998. In 1997, Healtheon used $5.3 million of cash to purchase
short-term investments. During the first nine months of 1998, Healtheon
purchased an additional $4.3 million of short-term investments and realized $8.8
million in cash from maturities of its short-term investments. Healtheon had no
purchases or maturities of short-term investments in 1995, 1996, or the nine
months ended September 30, 1997.
Cash provided by financing activities was $7.0 million, $11.1 million and
$34.6 million in 1995, 1996 and 1997 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 nine
months of
28
<PAGE>
1998 was $3.2 million, primarily from the net proceeds from the sale of
preferred and common stock, partially offset by payments on line of credit
borrowings and capital lease obligations. In November 1998, Healtheon received
proceeds of $46.1 million from the sale of its Series A preferred stock.
As of September 30, 1998, Healtheon did not have any material commitments
for capital expenditures. Healtheon's principal commitments at December 31, 1997
consisted of obligations of $14.4 million under operating leases and $2.2
million under capital leases. See Note 6 of Notes to Consolidated Financial
Statements.
Healtheon currently anticipates that the net proceeds from the 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, Healtheon 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. Healtheon's future liquidity and
capital requirements will depend upon numerous factors, including the success of
Healtheon's existing and new application and service offerings and competing
technological and market developments. Healtheon 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 Healtheon, 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 Healtheon's proprietary software systems as
well as hardware and software supplied by third parties; communications
networks, such as the Internet and private intranets, which Healtheon depends on
to provide electronic transactions to its customers; the internal systems of
Healtheon's customers and suppliers; the hardware and software systems used
internally by Healtheon in the management of its business; and non-information
technology systems and services used by Healtheon in its business, such as
telephone systems and building systems.
Healtheon has internally reviewed the proprietary software systems it uses
to deliver services to its customers. Although Healtheon believes that its
internally developed applications and systems are designed to be Year 2000
compliant, Healtheon 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 43% of Healtheon's
total revenue in the first nine months of 1998, will require modifications to
become Year 2000 compliant. Healtheon plans to release Year 2000 upgrades to
these systems in early 1999. Healtheon estimates the cost of these Year 2000
upgrades to be less than $1.0 million. In addition, Healtheon's 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
must be upgraded or replaced by Healtheon. Healtheon expects the costs of such
upgrades or replacements to be less than $1.0 million. However, Healtheon could
experience delays and cost overruns in the development of these upgrades, the
upgrades could contain defects and Healtheon could experience difficulties in
getting Healtheon's installed base of physicians to implement these upgrades in
a timely manner. If Healtheon 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 Healtheon's business, financial condition and results of operations.
Failure of third-party or Healtheon equipment or software to operate properly
with regard to the Year 2000 and thereafter could require Healtheon to incur
unanticipated expenses to remedy any problems, which could have a material
adverse
29
<PAGE>
effect on Healtheon's business, financial condition and results of operations.
In certain of its agreements, Healtheon warrants that its applications and
services are Year 2000 compliant. Failure of Healtheon'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 Healtheon's business, financial condition and results of
operations. Healtheon 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 Healtheon'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 Healtheon's systems is difficult to determine. Customer
difficulties due to Year 2000 issues could interfere with healthcare
transactions or information, which might expose Healtheon to significant
potential liability. If client failures result in the failure of Healtheon
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, is conducting a formal assessment of its Year
2000 exposure in order to determine what steps beyond those identified by
Healtheon's internal review may be advisable. Healtheon expects to complete this
assessment in the first quarter of 1999. Healtheon 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 Healtheon to address any
unforeseen Year 2000 issue could adversely affect Healtheon's business,
financial condition and results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board, or "FASB," issued
Statement of Financial Accounting Standards, or "SFAS," No. 131, "Disclosures
about Segments of an Enterprise and Related Information." Healtheon 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 Healtheon's
financial condition or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Healtheon 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 Healtheon
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 Healtheon's financial condition or results of operations.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position, or "SOP," 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 requires that
entities capitalize certain costs related to internal-use software once certain
criteria have been met. Healtheon is required to implement SOP 98-1 for the year
ending December 31, 1999. Adoption of SOP 98-1 is expected to have no material
impact on Healtheon's financial condition or results of operations.
30
<PAGE>
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. Healtheon 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:
- "Providers" -- physicians, medical practice groups, hospitals and other
organizations that deliver medical care;
- "Payers" -- the government agencies, insurance companies, managed care
organizations and other enterprises that pay the bills for healthcare;
- "Suppliers" -- clinical laboratories, pharmaceutical companies, and other
groups that provide tests, drugs, x-rays and other services; and
- "Consumers" -- individual patients who receive medical care, and the
government agencies, employers and other organizations that represent
groups of individuals.
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 payers. Payers 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. Healtheon 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
31
<PAGE>
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.
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 payers. 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 payer or
supplier, or to a limited subset of payers 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, 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,
32
<PAGE>
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 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. Healtheon 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. Healtheon 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.
Healtheon 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 Healtheon's customers as their businesses grow and evolve. The Healtheon
Platform is designed to scale to accommodate high
33
<PAGE>
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, 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 payers 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. Healtheon'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 Healtheon to integrate all categories of healthcare
participants--payers, providers, suppliers and consumers--to eliminate redundant
tasks and reduce costs. Healtheon believes that such connectivity will optimize
and simplify the flow of mission-critical information.
EXPAND FUNCTIONALITY AND TRANSACTION CAPABILITY. Healtheon seeks to
identify key functions that are critical to particular industry participants and
integrate applications supporting these functions into its VHN. Healtheon 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. Healtheon
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, Healtheon developed its Benefits Administration application suite to
automate healthcare plan enrollment and is developing its Healtheon Practice
application suite, which is in use at beta sites, to manage eligibility,
referrals, authorizations and claims transactions between healthcare providers
and payers.
FORM STRATEGIC RELATIONSHIPS WITH LEADING HEALTHCARE
PARTICIPANTS. Healtheon 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, Healtheon
plans to acquire companies with strategic relationships with leading healthcare
industry participants. Healtheon believes this strategy also provides
accelerated market
34
<PAGE>
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 leading healthcare organizations,
including: United HealthCare, one of the largest health maintenance
organizations in the United States; SmithKline Labs, one of the largest
independent clinical laboratory companies in the United States; 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. Healtheon 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 Healtheon's platform
increase. However, healthcare remains highly regional, driven by business
relationships and practices that are often unique to specific regions.
Therefore, Healtheon's approach is to target regional markets where it can gain
critical mass and to expand nationally region by region. Healtheon 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, Healtheon intends to leverage its existing
relationships to penetrate new regions and markets.
PURSUE USAGE-BASED BUSINESS MODEL. Healtheon 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 these systems for the first
time. By enabling the shift from fixed information technology costs to variable
costs, Healtheon 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, Healtheon offers consulting, application development,
systems integration and network management services to provide complete
customer-specific solutions. By offering this range of services, Healtheon 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.
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.
35
<PAGE>
<TABLE>
<CAPTION>
BUSINESS CUSTOMERS/
FUNCTION USERS TRANSACTIONS SUPPORTED HEALTHEON SERVICE
<S> <C> <C> <C>
Membership Services Consumers - Enrollment Benefits
Payers - Plan comparison/selection Administration
- Provider search, selection, change
- Benefits inquiry
- Messaging
Healthcare Administration Payers - Eligibility determination Healtheon Practice
and Financial Management Providers - Referrals Healtheon
- Authorization ProviderWorks*
- Claims submission and status ProviderLink
- Remittance advice
- Provider directories*
- Provider files-management*
- Reporting
- Claims repricing*
Clinical Information Providers - Patient identification and Healtheon Dx*
Services Suppliers encounter history SCAN+
- Patient registration GMPI+
- Lab orders and results
- Text document/transcription
distribution
Online Consumer Consumers - Access to licensed dictionaries Healtheon
Information and encyclopedias, medical news and Consumer
other reference sources Portal
- Customized wellness assessments
- Food label and nutritional library
- Secure communications and
transactions with providers and
health plans*
</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 Healtheon and are not yet Internet-enabled; Healtheon is
currently redeveloping or replacing these applications to integrate them with
the Healtheon Platform.
MEMBERSHIP SERVICES. Healtheon provides membership services through its
Benefits Administration service. The Benefits Administration service utilizes
internally developed applications operating on the Healtheon Platform. The
service provides Internet-based connectivity between healthcare payers 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 its Benefits Administration service directly and through aggregators to
45 companies, covering approximately 190,000 members.
36
<PAGE>
HEALTHCARE ADMINISTRATION AND FINANCIAL MANAGEMENT. Healtheon supports or
will support healthcare administration and financial management transactions
through its ProviderLink, Healtheon Practice and Healtheon ProviderWorks
services. ProviderLink was licensed by Healtheon's ActaMed subsidiary from
United HealthCare Corporation. Healtheon is currently developing a software
interface between the Healtheon Platform and ProviderLink to integrate
ProviderLink with Healtheon's network-based services. ProviderLink is used by
providers to support transactions and workflows with payers. 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
payers. ProviderLink is currently deployed in over 4,300 active provider sites
in more than 20 major markets, and processes over 3.2 million transactions per
month.
Healtheon has developed Healtheon Practice, a new Internet-based provider
service with support from Brown & Toland, one of Healtheon's strategic partners.
Healtheon Practice, which is in use at beta sites, is designed to provide all of
the functionality of ProviderLink and also support referrals, authorization, and
provider directories reporting. Providers using the Healtheon Practice service
will be able to receive real-time patient eligibility verifications and referral
authorizations over the Healtheon VHN.
Healtheon is developing Healtheon ProviderWorks, a new Internet-based payer
service, with support from Beech Street, one of Healtheon's strategic partners.
Healtheon ProviderWorks is designed to support the creation and management of
networks of providers. The service is designed to manage large, complex provider
directories and files, manage provider relationships and contracts and perform
certain claim processing functions, such as claim repricing. See "-- Strategic
Relationships."
CLINICAL INFORMATION SERVICES. Healtheon'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 4,650 installed
workstations serving physicians throughout the United States. SCAN is not
Internet-enabled; however, Healtheon is developing a new Internet-enabled
application called Healtheon Dx, currently in beta testing, that will combine
the functionality of SCAN and ProviderLink. See "-- Strategic Relationships."
Healtheon's Global Master Person Index, or "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.
ONLINE CONSUMER INFORMATION. Healtheon's recently introduced Consumer
Portal provides individual consumers with an authoritative source for healthcare
information and is intended to extend Healtheon's transaction services directly
to individual consumers. The Consumer Portal provides access to medical
dictionaries and encyclopedias, medical news, a food label and nutritional
library and customized wellness assessments. These sources include: Miller-Keane
Encyclopedia & Dictionary of Medicine, Nursing & Allied Health; Dorland's
Illustrated Medical Dictionary; Citizen 1's CitiLine index of authoritative
medical information; A.D.A.M.'s Hypertext Medical Encyclopedia; and Links to
medical headlines via the New York Times Syndicate. Healtheon's business
partners can integrate the Consumer Portal into their own sites to provide their
consumers with a single point of entry into the healthcare community.
Healtheon expects to expand its Consumer Portal to support secure
communications and transactions between consumers and their providers and health
plans.
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
37
<PAGE>
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. Healtheon 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. Healtheon currently offers a limited number
of applications on its platform.
CUSTOMERS AND MARKETS
Healtheon's target customers include providers, payers, suppliers and
consumers. Because Healtheon 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.
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, Healtheon 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. Healtheon's current customers in this category include Brown & Toland,
Baylor Health Care System, Hill Physician Group, Promina Health System and the
Greater Dayton Area Hospital Association.
PAYERS. Healtheon's target payer customers include managed care
organizations, indemnity insurers, third-party administrators and federal and
state governmental agencies. Healtheon targets managed care organization
customers, such as 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. Healtheon targets indemnity insurer and third-party administrator
customers, such as mid-sized to large commercial entities, Medicare and other
agencies of federal and state government. Healtheon'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. Healtheon's customers in this category include
SmithKline Labs and Schering Corporation.
CONSUMERS. Healtheon's target consumer customers include employers, health
plans and health plan brokers. Healtheon's services in this area include a
consumer web portal, 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.
38
<PAGE>
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 45 employers covering approximately
190,000 members.
STRATEGIC RELATIONSHIPS
Healtheon has entered into several strategic relationships that it believes
will enhance its application portfolio, provide important specialized industry
expertise, increase its market penetration, and generate revenue. Certain of
these relationships are described below:
UNITED HEALTHCARE GROUP. United HealthCare is one of the largest HMOs in
the United States. United HealthCare is Healtheon's second largest stockholder
and will own approximately 13.3% of Healtheon's common stock after the offering.
In March 1996, Healtheon acquired United HealthCare's ProviderLink network which
supports over 4,300 active provider sites in more than 20 major markets
servicing over 3.2 million transactions per month. Healtheon 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, Healtheon and United HealthCare entered into a Services and
License Agreement, the "United HealthCare Agreement", under which Healtheon,
using ProviderLink, provides claims processing, referral, eligibility and
enrollment services, to United HealthCare's managed care providers and
customers. Under the United HealthCare Agreement, Healtheon 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 Healtheon. The United HealthCare
Agreement has a five year term; however, the agreement provides that two years
after the date of the agreement, the parties will agree on new prices that will
be competitive with the marketplace. Healtheon and United HealthCare are
negotiating such new prices, and Healtheon anticipates that the new prices will
reduce the rates paid by United HealthCare. 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 Healtheon,
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, Healtheon has developed PLNet, an
Internet-based version of ProviderLink, which Healtheon intends to integrate
into the Healtheon Platform and offer to other major healthcare payers and
providers. Healtheon 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 Healtheon's Board of Directors. The
United HealthCare Agreement is effective through March 2001, subject to earlier
termination in the event Healtheon 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., or "SmithKline Labs," a subsidiary of SmithKline Beecham, is
one of the largest independent clinical laboratories in the United States.
SmithKline is a stockholder of Healtheon and will own approximately 9.1% of
Healtheon's common stock after the offering. In December 1997, Healtheon and
SmithKline Labs entered into a Services Agreement, or the "Services Agreement"
under which Healtheon provides lab orders and results to providers that use
SCAN. SmithKline Labs has also agreed to promote Healtheon as its preferred
vendor for laboratory electronic connectivity services.
39
<PAGE>
Healtheon acquired SCAN-related assets from SmithKline Labs, including
approximately 4,200 installed workstations in physicians' offices, hospitals and
other provider offices. Healtheon is currently developing Healtheon Dx, an
Internet-enabled version of the SCAN system, which Healtheon 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 Healtheon'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 Healtheon fails to meet certain network performance standards or if
Healtheon otherwise breaches its material obligations under the Services
Agreement. The Services Agreement provides that the parties will negotiate new
rates as of January 1, 2001 and each two years thereafter. Pursuant to 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
similarly situated customers.
In January 1999, Healtheon purchased certain assets used by SmithKline Labs
to provide laboratory results delivery services in exchange for $2.0 million in
cash and approximately 1.8 million shares of Healtheon's common stock. Healtheon
and SmithKline Labs entered into a related 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. The services agreement has a five year term.
BROWN & TOLAND PHYSICIAN SERVICES ORGANIZATION. Brown & Toland Medical
Group, or "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, or
"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, Healtheon and Brown & Toland entered
into an agreement under which Healtheon is developing Healtheon Practice, which
Healtheon intends to market to Brown & Toland and other payers and providers.
Healtheon also manages the information technology operations of Brown & Toland.
Through its relationship with Brown & Toland, Healtheon 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. Healtheon'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, Healtheon and Beech
Street have entered into an agreement under which Healtheon is developing
Healtheon ProviderWorks, which Healtheon intends to offer to Beech Street and to
other payers and providers. Healtheon also manages the information technology
operations of Beech Street. The relationship with Beech Street provides
Healtheon with important industry-segment expertise and a strategic entry-point
into the PPO market segment. Healtheon's agreement with Beech Street is
effective through December 2002, although it may be terminated by either party
upon 180 days' notice.
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.
40
<PAGE>
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. Healtheon 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.
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. Healtheon 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 highly-available access to the Internet. Healtheon'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 Healtheon 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 Healtheon's services are linked
to advanced storage systems that provide data protection through techniques such
as replication. Healtheon also maintains on-site backup power systems.
41
<PAGE>
AUDITS. Healtheon'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
Healtheon believes that a high level of customer support is necessary to
achieve wide acceptance of its solution. Healtheon provides a wide range of
customer support services through a staff of customer service personnel,
multiple call centers and an e-mail help desk. Healtheon 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.
Healtheon also employs technical support personnel who work directly with its
direct sales force, distributors and customers of its applications and services.
Healtheon provides its customers with the ability to purchase maintenance for
its applications and services, which includes technical support and upgrades.
Healtheon also provides training programs for its customers. As of September 30,
1998, Healtheon had 251 employees and independent contractors 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, payers, suppliers and consumers. Healtheon's
direct sales force targets significant potential customers in each market
segment by region. In certain instances, Healtheon'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.
Healtheon 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. Healtheon 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. Healtheon's
executive sales and marketing management is located in its Santa Clara,
California headquarters and in its Atlanta, Georgia, Minneapolis, Minnesota and
San Francisco, California facilities, while its account representatives are
deployed across the United States. As of September 30, 1998, Healtheon employed
67 sales executives, account managers, direct sales representatives and sales
support personnel.
DEVELOPMENT AND ENGINEERING
Healtheon 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, Healtheon leverages the modular nature of its platform
architecture to enable it to develop new applications and services rapidly.
Healtheon has developed applications and services both independently and through
acquisitions. Healtheon will continue to work closely with other companies in
its applications development efforts.
Healtheon has several significant projects currently in development. These
include the continued enhancement of the platform architecture, development of
new services such as Healtheon Practice, Healtheon ProviderWorks and Healtheon
Dx, and integration of ActaMed's platform, network and associated services. As
of September 30, 1998, Healtheon employed 201 people in the areas of
applications design, research and development, quality assurance and technical
support.
In 1995, 1996, 1997 and the nine months ended September 30, 1998,
Healtheon'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 $13.0 million, representing 112%, 78%, 97% and 39% of its
total
42
<PAGE>
revenue. Healtheon believes that timely development of new and enhanced
applications and technology is necessary to remain competitive in the
marketplace. Accordingly, Healtheon 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 Healtheon 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 Healtheon's competitors and market
acceptance. There can be no assurance that Healtheon 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 Healtheon to develop and introduce new applications and services
successfully on a timely basis and to achieve market acceptance for its
applications and services could have a material adverse effect on Healtheon'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
Healtheon to adapt its applications and services. Moreover, there is a risk that
a competitor's product might become the standard for healthcare information
services.
INTELLECTUAL PROPERTY
Healtheon 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. Healtheon believes that patent, trade secret and copyright protection
are less significant to Healtheon's success than its ability to further develop
applications. Healtheon has several trademarks in the United States and
internationally.
COMPETITION
The market for healthcare information services is intensely competitive,
rapidly evolving and subject to rapid technological change. Many of Healtheon's
actual and potential competitors have announced or introduced Internet
strategies. Healtheon's competitors can be divided into several groups:
healthcare information software vendors, including HBO & Company, which was
recently acquired by McKesson Corporation, one of the country's largest drug
wholesalers, and Shared Medical Systems Corporation; healthcare electronic data
interchange companies, including ENVOY Corporation, which has agreed to be
acquired by Quintiles Transnational Corp., 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
Healtheon 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 Healtheon, may enter
Healtheon's markets. In some cases, large customers may have the ability to
compete directly with Healtheon as well. Healtheon also competes with smaller
regional competitors. Many of Healtheon's competitors and potential competitors
have significantly greater financial, technical, product development, marketing
and other resources and greater market recognition than Healtheon. Many of
Healtheon's competitors also currently have, or may develop or acquire,
substantial installed customer bases in the healthcare industry. As a result of
these factors, Healtheon's competitors may be able to respond more
43
<PAGE>
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 Healtheon. There can be no assurance that
Healtheon will be able to compete successfully against current and future
competitors or that competitive pressures faced by Healtheon 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 Healtheon's applications and services and increase Healtheon's
cost of doing business, or otherwise have an adverse effect on Healtheon's
business, financial condition and results of operations. 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 Healtheon's business, or the
application of existing laws and regulations to the Internet and other online
services could have a material adverse effect on Healtheon's business, financial
condition and results of operations.
The confidentiality of patient records and the circumstances under which
records may be released for inclusion in Healtheon'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 this information to implement security
measures that may require substantial expenditures by Healtheon. 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
Healtheon's applications.
Legislation currently being considered at the federal level could impact the
manner in which Healtheon 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. Healtheon is designing its Platform and applications to enable compliance
with the proposed regulations; however, until the proposed regulations become
final, they could change, which could require Healtheon to expend additional
resources to comply with the revised standards. In addition, the success of
Healtheon'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. Healtheon 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. Healtheon 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 Healtheon'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. Healtheon
44
<PAGE>
does not believe that any of its current applications or services are subject to
FDA jurisdiction or regulation; however, Healtheon plans to expand its
application and service offerings into areas that may subject it to FDA
regulation. Healtheon 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
Healtheon's ability to introduce new applications or services in a timely
manner.
EMPLOYEES
As of September 30, 1998, Healtheon had a total of 613 employees and
independent contractors, of whom there were 184 in customer and network
services, 244 in development and engineering, 14 in consulting services, 67 in
provider services, 67 in sales and marketing and 37 in corporate finance and
administration. None of Healtheon's employees is represented by a labor union,
and Healtheon has never experienced a work stoppage. Healtheon believes its
relationship with its employees to be good. Healtheon'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 Healtheon's
industry and geographical location in the San Francisco Bay Area is intense,
particularly in software development and technical personnel.
FACILITIES
Healtheon'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. Healtheon 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; 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; and sales,
engineering and support operations in San Francisco, California, in
approximately 6,000 square feet and 5,000 square feet of leased office space
under two leases that expire in November 2000 and September 2001. Healtheon
believes that its facilities are adequate for its current operations and that
additional leased space can be obtained if needed.
45
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding Healtheon'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
Mark Bailey................................. 39 Vice President, Business Development
Kallen Chan................................. 44 Corporate Controller
Jack Dennison............................... 42 Vice President and General Counsel
Dennis Drislane............................. 49 Vice President, Customer and Network Services
Edward Fotsch, M.D.......................... 42 Vice President, Physician and Integrated Delivery Network
Group
Nancy Ham................................... 37 Vice President, Laboratories and Pharmaceuticals
J. Philip Hardin............................ 35 Vice President, Managed Care Group
John R. Hughes, Jr.......................... 46 Vice President, Provider Services
Krishna Kolluri............................. 36 Vice President, Applications
Matthew Moore............................... 34 Vice President, Consumer Internet Services
Pavan Nigam................................. 39 Vice President, Engineering
Charles Saunders, M.D....................... 44 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
Thomas A. Jermoluk.......................... 42 Director
C. Richard Kramlich(1)(2)................... 63 Director
William W. McGuire, M.D.(1)(2).............. 50 Director
P. E. Sadler(1)............................. 64 Director
Laura D'Andrea Tyson........................ 50 Director
Tadataka Yamada, M.D.(1).................... 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 Healtheon 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 that 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
Healtheon since joining Healtheon in July 1997. Prior to joining Healtheon, Mr.
Long was President and Chief Executive Officer of
46
<PAGE>
CSC Continuum, Inc., a unit of Computer Sciences Corporation, from August 1996
to 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 Healtheon since
Healtheon 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.
MARK BAILEY has served as Vice President, Business Development of Healtheon
since joining Healtheon in July 1998. Prior to joining Healtheon, Mr. Bailey
served as general partner at Venrock Associates, the venture capital
organization 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 Caufield &
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 Healtheon since April
1996. Prior to joining Healtheon, 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 Healtheon
since joining Healtheon 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 Healtheon since joining Healtheon 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.
EDWARD FOTSCH, M.D. has served as the Vice President, Physician and
Integrated Delivery Network group of Healtheon since Healtheon 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.
47
<PAGE>
NANCY HAM has served as Vice President, Laboratories and Pharmaceuticals
Group of Healtheon since Healtheon 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
Healtheon since Healtheon 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 payer 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
Healtheon since Healtheon 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 Healtheon
since July 1998, and prior to that, as Senior Director of Development
Engineering of Healtheon since February 1996. Prior to joining Healtheon, 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 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.
MATTHEW MOORE has served as Vice President, Consumer Internet Services since
joining Healtheon in September 1998. Prior to joining Healtheon, Mr. Moore spent
four years at Netscape Communications, where he co-founded the firm's European
operations and served as Director of Strategic Sales from August 1994 until
December 1997. Commencing January 1998, he moved to Netscape's U.S. operations
to head up vertical markets internationally. From 1989 to 1994, he was a partner
at Keystone Strategies, a technology consultancy firm based in Geneva,
Switzerland. Mr. Moore holds a B.A. from University of California, Los Angeles,
and an M.B.A from Hautes Etudes Commerciales, University of Geneva, Switzerland.
PAVAN NIGAM co-founded Healtheon and has served as its Vice President,
Engineering since February 1996. Prior to joining Healtheon, 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.
48
<PAGE>
CHARLES SAUNDERS, M.D. has served as Vice President, Marketing and
Consulting Services and Medical Director since joining Healtheon in September
1997. Prior to joining Healtheon, 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 Healtheon since joining Healtheon 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 Healtheon since July 1997. He has
been a general partner at Kleiner Perkins Caufield & Byers, or "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 At 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.
THOMAS A. JERMOLUK has served as a director of Healtheon since February
1999. Mr. Jermoluk has been Chairman of the Board, President and Chief Executive
Officer of @Home Corporation since he joined @Home in July 1996. From 1994 to
July 1996, he was President and, from 1992 to July 1996, he was Chief Operating
Officer of Silicon Graphics, Inc., a visual computing company. From 1991 to
1994, Mr. Jermoluk was Executive Vice President of Silicon Graphics, and, from
1988 to 1991, he was Vice President and General Manager of Silicon Graphics'
Advanced System Division. From October 1993 to August 1996, he was a member of
the board of directors of Silicon Graphics. Prior to joining Silicon Graphics in
1986, Mr. Jermoluk managed a variety of hardware and software development
projects at Hewlett-Packard Company and Bell Laboratories. He currently serves
on the board of directors of @Home Corporation and Forte Software, Inc. Mr.
Jermoluk holds B.S. and M.S. degrees in Computer Science from Virginia Tech.
C. RICHARD KRAMLICH has served as a director of Healtheon 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., and
Chalone Wine Group, 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 Healtheon since
Healtheon 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 of Peak Health
Plan. Before becoming President and Chief Operating Officer, 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.
P. E. SADLER has served as a director of the Company since Healtheon
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 Healtheon, and
served as its Chief Executive Officer from 1992 until May 1996. Prior to
49
<PAGE>
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, or "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.
LAURA D'ANDREA TYSON has served as a director of Healtheon since February
1999. Dr. Tyson has been the Dean of the Haas School of Business Administration
at the University of California at Berkeley since 1996. Dr. Tyson served as
National Economic Advisor to the President of the United States from March 1995
to December 1996 and as Chair of the White House Council of Economic Advisers
from 1993 to 1995. She also served as a member of the President's National
Security Council and Domestic Policy Council. Dr. Tyson was Director of the
Institute of International Studies from 1990 to 1992, and Research Director of
The Berkeley Roundtable on the International Economy from 1986 to 1992, at the
University of California, Berkeley, where she was also a professor of economics
and business administration.
TADATAKA YAMADA, M.D. has served as a director of Healtheon since Healtheon
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.
Healtheon's Bylaws authorize between six and eleven directors. The size of
the Board of Directors is currently set at ten. The Certificate of Incorporation
and the Bylaws of Healtheon also provide for a staggered Board. Under a
staggered Board, each director is designated to one of three categories. Each
year the directors' positions in one of the three 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 Healtheon 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 Healtheon.
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 recommends to the Board the internal accounting and financial controls for
Healtheon and the accounting principles and auditing practices and procedures to
be used for the financial statements of Healtheon. 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 Healtheon.
The Compensation Committee is currently comprised of Dr. Clark, Mr. Doerr,
Mr. Kramlich, and Dr. McGuire. The Compensation Committee reviews and recommends
to the Board policies, practices and
50
<PAGE>
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 Healtheon's employee equity
incentive plans and advises and consults with the officers of Healtheon
regarding managerial personnel policies.
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 for 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
will be eligible to receive stock options under the 1996 Plan, and outside
directors will receive stock options pursuant to automatic grants of stock
options under the 1996 Plan. In July 1998, Healtheon 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. In October 1998,
Drs. McGuire and Yamada each agreed to exchange his option for a new option with
an exercise price of $3.55 per share, reflecting the fair market value of
Healtheon's common stock on that date as determined by the Board of Directors
after taking into account Healtheon's financial results and prospects. In
connection with this repricing, the vesting of the options for Drs. McGuire and
Yamada was restarted. Therefore, 25% of their shares will vest in October 1999,
and the remainder will vest ratably over the subsequent three years. In January
1999, Healtheon granted to each of Mr. Jermoluk and Dr. Tyson an option to
purchase 30,000 shares of its common stock under the 1996 Plan with an exercise
price equal to $5.85 per share. 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 9.8% of Healtheon's common stock prior to
this offering, and has entered into the Services Agreement and certain other
agreements with Healtheon. Dr. McGuire, a member of the Compensation Committee,
is the Chairman and Chief Executive Officer of United HealthCare, which, with
its affiliates, beneficially owns approximately 14.4% of Healtheon's common
stock prior to this offering, and has entered into the United HealthCare
Agreement and certain other agreements with Healtheon. 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 interlocking relationship existed in the past.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
Healtheon's Certificate of Incorporation and Bylaws limit or eliminate the
personal liability of its directors 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. Consequently, a director or officer will not be personally liable to
Healtheon or its stockholders for monetary damages for breach of fiduciary duty
as a director, except for
- any breach of the director's duty of loyalty to Healtheon or its
stockholders;
- acts or omissions not in good faith or that involve intentional misconduct
or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases, redemptions
or other distributions; and
- any transaction from which the director derived an improper personal
benefit.
These provisions are permitted under Delaware law.
51
<PAGE>
Healtheon's Certificate of Incorporation also provides that Healtheon will
indemnify, to the fullest extent permitted by law, any person made or threatened
to be made a party to any action or proceeding by reason of the fact that he or
she is or was a director or officer of Healtheon or serves or served at any
other enterprise as a director, officer or employee at Healtheon's request.
Healtheon's Bylaws provide that Healtheon will, to the maximum extent and in
the manner permitted by Delaware law, indemnify each of the following persons
against expenses, including attorneys' fees, judgments, fines, settlements, and
other amounts incurred in connection with any proceeding arising by reason of
the fact that he or she is or was an agent of Healtheon:
- a current or past director or officer of Healtheon or any subsidiary of
Healtheon;
- a current or past director or officer of another enterprise who served at
the request of Healtheon; or
- a current or past director or officer of a corporation that was a
predecessor corporation of Healtheon or any of its subsidiaries or of
another enterprise at the request of a predecessor corporation or
subsidiary.
Healtheon intends to enter into Indemnification Agreements with each of its
directors and executive officers to give them additional contractual assurances
regarding the scope of the indemnification described above and to provide
additional procedural protections. These agreements, among other things,
indemnify Healtheon's directors and executive officers for certain expenses,
including attorneys' fees, judgments, fines, penalties and settlement amounts
incurred by them in any action or proceeding arising out of their services to
Healtheon, its subsidiaries or any other enterprise to which they provide
services at Healtheon's request. In addition, Healtheon intends to obtain
directors' and officers' insurance providing indemnification for Healtheon's
directors, officers and certain employees for certain liabilities. Healtheon
believes that these indemnification provisions and agreements are necessary to
attract and retain qualified directors and officers.
The limited liability and indemnification provisions in Healtheon's
Certificate of Incorporation and Bylaws may discourage stockholders from
bringing a lawsuit against directors for breach of their fiduciary duty and may
reduce the likelihood of derivative litigation against directors and officers,
even though a derivative action, if successful, might otherwise benefit
Healtheon and it stockholders. Furthermore, a stockholder's investment in
Healtheon may be adversely affected to the extent Healtheon pays the costs of
settlement and damage awards against directors and officers of Healtheon under
these indemnification provisions.
At present, there is no pending or threatened litigation or proceeding
involving any director, officer or employee of Healtheon where indemnification
is expected to be required or permitted, and Healtheon is not aware of any
threatened litigation or proceeding that might result in a claim for
indemnification.
52
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
earned for services rendered to Healtheon in 1998 by (1) Healtheon's Chief
Executive Officer and (2) Healtheon's four other most highly compensated
executive officers who earned more than $100,000 in 1998 and were serving as
executive officers at the end of 1998 (collectively, the "Named Executive
Officers"). Under the rules of the Securities and Exchange Commission, this
table does not include certain perquisites and other benefits received by the
Named Executive Officers which do not exceed the lesser of $50,000 or 10% of any
such officer's salary and bonus disclosed in this table.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------------
ANNUAL COMPENSATION SECURITIES
----------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($)(1) OPTIONS(#)
- ------------------------------------------------------------------- ---------- ----------- -------------------
<S> <C> <C> <C>
W. Michael Long
Chief Executive Officer.......................................... $ 458,337 $ -- --
Michael K. Hoover(2)
President........................................................ 154,487 60,000 80,000
Dennis Drislane
Vice President, Customer and Network Services.................... 163,500 73,500 --
Pavan Nigam
Vice President, Engineering...................................... 225,000 -- 325,000
Charles Saunders
Vice President, Marketing and Consulting Services and Medical
Director......................................................... 151,250 45,000 200,000(3)
</TABLE>
- ---------
(1) Some employee year-end bonus amounts for 1998 have not been determined yet
by the Board of Directors.
(2) Mr. Hoover joined Healtheon in May 1998.
(3) Includes 100,000 shares underlying an option granted in 1998 that was
cancelled under a stock option repricing exchange program in October 1998.
53
<PAGE>
OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1998
The following table sets forth certain information for the year ended
December 31, 1998 with respect to grants of stock options to each of the Named
Executive Officers. All options granted by Healtheon in 1998 were granted under
its 1996 Stock Plan. These options have a term of 10 years. See "--Employee
Benefit Plans" for a description of the material terms of these options.
Healtheon granted options to purchase common stock and issued shares of common
stock pursuant to restricted stock purchase agreements equal to a total of
8,652,807 shares during 1998. This amount includes 2,057,950 shares underlying
options granted and 568,732 shares issued pursuant to restricted stock purchase
agreements in connection with a repricing program in October 1998 and on
December 14, 1998. Options were granted at an exercise price equal to the fair
market value of Healtheon's common stock, as determined in good faith by the
Board of Directors. The Board of Directors determined the fair market value
based on Healtheon's financial results and prospects, the share price derived
for arms-length transactions, and evaluations conducted by valuation experts.
Potential realizable values are net of exercise price before taxes, and are
based on the assumption that the common stock of Healtheon 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 Healtheon's
projection or estimate of future stock price growth.
<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
OPTIONS EMPLOYEES PRICE PER EXPIRATION -------------------------
NAME GRANTED IN 1998 SHARE DATE 5% 10%
- ----------------------------------------------------- ---------- ---------- --------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
W. Michael Long...................................... -- --% $ -- -- $ -- $ --
Michael K. Hoover.................................... 80,000 0.9 3.55 6/2/08 178,606 452,623
Dennis Drislane...................................... -- -- -- -- -- --
Pavan Nigam.......................................... 325,000 3.8 4.50 7/8/08 919,758 2,330,848
Charles Saunders..................................... 100,000(1) 1.2 4.50 --(1) 283,003(1) 717,184(1)
100,000 1.2 3.55 10/21/08 223,258 565,779
</TABLE>
- ---------
(1) Represents an option to purchase 100,000 shares of common stock granted to
Dr. Saunders in 1998 that was cancelled pursuant to a stock option repricing
exchange program in October 1998.
54
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND 1998 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, 1998. The value of in-the-money options is based on an assumed
offering price of $6.50 per share and net of the option exercise price.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT THE-MONEY OPTIONS AT
DECEMBER 31, 1998(1) DECEMBER 31, 1998
SHARES ACQUIRED ON VALUE REALIZED -------------------------- ---------------------------
NAME EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- ------------------ ---------------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
W. Michael Long........ 400,000 $ 1,320,000(1) 537,500 1,562,500 $ 3,359,375 $ 9,765,625
750,000(2) -- 3,375,000 --
Michael K. Hoover...... 100,000 446,800(3) 793,268 80,000 4,686,486 236,000
Dennis Drislane........ -- -- -- -- -- --
Pavan Nigam............ -- -- 364,062 85,937 864,847 472,654
Charles Saunders....... -- -- 228,571 171,429 1,098,569 1,071,431
</TABLE>
- ---------
(1) Based on a value of $3.55 per share, the fair market value of the common
stock at June 2, 1998 as determined by the Board of Directors, minus the
exercise price.
(2) Represents shares issuable upon exercise of a warrant issued to Mr. Long
upon commencement of his employment with Healtheon. See "--Employment
Agreements."
(3) Based on value of $4.50 per share, the fair market value of the common stock
at July 8, 1998 as determined by the Board of Directors, minus the exercise
price.
Except in the case of Mr. Hoover, options shown above were granted under the
1996 Stock Plan and vest at a rate of 25% of the shares on the first anniversary
of the date of grant and 1/48 of the shares each month thereafter. An option to
purchase 80,000 shares of common stock held by Mr. Hoover was granted under the
1996 Stock Plan and vests as is described above. Mr. Hoover also holds options
to purchase 793,268 shares granted under the ActaMed 1992, 1993 Class B Common
and 1994 Stock Option Plans. These options were assumed by Healtheon upon the
consummation of the acquisition of ActaMed.
EMPLOYMENT AGREEMENTS
Healtheon'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, Healtheon and Mr. Long entered into an employment agreement
pursuant to which Mr. Long became the President and Chief Executive Officer of
Healtheon. Healtheon 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 of his employment.
In addition, Mr. Long purchased 250,000 shares for $500,000, $499,750 of which
was represented by a promissory note to Healtheon, 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 Healtheon because he is no longer offered a position with similar
responsibility due to a change of control of Healtheon, Mr. Long's option vests
immediately as to 625,000 shares and Healtheon's repurchase right lapses.
Additionally, if Healtheon 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 Healtheon's repurchase right will lapse.
55
<PAGE>
EMPLOYEE BENEFIT PLANS
1996 STOCK PLAN. In February 1996 the Board adopted, and Healtheon's
stockholders approved, the 1996 Plan. Healtheon 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 to increase the
number of shares of common stock reserved under the plan to 10,000,000 shares.
In July 1998, the Board approved, and in October 1998 the stockholders 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 (1)
5% of the outstanding shares or (2) a lesser amount determined by the Board. In
January 1999, an additional 3,107,321 shares were reserved for issuance under
the 1996 Plan under the annual increase provision. 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, 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 of the Board
(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 share of common stock previously
issued and sold or any option previously granted under the 1996 Plan is
affected.
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 Healtheon'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 its term 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 Healtheon.
In the case of SPRs, unless the Administrator determines otherwise, the
restricted stock purchase agreement will grant Healtheon a repurchase option
exercisable upon the voluntary or involuntary termination of the purchaser's
employment or consulting relationship with Healtheon 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 Healtheon. 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 the 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 Healtheon, 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 Healtheon with or
into another corporation, each outstanding option and SPR must be assumed or an
equivalent option substituted by the successor
56
<PAGE>
corporation. If the outstanding options and SPRs are not assumed or substituted
by the successor corporation, the outstanding options and SPRs will terminate.
ACTAMED STOCK OPTION PLANS. In connection with its acquisition of ActaMed
in a merger, Healtheon 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 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
options held by directors and executive officers of Healtheon were assumed by
Healtheon: options to purchase 1,424,216 shares of ActaMed common stock held by
Michael Hoover, options to purchase 250,000 shares of ActaMed common stock held
by Nancy Ham, options to purchase 80,000 shares of ActaMed common stock held by
J. Philip Hardin, and options to purchase 220,000 shares of ActaMed common stock
held by John R. Hughes, Jr. 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. Healtheon
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 issuance. Options granted under the ActaMed
Plans generally are not transferable 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 Healtheon 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 Healtheon does not remain in existence, the Administrator
may (1) 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, (2) provide that
all ActaMed options shall be assumed by the successor corporation, or (3)
provide for a combination of (1) and (2).
1998 EMPLOYEE STOCK PURCHASE PLAN. Healtheon's 1998 Employee Stock Purchase
Plan, or the "1998 Purchase Plan," was adopted by the Board in September 1998,
and approved by the stockholders in October 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 lesser of (1) 500,000 shares, (2) .5% of the
outstanding shares on such date or (3) a lesser amount determined by the Board.
The 1998 Purchase Plan 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 October 31, 2000.
Employees are eligible to participate if they are employed by Healtheon or
any participating subsidiary for at least 20 hours per week and more than five
months in any calendar year. However, an employee may not be granted an option
to purchase stock under the 1998 Purchase Plan if the employee (1) 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 Healtheon, or (2) holds
rights to purchase stock under any employee stock purchase plans of Healtheon
that together accrue at a rate which exceeds $25,000 worth of stock for each
calendar year. 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
57
<PAGE>
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.
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 (1) at the beginning of the offering period or (2) 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 Healtheon.
Rights granted under the 1998 Purchase Plan are not transferable by a
participant other than by will or the laws of descent and distribution. The 1998
Purchase Plan provides that, in the event of a merger of Healtheon with or into
another corporation or a sale of substantially all of Healtheon'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 amendment or termination may adversely affect any outstanding
options under the 1998 Purchase Plan. 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. Healtheon participates in a tax-qualified employee savings and
retirement plan, or the "401(k) Plan," which covers all of Healtheon's full-time
employees who have completed three months of service. Under 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 Healtheon 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, Healtheon has made no 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 Healtheon 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 Healtheon, if any, will be deductible by Healtheon 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.
58
<PAGE>
CERTAIN TRANSACTIONS
Since December 26, 1995, Healtheon's inception date, there has not been nor
is there currently proposed any transaction or series of similar transactions to
which Healtheon 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 Healtheon 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 (1) compensation agreements and other
arrangements, which are described where required in "Management," and (2) the
transactions described below.
ACTAMED CORPORATION ACQUISITION
On May 19, 1998, Healtheon acquired ActaMed in a merger. Pursuant to the
merger, Healtheon issued 23,271,355 shares of its common stock in exchange for
all of the issued and outstanding capital stock of ActaMed, and assumed all
options to purchase ActaMed common stock. The merger was treated as a tax-free
reorganization and as a "pooling-of-interests" transaction for accounting and
financial reporting purposes. All of the then outstanding shares of preferred
stock of Healtheon were converted into shares of common stock of Healtheon upon
the consummation of the merger.
Healtheon and certain stockholders of Healtheon who together hold a majority
of the outstanding shares of common stock of Healtheon entered into a Voting
Agreement in connection with the merger, or 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
1996 SERIES A PREFERRED STOCK. On January 26, 1996, Healtheon sold
10,285,000 shares of its Series A preferred stock for $.50 per share. The
purchasers of the Series A preferred stock included, among others:
- Dr. James H. Clark--3,500,000 shares;
- Kleiner Perkins Caufield & Byers VII--2,999,500 shares;
- KPCB VII Founders Fund--325,500 shares;
- KPCB Life Sciences Zaibatsu Fund II--175,000 shares; and
- New Enterprise Associates VI, Limited Partnership, or "New Enterprise
Associates VI"--2,000,000 shares.
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 Healtheon, 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 in the entity. C.
Richard Kramlich, a director of Healtheon, is a general partner of New
Enterprise Associates VI. Mr. Kramlich disclaims beneficial ownership of the
securities held by that entity except for his proportional interest in the
entity.
COMMON STOCK. On January 26, 1996, Healtheon sold 1,000,000 shares of its
common stock for $.05 per share. The purchasers of the common stock included:
- Dr. Clark--500,000 shares;
- Kleiner Perkins Caufield & Byers VII--428,500 shares;
- KPCB VII Founders Fund--46,500 shares; and
- KPCB Life Sciences Zaibatsu Fund II--25,000 shares.
59
<PAGE>
SERIES B PREFERRED STOCK AND WARRANTS. On October 1, 1996, Healtheon 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;
- Kleiner Perkins Caufield & Byers VII--1,068,750 shares;
- KPCB Life Sciences Zaibatsu Fund II--56,250 shares; and
- New Enterprise Associates VI--500,000 shares.
In related transactions, on November 1, 1996, Healtheon issued a warrant to
purchase 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 Dr. Clark to continue to
provide services to Healtheon. 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.
Also on November 1, 1996, Healtheon issued a warrant to purchase 1,000,000
shares of Series B preferred stock at an exercise price of $2.00 per share to
KPCB VII Associates, in consideration for services provided to Healtheon 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.
On July 11, 1997 Healtheon issued 250,000 shares of Series B preferred stock
for a purchase price of $.5 million 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, Mr. Long borrowed $499,750 from Healtheon pursuant to a one-year
interest-free full recourse promissory note. The note was paid in full on June
30, 1998.
BRIDGE FINANCING. Between April 15, 1997 and May 6, 1997, Healtheon
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 the
note in a bridge financing transaction, or the "Bridge Financing." The lenders
in the Bridge Financing included, among others:
- Dr. Clark--$765,750;
- Kleiner Perkins Caufield & Byers VII--$727,463;
- KPCB Life Sciences Zaibatsu Fund II--$38,288; and
- New Enterprise Associates VI--$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.
SERIES C PREFERRED STOCK. On July 1, 1997, Healtheon 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;
60
<PAGE>
- 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.
SERIES D PREFERRED STOCK. Between October 17, 1997 and December 19, 1997,
Healtheon 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;
- Kleiner Perkins Caufield & Byers VII--432,693 shares;
- KPCB Java Fund--480,769 shares;
- KPCB Life Sciences Zaibatsu Fund II--48,077 shares;
- Kathy Clark--96,154 shares;
- Michael James Clark Trust--96,154 shares; and
- New Enterprise Associates VI, Limited Partnership--576,923 shares.
Kathy Clark and Michael James Clark are adult children of Dr. Clark.
On May 19, 1998, pursuant to the ActaMed merger, each outstanding share of
preferred stock of Healtheon converted into one share of common stock and each
outstanding warrant to purchase shares of Healtheon's preferred stock converted
into a warrant to purchase shares of Healtheon's common stock.
1998 SERIES A PREFERRED STOCK. On November 3, 1998 and November 6, 1998
Healtheon sold an aggregate of 7,683,341 shares of its Series A preferred stock
for $6.00 per share. Among the purchasers were the following 5% stockholders and
entities affiliated with directors of Healtheon, who purchased the number of
shares indicated:
- Atherton Properties Partnership, LP, an entity controlled by Dr. Clark and
affiliated with Kathy Clark and Michael Clark--166,667 shares;
- Kathy Clark--166,667 shares;
- Michael James Clark Trust--166,667 shares;
- HLM Partners VII, LP, of which United HealthCare Corporation is a limited
partner--166,667 shares;
- KPCB Java Fund--416,667 shares;
- Kleiner Perkins Caufield & Byers--375,000 shares;
- KPCB Life Sciences Zaibatsu Fund II--41,667 shares;
- Monaco Partners, LP--2,850,000 shares; and
- New Enterprise Associates VI, LP--416,667 shares.
On November 21, 1996, ActaMed entered into an Amended and Restated
Development Agreement with The SFA Limited Partnership, or "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 Healtheon. SFA was given the right to use ActaMed's object broker technology
outside the healthcare industry and must pay royalties on any revenues that
would be derived from its use. This agreement expires in November 2001. To date,
no royalties have become payable to Healtheon 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 Healtheon. 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
61
<PAGE>
Healtheon, Mr. Sadler's guarantee was released. This line of credit was repaid
by Healtheon 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. ActaMed was paid approximately $256,000
in 1995, $215,000 in 1996, $137,000 in 1997 and $32,000 in 1998 under those
agreements.
CERTAIN BUSINESS RELATIONSHIPS
SMITHKLINE LABS
1997-1998 ASSET PURCHASE AGREEMENTS. Prior to the acquisition of ActaMed by
Healtheon, ActaMed entered into a series of agreements, the "SmithKline
Agreements," with SmithKline Labs, which agreements were assumed by Healtheon in
the ActaMed merger. Under the SmithKline Agreements, ActaMed agreed to purchase
certain assets, or 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. The shares of ActaMed preferred
stock issued to SmithKline were converted into 2,317,913 shares of Healtheon'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. Those shares were
converted into 763,548 shares of Healtheon's common stock in connection with the
ActaMed merger. In June 1998, SmithKline Labs transferred SmithKline Assets from
the remaining two regions to Healtheon in exchange for 1,336,209 shares of
common stock.
SERVICES AGREEMENT. Also pursuant to one of the SmithKline Agreements, the
"Services Agreement," Healtheon will perform laboratory test order and results
services to providers utilizing SmithKline Labs' laboratory services through
SCAN. SmithKline Labs is obligated to pay Healtheon a minimum of approximately
$10.0 million in 1998 for laboratory test orders and results transactions.
SmithKline Labs may be required to pay Healtheon certain additional fees for
transactions processed by Healtheon in the event the number of providers
accessing SmithKline Labs' laboratory services through SCAN increases.
SmithKline Labs paid Healtheon $7.1 million in service and transaction fees
during the first nine 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 Healtheon, prior to the end of a term. In the event
that Healtheon gives notice of non-renewal, SmithKline Labs will be entitled to
continued to receive long-term order entry and results reporting services from
Healtheon on a per transaction pricing basis or, in the alternative, may require
Healtheon to develop a service for SmithKline that duplicates the services
Healtheon 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 Healtheon engage in
certain exclusive development work for SmithKline Labs. SmithKline Labs has
agreed to use reasonable efforts to use Healtheon as its "preferred provider" of
electronic eligibility verification and claims processing services. The Services
Agreement provides that the parties will negotiate new rates as of January 1,
2001 and each two years after that date. The Services Agreement states that the
renegotiated rates must be competitive with the marketplace and must be no
higher than the lowest fees charged by Healtheon to similarly situated
customers. See "Management's Discussion and Analysis--Overview" and Note 3 of
Notes to Consolidated Financial Statements.
NONCOMPETE LETTER. In May 1998, Healtheon and SmithKline Labs entered into
a letter agreement under which Healtheon is obligated not to compete with
SmithKline Labs in the business of disease
62
<PAGE>
management, and has agreed to exclusively promote SmithKline Labs' disease
management products and services so long as SmithKline continues to promote
Healtheon as its preferred vendor. Healtheon 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.
1999 ASSET PURCHASE AGREEMENT. In January 1999, Healtheon purchased certain
assets used by SmithKline Labs to provide laboratory results delivery services
in exchange for $2.0 million in cash and approximately 1.8 million shares of
Healtheon's common stock. Healtheon and SmithKline Labs entered into a related
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. The services
agreement has a five year term with anticipated revenues of $17.0 to $18.0
million in the first year. Healtheon does not expect this arrangement to
significantly contribute to earnings in the near term. Profitability will depend
on Healtheon's ability to use these assets to provide results delivery services
for non-SmithKline labs and to transition these provider sites to Healtheon's
Internet-based services.
UNITED HEALTHCARE
EDI SERVICES ACQUISITION. 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 Healtheon's common stock in connection with the merger.
SERVICES AGREEMENT. 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 Healtheon 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 nine months of 1998, ActaMed, prior to the merger, and Healtheon
were paid an aggregate of $7.7 million. Healtheon 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 Healtheon fails to meet certain network performance standards or
otherwise breaches its material obligations under the United HealthCare
Agreement. The Service and License Agreement provides that two years after the
date of the agreement the parties will agree on new prices that will be
competitive with the marketplace. Healtheon and United HealthCare are
negotiating these new prices, and Healtheon anticipates that the new prices will
reduce the rates paid by United HealthCare. See "Management's Discussion and
Analysis--Overview" and Note 2 of Notes to Consolidated Financial Statements.
United HealthCare is a principal stockholder of Healtheon and Dr. William
McGuire, Chief Executive Officer and Chairman of United HealthCare, is a
director of Healtheon.
HLM NOTE. 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., or
"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
Healtheon. This note was repaid at the time of the merger.
63
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of Healtheon's common stock as of November 30, 1998 and as
adjusted to reflect the sale of the shares of common stock in this offering by:
(1) each person who is known by Healtheon to beneficially own more than 5% of
Healtheon's common stock, (2) each director of Healtheon, (3) each of the Named
Executive Officers and (4) all directors and executive officers of Healtheon as
a group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED(1)
NUMBER OF SHARES --------------------------
BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER OWNED OFFERING OFFERING(2)
- ------------------------------------------------------------------------ ----------------- ----------- -------------
<S> <C> <C> <C>
Entities associated with James H. Clark(3).............................. 11,502,265 18.5% 17.1%
Entities associated with United HealthCare Corporation(4)............... 8,936,687 14.4 13.3
William W. McGuire, M.D.(4)........................................... 8,936,687 14.4 13.3
Entities associated with Kleiner Perkins Caufield & Byers(5)............ 8,086,832 12.8 11.9
L. John Doerr(5)...................................................... 8,086,832 12.8 11.9
SmithKline Beecham Clinical Laboratories, Inc.(6)....................... 6,251,003(6) 9.8 9.1
Tadataka Yamada(6).................................................... 6,251,003(6) 9.8 9.1
P. E. Sadler(7)......................................................... 5,001,993 8.0 7.4
Entities associated with New Enterprise Associates, L.P.(8)............. 3,755,569 6.0 5.6
C. Richard Kramlich(8)................................................ 3,755,569 6.0 5.6
W. Michael Long(9)...................................................... 1,937,500 3.1 2.8
Integral Capital Partners, L.P.......................................... 1,255,129 2.0 1.9
Michael K. Hoover(10)................................................... 888,268 1.4 1.3
Dennis Drislane(11)..................................................... 550,000 * *
Pavan Nigam(12)......................................................... 509,062 * *
Thomas A. Jermoluk...................................................... 333,334 * *
Charles Saunders(13).................................................... 115,178 * *
Laura D'Andrea Tyson.................................................... -- -- --
All officers and directors as a group (23 persons)(14).................. 49,469,829 73.1 68.1
</TABLE>
- ----------
* Less than one percent
(1) The number and percentage of shares beneficially owned are based on
62,195,893 shares of common stock outstanding as of November 30, 1998,
assuming conversion of all outstanding shares of preferred stock into common
stock, and 67,195,893 shares of common stock outstanding after this
offering. Beneficial ownership is determined under 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 November 30, 1998 are deemed to be outstanding and beneficially
owned by the person holding the options or warrants for the purpose of
computing the number of shares beneficially owned and the percentage
ownership of that person, these shares 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, these persons have sole voting and
investment power with respect to all shares of Healtheon's common stock
shown as beneficially owned by them.
(2) The table assumes the U.S. Underwriters' over-allotment option to purchase
750,000 shares of common stock is not exercised.
(3) Represents 166,667 shares held of record by Atherton Properties Partnership,
LP, 4,000,000 shares held of record by Dr. Clark as trustee of the James H.
Clark and Nancy Rutter Clark Revocable Trust, 1,017,229 shares held of
record by Clark Ventures, 268,000 shares held of record by JHC Investments,
LLC and 6,050,369 shares held of record by Monaco Partners, LP. Dr. Clark
wholly controls Atherton Properties Partnership, LP, Clark Ventures, JHC
Investments, LLC and Monaco Partners, LP. Dr. Clark is a director of
Healtheon. The address for Dr. Clark is c/o Healtheon Corporation, 4600
Patrick Henry Drive, Santa Clara, CA 95054. The address for Clark Ventures
and Monaco Partners, LP is 777 East Williams Street, Suite 201, Carson City,
NV 89701.
64
<PAGE>
(4) 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, 676,262 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 to the extent of its pecuniary interests in the
entities. Dr. McGuire, a director of Healtheon, 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.
(5) Represents 5,500,863 shares held of record directly by Kleiner Perkins
Caufield & Byers VII L.P. ("KPCB VII"), 1,203,736 shares held of record by
KPCB Java Fund, and 352,874 shares held of record by KPCB Life Sciences
Zaibatsu Fund II. Also represents 976,423 shares subject to warrants held of
record by KPCB VII, and 52,936 shares subject to warrants held of record by
KPCB Life Sciences Zaibatsu Fund II L.P., all of which are exercisable
within 60 days of November 30, 1998. KPCB Life Sciences Zaibatsu Fund II and
KPCB VII are wholly controlled by KPCB VII Associates, L.P. KPCB Java Fund
is controlled by KPCB VIII Associates. L. John Doerr, a general partner of
KPCB VIII Associates and KPCB VII Associates, L.P., is a director of
Healtheon. Mr. Doerr disclaims beneficial ownership of shares held by these
entities except to the extent of his pecuniary interest in the entities.
Kleiner Perkins Caufield & Byers' address is 2750 Sand Hill Road, Menlo
Park, CA 94025.
(6) Includes in the number of shares beneficially owned by SmithKline Labs and
in the total number of outstanding shares of common stock 1,833,333 shares
of common stock issued under a December 1998 Asset Purchase Agreement with
SmithKline Labs. Dr. Yamada, a director of Healtheon, 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.
(7) 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 Healtheon. Mr. Sadler's address
is c/o Healtheon Corporation, 4600 Patrick Henry Drive, Santa Clara, CA
95054.
(8) Represents 3,723,590 shares held of record directly by New Enterprise
Associates VI, L.P., or "New Enterprise Associates VI," 11,979 shares
subject to warrants held of record by New Enterprise Associates VI
exercisable within 60 days of November 30, 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 these entities
except for his proportional interests in the entities. New Enterprise
Associates VI's address is 1119 St. Paul Street, Baltimore, MD 21202.
(9) Includes 750,000 shares subject to a warrant held of record by Mr. Long and
537,500 shares subject to options held of record by Mr. Long, in each case
exercisable within 60 days of November 30, 1998. 187,500 shares underlying
the warrant held by Mr. Long will remain subject to a right of repurchase by
Healtheon 60 days after November 30, 1998. Mr. Long is the Chief Executive
Officer and a director of Healtheon.
(10) Represents 92,500 shares held of record directly by Mr. Hoover, 2,500
shares held by Nicholas D. Hoover for which Mr. Hoover is custodian, and
793,268 shares subject to options held of record by Mr. Hoover that are
exercisable within 60 days of November 30, 1998. Mr. Hoover is the President
and a director of Healtheon.
(11) Includes 343,750 shares held by Mr. Drislane that will remain subject to a
right of repurchase by Healtheon 60 days after November 30, 1998.
(12) Includes 39,062 shares subject to options held of record by Mr. Nigam that
are exercisable within 60 days of November 30, 1998. Also includes 121,875
shares that will remain subject to a right of repurchase by Healtheon 60
days after November 30, 1998. Mr. Nigam is the Vice President, Engineering
of Healtheon.
(13) Represents 115,178 shares subject to options held of record by Mr. Saunders
that are exercisable within 60 days of November 30, 1998. Mr. Saunders is
the Vice President, Marketing and Consulting Services and Medical Director
of Healtheon.
(14) Includes all shares described in the above footnotes and includes an
additional 1,422,971 shares held by other executive officers, of which
1,085,928 shares were outstanding as of November 30, 1998 and 337,043 shares
are subject to options or warrants that are exercisable within 60 days of
November 30, 1998.
65
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary of certain provisions of Healtheon's capital stock
describes all material provisions of Healtheon'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 November 30, 1998, there were 62,183,393 shares of common stock
outstanding, par value $0.0001 per share, assuming the conversion of all
outstanding shares of preferred stock into shares of common stock. Upon
consummation of this offering, 150,000,000 shares of common stock and 5,000,000
shares of preferred stock will be authorized.
COMMON STOCK
The issued and outstanding shares of common stock are, and the shares of
common stock offered by this prospectus will be validly issued, fully paid and
nonassessable upon payment for the shares. The holders of outstanding shares of
common stock are entitled to receive dividends out of assets legally available
therefor at a time and in 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 Healtheon. Upon liquidation, dissolution or winding up of
Healtheon, the holders of common stock are entitled to receive pro rata the
assets of Healtheon 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
Upon the closing of this offering, each outstanding share of Series A
preferred stock will be converted into one share of common stock. See Note 14 of
Notes to Consolidated Financial Statements for a description of the Series A
preferred stock issued in November 1998. Upon the closing of this offering,
Healtheon's Certificate of Incorporation will provide that preferred stock may
be issued by Healtheon 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. The issuance of
preferred stock 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 Healtheon. Healtheon
has no present plans to issue any shares of preferred stock.
WARRANTS
As of November 30, 1998, Healtheon 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 expire with respect
to 1,000,000 shares on November 1, 1999, with respect to 750,000 shares on July
10, 2000, and with respect to 44,718 shares on June 30, 2002. Warrants to
purchase 282,522 shares of common stock have an exercise price of $7.97, which
expire December 2001. In addition, in December 1998, as part of a service
agreement with a customer, Healtheon issued to the customer a warrant to
purchase 500,000 shares of common stock with an exercise price of $10.40 per
share, which expires on March 15, 2003.
66
<PAGE>
REGISTRATION RIGHTS
The holders of approximately 50,007,164 shares of common stock or their
permitted transferees are entitled to certain rights with respect to
registration of their shares, or the "Registrable Securities," under the
Securities Act. These shares are held by (1) purchasers of common stock at the
founding of Healtheon in December 1995, (2) purchasers of preferred stock of
Healtheon prior to its conversion into common stock in connection with the
acquisition of ActaMed, (3) certain former shareholders of ActaMed who received
shares of Healtheon's common stock pursuant to Healtheon's acquisition of
ActaMed and who had registration rights with respect to their shares of ActaMed
capital stock and (4) purchasers of the Series A preferred stock sold in
November 1998.
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 Healtheon 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 Healtheon register their shares
for public resale on Form S-3 or any successor form, provided Healtheon is
eligible to use Form S-3 or any such successor form. The value of the securities
to be so registered must be at least $1.0 million. Furthermore, in the event
Healtheon 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 Healtheon 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 Healtheon. Registration rights, other than the
right to require Healtheon to register shares on Form S-3 or any successor form,
will terminate at such time as Healtheon'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 Healtheon's stockholders with registration
rights cause a large number of securities to be registered and sold in the
public market, those sales could have an adverse effect on the market price for
Healtheon's common stock. If Healtheon were to initiate a registration and
include Registrable Securities because of the exercise of registration rights,
the inclusion of Registrable Securities could have an adverse effect on
Healtheon's ability to raise capital.
CERTAIN ANTI-TAKEOVER EFFECTS OF PROVISIONS OF HEALTHEON'S CERTIFICATE OF
INCORPORATION AND BYLAWS AND OF DELAWARE LAW
GENERAL. Certain provisions of Delaware law and Healtheon'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 Healtheon. Such provisions could limit the price that certain investors might
be willing to pay in the future for shares of Healtheon'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 Healtheon, including
unsolicited takeover attempts, even though such a transaction may offer
Healtheon's stockholders the opportunity to sell their stock at a price above
the prevailing market price.
DELAWARE TAKEOVER STATUTE. Following consummation of this offering,
Healtheon will be subject to the "business combination" provisions of Section
203 of the Delaware General Corporation Law. In general, those 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:
- the transaction is approved by the board of directors prior to the date
the interested stockholder obtained interested stockholder status;
- 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
67
<PAGE>
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
- on or subsequent to the 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 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 Healtheon and, accordingly, may discourage
attempts to acquire Healtheon.
CERTIFICATE OF INCORPORATION AND BYLAWS. Healtheon's Certificate of
Incorporation provides that any action to be taken by the stockholders of
Healtheon must be effected at an annual or special stockholder meeting and may
not be taken by written consent. Healtheon's Bylaws provide that special
meetings of the stockholders of Healtheon may be called by the Board or by the
President of Healtheon, or by one or more stockholders holding at least 10% of
the voting power of Healtheon's outstanding capital stock, or any persons as may
be authorized by the Certificate of Incorporation or the Bylaws (which currently
only give this authority to the Board). Healtheon'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 stockholders meeting. No
business other than that stated in the notice may be transacted at any special
meeting. These provisions will delay consideration of a stockholder proposal
until the next annual meeting unless a special meeting is called by the Board.
Healtheon'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 Healtheon's voting stock or a majority of directors in office,
although less than a quorum. The Certificate of Incorporation and the Bylaws of
Healtheon also provide for a staggered Board. Under a staggered Board, each
director is designated to one of three categories. Each year the directors'
positions in one of the three 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 Healtheon.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Healtheon's Certificate of Incorporation limits the liability of directors
to the fullest extent permitted by the Delaware law. In addition, the
Certificate of Incorporation and Bylaws provide that Healtheon will indemnify
directors and officers of Healtheon to the fullest extent permitted by Delaware
law. Healtheon intends to enter into separate indemnification agreements with
its directors and executive officers that provide these persons indemnification
protection in the event the Certificate of Incorporation is subsequently
amended.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer Trust Company has been appointed as transfer agent
and registrar for Healtheon'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."
68
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the common stock
of Healtheon. Future sales of substantial amounts of common stock in the public
market, or the perception that such sales may occur, could adversely affect
prevailing market prices.
Upon consummation of the offering, Healtheon will have an aggregate of
67,195,893 shares of common stock outstanding, based on the number of shares of
common stock outstanding as of November 30, 1998, assuming no exercise of the
U.S. underwriters' over-allotment option and no exercise of outstanding options
or warrants. Of these shares, 5,658,184 shares, including the 5,000,000 shares
sold in this offering, will be freely tradable without restriction under the
Securities Act, except for any such shares that may be purchased by "affiliates"
of Healtheon, which shares will be subject to the volume and other limitations
of Rule 144 of the Securities Act, or "Rule 144" described below. 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. Upon the expiration of certain contractual
"lock-up" restrictions described below, 52,254,368 shares will be eligible for
sale 180 days after the date of this prospectus, with 41,817,104 of such shares
subject to the volume and other limitations of Rule 144. The remaining 9,283,341
shares will become eligible for sale at various times after that date, including
7,683,341 shares that will become eligible for resale between November 3 and
November 6, 1999; all of these remaining shares will be subject to the volume
and other limitations of Rule 144.
Each of Healtheon's directors and officers and certain other stockholders of
Healtheon have agreed with Morgan Stanley & Co. Incorporated, for a period of
180 days after the date of this prospectus, not to (1) 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 (2) 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 above is to be settled
by delivery of common stock or such other securities, in cash or otherwise.
Morgan Stanley & Co. Incorporated may choose to release a certain number of
these shares from such restrictions prior to the expiration of the 180-day
period "lock-up" period, although it has no current intention of doing so.
Under Rule 144 as currently in effect, beginning 90 days after the date of
this prospectus, a person who has beneficially owned restricted shares of common
stock for at least one year, including the holding period of any prior owner
except an affiliate, would be entitled to sell a number of such shares within
any three-month period equal to the greater of (1) 1% of the then outstanding
shares of the common stock or (2) the average weekly reported volume of trading
of the common stock on the Nasdaq National Market during the four calendar weeks
preceding such sale. Immediately after the offering, 1% of Healtheon's
outstanding shares of common stock would equal approximately 671,959 shares.
Rule 144 also imposes on such restricted shares certain manner of sale and
notice requirements and requirements as to the availability of current public
information concerning Healtheon. Under Rule 144(k), a person who is not deemed
to have been an affiliate 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 regard to the volume or other limitations
of Rule 144 just described.
The holders of approximately 50,007,164 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 Healtheon's common stock.
Immediately after this offering, there will be options to purchase
approximately 11,827,385 shares of common stock outstanding, based on the number
of options outstanding as of November 30, 1998. Subject
69
<PAGE>
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 non-Affiliates to sell their shares without having to comply with
the volume, holding period or other limitations of Rule 144 and permits
Affiliates to sell their shares without having to comply with the holding period
limitation of Rule 144, in each case beginning 90 days after the consummation of
this offering. In addition, shortly after this offering, Healtheon intends to
file a registration statement on Form S-8 covering the 13,811,659 shares of
common stock reserved for issuance under the 1996 Plan and the 1998 Purchase
Plan based upon the number of options outstanding as of November 30, 1998.
Shares of common stock registered under any registration statement will, subject
to Rule 144 volume limitations applicable to Affiliates, be available for sale
in the open market, unless the shares are subject to vesting restrictions with
Healtheon or the lock-up agreements described above.
70
<PAGE>
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:
- a citizen or resident of the United States;
- a corporation, partnership or other entity created or organized in or
under the laws of the United States or any state thereof;
- an estate, the income of which is subject to U.S. federal income taxation
regardless of its source; or
- 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. Withholding may not apply if the
dividends are effectively connected with the conduct of a trade or business
within the United States and, if an applicable income tax treaty 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, are attributable to a United
States permanent establishment of such holder. 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 payer 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, (1) the certification requirement
would generally be applied to the partners of the partnership and (2) 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.
71
<PAGE>
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.
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
one of the following conditions is satisfied:
- the gain is effectively connected with a trade or business conducted by
the non-U.S. Holder in the United States and, if an applicable income tax
treaty 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, is attributable to a
permanent establishment maintained in the United States by such non-U.S.
Holder;
- 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;
- Healtheon 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
- 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.
Healtheon 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 payer of dividends has actual knowledge that the payee is
a United States person, the payer 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.
72
<PAGE>
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
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.
73
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date hereof, or 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
Healtheon 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......................................................................................... 4,000,000
----------
International Underwriters:
Morgan Stanley & Co. International Limited.........................................................
Goldman Sachs International........................................................................
Hambrecht & Quist LLC..............................................................................
Volpe Brown Whelan & Company, LLC..................................................................
----------
Subtotal......................................................................................... 1,000,000
----------
Total.......................................................................................... 5,000,000
----------
----------
</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 by this prospectus if any shares are taken.
However, the underwriters are not required to take the shares covered by the
U.S. underwriters' over-allotment option described below.
Pursuant to the agreement between U.S. and international underwriters, each
U.S. underwriter has represented and agreed that, with certain exceptions: (1)
it is not purchasing any shares for the account of anyone other than a United
States or Canadian Person (as defined) and (2) 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: (1) it is not purchasing
any shares for the account
74
<PAGE>
of any United States or Canadian Person and (2) 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 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 (1) made by it in its capacity as a U.S. underwriter apply only to it
in its capacity as a U.S. underwriter and (2) 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.
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 (1) 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; (2) 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 (3) 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 in
connection with the distribution contemplated in this offering, except for
offers or sales to Japanese
75
<PAGE>
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.
Healtheon 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 750,000
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 Healtheon 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.
Healtheon has requested that the U.S. underwriters reserve up to 650,000
shares of common stock to be offered at the public offering price to certain
persons designated by Healtheon, including James H. Clark and Thomas A.
Jermoluk, directors of Healtheon.
Each of Healtheon and the directors, officers and certain other stockholders
of Healtheon 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, (1) 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 (2) 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 (1) or (2)
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 Healtheon 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 Healtheon relating to shares of common stock or other securities
acquired in open market transactions after the completion of the offering of the
shares, provided that purchasers in transactions described in clause (y) enter
into similar "lock-up" agreements.
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
76
<PAGE>
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.
Healtheon 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 Healtheon, for which such underwriters receive customary
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 Healtheon and the U.S. representatives. Among the factors to be
considered in determining the initial public offering price will be the future
prospects of Healtheon and its industry in general, sales, earnings and certain
other financial and operating information of Healtheon 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 Healtheon. 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 Healtheon 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, independent auditors, as stated in
their report appearing herein. The consolidated financial statements of ActaMed
Corporation as of December 31, 1996 and for the year then ended, which are not
separately presented in this Prospectus and Registration Statement, have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein. Such financial statements are included in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.
77
<PAGE>
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.
WHERE YOU CAN FIND MORE INFORMATION
Healtheon has filed with the Securities and Exchange Commission, or 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 Healtheon 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, Healtheon 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.
78
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<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-9
Notes to Consolidated Financial Statements................................ F-11
FINANCIAL STATEMENTS OF EDI SERVICES, INC.:
Report of Deloitte and Touche LLP, Independent Auditors................... F-34
Statement of Divisional Net Loss and United's Net Investment.............. F-35
Statement of Divisional Cash Flows........................................ F-36
Notes to Financial Statements............................................. F-37
</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
Corporation 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 Corporation in a transaction that was accounted for as
a pooling of interests. We did not audit the financial statements of ActaMed
Corporation for the year ended December 31, 1996, which statements reflect total
assets constituting approximately 82% of the related consolidated financial
statement totals at December 31, 1996 and revenues and a net loss constituting
approximately 89% and 54%, 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 Corporation, is
based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted accounting
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 September 26, 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 separately 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 (September 26, 1998 as to Note 1--Net Loss per Common Share,
paragraph 2 and Note 2--Acquisition of EDI Services, Inc., paragraph 4)
F-3
<PAGE>
HEALTHEON CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ---------- SEPTEMBER 30,
1998
-------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 7,539 $ 16,504 $ 4,526
Short-term investments................................................... -- 5,300 866
Accounts receivable, net of allowance for doubtful accounts of $41, $71
and $130 in 1996, 1997 and 1998, respectively........................... 959 2,723 5,104
Due from related parties................................................. 1,742 1,533 1,159
Other current assets..................................................... 437 527 621
---------- ---------- -------------
Total current assets..................................................... 10,677 26,587 12,276
Property and equipment, net................................................ 4,534 5,500 11,276
Intangible assets, net..................................................... 16,555 18,768 23,742
Other assets............................................................... 2,641 2,892 2,977
---------- ---------- -------------
$ 34,407 $ 53,747 $ 50,271
---------- ---------- -------------
---------- ---------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Borrowings under line of credit.......................................... $ 30 $ 3,425 $ 1,415
Accounts payable......................................................... 1,359 2,225 4,472
Accrued compensation..................................................... 242 448 2,465
Other accrued liabilities................................................ 1,097 1,265 3,871
Current portion of capital lease obligations............................. 763 1,038 1,716
Deferred revenue......................................................... 4,681 3,396 4,392
---------- ---------- -------------
Total current liabilities................................................ 8,172 11,797 18,331
Capital lease obligations, net of current portion.......................... 1,210 932 1,714
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 54,422,868 shares issued and outstanding in 1996, 1997 and
1998, respectively...................................................... 1 1 5
Additional paid-in capital............................................... 1,523 4,502 119,645
Note receivable from officer............................................. -- (349) --
Deferred stock compensation.............................................. -- (2,151) (4,184)
Accumulated deficit...................................................... (27,684) (55,689) (85,240)
---------- ---------- -------------
Total stockholders' equity (net capital deficiency)...................... (14,553) (9,930) 30,226
---------- ---------- -------------
$ 34,407 $ 53,747 $ 50,271
---------- ---------- -------------
---------- ---------- -------------
</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 NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ---------------------- ----------------------
1995 1996 1997 1997 1998
------------ ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Services............................................ $ 458 $ 1,795 $ 4,301 $ 1,216 $ 18,326
Services to related parties(2)...................... -- 4,237 7,309 5,199 14,320
Software licenses................................... 1,717 4,981 1,780 585 585
------------ ---------- ---------- ---------- ----------
Total revenue....................................... 2,175 11,013 13,390 7,000 33,231
Operating costs and expenses:
Cost of revenue:
Cost of services.................................. 1,573 1,648 4,011 1,080 18,688
Cost of services to related parties............... -- 4,919 6,536 4,648 13,206
Cost of software licenses......................... 343 160 -- -- --
------------ ---------- ---------- ---------- ----------
Total cost of revenue............................. 1,916 6,727 10,547 5,728 31,894
Development and engineering......................... 2,446 8,596 12,986 9,681 13,036
Sales, general and administrative................... 1,749 9,042 11,031 7,477 17,041
Amortization of intangible assets................... -- 3,189 4,249 3,187 6,703
------------ ---------- ---------- ---------- ----------
Total operating costs and expenses.................. 6,111 27,554 38,813 26,073 68,674
------------ ---------- ---------- ---------- ----------
Loss from operations.................................. (3,936) (16,541) (25,423) (19,073) (35,443)
Interest income....................................... 208 539 611 359 834
Interest expense...................................... (6) (56) (323) (177) (361)
Dividends on ActaMed's convertible redeemable
preferred stock..................................... -- (2,548) (2,870) (2,382) (890)
------------ ---------- ---------- ---------- ----------
Net loss.............................................. (3,734) (18,606) (28,005) (21,273) (35,860)
Dividends on ActaMed's convertible redeemable
preferred stock..................................... (724) -- -- -- --
------------ ---------- ---------- ---------- ----------
Net loss applicable to common stockholders............ $ (4,458) $ (18,606) $ (28,005) $ (21,273) $ (35,860)
------------ ---------- ---------- ---------- ----------
------------ ---------- ---------- ---------- ----------
Basic and diluted net loss per common share........... $ (.85) $ (2.83) $ (3.88) $ (3.03) $ (1.24)
------------ ---------- ---------- ---------- ----------
------------ ---------- ---------- ---------- ----------
Weighted-average shares outstanding used in computing
basic and diluted net loss per common share......... 5,246 6,583 7,223 7,019 28,934
------------ ---------- ---------- ---------- ----------
------------ ---------- ---------- ---------- ----------
Pro forma basic and diluted net loss per common share
(unaudited)......................................... $ (.56) $ (.74)
---------- ----------
---------- ----------
Shares used in computing pro forma basic and diluted
net loss per common share (unaudited)............... 44,715 47,263
---------- ----------
---------- ----------
</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 PREFERRED CONVERTIBLE PREFERRED
STOCK 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
----------- -------- ----------- -------- ---------- -------
----------- -------- ----------- -------- ---------- -------
HEALTHEON CORPORATION
BALANCES AT DECEMBER 31, 1995
(REFLECTING THE EXCHANGE 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
preferred stock for cash (less
issuance costs of $27)........... -- -- 10,285,000 5,115 -- --
Issuance of Series B convertible
preferred stock for cash (less
issuance costs of $8)............ -- -- 3,000,000 5,992 -- --
Issuance of Series B convertible
preferred 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>
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)
---------- ---------- ------------ ----------- -------------
---------- ---------- ------------ ----------- -------------
BALANCES AT DECEMBER 31, 1995
(REFLECTING THE EXCHANGE RATIO OF
.6272)........................... $ 1,379 $ -- $ -- $ (9,078) $ (7,698)
Net loss........................... -- -- -- (18,606) (18,606)
Issuance of common stock to
founders and employees for
cash............................. 140 -- -- -- 140
Issuance of Series A convertible
preferred stock for cash (less
issuance costs of $27)........... -- -- -- -- 5,115
Issuance of Series B convertible
preferred stock for cash (less
issuance costs of $8)............ -- -- -- -- 5,992
Issuance of Series B convertible
preferred 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 -- -- (27,684) (14,553)
</TABLE>
- -------------
(1) Because Healtheon did not commence operations until January 1996, the
ActaMed statement of convertible redeemable preferred stock and
stockholders' equity (net capital deficiency) 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 PREFERRED CONVERTIBLE PREFERRED
STOCK STOCK COMMON STOCK
--------------------- --------------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- -------- ----------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1996...... 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
<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...... $ 1,523 $ -- $ -- $(27,684) $(14,553)
Net loss........................... -- -- -- (28,005) (28,005)
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) (55,689) (9,930)
</TABLE>
- -------------
(1) Because Healtheon did not commence operations until January 1996, the
ActaMed statement of convertible redeemable preferred stock and
stockholders' equity (net capital deficiency) 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 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 PREFERRED CONVERTIBLE PREFERRED
STOCK STOCK COMMON STOCK
--------------------- --------------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- -------- ----------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
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)...................... -- -- -- -- 2,247,606 --
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)............. -- -- -- -- 2,936,209 --
Repayment of note receivable from
officer (unaudited).............. -- -- -- -- -- --
Deferred stock compensation
(unaudited)...................... -- -- -- -- -- --
Amortization of deferred stock
compensation (unaudited)......... -- -- -- -- -- --
Issuance of common stock pursuant
to restricted stock purchase by
employees (unaudited)............ -- -- -- -- 530,000 --
----------- -------- ----------- -------- ---------- -------
BALANCES, SEPTEMBER 30, 1998
(UNAUDITED)...................... -- $ -- -- $ -- 54,422,868 $ 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, 1997...... $ 4,502 $(349) $(2,151) $(55,689) $ (9,930)
Net loss (unaudited)............... -- -- -- (35,860) (35,860)
Issuance of common stock pursuant
to option exercises by employees
(unaudited)...................... 1,260 -- -- -- 1,260
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)............. 13,220 -- -- -- 13,220
Repayment of note receivable from
officer (unaudited).............. -- 349 -- -- 349
Deferred stock compensation
(unaudited)...................... 4,083 -- (4,083) -- --
Amortization of deferred stock
compensation (unaudited)......... -- -- 2,050 -- 2,050
Issuance of common stock pursuant
to restricted stock purchase by
employees (unaudited)............ 2,465 -- -- -- 2,465
---------- ---------- ------------ ----------- -------------
BALANCES, SEPTEMBER 30, 1998
(UNAUDITED)...................... $ 119,645 $ -- $(4,184) $(85,240) $ 30,226
---------- ---------- ------------ ----------- -------------
---------- ---------- ------------ ----------- -------------
</TABLE>
- -------------
(1) Because Healtheon did not commence operations until January 1996, the
ActaMed statement of convertible redeemable preferred stock and
stockholders' equity (net capital deficiency) 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-8
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS(1)
(IN THOUSANDS)
<TABLE>
<CAPTION>
HEALTHEON CORPORATION
ACTAMED ------------------------------------------
CORPORATION NINE MONTHS ENDED
------------- YEARS ENDED DECEMBER
YEAR ENDED 31, SEPTEMBER 30,
DECEMBER 31, -------------------- --------------------
1995(1) 1996 1997 1997 1998
------------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................... $ (3,734) $ (18,606) $ (28,005) $ (21,273) $ (35,860)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................ 359 6,366 9,319 6,937 13,488
Amortization of deferred stock compensation.............. -- -- 562 309 2,050
Warrants and preferred stock issued for services......... -- 500 119 55 --
Dividends on ActaMed's convertible redeemable preferred
stock................................................... -- 2,548 2,870 2,382 890
Changes in operating assets and liabilities:
Accounts receivable.................................... (36) (5,066) (806) 651 (1,819)
Other assets........................................... (77) (325) (224) 122 (162)
Accounts payable....................................... 49 1,139 751 (263) 2,580
Accrued compensation and other liabilities............. 516 800 345 681 3,964
Deferred revenue....................................... 1,603 3,078 (1,285) (285) 996
------------- --------- --------- --------- ---------
Net cash used in operating activities...................... (1,320) (9,566) (16,354) (10,684) (13,873)
------------- --------- --------- --------- ---------
Cash flows from investing activities:
Purchase of short-term investments......................... -- -- (5,300) -- (4,341)
Maturities of short-term investments....................... -- -- -- -- 8,775
Increase in restricted cash................................ -- -- (867) -- --
Purchases of property and equipment........................ (464) (2,027) (2,817) (449) (5,071)
Cash paid in business combination.......................... -- -- -- -- (652)
Acquisition costs related to business combination.......... -- (316) -- -- --
Capitalized internally developed software costs............ -- (1,001) (291) (291) --
------------- --------- --------- --------- ---------
Net cash used in investing activities...................... (464) (3,344) (9,275) (740) (1,289)
------------- --------- --------- --------- ---------
Cash flows from financing activities:
Proceeds from line of credit borrowings and bridge notes... -- 30 5,395 2,000 --
Payment of line of credit borrowings....................... -- -- -- -- (2,010)
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 4,470 2,034
Proceeds from issuance of common stock, net of
repurchases.............................................. 21 144 266 18 3,725
Payments on note receivable from officer................... -- -- 151 -- 349
Principal payments of capital lease obligations............ -- (218) (748) (573) (914)
------------- --------- --------- --------- ---------
Net cash from financing activities......................... 6,984 11,063 34,594 5,915 3,184
------------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents....... 5,200 (1,847) 8,965 (5,509) (11,978)
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 $ 2,030 $ 4,526
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
</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 statement of cash flows of Healtheon for that period on a
pooled basis.
F-9
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS(1) (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
HEALTHEON CORPORATION
ACTAMED ------------------------------------------
CORPORATION NINE MONTHS ENDED
------------- YEARS ENDED DECEMBER
YEAR ENDED 31, SEPTEMBER 30,
DECEMBER 31, -------------------- --------------------
1995(1) 1996 1997 1997 1998
------------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Supplemental disclosure of cash flow information:
Interest paid.............................................. $ 5 $ 56 $ 252 $ 154 $ 379
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
Supplemental schedule of noncash investing and financing
activities:
Equipment acquired under capital lease obligations......... $ -- $ 2,083 $ 774 $ 472 $ 2,278
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
Issuance of note receivable from officer for preferred
stock.................................................... $ -- $ -- $ 500 $ -- $ --
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
Conversion of bridge notes to preferred stock.............. $ -- $ -- $ 2,000 $ 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
asset purchase........................................... $ -- $ -- $ 8,500 $ -- $ 2,800
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
Issuance of common stock for asset purchase................ $ -- $ -- $ -- $ -- $ 4,900
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
Issuance of common stock for business combination.......... $ -- $ -- $ -- $ -- $ 8,320
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
Deferred stock compensation related to options granted..... $ -- $ -- $ 2,713 $ 1,101 $ 4,083
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
Conversion of convertible redeemable preferred and
convertible preferred stock to common stock.............. $ -- $ -- $ -- $ -- $ 94,119
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
</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 statement of cash flows of Healtheon for that period on a
pooled basis.
SEE ACCOMPANYING NOTES
F-10
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
In May 1998, Healtheon Corporation acquired ActaMed Corporation 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.
NATURE OF OPERATIONS
Healtheon is pioneering the use of the Internet to simplify workflows,
decrease costs and improve the quality of patient care throughout the healthcare
industry. We have designed and developed an Internet-based information and
transaction platform, which we call the Healtheon Platform, that allows us to
create Virtual Healthcare Networks, or VHNs, that facilitate and streamline
interactions among the myriad participants in the healthcare industry. Our VHN
solution includes a suite of services delivered through applications operating
on our Internet-based platform. Our 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. We provide our own
applications on the Healtheon Platform and also enable third-party applications
to operate on the platform. In addition to VHNs, Healtheon provides consulting,
implementation and network management services to enable our customers to take
advantage of the capabilities of the Healtheon Platform.
Healtheon has incurred operating losses to date and had an accumulated
deficit of $85,240,000 at September 30, 1998. Our activities have been primarily
financed through private placements of equity securities. We had cash, cash
equivalents and short-term investments totaling $5,392,000 at September 30,
1998. As noted above and as further discussed in Note 2, Healtheon merged with
ActaMed in May 1998. This merger may significantly affect our operating cash
needs. We may need to raise additional capital through the issuance of debt or
equity securities. There can be no assurance that we will be able to raise
additional financing, or that such financing will be available on terms
satisfactory to us, if at all.
INTERIM FINANCIAL INFORMATION
The financial information as of September 30, 1998 and for the nine months
ended September 30, 1997 and 1998 is unaudited but includes all adjustments,
consisting only of normal recurring adjustments, that Healtheon's management
considers necessary for a fair presentation of Healtheon's operating results and
cash flows for such period. Results for the nine months ended September 30, 1998
are not necessarily indicative of results to be expected for the full fiscal
year of 1998 or for any future period.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Healtheon and
its wholly owned subsidiaries. All significant inter-company balances and
transactions have been eliminated.
F-11
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Healtheon'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 our short-term investments mature within nine
months. The fair value of our cash equivalents and short-term investments is as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1996 1997 1998
--------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Cash equivalents:
Corporate and other non-government debt securities...... $ -- $ 12,704 $ 2,808
Money market funds...................................... 5,603 3,429 1,372
--------- --------- ------
5,603 16,133 4,180
Short-term investments:
Corporate and other non-government debt securities...... -- 5,300 866
--------- --------- ------
$ 5,603 $ 21,433 $ 5,046
--------- --------- ------
--------- --------- ------
</TABLE>
Net unrealized gains (losses) were immaterial at December 31, 1996 and 1997
and September 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 interest income.
Additionally, at December 31, 1997 and September 30, 1998, we 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). This amount is included in other assets in the
accompanying consolidated balance sheets.
F-12
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 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
Intangible assets related to software technology rights, services agreements
and goodwill are amortized on a straight-line basis over three years. Intangible
assets related to assembled workforce are amortized on a straight-line basis
over two years.
SOFTWARE DEVELOPMENT COSTS
Software development costs are incurred in the development or enhancement of
software utilized in providing Healtheon's business management systems and
services. Software development costs incurred after the establishment of
technological feasibility 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 $288,000 for the
years ended December 31, 1996 and 1997 and the nine months ended September 30,
1997. There were no internally developed software costs capitalized for the year
ended December 31, 1995 or for the nine months ended September 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 our capitalized internally developed software
costs included in cost of revenue was approximately $134,000 and $376,000 for
the years ended December 31, 1996 and 1997. Amortization expense was
approximately $268,000 and $782,000 for the nine months ended September 30, 1997
and 1998. There was no amortization expense related to ActaMed's capitalized
internally developed software costs for the year ended December 31, 1995.
LONG-LIVED ASSETS
Healtheon 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, we assess 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, we 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. We determined that we
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. This amount is included in the $782,000
amortization expense for the nine months ended September 30, 1998 noted above.
No impairment losses were recorded for the years ended December 31, 1995, 1996
and 1997 or for the nine months ended September 30, 1997.
F-13
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Healtheon earns revenue from services and services to related parties, both
of which include providing access to our network-based services and performing
development and consulting services, and from licensing software. We earn
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, we have derived no significant revenue
from brokers, value-added resellers or systems integrators.
During the year ended December 31, 1997, we entered into agreements with two
customers to manage and operate their current and expanding information
technology, or 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. We utilize our
own personnel, certain outside contractors and certain personnel and facilities
of the customers that are leased under contract terms to us 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 that we billed to the
customers. For the year ended December 31, 1997 and the nine months ended
September 30, 1998, we recognized revenue of approximately $2,100,000 and
$10,915,000 for the IT services and approximately $200,000 and $4,772,000 for
the development services. Revenue recognized for IT services for the year ended
December 31, 1997 and the nine months ended September 30, 1998 included amounts
related to leased personnel and facilities, in total, of $1,909,000 and
$8,806,000. These amounts were also included in cost of revenue for the
respective periods.
We recognize revenue from license fees when a noncancellable 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. Our products do not require significant customization.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 97-2, "Software Revenue Recognition." SOP
97-2 was effective January 1, 1998 and generally requires revenue earned on
software arrangements involving multiple elements such as software products,
upgrades, enhancements, post-contract 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 our accounting for revenue as a
result of the adoption of SOP 97-2.
ActaMed entered into a national marketing and licensing agreement, or the
Agreement, with International Business Machines Corporation 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 of this amount
F-14
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
was recognized as software license revenue upon delivery of the software. No
software license revenue was recognized under this agreement for the nine months
ended September 30, 1997 or 1998.
In December 1996, we entered into a new agreement, or the License, to
license our 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, we issued IBM a five-year warrant to purchase 282,522 shares
of our common stock at a price of $7.97 per share. Because of the extended
payment terms and our contentious relationship with IBM, we concluded that the
license fee was not assured of collection and, accordingly, we are recognizing
this revenue as the proceeds are collected. For the years ended December 31,
1996 and 1997, we recognized revenue from the License of $995,000 and $780,000.
For the nine months ended September 30, 1997 and 1998, we recognized revenue
from the License of $585,000 and $585,000. At December 31, 1997, amounts due
from IBM of $738,000 and $1,715,000 were included in accounts receivable and
other assets. At September 30, 1998, amounts due from IBM of $795,000 and
$1,112,000 were included in accounts receivable and other assets. Deferred
revenue at December 31, 1996 and 1997 and September 30, 1998 included
$3,121,000, $2,341,000 and $1,756,000 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 Healtheon 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
Healtheon 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 20%, 18% and 15% of the total balance of trade accounts
receivable and amounts due from related parties at September 30, 1998. We
believe that the concentration of credit risk in our trade receivables, with
respect to our limited customer base, is substantially mitigated by our credit
evaluation process. We do not require collateral. To date, our bad debt
write-offs have not been significant. During the years ended December 31, 1996
and 1997 and the nine months ended September 30, 1998 we added approximately
$41,000, $35,000 and $66,000 to our bad debt reserves. Total write-offs of
uncollectible amounts were zero, $5,000 and $7,000 in these periods.
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
F-15
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
revenue. For the nine months ended September 30, 1998, four customers accounted
for 27%, 22%, 21% and 20% of consolidated revenue.
We operate 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 September 30, 1998, we had no
export sales.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Healtheon 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," we account for stock option
grants to employees and directors in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees."
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. In accordance with 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
our 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, we have 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. For the year ended
December 31, 1995, the weighted-average number of shares of ActaMed reflects the
effect of the exchange ratio of 0.6272. 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 September
30, 1998.
F-16
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 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 NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------------- ----------------------
1995 1996 1997 1997 1998
--------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss applicable to common stockholders............. $ (4,458) $ (18,606) $ (28,005) $ (21,273) $ (35,860)
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
Basic and diluted:
Weighted-average shares of common stock
outstanding........................................ 5,246 7,398 8,621 8,396 30,389
Less: Weighted-average shares subject to
repurchase......................................... -- (815) (1,398) (1,377) (1,455)
--------- ---------- ---------- ---------- ----------
Weighted-average shares used in computing basic and
diluted net loss per common share.................... 5,246 6,583 7,223 7,019 28,934
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
Basic and diluted net loss per common share............ $ (.85) $ (2.83) $ (3.88) $ (3.03) $ (1.24)
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
Pro forma:
Net loss applicable to common stockholders............. $ (28,005) $ (35,860)
Add: Dividends on ActaMed convertible redeemable
preferred stock...................................... 2,870 890
---------- ----------
Pro forma net loss..................................... $ (25,135) $ (34,970)
---------- ----------
---------- ----------
Shares used above...................................... 7,223 28,934
Pro forma adjustment to reflect weighted effect of
assumed conversion of convertible preferred stock.... 37,492 18,329
---------- ----------
Shares used in computing pro forma basic and diluted
net loss per common share (unaudited)................ 44,715 47,263
---------- ----------
---------- ----------
Pro forma basic and diluted net loss per common share
(unaudited).......................................... $ (.56) $ (.74)
---------- ----------
---------- ----------
</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 loss per common share
because all such securities are anti-dilutive for all periods presented. For the
years ended December 31, 1995, 1996 and 1997, the total number of shares
excluded from the calculation of diluted loss per share were 10,157,109,
36,643,084 and 51,216,689. For the nine months ended September 30, 1997 and 1998
the total number of shares excluded from the calculation of diluted loss per
share were 46,893,485 and 12,687,723. See Notes 9, 10 and 11 for further
information on these securities.
F-17
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE LOSS
Healtheon has no material components of other comprehensive loss and
accordingly the comprehensive loss is the same as net loss for all periods
presented.
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."
Healtheon 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 our financial condition or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." We are 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 we currently
hold 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 our financial condition or results of operations.
In March 1998, the American Institute of Certified Public Accountants issued
SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use." SOP 98-1 requires that entities capitalize certain costs
related to internal use software once certain criteria have been met. We are
required to implement SOP 98-1 for the year ending December 31, 1999. Adoption
of SOP 98-1 is expected to have no material impact on our financial condition or
results of operations.
2. BUSINESS COMBINATIONS
ACQUISITION OF EDI SERVICES, INC.
Effective March 31, 1996, ActaMed acquired EDI Services Inc. or EDI, a
wholly-owned subsidiary of United HealthCare Corporation, in a transaction
through 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 under which we earn 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 our 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
F-18
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
2. BUSINESS COMBINATIONS (CONTINUED)
$20,957,000 of the purchase price was allocated to intangible assets, consisting
principally of software technology rights, the Services and License Agreement,
trademarks and goodwill.
Subsequent to the issuance of the financial statements for 1996 and 1997,
ActaMed changed the allocation of the purchase price associated with the
acquisition of the EDI technology to decrease the amount previously expensed as
in process research and development costs and increase the amount capitalized as
software technology rights. The financial statements for ActaMed for the year
ended December 31, 1996, have been reissued to reflect this restatement.
Intangible assets arising from the acquisition of EDI at March 31, 1996 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
AMORTIZATION
PERIOD
---------------
<S> <C> <C>
Goodwill.......................................................... 3 years $ 8,012
Software technology rights........................................ 3 years 8,333
Service and License Agreement..................................... 3 years 2,855
Trademarks........................................................ 3 years 216
Other intangibles................................................. 3 years 1,541
---------
$ 20,957
---------
---------
</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) $ (20,492)
---------- ----------
---------- ----------
Basic and diluted net loss per common share........................... $ (2.19) $ (3.11)
---------- ----------
---------- ----------
</TABLE>
ACQUISITION OF ACTAMED CORPORATION
On May 19, 1998, Healtheon 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 Healtheon and ActaMed for all dates and periods presented.
Healtheon 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. Healtheon 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-19
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 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) (10,063) (14,026) (6,186)
--------- ---------- ---------- ------------
$ (3,734) $ (18,606) $ (28,005) $ (12,850)
--------- ---------- ---------- ------------
--------- ---------- ---------- ------------
</TABLE>
There were no significant intercompany transactions between the two
companies or significant conforming accounting adjustments.
ACQUISITION OF METIS, LLC
On August 25, 1998, Healtheon acquired Metis, LLC, a provider of
Internet/intranet strategic consulting, design and development of Internet-based
applications and content for the healthcare industry enabling clinical
integration and managed care process improvement. The acquisition has been
accounted for using the purchase method of accounting and, accordingly, the
purchase price has been allocated to the tangible and intangible assets acquired
and the liabilities assumed on the basis of their respective fair values on the
acquisition date. Metis' results of operations have been included in the
consolidated financial statements from its date of acquisition.
Healtheon issued 1,600,000 shares of its common stock with a fair market
value of $8,320,000. Of these shares, 476,548 shares will be issued to employees
under restricted stock purchase agreements subject to a lapsing right of
repurchase, at Healtheon's option, over the respective vesting periods. In
addition, we made a cash payment of $652,000, assumed liabilities of
approximately $300,000 and incurred other acquisition related expenses,
consisting primarily of legal and other professional fees, of approximately
$100,000. The total purchase price was approximately $9,400,000. Approximately
$300,000 of the purchase price was allocated to accounts receivable and certain
assets; approximately $1,400,000 of the purchase price was allocated to the
assembled workforce of Metis and will be amortized over two years; and the
remaining $7,700,000 of the purchase price was allocated to goodwill and will be
amortized over three years.
F-20
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
3. SERVICES AGREEMENT WITH SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC.
Effective December 31, 1997, Healtheon entered into a series of agreements
with SmithKline Beecham Clinical Laboratories, Inc., or SmithKline, to outsource
the network connection between their customers and SmithKline laboratories. In
connection with this transaction, SmithKline and Healtheon entered into a
five-year Services Agreement under which we will earn transaction fee revenue by
providing certain health care information services to SmithKline and its
provider customers.
As part of that transaction, we 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 Healtheon 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 Healtheon and we paid the remaining purchase price of $7,700,000
through the issuance of 763,548 shares of our Series D convertible redeemable
preferred stock in March and 1,336,209 shares of our 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 Healtheon to upgrade the
technology. Payments to Healtheon are based upon achieving certain milestones in
the development effort. At September 30, 1998 we had not achieved any
milestones. Accordingly, no development revenue had been recognized under this
development agreement.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- --------- SEPTEMBER 30,
1998
-------------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment......................................... $ 3,677 $ 6,238 $ 12,458
Office equipment, furniture and fixtures................... 1,185 1,237 2,885
Purchased software for internal use........................ 1,001 1,240 1,852
Leasehold improvements..................................... 303 328 1,604
--------- --------- -------------
6,166 9,043 18,799
Less accumulated depreciation and amortization............. (1,632) (3,543) (7,523)
--------- --------- -------------
Property and equipment, net................................ $ 4,534 $ 5,500 $ 11,276
--------- --------- -------------
--------- --------- -------------
</TABLE>
Included in property and equipment at December 31, 1996 and 1997 and
September 30, 1998 were assets acquired under capital lease obligations with a
cost of approximately $2,302,000, $3,076,000 and $5,354,000. Accumulated
depreciation related to the assets acquired under capital leases totaled
$319,000, $1,174,000 and $2,176,000 at December 31, 1996 and 1997 and September
30, 1998.
F-21
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
5. INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
AMORTIZATION ----------------------
PERIOD 1996 1997
------------ ---------- ---------- SEPTEMBER 30,
1998
-------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Services agreements...................... 3 years $ 2,855 $ 2,855 $ 2,855
Software technology rights............... 3 years 8,333 17,664 23,107
Internally developed software............ 3 years 1,001 1,292 --
Trademarks............................... 3 years 216 216 216
Goodwill................................. 3 years 8,012 8,012 15,668
Other.................................... 2-3 years 1,541 1,541 2,924
---------- ---------- -------------
21,958 31,580 44,770
Less accumulated amortization............ (5,403) (12,812) (21,028)
---------- ---------- -------------
$ 16,555 $ 18,768 $ 23,742
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
6. COMMITMENTS
Healtheon 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. Approximately $2,900,000 and $5,135,000 had been
utilized under these lease lines through December 31, 1997 and September 30,
1998. At September 30, 1998, approximately $1,266,000 was available for future
utilization under these lease lines. This amount included approximately $901,000
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."
We lease our 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, $1,165,000
and $1,616,000 for the years ended December 31, 1995, 1996 and 1997 and the nine
months ended September 30, 1997 and 1998. These amounts are net of sublease
income from a related party of approximately $30,000, $68,000, $58,000, $42,000
and $43,000. Future minimum lease
F-22
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
6. COMMITMENTS (CONTINUED)
commitments under noncancellable lease agreements at December 31, 1997 were as
follows (in thousands):
<TABLE>
<CAPTION>
OPERATING LEASES CAPITAL 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, Healtheon borrowed $2,000,000 from certain stockholders in the form
of 6% convertible promissory notes in contemplation of the Series C convertible
preferred stock offering. These 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 Series B convertible
preferred stock issued to an officer, we received a one-year, full-recourse,
noninterest-bearing promissory note for $500,000. At December 31, 1997, $349,000
remained outstanding under the note. At September 30, 1998, the note had been
paid in full.
In February 1998, we entered into a $2,000,000 line of credit agreement with
a stockholder. We 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, Healtheon entered into a line of credit agreement with a
bank that allows us 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
September 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, and
expires on September 5, 2000. The amount outstanding is collateralized by
certain assets. At December 31, 1997 and September 30, 1998, $1,415,000 was
outstanding under the agreement.
F-23
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
8. LINES OF CREDIT (CONTINUED)
In December 1997, we entered into a loan agreement with a bank that allowed
us 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 and September 30,
1998). The loan was personally guaranteed by a stockholder 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%. Interest is payable monthly with payments commencing on January 31,
1998. At December 31, 1997, $2,000,000 was outstanding under the loan agreement.
The principal balance of the loan was repaid in full in August 1998.
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).
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 Healtheon.
F-24
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
10. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
Healtheon 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 Healtheon'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
common stock.
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.
PREFERRED STOCK
In July 1998, the Board of Directors approved a resolution authorizing
Healtheon to issue up to 5,000,000 shares of preferred stock, to be effective
upon the effective date of our initial public offering.
WARRANTS
In November 1996, Healtheon 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
Healtheon's behalf. A then partner of the venture capital firm assumed the role
of President and Chief Executive Officer for Healtheon from our inception
through June 1997. The warrant was immediately exercisable and expires three
years from the date of issuance. We recorded a charge of $500,000 representing
the fair value of the warrant issued and services received based on a valuation
obtained from an independent appraiser utilizing a modified Black-Scholes option
pricing model. This
F-25
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
warrant was outstanding at December 31, 1997 and in May 1998 was converted to a
warrant to purchase common stock. It remained outstanding at September 30, 1998.
In November 1996, we granted a warrant to one of our directors 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, we issued a warrant to a customer to purchase 282,522
shares of common stock at a price of $7.97 per share. The warrant expires in
December 2001. This warrant was outstanding at September 30, 1998.
In July 1997, we issued a warrant to an officer, 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
Healtheon, at our 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 September 30, 1998.
In July 1997, we 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 September 30, 1998, were converted to
warrants to purchase 44,718 shares of common stock.
At December 31, 1997 we had reserved 2,811,947 shares of our Series B
preferred stock and 282,522 shares of our common stock 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 September 30, 1998, we had
reserved 2,077,240 shares of our common stock for issuance upon exercise of the
outstanding warrants for common stock.
F-26
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
In December 1998, as part of a service agreement with a customer, we issued
to the customer a warrant to purchase 500,000 shares of common stock with an
exercise price of $10.40 per share. (See Note 14).
11. STOCK-BASED COMPENSATION
STOCK OPTION PLANS
Under the 1996 Stock Plan, or 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 1996 Plan. In March 1998, the Board of Directors and the
stockholders approved an increase in the reserve of 1,000,000 shares. In July
1998, the Board of Directors approved, subject to stockholder approval, an
additional increase in the reserve of 5,000,000 shares to a total of 15,000,000
shares reserved, plus annual increases equal to the lesser of 5% of the
outstanding common shares or a lesser amount determined by the Board of
Directors. 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
September 30, 1998, 274,166 and 1,715,853 shares remained available for future
grant under the 1996 Plan.
In connection with the acquisition of ActaMed, Healtheon 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 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 and the nine-month period
ended September 30, 1998, we issued approximately 1,806,000, 850,000 and 530,000
shares of common stock subject to restricted stock purchase agreements to
employees for cash. The common stock is subject to repurchase at the original
exercise price until vested, at our option, 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 September 30, 1998, approximately 1,660,000,
1,430,000 and 1,501,000 shares, respectively, were subject to repurchase.
F-27
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 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 PER
SHARES 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
Options outstanding at December 31, 1995 (reflecting the exchange ratio of
.6272).................................................................... 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)....................................................... 4,756,006 4.47
Exercised (unaudited)..................................................... (2,247,606) .59
Canceled (unaudited)...................................................... (522,178) 1.01
-----------------
Options outstanding at September 30, 1998 (unaudited)....................... 11,186,473 $ 2.33
-----------------
-----------------
</TABLE>
<TABLE>
<CAPTION>
ACTAMED
CORPORATION HEALTHEON CORPORATION
--------------- ---------------------------------------
NINE MONTHS
YEAR ENDED YEARS ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
--------------- -------------------- -----------------
1995 1996 1997 1998
--------------- --------- --------- -----------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Weighted-average fair value of options granted...................... $ .28 $ .15 $ .18 $ .75
--- --- --- ---
--- --- --- ---
</TABLE>
F-28
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 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
REMAINING WEIGHTED-
WEIGHTED- CONTRACTUAL AVERAGE
AVERAGE LIFE NUMBER EXERCISE
EXERCISE PRICES NUMBER OUTSTANDING EXERCISE PRICE (IN YEARS) EXERCISABLE 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 - $1.45.......................... 2,092,187 1.24 9.69 794,213 1.45
$3.24.................................. 924,178 3.24 7.94 76,644 3.24
---------- ----------
9,200,251 $ .72 8.63 3,233,227 $ .50
---------- ----------
---------- ----------
</TABLE>
We recorded deferred stock compensation of approximately $2,713,000 and
$4,083,000 during the year ended December 31, 1997 and the nine months ended
September 30, 1998, respectively. These amounts represented the difference
between the exercise price and the deemed fair value of our common stock on the
date such stock options were granted. We recorded amortization of deferred stock
compensation of approximately $562,000 and $2,050,000 during these periods based
on a graded vesting method. At September 30, 1998, we had a total of
approximately $4,184,000 remaining to be amortized on a graded vesting method
over the corresponding vesting period of each respective option, generally four
years.
PRO FORMA INFORMATION
We have 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 our 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 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 nine months ended September 30, 1998:
risk-free interest rate
F-29
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
11. STOCK-BASED COMPENSATION (CONTINUED)
of approximately 6.2%, 6.0%, 6.0% and 5.4%; a weighted-average expected life of
the option of 5.0 years, 4.3 years, 4.2 years and 3.5 years; and a dividend
yield of zero for all periods.
<TABLE>
<CAPTION>
HEALTHEON CORPORATION
ACTAMED ------------------------------------
CORPORATION
------------ YEARS ENDED NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
DECEMBER 31, ---------------------- SEPTEMBER 30
1995 1996 1997 1998
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Net loss applicable to common stockholders (in thousands):
As reported................................................ $ (4,458) $ (18,606) $ (28,005) $ (35,860)
------------ ---------- ---------- ------------
------------ ---------- ---------- ------------
Pro forma.................................................. $ (4,488) $ (18,695) $ (28,173) $ (36,892)
------------ ---------- ---------- ------------
------------ ---------- ---------- ------------
Basic and diluted net loss per common share:
As reported................................................ $ (.85) $ (2.83) $ (3.88) $ (1.24)
------------ ---------- ---------- ------------
------------ ---------- ---------- ------------
Pro forma.................................................. $ (.86) $ (2.84) $ (3.90) $ (1.28)
------------ ---------- ---------- ------------
------------ ---------- ---------- ------------
</TABLE>
In September 1998, the Board of Directors approved and in October 1998, the
stockholders also approved the adoption of Healtheon's 1998 Employee Stock
Purchase Plan, or the 1998 Purchase Plan, to be effective on the effective date
of our initial public offering. 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 or
a lesser amount determined by the Board of Directors.
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
F-30
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
12. INCOME TAXES (CONTINUED)
purposes. Significant components of Healtheon's deferred tax assets
(liabilities) were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....................................... $ 7,537 $ 14,263
Intangible assets...................................................... 1,580 3,688
Research and development tax credit.................................... 561 1,014
Reserves and accruals not currently deductible......................... 227 308
--------- ---------
Total deferred tax assets................................................ 9,905 19,273
Valuation allowance...................................................... (9,545) (18,931)
--------- ---------
Net deferred tax assets.................................................. 360 342
--------- ---------
Deferred tax liabilities
Depreciation........................................................... (31) (45)
Capitalized software development costs................................. (329) (297)
--------- ---------
Total deferred tax liabilities........................................... (360) (342)
--------- ---------
Net deferred tax assets and liabilities.................................. $ -- $ --
--------- ---------
--------- ---------
</TABLE>
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 our lack of earnings history. The valuation allowance for deferred tax
assets increased by $6,580,000 and $9,386,000 during the years ended December
31, 1996 and 1997.
At December 31, 1997, we 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 our 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
Healtheon has two customers that are significant stockholders of Healtheon.
We entered into a Development Agreement with a partnership controlled by the
former Chairman of the Board of Directors of ActaMed. Pursuant to this
agreement, we granted the partnership exclusive licenses to use ActaMed's
technology for industries other than the health care industry. Under the
agreement, we will receive a commercial royalty on the partnership's gross
receipts. If we desire in the
F-31
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
13. RELATED PARTY TRANSACTIONS (CONTINUED)
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
Healtheon. The agreement expires December 3, 1998 and to date no fees have been
paid to Healtheon under this agreement.
We share office space and provide 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 $62,000, $58,000, $46,000, $36,000 and $51,000 for the years ended
December 31, 1995, 1996, and 1997 and the nine months ended September 30, 1997
and 1998. Approximately $211,000, $187,000, $78,000 and $41,000 was reimbursed
during the years ended December 31, 1995, 1996 and 1997 and the nine months
ended September 30, 1997 for the use of the network maintained by Healtheon. No
income for the use of the network by the related party was recognized for the
nine months ended September 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 were included in other current assets in
the accompanying consolidated balance sheets. There were no amounts due from the
related party at September 30, 1998.
14. SUBSEQUENT EVENTS (UNAUDITED)
From October through December 1998, Healtheon granted to employees options
to purchase common stock and issued shares of common stock under restricted
stock purchase agreements equal to a total of 1,518,257 shares of common stock
at an exercise or purchase price of $3.55 per share. We estimate that we will
record additional deferred stock compensation of approximately $1,400,000 with
regard to these grants.
On October 20, 1998, we offered our employees who were granted options
between July 1998 through October 1998 the ability to cancel their original
option grant in exchange for a new option agreement with a new vesting start
date and option price of $3.55 per share. A total of 3,380,200 option shares
with exercise prices of $4.50, $6.30, $7.00 and $8.00 were eligible to be
repriced. A total of 2,057,950 option shares were cancelled and reissued. In
addition, on December 14, 1998, 455,000 shares of common stock issued in July
1998 pursuant to restricted stock purchase agreements with purchase prices of
$4.55 to $7.00 per share were rescinded. We estimate that we will record
additional deferred stock compensation of approximately $2,700,000 as a result
of this repricing.
In December 1998, we issued to a customer a warrant to purchase 500,000
shares of common stock at an exercise price of $10.40 per share.
In October 1998, the Board of Directors authorized 8,285,007 shares of
convertible preferred stock and designated all of these shares as Series A. In
November 1998, we issued 7,683,341 shares of Series A convertible preferred
stock for $46,100,000 of cash proceeds. The Series A convertible preferred
stockholders are entitled to non-cumulative dividends of $.405 per share per
annum, and liquidation rights per share equal to the issuance price plus all
declared but unpaid dividends. Each share of Series A preferred stock is
convertible into one share of common stock. The Series A preferred stock has
voting rights equal to the common stock issuable upon conversion. The Series A
preferred stock will convert to common stock effective upon the effective date
of our initial public offering.
F-32
<PAGE>
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
14. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
Also in October 1998, the Board of Directors approved an increase in the
number of shares of common stock authorized for issuance to 150,000,000 shares.
In January 1998, Healtheon and 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.
F-33
<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-34
<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-35
<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-36
<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-37
<PAGE>
EDI SERVICES GROUP
(A DIVISION OF UNITED HEALTHCARE CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1995
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>
<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-38
<PAGE>
EDI SERVICES GROUP
(A DIVISION OF UNITED HEALTHCARE CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1995
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-39
<PAGE>
[LOGO]
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED FEBRUARY 4, 1999
5,000,000 SHARES
[LOGO]
COMMON STOCK
-----------------
HEALTHEON CORPORATION IS OFFERING SHARES OF ITS COMMON STOCK. THIS IS OUR
INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR
SHARES. WE ANTICIPATE THAT THE INITIAL PUBLIC OFFERING
PRICE WILL BE BETWEEN $6 AND $7 PER SHARE.
-------------------
WE HAVE APPLIED TO LIST OUR COMMON STOCK ON THE NASDAQ NATIONAL MARKET UNDER THE
SYMBOL "HLTH."
-------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
-----------------
PRICE $ A SHARE
-----------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY
--------- ------------- -----------
<S> <C> <C> <C>
PER SHARE............................................. $ $ $
TOTAL................................................. $ $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT
APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
HEALTHEON HAS GRANTED THE UNDERWRITERS THE RIGHT TO PURCHASE UP TO AN ADDITIONAL
750,000 SHARES OF COMMON STOCK TO COVER OVER-ALLOTMENTS. MORGAN STANLEY & CO.
INCORPORATED EXPECTS TO DELIVER THE SHARES TO PURCHASERS ON , 1999.
-------------------
MORGAN STANLEY DEAN WITTER GOLDMAN, SACHS INTERNATIONAL
HAMBRECHT & QUIST VOLPE BROWN WHELAN & COMPANY
, 1999
<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............................. $ 9,730
NASD filing fee................................................................. 4,000
Nasdaq National Market listing fee.............................................. 95,000
Printing and engraving expenses................................................. 500,000
Professional fees and expenses.................................................. 1,650,000
Blue Sky fees and expenses...................................................... 5,000
Transfer agent fees............................................................. 5,000
Miscellaneous................................................................... 31,270
------------
Total......................................................................... $ 2,300,000
</TABLE>
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.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) From its founding in December 1995, through December 31, 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.
II-1
<PAGE>
(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.
(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.
II-2
<PAGE>
(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
15,985,609 shares of Registrant's common stock to employees pursuant to the
Company's 1996 Stock Plan.
(21) From July 6, 1996 through December 31, 1998, the Company issued an
aggregate of 6,108,770 shares of common stock as the result of exercises of
options or stock purchase rights for aggregate consideration, in the form of
cash and a promissory note, of approximately $4.1 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.
(23) On December 15, 1998 the Registrant issued to Beech Street
Corporation a warrant to Purchase 500,000 shares of the Registrant's common
stock at an exercise price of $10.40 per share as part of a service
agreement.
(24) On November 3 and November 6, 1998, the Registrant sold an
aggregate of 7,683,341 shares of Series A preferred stock to 21 investors at
a purchase price of $6.00 per share, which was paid in cash.
(25) On January 18, 1999, the Registrant sold an aggregate of 1,833,333
shares of its common stock to SmithKline Labs pursuant to an Asset Purchase
Agreement.
(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, including amendment.
2.2* Asset Purchase Agreement, dated June 25, 1998, among the Registrant, Metis
Acquisition Corp. and Metis, LLC.
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 to be 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 security holders.
10.11* Lease Agreement, dated December 2, 1997, between Larvan Properties and Registrant,
including addenda.
10.12* Lease Agreement, dated November 6, 1995, as amended, between ActaMed Corporation
and ZML-Central Park, L.L.C., including addenda.
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.
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C>
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, as amended, between ActaMed
Corporation and SmithKline Beecham Clinical Laboratories, Inc.
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 August 15, 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, as amended
10.29* 1998 Employee Stock Purchase Plan
10.30* Series A Preferred Stock Purchase Agreement, dated as of October 31, 1998, between
the Registrant and investors.
10.31+ Asset Purchase Agreement, dated December 31, 1998, between the Registrant and
SmithKline Beecham Clinical Laboratories, Inc.
10.32+ Services Agreement, dated January 19, 1999, between the Registrant and SmithKline
Beecham Clinical Laboratories, Inc.
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>
- ---------
* Previously filed with the Commission.
+ Confidential treatment requested as to portions of this exhibit.
II-5
<PAGE>
(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 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 3rd day of February, 1999.
HEALTHEON CORPORATION
BY: /S/ JOHN L. WESTERMANN III
-----------------------------------------
John L. Westermann III
CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ W. MICHAEL LONG* Chief Executive Officer and
- ------------------------------ Director (Principal February 3, 1999
W. Michael Long Executive Officer)
/s/ JOHN L. WESTERMANN III Chief Financial Officer
- ------------------------------ (Principal Financial and February 3, 1999
John L. Westermann III Accounting Officer)
/s/ JAMES H. CLARK* Chairman of the Board
- ------------------------------ February 3, 1999
James H. Clark
/s/ L. JOHN DOERR* Director
- ------------------------------ February 3, 1999
L. John Doerr
/s/ MICHAEL HOOVER* President and Director
- ------------------------------ February 3, 1999
Michael K. Hoover
Director
- ------------------------------
Thomas A. Jermoluk
/s/ C. RICHARD KRAMLICH* Director
- ------------------------------ February 3, 1999
C. Richard Kramlich
/s/ WILLIAM W. MCGUIRE, Director
M.D.*
- ------------------------------ February 3, 1999
William W. McGuire, M.D.
/s/ P. E. SADLER* Director
- ------------------------------ February 3, 1999
P. E. Sadler
Director
- ------------------------------
Laura D'Andrea Tyson
/s/ TADATAKA YAMADA* Director
- ------------------------------ February 3, 1999
Tadataka Yamada, M.D.
<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 September 26, 1998) in Amendment No. 1 to 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
February 3, 1999
II-8
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-70553 of Healtheon Corporation on Form S-1 of our report dated June 20, 1997
(September 26, 1998 as to Note 1-- Net Loss per Common Share, paragraph 2 and
Note 2-- Acquisition of EDI Services, Inc., paragraph 4), 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 separately 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
February 3, 1999
II-9
<PAGE>
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-70553 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
February 3, 1999
II-10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL PAGE
NUMBER DESCRIPTION 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, including amendment.
2.2* Asset Purchase Agreement, dated June 25, 1998, among the Registrant, Metis Acquisition
Corp. and Metis, LLC.
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 to be 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,
including addenda.
10.12* Lease Agreement, dated November 6, 1995, as amended, between ActaMed Corporation and
ZML-Central Park, L.L.C., including addenda.
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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL PAGE
NUMBER DESCRIPTION NUMBER
- --------- -------------------------------------------------------------------------------------- ---------------
<S> <C> <C>
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, as amended, between ActaMed
Corporation and SmithKline Beecham Clinical Laboratories, Inc.
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 August 15, 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, as amended
10.29* 1998 Employee Stock Purchase Plan
10.30* Series A Preferred Stock Purchase Agreement, dated as of October 31, 1998, between the
Registrant and investors.
10.31+ Asset Purchase Agreement, dated December 31, 1998, between the Registrant and
SmithKline Beecham Clinical Laboratories, Inc.
10.32+ Services Agreement, dated January 19, 1999, between the Registrant and SmithKline
Beecham Clinical Laboratories, Inc.
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>
- ---------
* Previously filed with the Commission.
+ Confidential treatment requested as to portions of this exhibit.
<PAGE>
[ ] SHARES
------------
HEALTHEON CORPORATION
COMMON STOCK ($.0001 PAR VALUE PER SHARE)
UNDERWRITING AGREEMENT
, 1999
- --------- --
<PAGE>
, 1999
--------- --
Morgan Stanley & Co. Incorporated
Goldman, Sachs & Co.
Hambrecht & Quist LLC
Volpe Brown Whelan & Company, LLC
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Morgan Stanley & Co. International Limited
Goldman Sachs International
Hambrecht & Quist LLC
Volpe Brown Whelan & Company, LLC
c/o Morgan Stanley & Co. International Limited
25 Cabot Square
Canary Wharf
London E14 4QA
England
Dear Sirs and Mesdames:
Healtheon Corporation, a Delaware corporation (the "COMPANY"),
proposes to issue and sell to the several Underwriters (as defined below)
_____ shares of its Common Stock, $.0001 par value per share (the "FIRM
SHARES").
It is understood that, subject to the conditions hereinafter
stated, ____________ Firm Shares (the "U.S. FIRM SHARES") will be sold to the
several U.S. Underwriters named in Schedule I hereto (the "U.S.
UNDERWRITERS") in connection with the offering and sale of such U.S. Firm
Shares in the United States and Canada to United States and Canadian Persons
(as such terms are defined in the Agreement Between U.S. and International
Underwriters of even date herewith), and __________ Firm Shares (the
"INTERNATIONAL SHARES") will be sold to the several International
Underwriters named in Schedule II hereto (the "INTERNATIONAL UNDERWRITERS")
in connection with the offering and sale of such International Shares outside
the United States and Canada to persons other than United States and Canadian
Persons. Morgan Stanley & Co. Incorporated and Goldman, Sachs & Co.,
Hambrecht & Quist LLC and Volpe Brown Whelan & Company, LLC shall act as
representatives (the "U.S. REPRESENTATIVES") of the several U.S.
Underwriters, and Morgan Stanley & Co. International Limited and Goldman
Sachs International, Hambrecht & Quist LLC and Volpe Brown Whelan & Company,
LLC shall act as representatives (the "INTERNATIONAL REPRESENTATIVES") of the
several International
<PAGE>
Underwriters. The U.S. Underwriters and the International Underwriters are
hereinafter collectively referred to as the Underwriters.
The Company also proposes to issue and sell to the several U.S.
Underwriters not more than an additional ________ shares of its Common Stock,
$.0001 par value per share (the "ADDITIONAL SHARES") if and to the extent
that the U.S. Representatives shall have determined to exercise, on behalf of
the U.S. Underwriters, the right to purchase such shares of common stock
granted to the U.S. Underwriters in Section 2 hereof. The Firm Shares and
the Additional Shares are hereinafter collectively referred to as the
"SHARES". The shares of Common Stock, $.0001 par value per share of the
Company to be outstanding after giving effect to the sales contemplated
hereby are hereinafter referred to as the "COMMON STOCK".
The Company has filed with the Securities and Exchange Commission
(the "COMMISSION") a registration statement relating to the Shares. The
registration statement contains two prospectuses to be used in connection
with the offering and sale of the Shares: the U.S. prospectus, to be used in
connection with the offering and sale of Shares in the United States and
Canada to United States and Canadian Persons, and the international
prospectus, to be used in connection with the offering and sale of Shares
outside the United States and Canada to persons other than United States and
Canadian Persons. The international prospectus is identical to the U.S.
prospectus except for the outside front cover page. The registration
statement as amended at the time it becomes effective, including the
information (if any) deemed to be part of the registration statement at the
time of effectiveness pursuant to Rule 430A under the Securities Act of 1933,
as amended (the "SECURITIES ACT"), is hereinafter referred to as the
"REGISTRATION STATEMENT"; the U.S. prospectus and the international
prospectus in the respective forms first used to confirm sales of Shares are
hereinafter collectively referred to as the "PROSPECTUS." If the Company has
filed an abbreviated registration statement to register additional shares of
Common Stock pursuant to Rule 462(b) under the Securities Act (the "RULE 462
REGISTRATION STATEMENT"), then any reference herein to the term "Registration
Statement" shall be deemed to include such Rule 462 Registration Statement.
As part of the offering contemplated by this Agreement, Morgan
Stanley & Co. Incorporated ("MORGAN STANLEY") has agreed to reserve out of
the Shares set forth opposite its name on Schedule I to this Agreement, up to
_________ shares, for sale to certain parties designated by the Company
(collectively, "PARTICIPANTS") (the "DIRECTED SHARE PROGRAM"). The Shares to
be sold by Morgan Stanley pursuant to the Directed Share Program (the
"DIRECTED SHARES") will be sold by Morgan Stanley pursuant to this Agreement
at the public offering price. Any Directed Shares not orally confirmed for
purchase by any Participants by the end of the first business day after the
date on which this Agreement is executed will be offered to the public by
Morgan Stanley as set forth in the Prospectus.
1. REPRESENTATIONS AND WARRANTIES. The Company represents and
warrants to and agrees with each of the Underwriters that:
2
<PAGE>
(a) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in effect,
and no proceedings for such purpose are pending before or threatened by the
Commission.
(b) (i) The Registration Statement, when it became effective, did
not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading, (ii) the Registration Statement and the Prospectus
comply and, as amended or supplemented, if applicable, will comply in all
material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder and (iii) the Prospectus does not
contain and, as amended or supplemented, if applicable, will not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, except that the representations
and warranties set forth in this paragraph do not apply to statements or
omissions in the Registration Statement or the Prospectus based upon
information relating to any Underwriter furnished to the Company in writing
by such Underwriter through you expressly for use therein.
(c) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own its property
and to conduct its business as described in the Prospectus and is duly
qualified to transact business and is in good standing in each jurisdiction
in which the conduct of its business or its ownership or leasing of
property requires such qualification, except to the extent that the failure
to be so qualified or be in good standing would not have a material adverse
effect on the Company and its Subsidiaries (as defined below), taken as a
whole.
(d) Other than Actamed Corporation, a Georgia corporation
("ACTAMED"), UHC Green Acquisition Corp., a Nevada corporation ("UHC") and
[Metis Acquisition Subsidiary] ("METIS") (each of Actamed, UHC and Metis
are referred to herein as a "SUBSIDIARY" and collectively as the
"SUBSIDIARIES"), the Company has no subsidiaries. Each Subsidiary of the
Company has been duly incorporated, is validly existing as a corporation in
good standing under the laws of the jurisdiction of its incorporation, has
the corporate power and authority to own its property and to conduct its
business as described in the Prospectus and is duly qualified to transact
business and is in good standing in each jurisdiction in which the conduct
of its business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or
be in good standing would not have a material adverse effect on the Company
and its Subsidiaries, taken as a whole. All of the issued shares of
capital stock of each Subsidiary of the Company have been duly and validly
authorized and issued, are fully paid and non-assessable and are owned
directly by the Company, free and clear of all liens, encumbrances,
equities or claims. The Company does not own, directly or indirectly, an
interest in any other corporation, partnership, business, trust or other
entity.
3
<PAGE>
(e) The Company and each of its Subsidiaries have good and marketable
title in fee simple to all real property and good and marketable title to
all personal property owned by them which is material to the business of
the Company and the Subsidiaries, taken as a whole, in each case free and
clear of all liens, encumbrances and defects except such as are described
in the Prospectus or such as do not materially affect the value of such
property and do not materially interfere with the use made and proposed to
be made of such property by the Company and its Subsidiaries, taken as a
whole; and any real property and buildings held under lease by the Company
and each of its Subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material to the Company
and its Subsidiaries, taken as a whole, and do not interfere with the use
made and proposed to be made of such property and buildings of the Company
and each of its Subsidiaries, in each case except as described in the
Prospectus, or which intervention is not material to the Company and its
Subsidiaries, taken as a whole.
(f) This Agreement has been duly authorized, executed and delivered
by the Company.
(g) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
(h) The shares of Common Stock outstanding prior to the issuance of
the Shares have been duly authorized and are validly issued, fully paid and
non-assessable. Except as set forth in the Prospectus, neither the Company
nor any of its Subsidiaries has outstanding any options to purchase, or any
preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments
to issue or sell, shares of its capital stock or any such options, rights,
convertible securities or obligations. All outstanding shares of capital
stock and options and other rights to acquire capital stock have been
issued in compliance with the registration and qualification provisions of
all applicable federal and state securities laws and were not issued in
violation of any preemptive rights, rights of first refusal or other
similar rights.
(i) The Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be validly
issued, fully paid and non-assessable, and the issuance of such Shares will
not be subject to any preemptive or similar rights.
(j) The execution and delivery by the Company of, and the performance
by the Company of its obligations under, this Agreement, and the sale by
the Company of the Shares as contemplated hereby, will not contravene any
provision of applicable law or the certificate of incorporation or by-laws
of the Company or any of its Subsidiaries or any agreement or other
instrument binding upon the Company or any of its Subsidiaries that is
material to the Company and its Subsidiaries, taken as a whole, or any
judgment,
4
<PAGE>
order or decree of any governmental body, agency or court having
jurisdiction over the Company or any Subsidiary, and no consent, approval,
authorization or order of, or qualification with, any governmental body or
agency is required for the performance by the Company of its obligations
under this Agreement, except such as may be required by the securities or
Blue Sky laws of the various states in connection with the offer and sale
of the Shares.
(k) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its Subsidiaries, taken as a whole, from that
set forth in the Prospectus (exclusive of any amendments or supplements
thereto subsequent to the date of this Agreement).
(l) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, (i) the Company and
its Subsidiaries have not incurred any material liability or obligation,
direct or contingent, nor entered into any material transaction not in the
ordinary course of business; (ii) the Company has not purchased any of its
outstanding capital stock, nor declared, paid or otherwise made any
dividend or distribution of any kind on its capital stock; and (iii) there
has not been any material change in the capital stock, short-term debt or
long-term debt of the Company and its Subsidiaries, except in each case as
described in the Prospectus.
(m) There are no legal or governmental proceedings pending or
threatened to which the Company or any of its Subsidiaries is a party or to
which any of the properties of the Company or any of its Subsidiaries is
subject that are required to be described in the Registration Statement or
the Prospectus and are not so described or any statutes, regulations,
contracts or other documents that are required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not described or filed as required.
(n) Each of the Company and each of its Subsidiaries has all
necessary consents, authorizations, approvals, orders, certificates and
permits of and from, and has made all declarations and filings with, all
federal, state, local, foreign and other governmental or regulatory
authorities, all self-regulatory organizations and all courts and other
tribunals, to own, lease, license and use its properties and assets and to
conduct its business in the manner described in the Prospectus, except to
the extent that the failure to obtain or file would not have a material
adverse effect on the Company and its Subsidiaries taken as a whole.
Neither the Company nor any of its Subsidiaries has received any notice of
proceedings related to the revocation or modification of any such consent,
authorization, approval, order, certificate or permit which, singly or in
the aggregate, if the subject of any unfavorable decision, ruling or
finding, would result in a material adverse change in the condition,
financial or otherwise, or in the earnings, business or operations of the
Company and its Subsidiaries, taken as a whole, except as described in the
Prospectus.
5
<PAGE>
(o) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Securities Act, complied when so filed in
all material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder.
(p) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described
in the Prospectus, will not be an "investment company" as such term is
defined in the Investment Company Act of 1940, as amended.
(q) The Company and each of its Subsidiaries (i) are in compliance
with any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("ENVIRONMENTAL LAWS"), (ii) have received all permits,
licenses or other approvals required of them under applicable Environmental
Laws to conduct their respective businesses and (iii) are in compliance
with all terms and conditions of any such permit, license or approval,
except where such noncompliance with Environmental Laws, failure to receive
required permits, licenses or other approvals or failure to comply with the
terms and conditions of such permits, licenses or approvals would not,
singly or in the aggregate, have a material adverse effect on the Company
and its Subsidiaries, taken as a whole.
(r) There are no costs or liabilities associated with Environmental
Laws (including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or compliance with
Environmental Laws or any permit, license or approval, any related
constraints on operating activities and any potential liabilities to third
parties) which would, singly or in the aggregate, have a material adverse
effect on the Company and its Subsidiaries, taken as a whole.
(s) Except as described in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person granting
such person the right to require the Company to file a registration
statement under the Securities Act with respect to any securities of the
Company or to require the Company to include such securities with the
Shares registered pursuant to the Registration Statement.
(t) The Company and each of its Subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in
such amounts as are prudent and customary in the businesses in which they
are engaged; neither the Company nor any of its Subsidiaries has been
refused any insurance coverage sought or applied for; and neither the
Company nor its Subsidiaries has any reason to believe that it will not be
able to renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not materially and
adversely affect the
6
<PAGE>
condition, financial or otherwise, or the earnings, business or operations
of the Company and its Subsidiaries, taken as a whole.
(u) The financial statements, including the notes thereto, included
in the Registration Statement and the Prospectus fairly present, in all
material respects, the financial position of the Company as of the dates
indicated and the results of its operations for the periods specified; said
financial statements have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis.
(v) Neither the Company nor, to the Company's knowledge, any other
party is in violation or breach of, or in default with respect to,
complying with any material provision of any contract, agreement,
instrument, lease, license, arrangement or understanding which is material
to the Company and its Subsidiaries taken as a whole, and each such
contract, agreement, instrument, lease, license, arrangement and
understanding is in full force and is the legal, valid and binding
obligation of the Company or its Subsidiary and, to the Company's
knowledge, the other parties thereto and is enforceable against the Company
or its Subsidiary and, to the Company's knowledge, against the other
parties thereto in accordance with its terms.
(w) The Company has complied with all provisions of Section 517.075,
Florida Statutes relating to doing business with the Government of Cuba or
with any person or affiliate located in Cuba.
(x) Except as disclosed in the Prospectus, (i) the Company and each
of its Subsidiaries owns or possesses all material patents, patent rights,
licenses, inventions, copyrights, know-how (including trade secrets and
other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), trademarks, service marks, trade
names, technology and know-how currently employed by them to conduct their
respective businesses in the manner described in the Prospectus,
(ii) neither the Company nor any of its Subsidiaries has received any
notice of infringement of or conflict with (and neither the Company nor any
of its Subsidiaries knows of any infringement or conflict with) asserted
rights of others with respect to any of the foregoing which, singly or in
the aggregate, if the subject of an unfavorable decision, ruling or
finding, would have a material adverse effect upon the Company and its
Subsidiaries, taken as a whole, and (iii) the discoveries, inventions,
products or processes of the Company and each of its Subsidiaries referred
to in the Prospectus do not, to the knowledge of the Company or any of its
Subsidiaries, infringe or conflict with any right or patent of any third
party, or any discovery, invention, product or process that would have a
material adverse effect on the Company and its Subsidiaries, taken as a
whole.
(y) The Company and its Subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurance that
(i) transactions are executed in accordance with management's general or
specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of financial statements in
7
<PAGE>
conformity with generally accepted accounting principles and to maintain
asset accountability; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv)
the recorded accountability for assets is compared with the existing
assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(z) No material labor dispute with the employees of the Company or
any of its Subsidiaries exists or, to the knowledge of the Company, is
imminent; and the Company is not aware of any existing, threatened or
imminent labor disturbance by the employees of any of its principal
suppliers, manufacturers or contractors that could have a material adverse
effect on the Company and its Subsidiaries, taken as a whole.
(aa) Substantially all of the outstanding shares of Common Stock, and
all securities convertible into or exercisable or exchangeable for Common
Stock, are subject to valid, binding and enforceable agreements
(collectively, the "LOCK-UP AGREEMENTS") that restrict the holders thereof
from selling, making any short sale or, granting any option for the
purchase of, or otherwise transferring or disposing of, any of such shares
of Common Stock, or any such securities convertible into or exercisable or
exchangeable for Common Stock, for a period of 180 days after the date of
the Prospectus without the prior written consent of the Company or Morgan
Stanley. The Company represents and warrants to Morgan Stanley that it
will not consent to any such sale, short sale, granting of option or other
transfer or disposition without the prior written consent of Morgan
Stanley.
(bb) As of the date the Registration Statement became effective, the
Common Stock was authorized for listing on the Nasdaq National Market upon
official notice of issuance.
(cc) The Company represents and warrants to Morgan Stanley that (i)
the Registration Statement, the Prospectus and any preliminary prospectus
comply, and any further amendments or supplements thereto will comply, with
any applicable laws or regulations of foreign jurisdictions in which the
Prospectus or any preliminary prospectus, as amended or supplemented, if
applicable, are distributed in connection with the Directed Share Program,
and that, (ii) no authorization, approval, consent, license, order,
registration or qualification of or with any government, governmental
instrumentality or court, other than such as have been obtained, is
necessary under the securities laws and regulations of foreign
jurisdictions in which the Directed Shares are offered outside the United
States.
(dd) The Company has not offered, or caused the Underwriters to offer,
Shares to any person pursuant to the Directed Share Program with the
specific intent to unlawfully influence (i) a customer, supplier or other
business partner of the Company to alter such person's or entity's level
or type of business with the Company, (ii) a trade journalist or
publication to write or publish favorable information about the Company or
8
<PAGE>
its applications or services, or (iii) a potential customer's, supplier's,
business partner's or other individual's or entity's decision to enter into
a business or commercial relationship of any type with the Company.
2. AGREEMENTS TO SELL AND PURCHASE. The Company hereby agrees to
sell to the several Underwriters, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from the
Company the respective numbers of Firm Shares set forth in Schedules I and II
hereto opposite its names at U.S.$_____ a share ("PURCHASE PRICE").
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to sell
to the U.S. Underwriters the Additional Shares, and the U.S. Underwriters shall
have a one-time right to purchase, severally and not jointly, up to ______
Additional Shares at the Purchase Price. If the U.S. Representatives, on
behalf of the U.S. Underwriters, elect to exercise such option, the U.S.
Representatives shall so notify the Company in writing not later than 30 days
after the date of this Agreement, which notice shall specify the number of
Additional Shares to be purchased by the U.S. Underwriters and the date on which
such shares are to be purchased. Such date may be the same as the Closing Date
(as defined below) but not earlier than the Closing Date nor later than ten
business days after the date of such notice. Additional Shares may be purchased
as provided in Section 4 hereof solely for the purpose of covering
over-allotments made in connection with the offering of the Firm Shares. If any
Additional Shares are to be purchased, each U.S. Underwriter agrees, severally
and not jointly, to purchase the number of Additional Shares (subject to such
adjustments to eliminate fractional shares as the U.S. Representatives may
determine) that bears the same proportion to the total number of Additional
Shares to be purchased as the number of U.S. Firm Shares set forth in Schedule I
hereto opposite the name of such U.S. Underwriter bears to the total number of
U.S. Firm Shares.
The Company hereby agrees that, without the prior written consent of
Morgan Stanley on behalf of the Underwriters, it will not, during the period
ending 180 days after the date of the 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 foregoing sentence shall not apply to (A) the Shares to
be sold hereunder or (B) the issuance by the Company of shares of Common Stock
upon the exercise of an option or warrant or the conversion of a security
outstanding on the date hereof of which the Underwriters have been advised in
writing or described as outstanding or reserved for issuance under the option
plans described in the Prospectus, or any other issuances of Common Stock or
options to acquire Common Stock hereafter under the option or equity incentive
plans described in the Prospectus, provided that with respect to securities
issued pursuant to the
9
<PAGE>
exceptions set forth in clause (B), the holders of such securities shall
enter into Lock-Up Agreements on the terms specified in Section 1(aa).
3. TERMS OF PUBLIC OFFERING. The Company is advised by you that the
Underwriters propose to make a public offering of their respective portions of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Company is further
advised by you that the Shares are to be offered to the public initially at
U.S.$_____ a share (the "PUBLIC OFFERING PRICE") and to certain dealers selected
by you at a price that represents a concession not in excess of U.S.$____ a
share under the Public Offering Price, and that any Underwriter may allow, and
such dealers may reallow, a concession, not in excess of U.S.$____ a share, to
any Underwriter or to certain other dealers.
4. PAYMENT AND DELIVERY. Payment for the Firm Shares shall be made
to the Company in Federal or other funds immediately available in New York City
against delivery of such Firm Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on ______ __, 1999, or at such
other time on the same or such other date, not later than ______ __, 1999, as
shall be designated in writing by you. The time and date of such payment are
hereinafter referred to as the "CLOSING DATE."
Payment for any Additional Shares shall be made to the Company in
Federal or other funds immediately available in New York City against delivery
of such Additional Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on the date specified in the
notice described in Section 2 or at such other time on the same or on such other
date, in any event not later than _______, 1999, as shall be designated in
writing by the U.S. Representatives. The time and date of such payment are
hereinafter referred to as the "OPTION CLOSING DATE."
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
5. CONDITIONS TO THE UNDERWRITERS' OBLIGATIONS. The obligations of
the Company to sell the Shares to the Underwriters and the several obligations
of the Underwriters to purchase and pay for the Shares on the Closing Date are
subject to the condition that the Registration Statement shall have become
effective not later than [_______] (New York City time) on the date hereof.
The several obligations of the Underwriters are subject to the
following further conditions:
10
<PAGE>
(a) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor shall any
notice have been given of any intended or potential downgrading or of
any review for a possible change that does not indicate the direction
of the possible change, in the rating accorded any of the Company's
securities by any "nationally recognized statistical rating
organization," as such term is defined for purposes of Rule 436(g)(2)
under the Securities Act; and
(ii) there shall not have occurred any change, or any development
involving a prospective change, in the condition, financial or
otherwise, or in the earnings, business or operations of the Company
and its Subsidiaries, taken as a whole, from that set forth in the
Prospectus (exclusive of any amendments or supplements thereto
subsequent to the date of this Agreement) that, in your judgment, is
material and adverse and that makes it, in your judgment,
impracticable to market the Shares on the terms and in the manner
contemplated in the Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer of
the Company, to the effect set forth in Section 5(a) above and to the
effect that the representations and warranties of the Company contained in
this Agreement are true and correct as of the Closing Date and that the
Company has complied with all of the agreements and satisfied all of the
conditions on its part to be performed or satisfied hereunder on or before
the Closing Date.
The officer signing and delivering such certificate may rely upon the
best of his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date an
opinion of Wilson Sonsini Goodrich & Rosati, counsel for the Company, dated
the Closing Date, to the effect that:
(i) the Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and
authority to own its property and to conduct its business as
described in the Prospectus and is duly qualified to transact
business and is in good standing in each jurisdiction in which the
conduct of its business or its ownership or leasing of property
requires such qualification, except to the extent that the failure
to be so qualified or be in good standing would not have a material
adverse effect on the Company and its Subsidiaries, taken as a
whole;
11
<PAGE>
(ii) each Subsidiary of the Company has been duly
incorporated, is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has the
corporate power and authority to own its property and to conduct
its business as described in the Prospectus and is duly qualified
to transact business and is in good standing in each jurisdiction
in which the conduct of its business or its ownership or leasing of
property requires such qualification, except to the extent that the
failure to be so qualified or be in good standing would not have a
material adverse effect on the Company and its Subsidiaries, taken
as a whole;
(iii) the authorized capital stock of the Company conforms as
to legal matters to the description thereof contained in the
Prospectus;
(iv) the shares of Common Stock outstanding prior to the
issuance of the Shares have been duly authorized and are validly
issued, fully paid and non-assessable;
(v) all of the issued shares of capital stock of each
subsidiary of the Company have been duly and validly authorized and
issued, are fully paid and non-assessable and are owned directly by
the Company, free and clear of all liens, encumbrances, equities or
claims;
(vi) the Shares have been duly authorized and, when issued
and delivered in accordance with the terms of this Agreement, will
be validly issued, fully paid and non-assessable, and the issuance
of such Shares will not be subject to any preemptive right or
rights of first refusal or similar rights.
(vii) this Agreement has been duly authorized, executed and
delivered by the Company;
(viii) the execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement
will not contravene any provision of applicable law or the
certificate of incorporation or by-laws of the Company or, to such
counsel's knowledge, any agreement or other instrument binding upon
the Company or any of its Subsidiaries that is material to the
Company and its Subsidiaries, taken as a whole, or, to such
counsel's knowledge, any judgment, order or decree of any
governmental body, agency or court having jurisdiction over the
Company or any Subsidiary, and no consent, approval, authorization
or order of, or qualification with, any governmental body or agency
is required for the performance by the Company of its obligations
under this Agreement, except such as may be required by the
securities or Blue Sky laws of the various states in connection
with the offer and sale of the Shares by the U.S. Underwriters;
12
<PAGE>
(ix) the statements (A) in the Prospectus under the captions
"Risk Factors--We Rely on Strategic Relationships," "Risk
Factors--Future Sales of Shares Could Affect Our Stock Price,"
"Business--Strategic Relationships, "Certain Transactions,"
"Description of Capital Stock," "Shares Eligible for Future Sale"
and, insofar as such statements relate to the terms of this
Agreement, "Underwriters" and (B) in the Registration Statement in
Items 14 and 15, in each case insofar as such statements constitute
summaries of the legal matters, documents or proceedings referred
to therein, fairly present the information called for with respect
to such legal matters, documents and proceedings and fairly
summarize the matters referred to therein;
(x) after due inquiry, such counsel does not know of any
legal or governmental proceedings pending or threatened to which
the Company or any of its Subsidiaries is a party or to which any
of the properties of the Company or any of its Subsidiaries is
subject that are required to be described in the Registration
Statement or the Prospectus and are not so described or of any
statutes, regulations, contracts or other documents that are
required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement
that are not described or filed as required;
(xi) the Company is not and, after giving effect to the
offering and sale of the Shares and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as such term is defined in the Investment Company Act of
1940, as amended;
(xii) to such counsel's knowledge: (1) the Registration
Statement has become effective under the Securities Act; (2) no
stop order proceedings with respect to the Registration Statement
have been instituted or are pending or threatened under the
Securities Act and nothing has come to such counsel's attention to
lead it to believe that such proceedings are contemplated; and (3)
any required filing of the Prospectus and any supplement thereto
pursuant to Rule 424(b) under the Securities Act has been made in
the manner and within the time period required by such Rule 424(b);
(xiii) except as described in the Prospectus, no shares of
Common Stock are required to be registered under the Registration
Statement and no person or entity has any right to cause any shares
of Common Stock to be registered under the Registration Statement,
pursuant to the Company's certificate of incorporation or bylaws
or, to such counsel's knowledge, any agreement or other right,
which rights have not been validly waived;
(xiv) based on a letter from the Nasdaq Stock Market, the
shares to be sold under this Agreement to the Underwriters are duly
authorized for quotation on the Nasdaq National Market; and
13
<PAGE>
(xv) such counsel (A) is of the opinion that the Registration
Statement and Prospectus (except for financial statements and schedules
and other financial data included therein as to which such counsel need
not express any opinion) comply as to form in all material respects
with the Securities Act and the applicable rules and regulations of the
Commission hereunder, (B) has no reason to believe that (except for
financial statements and schedules and other financial data as to which
such counsel need not express any belief) the Registration Statement
and the prospectus included therein at the time the Registration
Statement became effective contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading and (C) has
no reason to believe that (except for financial statements and
schedules and other financial data as to which such counsel need not
express any belief) the Prospectus, as of its date or the Closing Date,
contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
(d) The Underwriters shall have received on the Closing Date an
opinion of Fenwick & West LLP, counsel for the Underwriters, dated the
Closing Date, covering the matters referred to in Sections 5(c)(vi),
5(c)(vii), 5(c)(ix) (but only as to the statements in the Prospectus under
"Description of Capital Stock" and "Underwriters") and 5(c)(xv) above.
With respect to Section 5(c)(xv) above, Wilson Sonsini Goodrich &
Rosati, Professional Corporation and Fenwick & West LLP may state that
their opinion and belief are based upon their participation in the
preparation of the Registration Statement and Prospectus and any amendments
or supplements thereto and review and discussion of the contents thereof,
but are without independent check or verification, except as specified.
The opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation described in Section 5(c) above shall be rendered to the
Underwriters at the request of the Company and shall so state therein.
(e) The Underwriters shall have received, on each of the date hereof
and the Closing Date, a letter dated the date hereof or the Closing Date,
as the case may be, in form and substance satisfactory to the Underwriters,
from Ernst & Young LLP and with respect to the Financial Statements and
certain financial information with respect to Actamed, Deloitte & Touche
LLP, independent public accountants, containing statements and information
of the type ordinarily included in accountants' "comfort letters" to
underwriters with respect to the financial statements and certain financial
information contained in the Registration Statement and the Prospectus;
PROVIDED that the letter delivered on the Closing Date shall use a "cut-off
date" not earlier than the date hereof.
14
<PAGE>
(f) The "lock-up" agreements, each substantially in the form of
Exhibit A hereto, between you and certain stockholders, officers and
directors of the Company relating to sales and certain other dispositions
of shares of Common Stock or certain other securities, delivered to you on
or before the date hereof, shall be in full force and effect on the Closing
Date.
(g) The Shares shall have received approval for listing, upon
official notice of issuance, on the Nasdaq National Market.
All the agreements, opinions, certificates and letters mentioned
above or elsewhere in this Agreement shall be deemed in compliance with the
provisions hereof only if Fenwick & West LLP, counsel for the Underwriters,
shall be reasonably satisfied that they comply in form and scope.
The several obligations of the U.S. Underwriters to purchase
Additional Shares hereunder are subject to the delivery to the U.S.
Representatives on the Option Closing Date of such documents as they may
reasonably request with respect to the good standing of the Company, the due
authorization and issuance of the Additional Shares and other matters related
to the issuance of the Additional Shares.
6. COVENANTS OF THE COMPANY. In further consideration of the
agreements of the Underwriters herein contained, the Company covenants with
each Underwriter as follows:
(a) To furnish to you, without charge, nine (9) signed copies of the
Registration Statement (including exhibits thereto) and for delivery to
each other Underwriter a conformed copy of the Registration Statement
(without exhibits thereto) and to furnish to you in New York City, without
charge, prior to 10:00 a.m. New York City time on the business day next
succeeding the date of this Agreement and during the period mentioned in
Section 6(c) below, as many copies of the Prospectus and any supplements
and amendments thereto or to the Registration Statement as you may
reasonably request.
(b) Before amending or supplementing the Registration Statement or
the Prospectus, to furnish to you a copy of each such proposed amendment or
supplement and not to file any such proposed amendment or supplement to
which you reasonably object, and to file with the Commission within the
applicable period specified in Rule 424(b) under the Securities Act any
prospectus required to be filed pursuant to such Rule.
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of counsel for the Underwriters
the Prospectus is required by law to be delivered in connection with sales
by an Underwriter or dealer, any event shall occur or condition exist as a
result of which it is necessary to amend or supplement the Prospectus in
order to make the statements therein, in the light of the circumstances
when the Prospectus is delivered to a purchaser, not misleading, or if, in
the opinion of counsel
15
<PAGE>
for the Underwriters, it is necessary to amend or supplement the
Prospectus to comply with applicable law, forthwith to prepare, file
with the Commission and furnish, at its own expense, to the Underwriters
and to the dealers (whose names and addresses you will furnish to the
Company) to which Shares may have been sold by you on behalf of the
Underwriters and to any other dealers upon request, as many copies as
you may from, time to time reasonably request of either amendments or
supplements to the Prospectus so that the statements in the Prospectus
as so amended or supplemented will not, in the light of the circumstances
when the Prospectus is delivered to a purchaser, be misleading or so that
the Prospectus, as amended or supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as you shall reasonably
request.
(e) To make generally available to the Company's security holders and
to you as soon as practicable an earning statement covering the
twelve-month period ending [March 31, 2000] that satisfies the provisions
of Section 11(a) of the Securities Act and the rules and regulations of the
Commission thereunder.
(f) During a period of three years from the effective date of the
Registration Statement, the Company will furnish to you copies of (i) all
reports to its stockholders and (ii) all reports, financial statements and
proxy or information statements filed by the Company with the Commission or
any national securities exchange.
(g) The Company will apply the proceeds from the sale of the Shares
as set forth under "Use of Proceeds" in the Prospectus.
(h) The Company will use its best efforts to obtain and maintain in
effect the quotation of the Shares on the Nasdaq National Market and to
maintain such inclusion for a period of three years after the date hereof
or until such earlier date as the Shares shall be listed for regular
trading privileges on another national securities exchange approved by you.
(i) The Company will comply with all registration, filing and
reporting requirements of the Securities Exchange Act of 1934, as amended
(the "EXCHANGE ACT"), which may from time to time be applicable to the
Company.
(j) The Company will comply with all provisions of all undertakings
contained in the Registration Statement.
(k) Prior to the Closing Date, the Company will not, directly or
indirectly, issue any press release or other communication and will not
hold any press conference with respect to the Company, or its financial
condition, results of operations, business, properties, assets, or
prospects or this offering, without your prior written consent.
16
<PAGE>
(l) Whether or not the transactions contemplated in this Agreement
are consummated or this Agreement is terminated, to pay or cause to be paid
all expenses incident to the performance of its obligations under this
Agreement, including but not limited to: (i) the fees, disbursements and
expenses of the Company's counsel and the Company's accountants in
connection with the registration and delivery of the Shares under the
Securities Act and all other fees or expenses in connection with the
preparation and filing of the Registration Statement, any preliminary
prospectus, the Prospectus and amendments and supplements to any of the
foregoing, including all printing costs associated therewith, and the
mailing and delivering of copies thereof to the Underwriters and dealers,
in the quantities hereinabove specified, (ii) all costs and expenses
related to the transfer and delivery of the Shares to the Underwriters,
including any transfer or other taxes payable thereon, (iii) the cost of
printing or producing any Blue Sky or Legal Investment memorandum in
connection with the offer and sale of the Shares under state securities
laws and all expenses in connection with the qualification of the Shares
for offer and sale under state securities laws as provided in Section 6(d)
hereof, including filing fees and the reasonable fees and disbursements of
counsel for the Underwriters in connection with such qualification and in
connection with the Blue Sky or Legal Investment memorandum, (iv) all
filing fees and the reasonable fees and disbursements of counsel to the
Underwriters incurred in connection with the review and qualification of
the offering of the Shares by the National Association of Securities
Dealers, Inc., not to exceed $15,000, (v) all fees and expenses in
connection with the preparation and filing of the registration statement on
Form 8-A relating to the Common Stock and all costs and expenses incident
to listing the Shares on the Nasdaq National Market, (vi) the cost of
printing certificates representing the Shares, (vii) the costs and charges
of any transfer agent, registrar or depositary, (viii) the costs and
expenses of the Company relating to investor presentations on any "road
show" undertaken in connection with the marketing of the offering of the
Shares, including, without limitation, expenses associated with the
production of road show slides and graphics, fees and expenses of any
consultants engaged in connection with the road show presentations with the
prior approval of the Company, travel and lodging expenses of the
representatives and officers of the Company and any such consultants, and
the pro rata cost of the seats used by Representative's (as compared to
seats used by the Representatives and officers of the Company and any such
consultants) cost of any aircraft chartered or limousines hired in
connection with the road show, (ix) all expenses in connection with any
offer and sale of the Shares outside of the United States, including filing
fees and the reasonable fees and disbursements of counsel for the
Underwriters in connection with offers and sales outside of the United
States, and (x) all fees and disbursements of counsel incurred by the
Underwriters in connection with the Directed Share Program and stamp
duties, similar taxes or duties or other taxes, if any, incurred by the
Underwriters in connection with the Directed Share Program. It is
understood, however, that except as provided in this Section, Section 7
entitled "Indemnity and Contribution", and the last paragraph of Section 9
below, the Underwriters will pay all of their costs and expenses, including
fees and disbursements of
17
<PAGE>
their counsel, stock transfer taxes payable on resale of any of the Shares
by them and any advertising expenses connected with any offers they may
make.
(m) That in connection with the Directed Share Program, the Company
will ensure that the Directed Shares will be restricted to the extent
required by the NASD or the NASD rules from sale, transfer, assignment,
pledge or hypothecation for a period of three months following the date of
the effectiveness of the Registration Statement. Morgan Stanley will
notify the Company as to which Participants are required to be so
restricted. The Company will direct the transfer agent to place stop
transfer restrictions upon such securities for such period of time.
(n) That the Company will comply with all applicable securities and
other applicable laws, rules and regulations in each foreign jurisdiction
in which the Directed Shares are offered in connection with the Directed
Share Program.
7. INDEMNITY AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within
the meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act, from and against any and all losses, claims, damages and
liabilities (including, without limitation, any legal or other expenses
reasonably incurred in connection with defending or investigating any such
action or claim) caused by any untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement or any amendment
thereof, any preliminary prospectus or the Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or
supplements thereto), or caused by any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, except insofar as such losses,
claims, damages or liabilities are caused by any such untrue statement or
omission or alleged untrue statement or omission based upon information
relating to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein; provided, however that
the foregoing indemnity with respect to any preliminary prospectus shall
not inure to the benefit of any Underwriter from whom the person asserting
any such losses, claims, damages or liabilities purchased Shares, or any
person controlling such Underwriter, if a copy of the Prospectus (as then
amended or supplemented if the Company shall have furnished any amendments
or supplements thereto) was not sent or given by or on behalf of such
Underwriter to such person, if required by law so to have been delivered,
at or prior to the written confirmation of the sale of the Shares to such
person, and if the Prospectus (as so amended or supplemented) would have
cured the defect giving rise to such losses, claims, damages or liabilities
unless such failure is the result of noncompliance by the Company, with
Sections 6(a) or 6(c) hereof.
18
<PAGE>
(b) The Company agrees to indemnify and hold harmless Morgan
Stanley and each person, if any, who controls Morgan Stanley within the
meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act ("MORGAN STANLEY ENTITIES"), from and against any and all
losses, claims, damages and liabilities (including, without limitation, any
legal or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) (i) caused by any untrue statement
or alleged untrue statement of a material fact contained in the prospectus
wrapper material prepared by or with the consent of the Company for
distribution in foreign jurisdictions in connection with the Directed Share
Program attached to the Prospectus or any preliminary prospectus, or caused
by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statement therein,
when considered in conjunction with the Prospectus or any applicable
preliminary prospectus, not misleading; (ii) caused by the failure of any
Participant to pay for and accept delivery of the shares which, immediately
following the effectiveness of the Registration Statement, were subject to
a properly confirmed agreement to purchase but only to the extent that
Morgan Stanley is unable to sell these; or (iii) related to, arising out
of, or in connection with the Directed Share Program, provided that, the
Company shall not be responsible under this subparagraph (iii) for any
losses, claim, damages or liabilities (or expenses relating thereto) that
are finally judicially determined to have resulted from the bad faith or
gross negligence of Morgan Stanley Entities.
(c) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who
sign the Registration Statement and each person, if any, who controls the
Company within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act to the same extent as the foregoing
indemnity from the Company to such Underwriter, but only with reference to
information relating to such Underwriter furnished to the Company in
writing by such Underwriter through you expressly for use in the
Registration Statement, any preliminary prospectus, the Prospectus or any
amendments or supplements thereto.
(d) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to Section 7(a), 7(b) or 7(c), such person
(the "INDEMNIFIED PARTY") shall promptly notify the person against whom
such indemnity may be sought (the "INDEMNIFYING PARTY") in writing and the
indemnifying party, upon request of the indemnified party, shall retain
counsel reasonably satisfactory to the indemnified party to represent the
indemnified party and any others the indemnifying party may designate in
such proceeding and shall pay the reasonable fees and disbursements of such
counsel related to such proceeding. In any such proceeding, any
indemnified party shall have the right to retain its own counsel, but the
fees and expenses of such counsel shall be at the expense of such
indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii)
the named parties to any such proceeding (including any impleaded parties)
include both the indemnifying party and the indemnified party and
representation of both parties by the same counsel
19
<PAGE>
would be inappropriate due to actual or potential differing interests
between them. It is understood that the indemnifying party shall not,
in respect of the legal expenses of any indemnified party in connection
with any proceeding or related proceedings in the same jurisdiction, be
liable for the fees and expenses of more than one separate firm (in
addition to any local counsel) for all such indemnified parties and that
all such fees and expenses shall be reimbursed as they are incurred. Such
firm shall be designated in writing by Morgan Stanley, in the case of
parties indemnified pursuant to Section 7(a) or 7(b), and by the Company,
in the case of parties indemnified pursuant to Section 7(c). The
indemnifying party shall not be liable for any settlement of any proceeding
effected without its written consent, but if settled with such consent or
if there be a final judgment for the plaintiff, the indemnifying party
agrees to indemnify the indemnified party from and against any loss or
liability by reason of such settlement or judgment. Notwithstanding the
foregoing sentence, if at any time an indemnified party shall have
requested an indemnifying party to reimburse th indemnified party for
fees and expenses of counsel as contemplated by the second and third
sentences of this paragraph, the indemnifying party agrees that it shall
be liable for any settlement of any proceeding effected without its
written consent if (i) such settlement is entered into more than 30 days
after receipt by such indemnifying party of the aforesaid request and
(ii) such indemnifying party shall not have reimbursed the indemnified
party in accordance with such request prior to the date of such
settlement. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending
or threatened proceeding in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder
by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on
claims that are the subject matter of such proceeding. Notwithstanding
anything contained herein to the contrary, if indemnity may be sought
pursuant to Section 7(b) hereof in respect of such action or proceeding,
then in addition to such separate firm for the indemnified parties, the
indemnifying party shall be liable for the reasonable fees and expenses
of not more than one separate firm (in addition to any local counsel)
for Morgan Stanley for the defense of any losses, claims, damages and
liabilities arising out of the Directed Share Program, and all persons,
if any, who control Morgan Stanley within the meaning of either Section
15 of the Act or Section 20 of the Exchange Act.
(e) To the extent the indemnification provided for in Section
7(a), 7(b) or 7(c) is unavailable to an indemnified party or insufficient
in respect of any losses, claims, damages or liabilities referred to
therein, then each indemnifying party under such paragraph, in lieu of
indemnifying such indemnified party thereunder, shall contribute to the
amount paid or payable by such indemnified party as a result of such
losses, claims, damages or liabilities (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the
one hand and the Underwriters on the other hand from the offering of the
Shares or (ii) if the allocation provided by clause 7(e)(i) above is not
permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause 7(e)(i) above
but also the relative fault
20
<PAGE>
of the Company on the one hand and of the Underwriters on the other
hand in connection with the statements or omissions that resulted in
such losses, claims, damages or liabilities, as well as any other
relevant equitable considerations. The relative benefits received by
the Company on the one hand and the Underwriters on the other hand in
connection with the offering of the Shares shall be deemed to be in the
same respective proportions as the net proceeds from the offering of the
Shares (before deducting expenses) received by the Company and the total
underwriting discounts and commissions received by the Underwriters, in
each case as set forth in the table on the cover of the Prospectus, bear
to the aggregate Public Offering Price of the Shares. The relative
fault of the Company on the one hand and the Underwriters on the other
hand shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to
information supplied by the Company or by the Underwriters and the
parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The
Underwriters' respective obligations to contribute pursuant to this
Section 7 are several in proportion to the respective number of Shares
they have purchased hereunder, and not joint.
(f) The Company and the Underwriters agree that it would not be
just or equitable if contribution pursuant to this Section 7 were
determined by PRO RATA allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation that does
not take account of the equitable considerations referred to in Section
7(e). The amount paid or payable by an indemnified party as a result of
the losses, claims, damages and liabilities referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations
set forth above, any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 7, no
Underwriter shall be required to contribute any amount in excess of the
amount by which the total price at which the Shares underwritten by it and
distributed to the public were offered to the public exceeds the amount of
any damages that such Underwriter has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The remedies provided for in this Section 7 are not
exclusive and shall not limit any rights or remedies which may otherwise be
available to any indemnified party at law or in equity.
(g) The indemnity and contribution provisions contained in this
Section 7 and the representations, warranties and other statements of the
Company contained in this Agreement shall remain operative and in full
force and effect regardless of (i) any termination of this Agreement, (ii)
any investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter or by or on behalf of the
21
<PAGE>
Company, its officers or directors or any person controlling the Company
and (iii) acceptance of and payment for any of the Shares.
8. TERMINATION. This Agreement shall be subject to termination
by notice given by you to the Company, if (a) after the execution and
delivery of this Agreement and prior to the Closing Date (i) trading
generally shall have been suspended or materially limited on or by, as the
case may be, any of the New York Stock Exchange, the American Stock Exchange,
the National Association of Securities Dealers, Inc., the Chicago Board of
Options Exchange, the Chicago Mercantile Exchange or the Chicago Board of
Trade, (ii) trading of any securities of the Company shall have been
suspended on any exchange or in any over-the-counter market, (iii) a general
moratorium on commercial banking activities in New York shall have been
declared by either Federal or New York State authorities or (iv) there shall
have occurred any outbreak or escalation of hostilities or any change in
financial markets or any calamity or crisis that, in your judgment, is
material and adverse and (b) in the case of any of the events specified in
clauses 8(a)(i) through 8(a)(iv), such event, singly or together with any
other such event, makes it, in your judgment, impracticable to market the
Shares on the terms and in the manner contemplated in the Prospectus.
9. EFFECTIVENESS; DEFAULTING UNDERWRITERS. This Agreement shall
become effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase
Shares that it has or they have agreed to purchase hereunder on such date,
and the aggregate number of Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase is not more than
one-tenth of the aggregate number of the Shares to be purchased on such date,
the other Underwriters shall be obligated severally in the proportions that
the number of Firm Shares set forth opposite their respective names in
Schedule I or Schedule II bears to the aggregate number of Firm Shares set
forth opposite the names of all such non-defaulting Underwriters, or in such
other proportions as you may specify, to purchase the Shares which such
defaulting Underwriter or Underwriters agreed but failed or refused to
purchase on such date; PROVIDED that in no event shall the number of Shares
that any Underwriter has agreed to purchase pursuant to this Agreement be
increased pursuant to this Section 9 by an amount in excess of one-ninth of
such number of Shares without the written consent of such Underwriter. If,
on the Closing Date, any Underwriter or Underwriters shall fail or refuse to
purchase Firm Shares and the aggregate number of Firm Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of
Firm Shares to be purchased, and arrangements satisfactory to you and the
Company for the purchase of such Firm Shares are not made within 36 hours
after such default, this Agreement shall terminate without liability on the
part of any non-defaulting Underwriter or the Company. In any such case
either you or the Company shall have the right to postpone the Closing Date,
but in no event for longer than seven days, in order that the required
changes, if any, in the Registration Statement and in the Prospectus or in
any other documents or arrangements may be effected. If, on the Option
Closing Date, any Underwriter or Underwriters shall fail or refuse to
purchase Additional Shares and the aggregate number of Additional Shares with
respect to which
22
<PAGE>
such default occurs is more than one-tenth of the aggregate number of
Additional Shares to be purchased, the non-defaulting Underwriters shall have
the option to (i) terminate their obligation hereunder to purchase Additional
Shares or (ii) purchase not less than the number of Additional Shares that
such non-defaulting Underwriters would have been obligated to purchase in the
absence of such default. Any action taken under this paragraph shall not
relieve any defaulting Underwriter from liability in respect of any default
of such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any
of them, because of any failure or refusal on the part of the Company to
comply with the terms or to fulfill any of the conditions of this Agreement,
or if for any reason the Company shall be unable to perform its obligations
under this Agreement, the Company will reimburse the Underwriters or such
Underwriters as have so terminated this Agreement with respect to themselves,
severally, for all out-of-pocket expenses (including the fees and
disbursements of their counsel) reasonably incurred by such Underwriters in
connection with this Agreement or the offering contemplated hereunder.
10. COUNTERPARTS. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument.
11. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York.
23
<PAGE>
12. HEADINGS. The headings of the sections of this Agreement have
been inserted for convenience of reference only and shall not be deemed a
part of this Agreement.
Very truly yours,
HEALTHEON CORPORATION
By:
-------------------------------------
Name:
Title:
Accepted as of the date hereof
MORGAN STANLEY & CO. INCORPORATED
GOLDMAN, SACHS & CO.
HAMBRECHT & QUIST LLC
VOLPE BROWN WHELAN & COMPANY, LLC
Acting severally on behalf of themselves
and the several U.S. Underwriters
named in Schedule I hereto.
By: Morgan Stanley & Co. Incorporated
By:
-------------------------------------
Name:
Title:
MORGAN STANLEY & CO. INTERNATIONAL LIMITED
GOLDMAN SACHS INTERNATIONAL
HAMBRECHT & QUIST LLC
VOLPE BROWN WHELAN & COMPANY, LLC
Acting severally on behalf of themselves and
the several International Underwriters
named in Schedule II hereto.
By: Morgan Stanley & Co. International Limited
By:
-------------------------------------
Name:
Title:
24
<PAGE>
SCHEDULE I
U.S. UNDERWRITERS
<TABLE>
<CAPTION>
Number of Firm
Underwriter Shares To Be Purchased
----------- ----------------------
<S> <C>
Morgan Stanley & Co. Incorporated
Goldman, Sachs & Co.
Hambrecht & Quist LLC
Volpe Brown Whelan & Company, LLC
--------------
Total U.S. Firm Shares:
--------------
--------------
</TABLE>
<PAGE>
SCHEDULE II
INTERNATIONAL UNDERWRITERS
<TABLE>
<CAPTION>
Number of Firm
Underwriter Shares To Be Purchased
----------- ----------------------
<S> <C>
Morgan Stanley & Co. International Limited
Goldman Sachs International
Hambrecht & Quist LLC
Volpe Brown Whelan & Company, LLC
--------------
Total International Firm Shares:
--------------
--------------
</TABLE>
<PAGE>
EXHIBIT 10.31
CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement (this "ASSET PURCHASE AGREEMENT" or
"AGREEMENT"), dated December 31, 1998, is an agreement by and between
SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC., a corporation organized and
existing under the laws of Delaware ("SELLER") and Healtheon Corporation, a
corporation organized and existing under the laws of Delaware ("BUYER").
Capitalized terms used in this Asset Purchase Agreement and not otherwise
defined herein are defined in EXHIBIT A hereto.
PREAMBLE
Buyer is in the business of providing and managing certain information
services and desires to provide services to Seller relating to reporting of
results of clinical laboratory tests to Providers. Seller provides laboratory
testing services to certain Providers who receive clinical laboratory test
result reports via teleprinters and related assets owned by Seller.
Buyer desires to purchase and Seller desires to sell teleprinters and
related assets as more fully set forth herein. Concurrently with the execution
and delivery of this Agreement, Seller and Buyer are entering into a Services
Agreement whereby Buyer agrees, among other things, to facilitate the provision
of Teleprinter Services to Providers and Seller agrees to pay certain
compensation to Buyer in connection therewith. This Agreement states the
parties' agreements relating to the purchase and sale of the Purchased Assets
and certain transition matters.
AGREEMENT
NOW THEREFORE, in consideration of the recitals and of the respective
covenants, representations, warranties and agreements herein contained, and
intending to be legally bound hereby, the parties hereto hereby agree as
follows:
ARTICLE I
PURCHASE AND SALE
SECTION 1.1. AGREEMENT TO SELL. At the Closing, Seller hereby
agrees to sell, convey, assign, transfer and deliver to Buyer, upon and subject
to the terms and conditions of this Agreement, all right, title and interest of
Seller in and to the following assets, free and clear of all Liens:
1.1.1. All of the teleprinters owned by Seller and used for
Teleprinter Services or intended by Seller to be used for Teleprinter Services
located at Provider Sites, or in the case of inventory, spare or replacement
teleprinters, at Provider Sites, Seller Labs or Seller's suppliers, or with
Seller's sales and distribution representatives;
<PAGE>
1.1.2. The printer stands and incidental supplies owned by Seller
and used or intended by Seller for use in conjunction with the teleprinters
described in Section 1.1.1; and
1.1.3. To the extent assignable and assumed by Buyer, the contracts
between Seller and Key Communications, Inc. relating to the provision of
products or services to Providers in connection with Seller's provision of
Teleprinter Services to Provider Sites.
SECTION 1.2. INVENTORY. Seller shall count and identify by way
of performing a physical inventory as of the Closing Date, any Purchased
Assets not located at a Provider Site, such inventory to be completed as soon
as practicable but in all events [*] following the Closing. The portion of
the Purchased Assets identified pursuant to the physical inventory shall be
listed on a schedule which shall be delivered to Buyer within [*] after
completion of the physical inventory.
SECTION 1.3. AGREEMENT TO PURCHASE. Buyer hereby agrees to
purchase the Purchased Assets from Seller, upon and subject to the terms and
conditions of this Agreement and in reliance on the representations,
warranties and covenants of Seller contained herein, for (i) the Purchase
Price and (ii) the execution and delivery of the assumption agreement
referenced in Section 5.2.4.
SECTION 1.4. PURCHASE PRICE. The purchase price for the Purchased
Assets shall be thirteen million dollars ($13,000,000), to be paid by (i) a wire
transfer in the amount of two million dollars ($2,000,000) in United States
federal funds to such account as Seller shall designate prior to the Closing,
and (ii) the issuance to Seller of the Consideration Shares.
SECTION 1.5. ASSUMPTION OF CONTRACTS. To the extent assignable,
Seller will assign to Buyer on the Closing Date, and Buyer will assume, all of
Seller's obligations under the Assumed Contracts.
SECTION 1.6. CALCULATION OF CONSIDERATION SHARES.
1.6.1. If Buyer has not consummated an initial public offering of
its common stock pursuant to the Securities Act as of the Closing, then the
number of Consideration Shares shall be 1,833,333.
1.6.2. If Buyer has consummated an initial public offering of
its common stock pursuant to the Securities Act as of the Closing, then the
number of Consideration Shares shall be the result of eleven million dollars
($11,000,000) divided by [*] for the five (5) business days (or such lesser
number of business days since the consummation of such initial public
offering) immediately preceding the Closing Date.
1.6.3. The number of Consideration Shares shall be equitably
adjusted for any subdivision or combination of shares of Buyer capital stock or
similar change in Buyer's
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
-2-
<PAGE>
capital structure (whether by stock split, stock dividend, merger, share
exchange, consolidation or otherwise) occurring between the date hereof and
the Closing Date.
ARTICLE II
CLOSING
SECTION 2.1. TIME AND PLACE. Unless otherwise mutually agreed to in
writing by both parties, the closing of the transactions (the "Closing")
contemplated hereby shall be held at the offices of Pepper Hamilton LLP, at 3000
Two Logan Square, 18th and Arch Streets, Philadelphia, Pennsylvania, and shall
be held promptly after the satisfaction or waiver of all of the conditions
precedent set forth in Article V hereof, or at such time as the parties may
otherwise mutually agree (the date of Closing, the "Closing Date").
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1. BY SELLER. Seller hereby represents and warrants to
Buyer as follows:
3.1.1. ORGANIZATION AND STANDING. Seller is a corporation duly
organized, validly existing, and in good standing under the laws of Delaware.
Seller has full power and authority to provide Teleprinter Services.
3.1.2. POWER AND AUTHORITY. Seller has the requisite power and
authority to execute, deliver and perform this Agreement and each of the
Collateral Documents by Seller and to consummate the transactions contemplated
hereby and thereby. The execution, delivery and performance of this Agreement
and each of the Collateral Documents to which it is a party, and the
consummation of the transactions contemplated hereby and thereby, have been duly
authorized by all necessary action on the part of Seller and requires no further
authorization or consent by Seller. This Agreement is and each of the
Collateral Documents will be, once fully executed, valid and binding
obligations, enforceable in accordance with their respective terms, except as
such enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally or by general principles of equity.
3.1.3. VALIDITY OF CONTEMPLATED TRANSACTIONS.
(a) NO VIOLATION. The execution, delivery and performance
of this Agreement and each of the Collateral Documents to which it is a party,
and the consummation of the transactions contemplated hereby and thereby, do not
and will not (i) violate, breach or contravene any of the terms, conditions or
provisions of the Certificate of
-3-
<PAGE>
Incorporation or Bylaws of Seller, (ii) violate any Regulation or Court Order
applicable to Seller or to any of the Purchased Assets, or (iii) violate,
breach or contravene any of the terms, conditions or provisions of any
mortgage, indenture, agreement, contract, commitment, lease or other
instrument, document or understanding, oral or written, to which Seller is a
Party.
(b) REQUIRED FILINGS. Seller will not be required to make
any filing or registration with, or obtain any Permit from, any Governmental
Entity in order to execute, deliver and perform its obligations under this
Agreement and each of the Collateral Documents to which it is a party.
3.1.4. REAL PROPERTY. Seller neither owns nor leases (either as
lessee or lessor) any real property related exclusively to its provision of
Teleprinter Services.
3.1.5. PERSONAL PROPERTY.
(a) Except as provided in Section 3.1.5(c), Seller owns and
has good title to the Purchased Assets, free and clear of any and all Liens of
any kind or nature, except for Liens which will have been removed on or prior to
the Closing Date.
(b) Except as provided in Section 3.1.5(c), Seller does not
lease from any Person any of the Purchased Assets, and Seller does not lease any
personal property as lessor in connection with its provision of Teleprinter
Services.
(c) Certain of the Purchased Assets are subject to
equipment financing leases. Seller expects that such leases will have been
paid in full on or prior to the Closing Date or within a [*] period after
Closing as contemplated by Section 5.1.6. Upon repayment of such leases,
Buyer will have good title to such Purchased Assets, free and clear of any
and all Liens of any kind or nature.
3.1.6. COMPLIANCE WITH LAWS. To Seller's knowledge, in its
provision of Teleprinter Services and incidental services or benefits provided
to Providers in connection with the provision of Teleprinter Services, Seller
has complied in all material respects with all applicable Regulations.
3.1.7. LITIGATION. There is no Litigation pending or, to Seller's
knowledge threatened, against or related to Seller, which seeks to prohibit or
delay the execution, delivery or performance of this Agreement or the Collateral
Documents or the consummation of the transactions contemplated hereby or
thereby.
3.1.8. CONTRACTS AND COMMITMENTS; WARRANTIES.
(a) All Assumed Contracts are in full force and effect. No
material Default by Seller, or, to Seller's knowledge, any other party, under
any of the terms or conditions set forth in any Assumed Contract to which it is
bound has occurred or, to Seller's knowledge, been asserted. The execution,
delivery and performance of this Agreement and the
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
-4-
<PAGE>
Collateral Documents, and the consummation of the transactions contemplated
hereby or thereby, will not conflict with, result in a breach of, or
constitute a Default under any such Assumed Contract, affect the
continuation, validity and effectiveness of any of such Contract, or any
terms thereof, or result in the creation of any Lien upon any of the
Purchased Assets, or result in the acceleration of the maturity of any
payment date of any of Seller's obligations, or increase or adversely affect
the obligations of Seller or Buyer (after assumption) thereunder. Seller has
provided true, correct and complete copies of the Assumed Contracts to Buyer
for review.
3.1.9. CONDITION OF ASSETS. The Purchased Assets are in good
operating condition, and are able to provide Teleprinter Services to each of the
Providers, subject to ordinary wear and tear and repairs needed which are
consistent with past practice. Seller has maintained and repaired the Purchased
Assets in the ordinary course of business consistent with past practice. Except
as expressly provided herein or in the Services Agreement, Seller otherwise
makes no representation, warranty, statement or promise to Buyer concerning the
Purchased Assets, the quality, value, physical aspects or condition thereof, any
dimensions or specifications of the Purchased Assets, the feasibility,
desirability, convertibility of the Purchased Assets for or into any particular
use, the current or projected income or expenses of the Purchased Assets or any
other matter with respect to the Purchased Assets. In entering into this
Agreement, Buyer has not relied upon any representation, statement or warranty
of Seller except as expressly set forth in this Agreement or in the Services
Agreement, and that, subject to the foregoing, Buyer acknowledges that it is
purchasing the assets "as is" and "where is". Buyer does hereby waive and
Seller does hereby disclaim all other warranties of any kind or type whatsoever
with respect to the Purchased Assets, whether expressed or implied, including by
way of description but not limitation, those of fitness for a particular purpose
and use.
3.1.10. BROKERS AND FINDERS. No third party is entitled to receive
any commission, fees or similar consideration in connection with the
transactions contemplated by this Agreement based on any arrangement or
agreement made by or on behalf of Seller for which Buyer could become obligated.
3.1.11. INVESTMENT REPRESENTATIONS; LEGEND ON SHARES.
(a) Seller hereby acknowledges that (i) the Consideration
Shares delivered pursuant to this Agreement have not been registered under the
Securities Act, and the resale of such shares is therefore subject to
restrictions imposed by federal and state securities laws including without
limitation that such shares cannot be sold or otherwise disposed of except in a
transaction which is registered under the Securities Act or exempted from
registration; (ii) Buyer has advised Seller, a reasonable time prior to the
execution of this Agreement, that the shares have not been registered under the
Securities Act; and (iii) all certificates representing the shares delivered to
Seller shall be stamped or otherwise imprinted with a legend substantially in
the following form (together with any other legend required by state law), and
that stop transfer orders will be given to Buyer's transfer agent:
-5-
<PAGE>
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 OR ANY STATE SECURITIES ACTS AND MAY
NOT BE TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS THEY HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND ANY
APPLICABLE STATE SECURITIES ACTS OR EXEMPTIONS FROM SUCH
REGISTRATIONS ARE AVAILABLE."
(b) Seller is an accredited investor (as such term is
defined in Rule 506 of Regulation D promulgated by the SEC) and is acquiring the
Consideration Shares for its own account for investment purposes only, and not
with a view to the distribution, transfer, or assignment of the same in whole or
in part. Seller has been represented by counsel and advisers, each of whom has
been previously selected by Seller, as Seller has found necessary to consult
concerning this Agreement and the shares to be issued pursuant to this
Agreement. Seller, either alone or with its representative(s), has such
knowledge and experience in financial or business matters that it is capable of
evaluating the merits and risks of the prospective investment. Seller and its
counsel and other advisers have been provided with such information concerning
Buyer as they have deemed relevant with respect to Seller's investment decision
relating to the shares being delivered to it. Seller has had a reasonable
opportunity to ask questions and receive answers concerning the terms and
conditions of the transactions contemplated by this Agreement, to discuss
Buyer's business, management and financial affairs with the management of Buyer,
and to obtain any additional information which Buyer possesses or can acquire
without unreasonable effort or expense that is necessary to verify the accuracy
of the information furnished. Seller has received satisfactory responses from
management of Buyer to Seller's inquiries.
3.1.12. NUMBER OF PROVIDER SITES. The Purchased Assets include
[*] teleprinters that are being used at Provider Sites.
3.1.13. FULL DISCLOSURE. No representation or warranty by Seller
contained in this Agreement contains any untrue statement of a material fact or
omits a material fact necessary to make the statements made herein true and not
misleading.
SECTION 3.2. BY BUYER. Buyer hereby represents and warrants to
Seller as follows:
3.2.1. ORGANIZATION AND STANDING. Buyer is a corporation duly
organized, validly existing, and in good standing under the laws of Delaware.
Buyer has full power and authority to carry on its business as it is now being
conducted and to own and operate the properties and assets now owned and
operated by it.
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
-6-
<PAGE>
3.2.2. POWER AND AUTHORITY. Buyer has the requisite power and
authority to execute, deliver, and, subject to obtaining the approval of Buyer's
Board of Directors and the waivers required under the Investors' Rights
Agreement (as set forth in Section 5.1.5), perform this Agreement and each of
the Collateral Documents to be executed and delivered hereunder by Buyer and to
consummate the transactions contemplated hereby and thereby. This Agreement is
and each of the Collateral Documents will be, once fully executed, valid and
binding obligations, enforceable in accordance with their respective terms,
except as such enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally or by general principles of equity.
3.2.3. VALIDITY OF CONTEMPLATED TRANSACTIONS.
(a) NO VIOLATION. The execution, delivery, and, subject to
obtaining the approval of Buyer's Board of Directors and the waivers required
under the Investors' Rights Agreement (as set forth in Section 5.1.5),
performance of this Agreement and each of the Collateral Documents to which it
is a party, and the consummation of the transactions contemplated hereby and
thereby, do not and will not (i) violate, breach or contravene any of the terms,
conditions or provisions of the Certificate of Incorporation or Bylaws of Buyer,
(ii) violate any Regulation or Court Order applicable to Buyer, or (iii)
violate, breach or contravene any of the terms, conditions or provisions of any
mortgage, indenture, agreement, contract, commitment, lease or other instrument,
document or understanding, oral or written, to which Buyer is a party.
(b) NO DEFAULT. No Default by Buyer under any Contract has
occurred or, to Buyer's knowledge, been asserted, which could reasonably be
expected to have a Material Adverse Effect. The execution, delivery and
performance of this Agreement and the Collateral Documents, and the consummation
of the transactions contemplated hereby or thereby, will not conflict with,
result in a breach of, or constitute a Default under any such Contract, affect
the continuation, validity and effectiveness of any such Contract, or any terms
thereof, or result in the acceleration of the maturity of any payment date of
any of Buyer's obligations, or increase or adversely affect the obligations of
Buyer thereunder, except such as could not reasonably be expected to cause a
Material Adverse Effect; provided, however, that the execution, delivery and
performance of this Agreement and the Collateral Documents, and the consummation
of the transactions contemplated hereby or thereby, could conflict with, result
in a breach of, or constitute a Default under the Investors' Rights Agreement
if, and only if, the waivers referenced in Section 5.1.5 are not obtained prior
to Closing.
(c) REQUIRED FILINGS. Buyer will not be required to make
any filing or registration with, or obtain any Permit from, any Governmental
Entity in order to execute, deliver and perform its obligations under this
Agreement and each of the Collateral Documents to which it is a party.
3.2.4. LITIGATION. There is no Litigation pending or, to Buyer's
knowledge threatened, against or related to Buyer, which seeks to prohibit or
delay the
-7-
<PAGE>
execution, delivery or performance of this Agreement or the Collateral
Documents or the consummation of the transactions contemplated hereby or
thereby. There are no actions at law, suits in equity or other proceedings
or, to the knowledge of Buyer, any investigations, in any court, tribunal or
by or before any other governmental or public authority or agency or any
arbitrator or arbitration panel or any governmental or private third-party
insurance agency, pending or, to the knowledge of Buyer, threatened, against
or affecting Buyer that either individually or in the aggregate, would have a
Material Adverse Effect, or, would question the validity or enforceability of
this Agreement, the Collateral Documents, or any of the transactions
contemplated hereby and thereby. Buyer is not in default with respect to any
Court Order.
3.2.5. BUYER FINANCIAL STATEMENTS; UNDISCLOSED LIABILITIES.
(a) SCHEDULE 3.2.5 hereto contains a true and correct copy
of (i) the balance sheets of Buyer at December 31, 1996, December 31, 1997 and
June 30, 1998 and the statements of operations, statements of stockholders
equity and statements of cash flows of Buyer for the years ended December 31,
1996 and December 31, 1997, and the six months ended June 30, 1998, which have
been audited by Ernst & Young LLP, independent accountants (the "BUYER FINANCIAL
STATEMENTS"), and (ii) the September 30, 1998 unaudited financial statements of
Buyer delivered in accordance with the Investors' Rights Agreement (the "BUYER
UNAUDITED STATEMENTS").
(b) The Buyer Financial Statements have been prepared in
accordance with GAAP applied on a consistent basis during the respective periods
covered thereby. The Buyer Financial Statements are correct and complete and
present fairly in all material respects the financial position of Buyer at the
date of the balance sheets included therein and the results of operations and
cash flows of Buyer for the respective periods covered by the statements of
operations and cash flows included therein. Buyer has no material obligations
or liabilities of any nature whatsoever (whether absolute, accrued, contingent
or otherwise and whether due or not due) which would be required by GAAP to be
disclosed in the Buyer Unaudited Statements and which are not disclosed by the
Buyer Unaudited Statements. Buyer has no material obligations or liabilities of
any nature whatsoever (whether absolute, accrued, contingent or otherwise, known
or unknown, and whether due or not due) which, either individually or in the
aggregate, could reasonably be expected to have a Material Adverse Effect and
which are not disclosed by the Buyer Unaudited Statements.
(c) The Buyer Unaudited Statements have been prepared in
reasonable detail and in accordance with GAAP applied consistently throughout
the periods reflected therein (except as otherwise disclosed therein) and
certified by the chief financial officer of Buyer as presenting fairly the
financial condition and results of operations of Buyer and any of its
Subsidiaries for the periods covered by the statements (subject to customary
exceptions for interim unaudited financial statements).
3.2.6. CONSENTS. No consent, approval or authorization of, or
qualification, designation, declaration or filing with, or notice to any
governmental authority on
-8-
<PAGE>
the part of Buyer is required in connection with (a) the valid execution and
delivery of this Agreement and the Collateral Documents and (b) the issuance
of the Consideration Shares.
3.2.7. CAPITALIZATION.
(a) The authorized capital stock of Buyer consists of the
authorized, issued and outstanding capital stock set forth in SCHEDULE 3.2.7.
None of such issued shares is held in the treasury of Buyer. Except as set
forth in SCHEDULE 3.2.7, Buyer does not have outstanding any stock or securities
convertible into or exchangeable for any shares of its capital stock and no
Person has any right against Buyer to subscribe for or to purchase, or any
options for the purchase, or any agreements providing for the issuance, of any
capital stock or any stock or securities convertible into capital stock of
Buyer.
(b) All of the issued and outstanding shares of Buyer
capital stock have been validly issued and are fully paid and non-assessable.
The Consideration Shares, when issued to Seller pursuant to this Agreement, will
be validly issued, fully paid and nonassessable, will have the designations,
preferences, limitations, and relative rights of common stock as set forth in
Buyer's charter, a true and correct copy of which is attached hereto in SCHEDULE
3.2.7, and will be free and clear of all liens, claims and encumbrances.
3.2.8. REGISTRATION RIGHTS. Except as provided in the Investors'
Rights Agreement or in a separate writing delivered to and acknowledged by
Seller prior to or concurrently with Closing, and except for the registration
rights to be provided to Seller as contemplated by this Agreement, Buyer is not
under any obligation to register under the Securities Act any of its outstanding
securities or any of its securities which may hereafter be issued.
3.2.9. OFFERING. Subject to the accuracy of the representations
and warranties by Seller in Section 3.1.11 hereof, the issuance of the
Consideration Shares at the Closing constitutes a transaction exempt from the
registration requirements of Section 5 of the Securities Act, and from the
qualification requirements of any applicable state securities or "blue sky"
laws.
3.2.10. CHANGES. Since the date of the most recent Buyer Financial
Statements and except as set forth in a separate writing delivered to and
acknowledged by Seller prior to or concurrently with Closing, there has not been
(i) any adverse change in the assets, liabilities or financial condition of
Buyer from that reflected in the Buyer Financial Statements, other than any such
changes disclosed in the Buyer Unaudited Statements, which, either individually
or in the aggregate with other adverse changes, has had or could reasonably be
expected to have a Material Adverse Effect or (ii) any adverse change in the
prospects of Buyer or any other event or condition (or events or conditions) of
any character which, either individually or cumulatively, has had or could
reasonably be expected to have a Material Adverse Effect.
-9-
<PAGE>
3.2.11. SUBSIDIARIES. Except as set forth in SCHEDULE 3.2.11, Buyer
has no Subsidiaries. Except as set forth in this Agreement, Buyer does not own,
or have the right to acquire, any securities or other equity or ownership
interest in or the assets of any corporation, association or other business
entity or Person.
3.2.12. TITLE TO PROPERTIES. Buyer has good and marketable title to
its properties and assets and has good title to all its respective leasehold
interests.
3.2.13. INTELLECTUAL PROPERTY, ETC. Buyer owns or possesses the
rights to use, free from burdensome restrictions or conflicts with the rights of
others, all Intellectual Property necessary for the conduct of Buyer's business
as now conducted and as proposed to be conducted. All licenses constituting
Buyer's Intellectual Property are in full force and effect and constitute legal,
valid and binding obligations of the respective parties thereto, and there have
not been and are not any Defaults thereunder by any party that could reasonably
be expected to have a Material Adverse Effect. Buyer has not received any
communications alleging that it has violated or, by conducting its business as
proposed, would violate any of the Intellectual Property rights of any other
Person. To Buyer's knowledge, none of its employees is obligated under any
contract (including licenses, covenants or commitments of any nature) or other
agreement, or subject to any judgment, decree or order of any court or
administrative agency, that could reasonably be expected to interfere with the
use of their best efforts to promote the interests of Buyer and cause a Material
Adverse Effect, or that could reasonably be expected to conflict with Buyer's
business and cause a Material Adverse Effect. Neither the execution nor
delivery of this Agreement, nor the carrying on of Buyer's business by the
employees of Buyer, nor the conduct of Buyer's business, will, to Buyer's
knowledge, conflict with or result in a breach of the terms, conditions or
provisions of, or constitute a Default under, any Contract under which any of
such employees is now obligated, which conflict or breach could reasonably be
expected to have a Material Adverse Effect. Buyer does not believe it is or
will be necessary to utilize any inventions of any of its employees made prior
to their employment by Buyer.
3.2.14. COMPLIANCE WITH LAW AND ORGANIZATIONAL DOCUMENTS. Buyer is
in compliance with all Regulations to which it is subject, the violation of
which, either individually or in the aggregate, would have a Material Adverse
Effect, and Buyer is not in violation or in Default under any term of its
organizational documents.
3.2.15. EMPLOYEE BENEFIT PLANS. Except where an inaccuracy in this
Section 3.2.15 could not reasonably be expected to have a Material Adverse
Effect:
(a) all Employee Benefit Plans conform (and at all times
have conformed) in all respects to, and are being administered and operated (and
have at all time been administered and operated) in compliance with their terms,
the requirements of ERISA, the Code and all other applicable laws;
(b) neither Buyer nor any Controlled Group Member sponsors
or contributes to, and has not in the past sponsored or contributed to, and has
no Liability with
-10-
<PAGE>
respect to, any defined benefit plan subject to Title IV of ERISA or any
multi-employer plan (as defined in Section 3(37) of ERISA). Neither Buyer nor
any ERISA Affiliate has any current or contingent obligation to any
multi-employer plan (as defined in Section 3(37) of ERISA).
(c) neither Buyer nor any Controlled Group Member maintains
any plan or arrangement that provides post retirement medical benefits, post
retirement death benefits or other post retirement welfare benefits, other than
to the extent required by Part 6 of Title I of ERISA.
3.2.16. COMPLIANCE WITH ENVIRONMENTAL LAWS.
(a) Buyer is in compliance with all environmental
Regulations applicable to Buyer with respect to all discharges into the ground
and surface water, emissions into the ambient air and generation, accumulation,
storage, treatment, recycling, transportation, labeling or disposal of waste
materials or process by-products, except violations which, either individually
or in the aggregate, would not have a Material Adverse Effect. Buyer is not
liable for any penalties, fines or forfeitures for failure to comply with any of
the foregoing. All licenses, permits or registrations required for the Buyer's
business as presently conducted and proposed to be conducted, under any
environmental Regulations have been or will, in a timely manner, be obtained or
made, except where the lack thereof would not either individually or in the
aggregate, have a Material Adverse Effect, and Buyer is in compliance therewith
in all material respects.
(b) Except such as would not, either individually or in the
aggregate, cause a Material Adverse Effect, no release, emission or discharge
into the environment of hazardous substances, as defined under the Comprehensive
Environmental Response, Compensation, and Liability Act, as amended, or
hazardous waste, as defined under the Resource Conservation and Recovery Act, or
air pollutants as defined under the Clean Air Act, or pollutants, as defined
under the Clean Water Act, by Buyer has occurred or is presently occurring on or
from any property owned or leased by Buyer in excess of federal, state or local
permitted releases or reportable quantities, or other concentrations, standards
or limitations under the foregoing Regulations governing the protection of
health and the environment or under any other Regulations (then or now
applicable, as the case may be).
(c) Except such as would not, either individually or in the
aggregate, cause a Material Adverse Effect, Buyer has never (1) to its
knowledge, owned, occupied or operated a site or structure on or in which any
hazardous substance was or is stored, transported or disposed of in violation of
any environmental Regulations at such time as such site or structure was owned,
occupied or operated by Buyer or at any other time, or (2) stored, transported
or disposed of or arranged for the storage, transportation or disposal of any
hazardous substance other than in full compliance with all applicable
environmental Regulations. Buyer has never caused or been held legally
responsible for any release or threatened release of any hazardous substance, or
received notification from any federal, state or other governmental authority of
any such release or threatened release, or that Buyer may be required to pay any
-11-
<PAGE>
costs or expenses incurred or to be incurred in connection with any efforts
to mitigate the environmental impact of any release or threatened release, of
any hazardous substance from any site or structure owned, occupied or
operated by Buyer.
3.2.17. INSURANCE. Buyer has fire, casualty, liability, and
business interruption insurance policies with recognized insurers, in such
amounts and with such coverage as set forth in SCHEDULE 3.2.17. Except as set
forth in a separate writing (applicable only to Buyer) delivered to and
acknowledged by Seller prior to or concurrently with Closing, substantially
similar liability insurance (taking into account, with respect to Buyer, the
growth of Buyer's business and, therefore, insured risk, during such period) has
been maintained by Buyer and ActaMed without interruption for each of the last
two (2) years.
3.2.18. TAXES. All federal, state and other tax returns of Buyer
required by law to be filed have been duly filed and all federal, state and
other Taxes, assessments, fees and other federal governmental charges upon Buyer
or any of the properties, incomes or assets of Buyer that are due and payable
have been paid, except where an inaccuracy in the foregoing could not reasonably
be expected to have a Material Adverse Effect. No extensions of the time for
the assessment of deficiencies have been granted to Buyer in connection with any
federal tax, assessment, fee or other federal governmental charge. There are no
Liens on any properties or assets of the Buyer imposed or arising as a result of
the delinquent payment or the non-payment of any tax, assessment, fee or other
governmental charge. The charges, accruals and reserves, if any, on the books
of Buyer in respect of all Taxes for all fiscal periods to date are adequate and
in accordance with GAAP, and Buyer knows of no additional unpaid assessments for
such periods or other governmental charges payable by Buyer in connection with
the execution and delivery of this Agreement, the Collateral Documents or the
issuance of the Consideration Shares by Buyer, other than stock transfer taxes,
recording fees and filing fees in connection with state securities or "blue sky"
filings, if any.
3.2.19. INVESTMENT COMPANY. Buyer is not an "investment company",
or an "affiliated person" of an "investment company", or a company "controlled"
by an "investment company" as such terms are defined in the Investment Company
Act of 1940, as amended, and Buyer is not an "investment adviser" or an
"affiliated person" of an "investment adviser" as such terms are defined in the
Investment Advisers Act of 1940, as amended.
3.2.20. LABOR RELATIONS. Buyer is not engaged in any unfair labor
practices. There is:
(a) no unfair labor practice complaint pending or, to the
best of Buyer's knowledge, threatened against Buyer before the National Labor
Relations Board or any court or labor board, and no grievance or arbitration
proceedings arising out of or under collective bargaining agreements is so
pending or, to the best of Buyer's knowledge, threatened,
(b) no strike, lock-out, labor dispute, slowdown or work
stoppage pending or, to the best of Buyer's knowledge, threatened against Buyer,
and
-12-
<PAGE>
(c) no union representation or certification question
existing or pending with respect to the employees of Buyer, and, to the best
knowledge of Buyer, no union organization activity taking place, other than such
actions or proceedings as, either individually or in the aggregate, could not
reasonably be expected to have a Material Adverse Effect.
3.2.21. NO CONFLICT OF INTEREST. Buyer is not indebted, directly or
indirectly, to any Substantial Holder, or, to Buyer's knowledge, to any
Affiliate of a Substantial Holder, in any amount whatsoever. To the best
knowledge of Buyer, none of the Substantial Holders, or any of their Affiliates,
is indebted to any firm or corporation with which Buyer is affiliated or with
which Buyer has a business relationship, or any firm or corporation which
competes with Buyer. Except as set forth in Schedule 3.2.21, no Substantial
Holder, or, to Buyer's knowledge, any Affiliate of a Substantial Holder, is
directly or indirectly interested in any contract with Buyer or any of its
Subsidiaries.
3.2.22. FUNDAMENTAL TRANSACTIONS. Except as disclosed in writing to
Seller prior to or concurrently with Closing, Buyer is not engaged in any
substantive negotiations that Buyer reasonably believes will lead to a change in
control of Buyer or a change in ownership of a substantial portion of Buyer's
assets.
3.2.23. BROKERS AND FINDERS. No third party is entitled to receive
any commission, fees or similar consideration in connection with the
transactions contemplated by this Agreement based on any arrangement or
agreement made by or on behalf of Buyer for which Seller could become obligated.
3.2.24. FULL DISCLOSURE. No representation or warranty by Buyer
contained in this Agreement contains any untrue statement of a material fact or
omits a material fact necessary to make the statements made herein or therein
true and not misleading.
ARTICLE IV
COVENANTS
SECTION 4.1. COVENANTS OF SELLER.
4.1.1. OPERATION OF THE BUSINESS. Except with the prior written
consent of Buyer or as necessary to effect the transactions contemplated by this
Agreement, Seller shall, from and after the date hereof until the Closing, in
connection with its provision of Teleprinter Services: (i) provide Teleprinter
Services in substantially the same manner as presently being conducted; (ii)
maintain and repair the Purchased Assets consistent with past practice; (iii)
perform its obligations under the vendor contracts referenced in Section 1.1.3;
and (iv) notify Buyer of any development that could materially and adversely
affect Seller's ability to fulfill its obligations under this Agreement or its
ability to continue to provide Teleprinter Services.
-13-
<PAGE>
4.1.2. ACCESS TO INFORMATION. At all times prior to the Closing,
the attorneys, accountants, agents and other authorized and designated
representatives of Buyer will be allowed upon reasonable advance notice and
with minimal disruption to Seller's business operations, reasonable access to
the properties, books and records of Seller relating to the Purchased Assets,
including without limitation, title documents, leases, customer lists, and other
data that, in the reasonable opinion of both Buyer and Seller, are required for
Buyer to obtain such information as it may reasonably request about the
Purchased Assets or to verify the Non-Telecom Baseline Amount and the Initial
Baseline Telecom Amount (as defined in the terms and conditions set forth on
EXHIBIT B hereto). Buyer shall also be allowed reasonable opportunity to
consult with the officers, employees, accountants, counsel and agents of Seller
in connection with such investigation.
4.1.3. OTHER OFFERS AND EXCLUSIVE DEALING. Prior to the Closing
Date, Seller shall not, directly or indirectly, (a) solicit, initiate or
encourage submission of proposals or offers from any Person, corporation or
other entity for the purpose of selling the Purchased Assets, or relating to the
provision of Teleprinter Services to Providers, (b) participate in any
discussions or negotiations regarding, or, except as required by a legal or
judicial process, furnish to any other Person, corporation or other entity any
information with respect to, or otherwise cooperate in any way with, or assist
or participate in, facilitate or encourage, any effort or attempt by any other
Person to purchase the Purchased Assets or to obtain the right to provide
Teleprinter Services to Providers, or (c) approve or undertake any such
transaction; provided, however, that this covenant shall not limit in any way
the ability of Seller or any of its Affiliates to be sold to (whether via sale
of stock or substantially all assets), or merged or consolidated with, any other
Person, or to take any actions deemed appropriate in connection therewith.
4.1.4. NOTICE OF CHANGE. Seller shall promptly notify Buyer of the
existence or happening of any fact, event or occurrence prior to the Closing and
of which Seller has knowledge which may materially alter the accuracy or
completeness of any representation or warranty contained in Section 3.1 of this
Agreement.
4.1.5. OTHER DELIVERIES. At or prior to Closing, Seller shall have
delivered to Buyer any written disclosures referenced in this Agreement which
have not been delivered as of the date hereof, which other disclosures shall be
incorporated into this Agreement pursuant to Section 10.2 as if they were
attached to this Agreement at the date hereof.
4.1.6. BEST EFFORTS. Subject to the other provisions of this
Agreement, Seller shall use its best efforts to cause the conditions listed in
Section 6.1 hereof to be satisfied expeditiously and on the Closing Date and to
take all actions necessary in order to consummate the transactions contemplated
hereby and by the Collateral Documents on the terms and conditions herein and
therein.
-14-
<PAGE>
SECTION 4.2. COVENANTS OF BUYER. Buyer covenants and agrees as
follows:
4.2.1. PRIOR COVENANTS. Buyer hereby acknowledges its covenants
made in Section 5.1.1 ("Transactions with Affiliates"), Section 5.1.2
("Corporate Existence, Business, Maintenance, Insurance") and Section 5.2
("Informational Covenants of Healtheon") of the Asset Purchase Agreement between
ActaMed and Seller dated December 31, 1997, as amended by Amendment No. 1 to
Asset Purchase Agreement dated May 18, 1998 among Seller, ActaMed and Buyer (the
"Prior Covenants"). Buyer agrees that (i) to the extent the Prior Covenants
apply for so long as Seller owns stock of Buyer, such Prior Covenants shall also
apply for so long as an Affiliate of Seller owns stock of Buyer (or a designated
percentage thereof, as applicable), and (ii) the Consideration Shares shall be
taken into account in assessing Losses, if any, arising from a breach of any of
the Prior Covenants.
4.2.2. NOTICE OF CHANGE. Buyer shall promptly notify Seller of the
existence or happening of any fact, event or occurrence prior to the Closing and
of which Buyer has knowledge which may materially alter the accuracy or
completeness of any representation or warranty contained in Section 3.2 of this
Agreement.
4.2.3. OTHER DELIVERIES. At or prior to Closing, Buyer shall have
delivered to Seller completed schedules to, and any other written disclosures
referenced in, this Agreement which have not been delivered as of the date
hereof, which other schedules and disclosures shall be incorporated into this
Agreement pursuant to Section 10.2 as if they were attached to this Agreement at
the date hereof.
4.2.4. BEST EFFORTS. Subject to the other provisions of this
Agreement, Buyer shall use its best efforts to cause the conditions listed in
Section 5.2 hereof to be satisfied expeditiously and on the Closing Date and to
take all actions necessary in order to consummate the transactions contemplated
hereby and by the Collateral Documents on the terms and conditions herein and
therein.
4.2.5. COVENANTS OF SELLER AND BUYER
4.2.6. CONFIDENTIALITY OF TRADE SECRETS. Each party hereto agrees
not to use, copy or disclose the Trade Secrets of the other party, except as
permitted by this Agreement and the Collateral Documents. Each party shall
treat the other's Trade Secrets with at least that degree of care it uses with
respect to its own such Trade Secrets. Seller will give access to its Trade
Secrets relating to its provision of Teleprinter Services to those Buyer
personnel who have a need for such access and to no other Person whatsoever.
Buyer will give access to its Trade Secrets relating to its anticipated
performance under the Services Agreement to those Seller personnel who have a
need for such access and to no other Person whatsoever. If any party is ordered
by a court, administrative agency, or other governmental body of competent
jurisdiction to disclose Trade Secrets, or if it is served with or otherwise
becomes aware of a motion or similar request that such an order be issued, then
such party will not be liable to the other party
-15-
<PAGE>
for disclosure of Trade Secrets required by such order if the disclosing
party complies with the following requirements: (1) if an already issued
order calls for immediate disclosure, then the disclosing party shall
immediately move for or otherwise request a stay of such order to permit the
other party to respond; (2) the disclosing party promptly notifies the other
party of the motion or order; and (3) the disclosing party does not oppose a
motion or similar request by the other party for an order protecting the
Trade Secrets including joining or agreeing to (or non-opposition to) a
motion for leave to intervene by such other party. Notwithstanding anything
to the contrary contained in this Agreement, Seller may disclose to the OIG
as part of the disclosure Seller makes under its Integrity Agreement the fact
that Seller and Buyer have entered into the transactions contemplated by the
parties and any information relating to such transaction or this Agreement
which Seller determines, in good faith upon advice of counsel, is required
or, in light of Seller's obligations under the Integrity Agreement,
appropriate for Seller to make, or Seller proposes to make in response to a
request for such information from the OIG, provided that Buyer shall be given
opportunity (which shall be reasonable in light of all facts and
circumstances) to review and comment upon the information Seller intends to
include in any such submission. In the event that any such disclosure that
Seller intends to make includes any information that constitutes Trade
Secrets of Buyer, Seller will provide reasonable (in light of all facts and
circumstances, including the time frame in which such disclosure is required
to be made) assistance to Buyer to take reasonable steps to assure that such
Trade Secrets of Buyer are maintained in confidence, including, but not
limited to, (i) requesting that the OIG treat such information as trade
secrets within the meaning of the Freedom of Information Act, 5 U.S.C.
Section 552(b)(4), (ii) requesting of the OIG that Seller and Buyer be given
prior notice of a proposed release of such information to Persons or entities
outside of the OIG; (iii) requesting that the OIG otherwise assure the
confidentiality of the information provided by Buyer as if such information
was a Trade Secret of Seller as provided for in Section 46 of the Integrity
Agreement and taking other reasonable steps that may be requested by Buyer
and to which Seller may, in its sole discretion, agree to assure that the OIG
honors its confidentiality obligations in that section; (iv) where such
information is o be provided in response to a request by the OIG, take
reasonable steps to narrow the request from the OIG in an appropriate manner
in order to limit the amount of information, if any, that constitutes Trade
Secrets of Buyer covered by such request; and (v) make reasonable efforts to
permit Buyer, with the concurrence of the OIG, to disclose such information
directly to the OIG, provided that in any such case, Buyer shall give Seller
a timely opportunity to review, comment upon and approve the information
Buyer intends to include in such submission. The additional safeguards
described in subsections (i) through (v) above are designed to help assure
the confidentiality of the Trade Secrets, the disclosure of which would have
a material adverse impact on Buyer. These additional provisions are not
intended to interfere with Seller's ability to meet its disclosure
obligations under the Integrity Agreement. Each party shall promptly notify
the other in the event it receives an inquiry, investigation or request for
information from the OIG or other governmental agency into the matters
relating to the proposed transactions. The provisions of this Section 4.3.1
shall apply in addition to similar provisions in the Services Agreement and
shall permanently survive termination of any other provisions of this
Agreement or the Collateral Documents.
-16-
<PAGE>
4.2.7. PUBLIC ANNOUNCEMENTS AND REGISTRATION STATEMENTS. The
parties hereto shall jointly develop a mutually acceptable plan (the
"COMMUNICATION PLAN") for communicating the transactions contemplated by this
Agreement and the Services Agreement to Providers and the public. The
parties agree to use their collective best efforts to complete the
Communication Plan within [*] after Closing, and each party agrees to abide
by such Communication Plan. Without limiting the foregoing, neither party
shall send any communication to any Provider describing, or otherwise in
connection with, the transactions and relationships contemplated by this
Agreement and the Services Agreement, and neither party shall make any
disclosure of the transactions contemplated hereby except pursuant to the
Communication Plan, unless the form and content of such communication shall
have been approved in advance by the other, or unless required by law or
judicial process, in which case notification shall be given to the other
party hereto sufficiently prior to such disclosure to allow the party
receiving such notice to comment on, or take reasonable action to avoid or
mitigate, such disclosure. Buyer shall not make any filings with any
governmental authority, including registration statements pursuant to the
Securities Act, without giving Seller the reasonable opportunity to review
and comment on any disclosures pertaining to Seller. In any of the foregoing
circumstances, the disclosing party shall use its commercially reasonable
efforts to incorporate or otherwise accommodate all reasonable comments or
requests of the other party with respect to such contemplated disclosure or
filing.
ARTICLE V
CONDITIONS PRECEDENT TO CLOSING
SECTION 5.1. CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER. The
obligations of Buyer to consummate the transactions contemplated by this
Agreement shall be subject to the satisfaction, on or before the Closing, of
each and every one of the following conditions, all or any of which may be
waived, in whole or in part, by Buyer for purposes of consummating such
transactions, but without prejudice to any other right or remedy which Buyer may
have hereunder as a result of any misrepresentation by, or breach of any
agreement, covenant or warranty of Seller contained in this Agreement or any of
the Collateral Documents.
5.1.1. REPRESENTATIONS AND WARRANTIES; COMPLIANCE WITH AGREEMENT.
(i) Each of the representations and warranties of Seller set forth in this
Agreement shall be true and correct in all material respects as of the date of
this Agreement and as of the Closing as though made on and as of the Closing
(except for representations and warranties qualified by a materiality provision,
which representations and warranties shall be true and correct as stated
therein), and (ii) Seller shall have performed all covenants, agreements and
obligations to be performed by it under this Agreement on or prior to the
Closing.
5.1.2. NO INJUNCTION, ETC. No action, proceeding, investigation or
Regulation shall have been instituted, threatened or proposed before any court,
governmental agency or legislative body to enjoin, restrain, prohibit, or obtain
substantial damages in respect
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
-17-
<PAGE>
of, or which is related to, or arises out of, this Agreement or the
consummation of the transactions contemplated hereby, or which is related to
or arises out of the provision of Teleprinter Services, if such action,
proceeding, investigation or Regulation, in the reasonable judgment of Buyer,
would make it inadvisable to consummate the transactions contemplated hereby.
5.1.3. COMPLIANCE. Seller shall have delivered to Buyer a
certificate (the "SELLER COMPLIANCE CERTIFICATE") to the effect that each of the
conditions specified in Sections 5.1.1, 5.1.2 and 5.1.6 is satisfied in all
respects, except that Seller shall be permitted to limit to its knowledge the
certification with respect to Section 5.1.2, insofar as Section 5.1.2 pertains
to threatened or proposed actions, proceedings, investigations or Regulations.
5.1.4. DELIVERIES. Seller shall have executed and delivered the
following documents, instruments and agreements:
(a) a bill of sale in form and substance reasonably
satisfactory to Buyer;
(b) an assignment and assumption agreement covering each of
the Assumed Contracts in form and substance reasonably satisfactory to Buyer and
Seller;
(c) a compliance plan relating to compliance by Buyer and
Seller with applicable Regulations, including, but not limited to, the federal
Physician Self-Referral Law, 42 U.S.C. 1395nn, and the regulations promulgated
thereunder, similar state physician self-referral laws and regulations, the
federal Medicare/Medicaid Antikickback Law and regulations promulgated
thereunder, and similar state antikickback laws and regulations, in form and
substance reasonably satisfactory to Buyer and Seller (the "Compliance Plan").
(d) a Seller Secretary's Certificate certifying as to the
corporate approvals of this Agreement, the Collateral Documents and the
transactions contemplated hereby and thereby, in form and substance reasonably
satisfactory to Buyer;
(e) the Services Agreement;
(f) an agreement between Buyer and Seller in form and
substance reasonably satisfactory to Buyer containing lock-up provisions
comparable to the lock-up provisions contained in the Investors' Rights
Agreement;
(g) a schedule identifying the Provider Sites, including
their addresses, as of a date not greater than three (3) business days prior to
the Closing Date, in form and substance reasonably satisfactory to Buyer, and
Seller shall update such schedule to be updated not later than three (3)
business days after the Closing Date to identify the Provider Sites, including
their addresses, as of the Closing Date;
-18-
<PAGE>
(h) such other documents and instruments as reasonably may
be requested by Buyer in order to consummate the transactions contemplated by
this Agreement and the Collateral Documents.
5.1.5. OTHER DELIVERIES. All disclosures required to be delivered
to Buyer under Section 4.1.5 shall have been delivered to Buyer pursuant thereto
in form and substance satisfactory to Buyer.
5.1.6. BOARD APPROVAL; WAIVER UNDER INVESTORS' RIGHTS AGREEMENT.
Buyer's Board of Directors shall have approved this Agreement and the waivers
required under the Investors' Rights Agreement in order for Buyer to issue the
Consideration Shares and grant the registration rights to Seller contemplated by
this Agreement, shall have been obtained in accordance with the terms of the
Investors' Rights Agreement.
5.1.7. FINANCING LEASES. Seller shall have repaid the financing
leases referenced in Section 3.1.5(b) or shall have made commitments for the
payment thereof within thirty (30) days after Closing.
SECTION 5.2. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER. The
obligations of Seller to consummate the transactions contemplated by this
Agreement shall be subject to the satisfaction, on or before the Closing (except
where an earlier date is specified herein), of each and every one of the
following conditions, all or any of which may be waived, in whole or in part, by
Seller for purposes of consummating such transactions, but without prejudice to
any other right or remedy which Seller may have hereunder as a result of any
misrepresentation by, or breach of any agreement, covenant or warranty of Buyer
contained in this Agreement or any of the Collateral Documents.
5.2.1. REPRESENTATIONS AND WARRANTIES; COMPLIANCE WITH AGREEMENT.
(i) Each of the representations and warranties of Buyer set forth in this
Agreement shall be true and correct in all material respects as of the date of
this Agreement and as of the Closing as though made on and as of the Closing
(except for representations and warranties qualified by a materiality or
Material Adverse Effect provision, which representations and warranties shall be
true and correct as stated therein), (ii) the representations and warranties of
Buyer set forth in this Agreement (taken as a whole and disregarding any
materiality or Material Adverse Effect provisions) shall be true and correct in
all material respects as of the date of this Agreement and as of the Closing as
though made on and as of the Closing, except where the failure of the
representations and warranties (taken as a whole and disregarding any
materiality or Material Adverse Effect provisions) to be true and correct in all
material respects would not cause a Material Adverse Effect, and (iii) Buyer
shall have performed all covenants, agreements and obligations to be performed
by it under this Agreement on or prior to the Closing.
5.2.2. NO INJUNCTION, ETC. No action, proceeding, investigation or
Regulation shall have been instituted, threatened or proposed before any court,
governmental agency or legislative body to enjoin, restrain, prohibit, or obtain
substantial damages in respect
-19-
<PAGE>
of, or which is related to, or arises out of, this Agreement or the
consummation of the transactions contemplated hereby, or which is related to
or arises out of the business of Buyer, if such action, proceeding,
investigation or Regulation, in the reasonable judgment of Seller, would make
it inadvisable to consummate the transactions contemplated hereby.
5.2.3. COMPLIANCE. Buyer shall have delivered to Seller a
certificate (the "BUYER COMPLIANCE CERTIFICATE") to the effect that each of the
conditions specified in Sections 5.2.1 and 5.2.2 is satisfied in all respects,
except that Buyer shall be permitted to limit to its knowledge the certification
with respect to Section 5.2.2, insofar as Section 5.2.2 pertains to threatened
or proposed actions, proceedings, investigations or Regulations.
5.2.4. DELIVERIES. Buyer shall have executed and delivered the
following documents, instruments and agreements:
(a) a certificate in form reasonably satisfactory to Seller
for the Consideration Shares;
(b) an assignment and assumption agreement covering each of
the Assumed Contracts in form and substance reasonably satisfactory to Buyer and
Seller;
(c) the Compliance Plan;
(d) a Buyer Secretary's Certificate certifying as to
Buyer's charter, bylaws, good standing, incumbent officers and the resolutions
approving this Agreement, the Collateral Documents and the transactions
contemplated hereby and thereby, in form and substance reasonably satisfactory
to Seller;
(e) the Services Agreement;
(f) either a Registration Rights Agreement between Buyer
and Seller containing registration rights for the Consideration Shares and
lock-up provisions comparable to the registration rights and lock-up
provisions contained in the Investors' Rights Agreement, or an amendment to
the Investors' Rights Agreement in form and substance reasonably satisfactory
to Seller, in either case, which grants Seller registration rights which are
the same as if the term "Registrable Securities" as used in the Investors'
Rights Agreement included the Consideration Shares; and
(g) such other documents and instruments as reasonably may
be requested by Seller in order to consummate the transactions contemplated by
this Agreement and the Collateral Documents.
5.2.5. OTHER DELIVERIES. All schedules and disclosures required to
be delivered to Seller under Section 4.2.3 shall have been delivered to Seller
pursuant thereto in form and substance satisfactory to Seller.
-20-
<PAGE>
ARTICLE VI
POST-CLOSING OBLIGATIONS
SECTION 6.1. EXPENSES. Except as otherwise provided herein, each of
the parties to this Agreement shall bear its respective expenses incurred in
connection with the preparation, execution and performance of this Agreement and
the transactions contemplated hereby, including, without limitation, all fees
and expenses of agents, representatives, counsel and accountants.
SECTION 6.2. TRANSACTION TAXES. Buyer shall pay any documentary,
stamp, sales, transfer, use, filing or other similar taxes payable as a result
of the transactions contemplated hereby.
SECTION 6.3. YEAR 2000 COVENANTS.
6.3.1. SELLER SYSTEMS. Seller hereby represents and warrants to
Buyer that Seller's computerized laboratory computer systems known as TopLab
will not fail due to: (i) any non-recognition of date data at the change of the
century on January 1, 2000, or (ii) the failure of any calculations to
accommodate same century and multi-century formulae and date values or date data
interface values that reflect the century, in either case, where such failure
causes Seller to be unable to accurately transmit reports to Providers via the
teleprinters. Seller shall make any necessary modifications to TopLab to ensure
accuracy of this warranty.
6.3.2. TELEPRINTERS. Seller has received assurances from its
primary supplier regarding year 2000 compliance (as described in Section
6.3.1 above) of teleprinters included in the Purchased Assets. In the event
any teleprinter(s) fail to receive or print accurate and complete test
reports because of any problem related to the occurrence of dates prior to,
during, or after the year 2000 and reasonably classified as a "year 2000"
problem, for each such teleprinter with respect to which Buyer provides
reasonable notice to Seller of such failure within thirty (30) days after
Buyer knows that such failure was the result of a "year 2000" problem,
acquiring knowledge of the initial manifestation of such failure, Seller will
(i) [*] Buyer associated with [*] to the Provider Site in accordance with
Seller's directions, (ii) not hold Buyer responsible for any Loss of Seller
by reason of such failure of such teleprinter(s), and (iii) indemnify and
hold harmless Buyer (in accordance with Section 7.2.1 hereof, except that the
threshold amount provided for in Section 7.2.6(b) shall not apply) against
any Third Party Claim to the extent such claim is alleged to have been caused
by reason of such failure of such teleprinter. Buyer will use its
commercially reasonable efforts, if Seller so requests, to remedy the year
2000 non-compliance of such teleprinter(s) at Seller's cost (as provided in
clause (i) above), and Seller shall reimburse Buyer for any reasonable
expenses in connection therewith.
6.3.3. REMEDIES. Buyer and Seller agree that the remedies provided
for in this Section 6.3 shall be the exclusive remedy in the event any
teleprinter or TopLab fails
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
-21-
<PAGE>
because of year 2000 non-compliance. Nothing in this Section 6.3 shall
affect any rights or obligations of Buyer or Seller under the Services
Agreement.
ARTICLE VII
SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS AND INDEMNIFICATION
SECTION 7.1. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND
COVENANTS. Notwithstanding anything herein to the contrary, all of the
representations, warranties, covenants and agreements (including, without
limitation, the corresponding indemnification obligations) contained in this
Agreement shall survive the Closing and continue in full force and effect for
one (1) year, except that the representation of Seller made in section 6.3.1
and the covenant in Section 6.3.2 shall survive for a period of [*], and
except that any representations or warranties not true when made and made
fraudulently or with the intent to defraud or mislead, shall continue in full
force and effect thereafter (subject to any applicable statute of limitations
and any extensions thereof); and, in all cases, thereafter as to any Losses
relating thereto for which a Claims Notice has been given prior to the
termination of such period of survival. Notwithstanding the foregoing,
covenants contained herein which by their terms survive for a longer period
shall continue to apply as provided in such specific terms.
SECTION 7.2. OBLIGATION TO INDEMNIFY.
7.2.1. OBLIGATIONS OF SELLER TO INDEMNIFY. From and after the
Closing, regardless of any investigation undertaken by Buyer, Seller shall
indemnify and hold harmless Buyer Indemnitees against and in respect of all
Losses asserted against, imposed upon or incurred by any Buyer Indemnitee by
reason of or resulting from (i) any misrepresentation or breach of warranty made
to Buyer by Seller in this Agreement; (ii) any failure by Seller to perform any
of the covenants, agreements or obligations required to be performed by it in
accordance with the terms and conditions of this Agreement; (iii) any and all
operation by Seller of the Purchased Assets prior to Closing; and (iv) any and
all Litigation arising out of any of the foregoing or the enforcement of this
Section 7.2.1.
7.2.2. OBLIGATION OF BUYER TO INDEMNIFY. From and after the
Closing, regardless of any investigation undertaken by Seller, Buyer shall
indemnify and hold harmless Seller Indemnitees against and in respect of all
Losses asserted against, imposed upon or incurred by any Seller Indemnitee by
reason of or resulting from (i) any misrepresentation or breach of warranty made
to Seller by Buyer in this Agreement; (ii) any failure by Buyer to perform any
of the covenants, agreements or obligations required to be performed by it in
accordance with the terms and conditions of this Agreement; (iii) any and all
operation by Buyer of the Purchased Assets after Closing; and (iv) any and all
Litigation arising out of any of the foregoing or the enforcement of this
Section 7.2.2.
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
-22-
<PAGE>
7.2.3. CLAIMS NOTICE. A Claim shall be made by any Indemnitee by
delivery of a Claims Notice to the Indemnifying Party requesting indemnification
and specifying the basis on which indemnification is sought and the amount of
asserted Losses and, in the case of a Third Party Claim, attaching any written
documentation received from the third party claimant with respect thereto.
7.2.4. PROCEDURES INVOLVING NON-THIRD PARTY CLAIMS. If the Claim
involves a matter other than a Third Party Claim, the Indemnifying Party shall
have forty-five (45) days to object to such Claim by delivery of a written
notice of such objection to such Indemnitee specifying in reasonable detail the
basis for such objection. If an objection is timely made by the Indemnifying
Party, the Indemnifying Party and the Indemnitee shall cooperate in the
compromise of the Claim with ultimate resolution of the validity of such Claim
to be determined under Article VIII. If an objection is not timely made by the
Indemnifying Party, such failure shall be deemed to be an objection, and the
Indemnifying Party and the Indemnitee shall cooperate in the compromise of the
Claim with ultimate resolution of the validity of such Claim to be determined
under Article VIII.
7.2.5. PROCEDURES INVOLVING THIRD PARTY CLAIMS. Subject to the
rights and obligations of the Parties in this Section 7.2.5, each of Indemnitee
and Indemnifying Party shall cooperate with the other in the resolution of a
Third Party Claim. The obligations and liabilities of the parties hereunder
with respect to a Third Party Claim shall be subject to the following terms and
conditions:
(a) The Indemnitee shall give the Indemnifying Party
written notice of a Third Party Claim promptly after receipt by the Indemnitee
of notice thereof, and the Indemnifying Party may undertake the defense,
compromise and settlement thereof by representatives of its own choosing
reasonably acceptable to the Indemnitee. The failure of the Indemnitee to
notify the Indemnifying Party of such claim shall not relieve the Indemnifying
Party of any liability that it may have with respect to such claim except to the
extent the Indemnifying Party demonstrates that the defense of such claim is
prejudiced by such failure. The assumption of the defense, compromise and
settlement of any such Third Party Claim by the Indemnifying Party shall be an
acknowledgment of the obligation of the Indemnifying Party to indemnify the
Indemnitee with respect to such claim hereunder to the extent an indemnity
obligation arises pursuant to Section 7.2.1 or 7.2.2, as applicable. If the
Indemnitee desires to participate in, but not control, any such defense,
compromise and settlement, it may do so at its sole cost and expense. If,
however, the Indemnifying Party fails or refuses to undertake the defense of
such Third Party Claim within a reasonable period of time after written notice
of such claim has been given to the Indemnifying Party by the Indemnitee (but in
no event more than thirty (30) days after receipt of such notice), the
Indemnitee shall have the right to undertake the defense, compromise and
settlement of such claim with counsel of its own choosing. In the circumstances
described in the preceding sentence, the Indemnitee shall, promptly upon its
assumption of the defense of such claim, make a Claim as specified in
Section 7.2.1(iv) or 7.2.2(iv) which shall be deemed a Claim that is not a Third
Party Claim for the purposes of the procedures set forth herein.
-23-
<PAGE>
(b) No settlement of a Third Party Claim involving the
asserted liability of the Indemnifying Party under this Article shall be made
without the prior written consent by or on behalf of the Indemnifying Party,
which consent shall not be unreasonably withheld or delayed. If the
Indemnifying Party assumes the defense of such a Third Party Claim, (1) no
compromise or settlement thereof may be effected by the Indemnifying Party
without the Indemnitee's consent unless (a) there is no finding or admission of
any violation of law or any violation of the rights of any Person and no effect
on any other claim that may be made against the Indemnitee (b) the sole relief
provided is monetary damages that are paid in full by the Indemnifying Party and
(c) the compromise or settlement includes, as an unconditional term thereof, the
giving by the claimant or the plaintiff to the Indemnitee of a release, in form
and substance reasonably satisfactory to the Indemnitee, from all liability in
respect of such Third Party Claim, and (2) the Indemnitee shall have no
liability with respect to any compromise or settlement thereof effected without
its consent.
7.2.6. LIMITATIONS ON INDEMNIFICATION.
(a) No party to this Agreement shall be entitled to
indemnification under this Agreement to the extent that such party's Losses are
increased or extended by the willful misconduct, violation of law or bad faith
of such party.
(b) No Indemnifying Party shall be required to indemnify
an Indemnitee with respect to any Loss with respect to a Claim unless the
amount of such Loss, when aggregated with all other such Losses suffered by
that Indemnitee, shall [*], at which time Claims may be asserted to the
extent that all Losses are in excess of such threshold amount; PROVIDED,
however, that such threshold amount shall not apply to any Loss which results
from or arises out of fraud or intentional misrepresentation or an
intentional breach of a representation, warranty, covenant or agreement in
this Agreement or the Collateral Documents.
(c) The parties acknowledge there will be an
indemnification section in the Services Agreement, and that an Indemnitee shall
only be entitled to a single satisfaction of any Loss.
SECTION 7.3. NO RELEASE FOR FRAUD. Nothing contained in this
Agreement shall relieve or limit the liability of either party hereto or any
officer or director of either party from any Liability arising out of or
resulting from common law fraud or intentional misrepresentation in connection
with the transactions contemplated by this Agreement or in connection with the
delivery of any of the Collateral Documents. Each party shall have a right to
indemnification for any Loss incurred as the result of any common law fraud or
intentional misrepresentation by the other party or any officer or director of
the other party without regard to the Threshold Amount or any period of
limitation provided in this Agreement.
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
-24-
<PAGE>
7.3.1. PAYMENT.
(a) If any party is required to make any payment under this
Article, such party shall promptly pay the Indemnified Party the amount so
determined. If there is a dispute as to the amount or manner of determination
of any indemnity obligation owed under this Article, the Indemnifying Party
shall nevertheless pay when due such portion, if any, of the obligation as shall
not be subject to dispute. The difference, if any, between the amount of the
obligation ultimately determined as properly payable under this Article and the
portion, if any, theretofore paid shall bear interest as provided in Section
7.2.8(b).
(b) If all or part of any indemnification obligation under
this Agreement is not paid when due, then the Indemnifying Party shall pay the
Indemnified Party interest on the unpaid principal amount of the obligation from
the date the amount became due until payment in full, at the per annum rate of
interest published from time to time by The Wall Street Journal as the "Prime
Rate."
ARTICLE VIII
DISPUTE RESOLUTION
SECTION 8.1. INFORMAL DISPUTE RESOLUTION. Any dispute between the
parties arising out of or with respect to this Agreement, either with respect to
the interpretation of any provision of this Agreement or with respect to the
performance by Buyer or Seller, shall be resolved as provided in this Article.
8.1.1. INFORMAL DISPUTE RESOLUTION. Prior to the initiation of
formal dispute resolution procedures, the parties shall first attempt to resolve
their dispute informally, as follows:
(a) The Relationship Managers for each party shall meet
for the purpose of endeavoring to resolve such dispute. They shall meet as
often as the parties reasonably deem necessary in order to gather and furnish
to the other all information with respect to the matter in issue which the
parties believe to be appropriate and germane in connection with its
resolution. The Relationship Managers shall discuss the problem and
negotiate in good faith in an effort to resolve the dispute without the
necessity of any formal proceeding. During the course of negotiations, all
reasonable requests made by one party to another for non-privileged
information, reasonably related to this Agreement, shall be honored in order
that each of the parties may be fully advised of the other's position.
(b) If, within [*] days after a matter has been
identified for resolution pursuant to this Article, either of the
Relationship Managers concludes in good faith that amicable resolution
through continued negotiation in this forum does not appear likely, the
matter will be escalated by formal written notification to the Seller and the
Buyer.
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
-25-
<PAGE>
(c) Formal proceedings for the resolution of a dispute may
not be commenced until the earlier of: (i) the date on which the Seller and
Buyer conclude in good faith that amicable resolution through continued
negotiation of the matter does not appear likely; or (ii) fifteen (15) days
after the dispute has been referred to the Seller and the Buyer.
8.1.2. FORMAL PROCEEDINGS PERMITTED. The provisions of this
Section 8.1 shall not be construed to prevent a party from instituting, and a
party being authorized to institute, formal proceedings earlier to avoid the
expiration of any applicable limitations period or any period provided for in
Section 7.1.
SECTION 8.2. ARBITRATION. If the parties are unable to resolve any
controversy arising under this Agreement as contemplated by Section 8.1 and if
such controversy is not subject to Article VII or Section 8.3, then such
controversy shall be submitted to mandatory and binding arbitration at the
election of either party (the "DISPUTING PARTY") pursuant to the following
conditions:
8.2.1. SELECTION OF ARBITRATORS. The Disputing Party shall notify
the AAA and the other party in writing describing in reasonable detail the
nature of the dispute (the "DISPUTE NOTICE"). Each of the parties shall select
a neutral arbitrator in accordance with the rules of AAA, and the two
arbitrators so selected shall select a third neutral arbitrator (the three
arbitrators referred to in this Section being hereinafter referred to as the
"PANEL").
8.2.2. CONDUCT OF ARBITRATION. The Panel shall allow reasonable
discovery as permitted by the Federal Rules of Civil Procedure, to the extent
consistent with the purpose of the arbitration. The panel shall have no power
or authority to amend or disregard any provision of this Section 8.2. The
arbitration hearing shall be commenced promptly and conducted expeditiously,
with each of Buyer and Seller being allocated one-half of the time for the
presentation of its case. Unless otherwise agreed to by the parties, an
arbitration hearing shall be conducted on consecutive days.
8.2.3. REPLACEMENT OF ARBITRATOR. Should an arbitrator refuse or
be unable to proceed with arbitration proceedings as called for by this Section
8.2, such arbitrator shall be replaced by an arbitrator selected in accordance
with the rules of the AAA.
8.2.4. FINDINGS AND CONCLUSIONS. The Panel rendering judgment upon
disputes between parties as provided in this Section shall, after reaching
judgment and award, prepare and distribute to the parties a writing describing
the findings of fact and conclusions of law relevant to such judgment and award
and containing an opinion setting forth the reasons for the giving or denial of
any award. The award of the Panel shall be final and binding on the parties,
and judgment thereon may be entered in a court of competent jurisdiction.
8.2.5. PLACE OF ARBITRATION HEARINGS. Arbitration hearings
hereunder shall be held in Washington, D.C.
-26-
<PAGE>
8.2.6. TIME OF THE ESSENCE. The Panel is instructed that time
is of the essence in the arbitration proceeding. The Panel shall use its
best efforts to render its judgment or award within [*] following the
conclusion of the hearing or as soon as possible thereafter. Recognizing the
express desire of the parties for an expeditious means of dispute resolution,
the Panel shall limit or allow the parties to expand the scope of discovery
as may be reasonable under the circumstances.
SECTION 8.3. IMMEDIATE INJUNCTIVE RELIEF. In the event of a breach
of the confidentiality obligations set forth in this Agreement, or in the event
a party makes a good faith determination that a breach of the terms of this
Agreement by the other party is such that the damages to such party resulting
from the breach will be so immediate, so large or severe, and so incapable of
adequate redress after the fact that a temporary restraining order or other
immediate injunctive relief is a necessary remedy, then such party may file a
pleading with a court seeking immediate injunctive relief. If a party files a
pleading with a court seeking immediate injunctive relief and this pleading is
challenged by the other party and the injunctive relief sought is not awarded in
substantial part (or in the event of a temporary restraining order is vacated
upon challenge by the other party), the party filing the pleading seeking
immediate injunctive relief shall pay all of the costs and attorneys' fees of
the party successfully challenging the pleading.
ARTICLE IX
TERMINATION
SECTION 9.1. EVENTS OF TERMINATION. Anything herein or elsewhere to
the contrary notwithstanding, this Agreement may be terminated by written notice
of termination at any time prior to the Closing only as follows:
9.1.1. MUTUAL CONSENT. By mutual consent of Seller and Buyer;
9.1.2. BY SELLER OR BUYER.
(a) By Seller if Buyer shall have (i) materially misstated
any representation or been materially in breach of any warranty contained herein
or (ii) been materially in breach of any covenant, undertaking or restriction
contained herein, and such misstatement or breach has not been cured by the
earlier of (A) 10 days after the giving of notice to such party of such
misstatement or breach or (B) the Closing;
(b) By Buyer if Seller shall have (i) materially misstated
any representation or been materially in breach of any warranty contained herein
or (ii) been materially in breach of any covenant, undertaking or restriction
contained herein, and such misstatement or breach has not been cured by the
earlier of (A) 10 days after the giving of notice to such party of such
misstatement or breach or (B) the Closing; and Final Closing Date. By either
party if the Closing has not occurred by January 15, 1999.
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
-27-
<PAGE>
SECTION 9.2. CONSEQUENCES OF TERMINATION. In the event of the
termination hereof pursuant to the provisions of Section 9.1, this Agreement
shall become void and have no effect, without any liability on the part of
either of the parties or their officers and directors; provided, however, that
(i) if this Agreement is terminated under the provisions of Section 9.1.2, the
provisions of this Section 9.2 shall not relieve the misstating or breaching
party of any liability therefor, and (ii) the obligations of the parties under
Section 4.3.1 shall survive the termination of this Agreement.
ARTICLE X
MISCELLANEOUS
SECTION 10.1. GENERAL PROVISIONS.
10.1.1. NOTICES. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
given if (1) delivered by hand or if mailed by United States registered or
certified mail, return receipt requested, first class postage prepaid, (2) sent
by Federal Express or similar overnight courier service to the parties or their
assignees, or (3) sent by telecopy to the number set forth below and promptly
followed by a written copy sent by any other means specified herein, addressed
as follows:
If to Seller:
SmithKline Beecham Clinical Laboratories, Inc.
1201 South Collegeville Road
Collegeville, PA 19426
Attention: President
Telephone: 610.454.6116
Telecopy: 610.983.2185
with a copy to:
SmithKline Beecham Corporation
One Franklin Plaza
16th and Race Streets
Philadelphia, PA 19103
Attention: General Counsel-U.S.
Telephone: 215.751.5844
Telecopy: 215.751.5132
If to Buyer:
Healtheon Corporation
4600 Patrick Henry Drive
Santa Clara, CA 95054
Attention: W. Michael Long
-28-
<PAGE>
Telephone: 650.614.0200
Telecopy: 650.614.3300
with a copy to:
Alston & Bird
One Atlantic Center
1201 W. Peachtree Street
Atlanta, GA 30309
Attention: John C. Weitnauer
Telephone: 404.881.7780
Telecopy: 404.881.7777
(a) If delivered personally, the date on which a notice,
request, instruction or document is delivered shall be the date on which such
delivery is made and, if delivered by mail, telecopy, Federal Express or other
overnight courier, the date on which such notice, request, instruction or
document is first received shall be the date of delivery.
(b) Any party hereto may change its address specified for
notices herein by designating a new address by notice in accordance with this
Section 10.1.1.
(c) Failure of any party to send a copy of any notice to
counsel for the other Party shall not affect in any way the validity of such
notice to other party.
10.1.2. ENTIRE AGREEMENT. This Agreement and the Collateral
Documents constitute the entire understanding and agreement among the parties
with respect to the subject matter contained herein and supersede any prior
understandings and agreements (whether written or oral) among them respecting
such subject matter, except that any other confidentiality provisions agreed to
in writing between the parties shall survive and be merely supplemented by
Section 4.3.1 of this Agreement (except to the extent such other written
provisions may be in conflict with Section 4.3.1, in which cases such other
written provisions shall be superseded to the extent necessary to resolve such
conflict). The exhibits and schedules identified in this Agreement are
incorporated herein by reference and made a part hereof.
10.1.3. HEADINGS. The headings in this Agreement (and the Table of
Contents) are for convenience of reference only and shall not affect its
interpretation.
10.1.4. ASSIGNMENT. This Agreement shall not be assignable by any
of the parties hereto without the written consent of the other party hereto, and
no rights under this Agreement may be transferred without the consent of the
non-transferring party, except that (i) all the rights and obligations of Seller
hereunder may be transferred, without the consent of (but with notice to) Buyer,
to an Affiliate of Seller or an acquiror of substantially all of Seller's assets
(whether by purchase of assets, merger or other corporate reorganization), and
(ii) all rights and obligations of Buyer hereunder may be transferred, without
the consent of (but with
-29-
<PAGE>
notice to) Seller, to any assignee of Buyer's rights and obligations under
the Services Agreement provided such assignment is made in accordance with
the Services Agreement. Any attempted assignment without a required consent
shall be void. Any assignment with a required consent does not release the
assigning party from any of its obligations under this Agreement unless the
consent so states.
10.1.5. BINDING EFFECT. Subject to the limitations on transfer set
forth in Section 10.1.4, this Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, legal representatives,
executors, administrators, successors and assigns.
10.1.6. KNOWLEDGE. As used herein, the words "TO THE KNOWLEDGE OF"
or words of similar import mean, (i) with respect to Seller, the actual
knowledge of the directors, managers and officers of Seller, and persons with
similar such responsibilities, and that knowledge which would have been acquired
by any such persons after making due and diligent inquiry of those employees of
the Company who could reasonably be expected to have actual knowledge of the
matters in question, or other due inquiry, and (ii) with respect to Buyer, the
actual knowledge of the directors, managers and officers of Buyer and persons
with similar such responsibilities, and that knowledge which would have been
acquired by any such persons after making due and diligent inquiry of those
employees of Buyer who could reasonably be expected to have actual knowledge of
the matters in question, or other due inquiry.
10.1.7. SEVERABILITY. It is the desire and intent of the parties
that all of the material provisions of this Agreement and the Services Agreement
be enforced to the fullest extent permissible and no severability shall pertain
thereto. In the event that any other provision of this Agreement is held
illegal, invalid, prohibited or unenforceable for any reason, such illegality,
invalidity, or unenforceability will not affect any other provision hereof, and
this Agreement shall be deemed modified to the extent necessary to render
enforceable the remaining provisions hereof. Notwithstanding the foregoing, if
such provision could be more narrowly interpreted so as not to be illegal,
invalid, prohibited or unenforceable, without invalidating any of the material
remaining provisions of this Agreement or the Services Agreement, it shall be so
narrowly interpreted.
10.1.8. WAIVER. The failure of either party to insist upon strict
performance of any of the terms or conditions of this Agreement will not
constitute a waiver of any of its rights hereunder. No waiver by any party of
any default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence.
10.1.9. GOVERNING LAW. This Agreement will be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania,
without giving effect to any choice of law or conflicting provision or rule
(whether of the Commonwealth of Pennsylvania or any other jurisdiction) that
would cause the laws of any jurisdiction other than the Commonwealth of
Pennsylvania to be applied. In furtherance of the foregoing, the internal
-30-
<PAGE>
law of the Commonwealth of Pennsylvania will control the interpretation and
construction of this Agreement, even if under such jurisdiction's choice of
law or conflict of law analysis, the substantive law of some other
jurisdiction would ordinarily apply. Any legal action or proceeding with
respect to this Agreement may be brought exclusively in the courts of the
Commonwealth of Pennsylvania or of the United States that are located in
Pennsylvania, and, by execution and delivery of this Agreement, each party
hereto hereby irrevocably accepts for itself and in respect of its property
and assets, generally and unconditionally the jurisdiction of the aforesaid
courts.
10.1.10. RULE OF STRICT CONSTRUCTION. The language used in this
Agreement has been chosen by the parties to express their mutual intent, and no
rule of strict construction shall be applied against either party.
10.1.11. CONSTRUCTION. Unless the context of this Agreement
otherwise requires, (i) words of any gender include each other gender; (ii)
words using the singular or plural number also include the plural or singular
number, respectively; (iii) the terms "hereof," "herein," "hereby" and
derivative or similar words refer to this entire Agreement; and (iv) the terms
"Article" or "Section" refer to the specified Article or Section of this
Agreement. Whenever this Agreement refers to a number of days, such number
shall refer to calendar days.
10.1.12. AMENDMENTS. This Agreement may be amended or supplemented
only by a written instrument duly executed by each party.
10.1.13. TIME OF ESSENCE. Time is of the essence in this Agreement.
10.1.14. COUNTERPARTS. This Agreement may be executed in any number
of counterparts and either party hereto may execute any such counterpart, each
of which when executed and delivered shall be deemed to be an original and all
of which counterparts taken together shall constitute but one and the same
instrument. The execution of this Agreement by either party hereto will not
become effective until counterparts hereof have been executed by the other party
hereto. It shall not be necessary in making proof of this Agreement or any
counterpart hereof to produce or account for any other counterpart.
10.1.15. FACSIMILE SIGNATURES. This Agreement may be executed by
facsimile signature which shall be deemed to be an original for all purposes.
(SIGNATURE PAGE FOLLOWS)
-31-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Asset Purchase
Agreement on the day and year first above written.
Healtheon Corporation
-----------------------------------------------
By:
Its:
SmithKline Beecham Clinical Laboratories, Inc.
-----------------------------------------------
By:
Its:
-32-
<PAGE>
EXHIBIT A
DEFINITIONS
"AAA" means the American Arbitration Association.
"ActaMed" means ActaMed Corporation, a Delaware corporation and Subsidiary
of Buyer.
"Affiliate" means, with respect to any Person, any other Person
controlling, controlled by or under common control with such Person.
"Agreement" means the Asset Purchase Agreement of which this Exhibit forms
a part.
"Assumed Contracts" means the Contracts referenced in Section 1.1.3.
"Buyer Indemnitee" means Buyer and its Affiliates, and its or their
respective directors, officers, employees, and permitted assigns.
"Claim" means any claim for indemnification under Article VII of the
Agreement.
"Claims Notice" means a written notice of an indemnification claim
delivered pursuant to Section 7.2.3 of the Agreement.
"Code" means the Internal Revenue Code of 1986, as amended.
"Collateral Documents" means the documents, agreements and instruments to
be executed and delivered in connection with the Agreement, including without
limitation the Services Agreement and other agreements and documents to be
executed at or prior to Closing as contemplated by Article V of the Agreement.
"Consideration Shares" means the number of shares of Buyer's common stock
determined pursuant to Section 1.6.
"Contract" means any written contract, agreement, lease, plan, instrument
or other document, commitment, arrangement, undertaking, practice or
authorization that is binding on any Person or its property under applicable
law.
"Controlled Group Member" means any trade or business (whether or not
incorporated) which is aggregated with Buyer pursuant to sections 414(b), (c),
(m) or (o) of the Code.
"Court Order" means any judgment, decree, writ, injunction, order or ruling
of any federal, state or local court or governmental or regulatory body or
authority that is binding on any Person or its property under applicable law.
A-1
<PAGE>
"Default" means (a) a breach of or default under any Contract or License,
(b) the occurrence of an event that with the passage of time or the giving of
notice or both would constitute a breach of or default under any Contract or
License or (c) the occurrence of an event that with or without the passage of
time or the giving of notice or both would give rise to a right of termination,
renegotiation (but not where the right of renegotiation would arise in the
ordinary course of business or by virtue of the terms of the Contract or
License, in either case, independent of the transactions contemplated hereby) or
acceleration under any Contract or License.
"Employee Benefit Plan" means any pension, retirement profit-sharing,
deferred compensation, bonus, incentive, performance, stock option, phantom
stock, stock purchase, restricted stock, medical, hospitalization, vision,
dental or other health, life, disability, severance, termination or other
employee benefit plan, program, arrangement, agreement or policy, whether
written or unwritten, to which Buyer contributes or is obligated to contribute,
is a party to or is otherwise bound, or with respect to which Buyer may have any
Liability.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" means (i) a member of any "controlled group," as defined
in Section 414(b) of the Code, of which Buyer is a member, (ii) a trade or
business, whether or not incorporated, under common control (within the meaning
of Section 414(c) of the Code) with Buyer, or (iii) a member of any affiliated
service groups (within the meaning of Section 414(m) of the Code) of which Buyer
is a member.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Indemnifying Party" means the party obligated to provide indemnification
pursuant to Sections 7.2.1 or 7.2.2 of the Agreement.
"Indemnitee" means a party seeking indemnification under Sections 7.2.1 or
7.2.2 of the Agreement.
"Integrity Agreement" means the Corporate Integrity Agreement between
Seller and the OIG.
"Intellectual Property" means copyrights, trademarks, service marks, trade
names, patents or applications therefor, technology rights and licenses,
computer software (including, without limitation, any source or object codes
therefor or documentation relating thereto), computer software licenses, trade
secrets, franchises, know-how, inventions and intellectual property rights.
"Investors' Rights Agreement" means the Amended and Restated Investors'
Rights Agreement between Healtheon Corporation, Seller and the other persons and
entities listed on schedules A and B thereto, dated in May 1998.
A-2
<PAGE>
"Liability" means any direct or indirect liability, indebtedness,
obligation, expense, guaranty or endorsement of or by any Person (other than
endorsements of notes, bills and checks presented to banks for collection or
deposit in the ordinary course of business) of any type, whether accrued,
absolute, contingent, matured, unmatured, known or unknown.
"License" means any license, franchise, permit, easement, right or
authorization.
"Lien" means any mortgage, lien, security interest, pledge, encumbrance,
restriction on transferability, defect of title, charge or claim of any nature
whatsoever on any property or property interest.
"Litigation" means any lawsuit, action, claim, arbitration, administrative
or other proceeding, criminal prosecution or governmental investigation or
inquiry involving or affecting a Party or its business, assets or Contracts to
which it is a party or by which it or its business, assets or Contracts may be
bound or affected.
"Losses" means any and all demands, claims, actions or causes of action,
assessments, losses, diminution in value, damages (including special and
consequential damages), Liabilities, costs, and expenses, including without
limitation, interest, penalties, cost of investigation and defense, and
reasonable attorneys' and other professional fees and expenses.
"Material Adverse Effect" means a material adverse effect on the business,
operations, assets, condition (financial or otherwise), operating results,
prospects or liabilities of Buyer and its subsidiaries, taken as a whole, or on
the ability of Buyer to perform its obligations under this Agreement and the
Collateral Documents.
"OIG" means the Office of Inspector General of the Department of Health and
Human Services.
"Person" means any individual, corporation, trust, estate, business trust,
general or limited partnership, limited liability company, limited liability
partnership, unincorporated association or other legal entity.
"Prior Services Agreement" means the Services Agreement between Buyer and
Seller dated December 31, 1997.
"Provider" means a physician, clinic, hospital, patient service center or
other provider of clinical health care services who or which uses any of the
Purchased Assets to receive test result reports from a Seller Lab.
"Provider Site" means the site of a Provider utilizing a teleprinter for
Teleprinter Services.
"Public Offering" means a bona fide firm commitment underwritten offering
of the common stock of Buyer pursuant to a registration statement filed with and
declared effective by the SEC pursuant to the Securities Act.
A-3
<PAGE>
"Purchase Price" means the total purchase price of the Purchased Assets.
"Purchased Assets" means the assets described in subsections 1.1.1 through
1.1.3 of this Agreement.
"Regulation" means any statute, law, ordinance, regulation, requirement,
order or rule of any federal, state, or local government or other governmental
agency or body or of any other type of regulatory body, or any governmental or
administrative interpretation of any thereof, including, without limitation, (i)
those covering health, safety, environmental, energy, transportation, bribery,
record keeping, zoning, anti-discrimination, antitrust, wage and hour, and price
and wage control matters, (ii) requirements imposed by any governmental or
regulatory body which must be satisfied to qualify for Medicare reimbursements,
and (iii) any and all federal, state and local health care laws relating to or
covering the methods and ways in which Teleprinter Services, and incidental
services or benefits provided to Providers in connection with the provision of
Teleprinter Services, are provided to the Providers, including, but not limited
to, 42 U.S.C. Section 1395nn and the Clinical Laboratory Improvement Amendments
of 1988, as amended.
"Relationship Manager" means, for each party, the person designated in
writing (such writing to be delivered to the other party) by such party prior to
Closing.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Seller Indemnitee" means Seller and its Affiliates, and its or their
respective directors, officers, employees and permitted assigns.
"Seller Lab" means any location at which Seller or its Affiliates provide,
or may in the future provide, clinical laboratory testing services, regardless
of the means used by such lab for lab order entry and results reporting.
"Services Agreement" means (except as used in the definition of "Prior
Services Agreement") the Services Agreement between Buyer and Seller in a form
and substance to be agreed by Buyer and Seller, to be entered into on or prior
to the Closing Date, containing substantially the same terms and conditions as
those set forth on EXHIBIT B to the Agreement, and such other terms as Buyer and
Seller may agree upon.
"Subsidiary" means a corporation, limited liability company, partnership,
association, trust, joint venture or other entity in which Buyer or Seller, as
the case may be, has, directly or indirectly, an equity, ownership or
proprietary interest of greater than ten percent (10%).
"Substantial Holder" means an officer or employee of Buyer who is the
beneficial owner of one percent (1%) or more of the outstanding voting power or
the outstanding equity (on a fully diluted basis) of Buyer.
A-4
<PAGE>
"Teleprinter Services" means the transmission by Seller of clinical
laboratory test results from a Seller Lab to a teleprinter at a Provider Site
via a telephone line in the Provider Site which is automatically dialed by the
applicable Seller Lab and the printing of such results by such teleprinter.
"Third Party Claim" means any claim, suit or proceeding (including, without
limitation, a binding arbitration or an audit by any taxing authority) that is
instituted against an Indemnitee by a Person other than a party hereto and
which, if prosecuted successfully, would result in a Loss for which such
Indemnitee is entitled to indemnification hereunder.
"Trade Secrets" means information related to a party (1) which derives
economic value, actual or potential, from not being generally known to or
readily ascertainable by other Persons who can obtain economic value from its
disclosure or use, and (2) which is the subject of efforts by said party that
are reasonable under the circumstances to maintain its secrecy.
A-5
<PAGE>
EXHIBIT B
SUMMARY TERMS AND CONDITIONS
SERVICES AGREEMENT
BETWEEN SBCL AND HEALTHEON CORPORATION
[*]
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
<PAGE>
CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
SERVICES AGREEMENT
This SERVICES AGREEMENT (the "Services Agreement" or "Agreement") is made
and entered into this 19th day of January, 1999 by and between HEALTHEON
CORPORATION, a Delaware corporation ("Healtheon") and SMITHKLINE BEECHAM
CLINICAL LABORATORIES, INC., a Delaware Corporation ("SBCL").
BACKGROUND
Healtheon is in the business of providing and managing certain information
services and desires to provide services to SBCL relating to reporting of
results of clinical laboratory tests to Providers via teleprinters. SBCL
provides laboratory testing services to certain Providers who receive clinical
laboratory test results via teleprinters and related assets previously owned by
SBCL and purchased by Healtheon pursuant to an Asset Purchase Agreement dated
December 31, 1998 (the "Asset Purchase Agreement").
This Agreement sets forth the parties' agreements relating to their rights
and obligations following the date hereof relating to provision of Teleprinter
Services to Connected Providers. There are two basic components of the fees for
the services to be provided under this Agreement: one based on [*] and [*].
Because the per teleprinter [*] fee used in the first Year of this Agreement is
based on [*] for teleprinters during the Baseline Period, after the end of Year
One there will be [*]; and the [*] fee used in Years Two through Year Five are
reset at the end of Year One. In addition, SBCL will be entitled to [*] and [*]
pricing applied to the [*] as so calculated.
NOW THEREFORE, in consideration of the premises and the mutual promises
contained herein, the parties, intending to be legally bound, agree that
capitalized terms used above and in this Agreement and not otherwise defined
herein shall have the meanings set forth in EXHIBIT A attached hereto, and
further agree as follows:
1. AGREED SERVICES.
1.1. General.
Healtheon will provide the following services to SBCL at Sites in
accordance with the Performance Standards and will take all reasonable and
appropriate action to preserve the goodwill of the Connected Providers utilizing
such services (the "Agreed Services"):
1.1.1. TELEPRINTER SERVICES.
(a) HARDWARE AND EQUIPMENT.
Healtheon shall provide Connected Providers with all necessary hardware and
equipment to allow them to receive Teleprinter Services (the "Hardware")
(including shipping and transportation thereof), including without limitation:
(i) teleprinters (with at
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
least the same capabilities as those utilized by SBCL on the date hereof), (ii)
teleprinter stands (as needed), and (iii) cabling, connectors and line splitting
devices within the Site, as needed.
(b) SUPPLIES.
Healtheon shall provide Connected Providers with all supplies necessary to
their receipt of Teleprinter Services, including without limitation: paper,
forms, ribbons, and replacement parts; PROVIDED THAT SBCL and Healtheon will use
commercially reasonable efforts to preserve [*] in terms of [*]. The parties
will establish what [*] is for requisitions for [*] Teleprinters and [*]
Teleprinters based on due diligence completed prior to the Effective Date.
(c) REPAIR AND REPLACEMENT.
Healtheon shall repair or replace any malfunctioning Hardware and maintain
the Hardware in proper working condition; provided, however, that any
replacement teleprinters (which may be new or used) have at least the same
capabilities as the units which they replace.
(d) INSTALLATION AND DE-INSTALLATION.
Healtheon shall provide installation and de-installation of Hardware at
Sites where such installation or de-installation is requested or approved by
SBCL; provided, however, that (i) in place of de-installation, Healtheon may, in
its discretion, discontinue SBCL service following SBCL's request for
de-installation; and (ii) in place of installation, Healtheon may, in its
discretion and subject to meeting the Performance Standards and other terms and
conditions hereof, commence SBCL service utilizing a teleprinter already
installed at the applicable Site.
(e) TRAINING.
Healtheon shall provide training and re-training services for all Connected
Providers and their designated personnel as necessary to enable them to utilize
the Teleprinter Services accurately and efficiently, or as reasonably requested
by the Connected Provider.
(f) CUSTOMER SUPPORT.
Healtheon will provide all reasonably necessary and appropriate end user
support for issues relating to the utilization of Teleprinter Services,
including without limitation, [*] help desk support (except that SBCL shall
[*]), as set forth in EXHIBIT 1.2 hereto. All customer support services shall
be performed in a competent and professional manner meeting or exceeding
generally accepted industry standards for Teleprinter Services and will be
rendered by qualified personnel who will perform the tasks assigned consistently
with good professional practice and the state of the art involved. SBCL shall
have the right to request the removal from Connected Providers' accounts of any
Healtheon personnel used by Healtheon to perform customer support services,
provided such
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
objection would not constitute unlawful discrimination, if SBCL becomes aware
that such person is causing customer dissatisfaction. If an objection is raised
by SBCL, Healtheon agrees to confer with SBCL and endeavor to furnish a
replacement as quickly as practicable.
(g) REPORTS.
Healtheon shall provide SBCL, at Healtheon's own expense, and SBCL shall
provide Healtheon, at SBCL's own expense, with the reports specified on
EXHIBIT 1.1.1(g) hereto as to be delivered by them and at the times specified
thereon.
(h) PROVIDER AGREEMENTS.
From time to time and as requested by SBCL, Healtheon and SBCL shall use
their respective commercially reasonable efforts to [*] Connected Providers or
[*], containing provisions substantially the same as those set forth in EXHIBIT
1.1.1(h). Healtheon shall use its commercially reasonable efforts, with SBCL's
cooperation, to [*] with all [*] Connected Providers, which agreements shall
contain provisions substantially the same as those set forth in EXHIBIT
1.1.1(h).
1.1.2. TELECOMMUNICATIONS SERVICES.
Healtheon shall: (i) arrange all installations of Phone Lines at
Connected Providers designated by SBCL and notify SBCL when such Phone Lines
become available for Teleprinter Services, (ii) not use the Phone Lines
other than for printing of SBCL clinical test reports or as agreed pursuant
to Section 1.1.3, unless and until [*] for the Phone Line [*] to Healtheon,
(iii) at SBCL's direction, arrange termination of any Phone Line connected
to a teleprinter to which SBCL is no longer providing Teleprinter Services
and de-installation of such teleprinter, PROVIDED HOWEVER, that at [*]
option, [*] may choose [*] such Phone Line so long as such Phone Line is or
[*] pursuant to Section 4 of this Agreement, and may choose to [*] in place,
and such teleprinter will not thereafter be considered an Active Teleprinter,
and (iv) arrange for the maintenance of Phone Lines and provide help desk
support.
1.1.3. CONTRACTUAL COMMITMENTS.
Healtheon acknowledges and agrees that SBCL has contractual commitments
with payers and other third parties which may require such parties [*].
Healtheon and SBCL shall work together on mutually agreeable terms, including
without limitation reasonable and appropriate fees [*], to assist SBCL in
meeting its contractual commitments under such contracts as they exist from time
to time.
1.1.4. MONITORING OF PERFORMANCE STANDARDS.
Healtheon shall continuously monitor its performance against the
Performance Standards. Healtheon shall notify SBCL at any time when it fails to
meet the Performance Standards. SBCL shall similarly notify Healtheon of any
such failure, provided that the failure by SBCL to so notify shall not
constitute a waiver of SBCL's
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
rights hereunder. In the event that Healtheon fails to meet any Performance
Standard at any time, Healtheon shall promptly diagnose the cause of the failure
and shall work continuously and diligently to correct such failure to perform
until it is corrected. Any failure to meet the Performance Standards which
occurs while Healtheon is working to remedy the problem shall continue to be
counted for purposes of Section 14.2 hereof.
1.1.5. MONITORING OF MATTERS RELATING TO COMPLIANCE MATTERS.
Healtheon shall diligently monitor whether there is any Shared Use of
Phone Lines or Hardware which is inconsistent with the terms of this
Agreement; PROVIDED THAT, such monitoring for Shared Use of Phone Lines [*]
under Section 4 of this Agreement shall be required only to the extent
information required for such monitoring is provided by SBCL. Healtheon
shall notify SBCL when it becomes aware of any Shared Use which is
inconsistent with the terms of this Agreement. SBCL shall similarly notify
Healtheon of any such awareness of SBCL, provided that the failure by SBCL to
so notify shall not constitute a waiver of Healtheon's obligations hereunder.
1.2. PERFORMANCE STANDARDS.
EXHIBIT 1.2 to this Agreement specifies the Performance Standards for the
services hereunder which Healtheon must achieve and maintain and the applicable
time periods for measuring compliance with such standards. To the extent
Exhibit 1.2 requires later agreement as to the metrics for designated
Performance Standards, then if the parties fail to agree on such metrics for
such Performance Standards by [*], notwithstanding anything in this Agreement to
the contrary, either party may identify the dispute regarding the metrics for
such Performance Standards for resolution pursuant to Section 16.
1.3. RECORDS AND AUDITS.
1.3.1 Healtheon shall maintain accurate and complete billing records
regarding the provision of Agreed Services in compliance with applicable
Regulations, but in no event for less than three (3) years or such longer period
as may be required by Regulations or the Integrity Agreement; AND PROVIDED
FURTHER THAT with respect to Transmissions which, after accepted Systems
Changes, are run [*], such records shall include such information as would
conform to accepted information storage practices in the clinical laboratory
industry.
1.3.2 The records maintained pursuant to Section 1.3.1 above shall
include without limitation records of the amounts Healtheon charges SBCL under
this Agreement, with a system of audit trails, records and controls sufficient
to allow SBCL to audit such transactions and charges under this Agreement and to
assure satisfaction of any requirements imposed on SBCL by their external
auditors or on Healtheon or SBCL by government officials enforcing applicable
Regulations.
1.3.3 In addition to the grant of Audit Rights pursuant to Sections
4.11, 5.1.8, 5.11 and 8.4 of this Agreement, SBCL shall have the right,
exercisable [*] to have any of
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
its agents or employees, who or which are reasonably acceptable to Healtheon,
audit, in accordance with the Audit Rights, the books and records of Healtheon
relating to Agreed Services to examine or determine compliance with this
Agreement and the proper amounts which should have been billed to SBCL, the
amounts which were billed to SBCL, and the amounts which SBCL has paid under
this Agreement.
1.3.4 In any exercise of Audit Rights under this Agreement, including
without limitation pursuant to Section 1.3.3, SBCL shall give Healtheon two
week's prior notice of any such audit, and shall abide by reasonable Healtheon
security and confidentiality procedures during the audit. SBCL and Healtheon
shall each bear their own costs associated with such audit, provided that in the
event the audit determines that Healtheon has [*] of the [*] Healtheon in any
month, Healtheon shall pay all costs of such audit. If the audit reveals an
overpayment by SBCL to Healtheon, Healtheon shall promptly refund such
overpayment to SBCL. If the audit reveals an underpayment by SBCL, SBCL shall
promptly pay to Healtheon the amount of such underpayment. In the exercise of
any Audit Rights under this Agreement, SBCL shall use its commercially
reasonable efforts to coordinate such exercise with the exercise of comparable
rights under the Prior Services Agreement so as to reasonably minimize the
inconvenience thereof to Healtheon.
1.4. SBCL [*].
If the net number of Active Teleprinters increases by more than [*], or by
more than [*], SBCL will provide mutually agreeable [*] to Healtheon for the [*]
number of Active Teleprinters in [*]. The terms of [*] shall be consistent with
past practice between the parties under the Prior Services Agreement and shall
result in [*] to SBCL within [*] is provided.
1.5. SBCL [*].
If requested by SBCL, Healtheon shall give [*] Hardware, supplies or
telecommunications or other services [*].
1.6. SUBCONTRACTED SERVICES.
Healtheon will be permitted to engage subcontractors to provide Agreed
Services under this Agreement; PROVIDED THAT:
1.6.1 Healtheon shall not be relieved of any liability to SBCL by
reason of the subcontract;
1.6.2 Healtheon shall have sole responsibility for all payments due
under such subcontract;
1.6.3 SBCL is notified, in advance of the effectiveness of any material
contract with a third party subcontractor(s), of the identity of the third party
subcontractor and the services to be provided by such subcontractor. SBCL will
promptly notify Healtheon of any objection it may have to a particular
subcontract or subcontractor and Healtheon will
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
use its commercially reasonable efforts to accommodate SBCL's concerns. The
parties hereby acknowledge and agree that [*] is a permitted subcontractor. The
parties agree that material contracts for purposes of this Section 1.6.3 include
any subcontract for Agreed Services greater than [*].
1.6.4 The [*], except that [*] may be engaged by Healtheon [*] to [*]
Teleprinters or, at SBCL's option, to [*].
1.6.5 Healtheon will have total responsibility for the subcontracted
services.
2. TRANSITION SERVICES
2.1. TRANSITION COMMITTEE.
Prior to the Effective Date, the parties shall appoint a Transition
Committee which will plan for and assist in the transition of the provision of
Teleprinter Services from SBCL to Healtheon. The Transition Committee will
consist of persons meeting the criteria for each of the parties as set forth on
EXHIBIT 2.1 hereto. The Transition Committee will serve [*] or such later date
as the parties shall mutually agree. The Transition Committee shall have
responsibility for the design and execution of an implementation plan setting
forth the business plan for transition of Agreed Services from SBCL to
Healtheon. The initial draft of the implementation plan is attached hereto as
part of EXHIBIT 2.1.
2.2. TRANSITION SERVICES.
From and after the date hereof and until [*], SBCL will provide necessary
and appropriate services other than such services as have been transitioned to
Healtheon in order that the Agreed Services are rendered to SBCL.
Notwithstanding the foregoing, SBCL shall not be required to provide any
services provided by [*] under Assumed Contracts (as defined in the Asset
Purchase Agreement). In consideration of such services from the Effective Date,
SBCL will invoice Healtheon not more frequently than monthly for all [*] Costs
(other than [*]) incurred by SBCL in the provision of such services. Each such
invoice shall be accompanied by reasonable documentation relating to charges on
such invoice. In the event that SBCL is still required to provide any such
services after [*] in order for all Agreed Services to be rendered, it shall
invoice Healtheon for [*] of all such [*] Costs incurred after [*]; provided
that the foregoing [*] in charges shall not apply to the extent such delays are
due to the acts of, or one or more failures to act by, SBCL, and Healtheon
provides reasonable documentation of such fact. All amounts shown on any such
invoice shall be paid by Healtheon, without offset for any amounts which may
then be owed by SBCL to Healtheon, within [*] after the date of the invoice. In
the event that Healtheon disputes any amount shown due on any such invoice,
Healtheon shall pay timely any undisputed amounts and send a Dispute Notice to
SBCL with respect to any disputed amounts. Within a period of [*] after the
date of the Dispute Notice, Healtheon shall have the right to initiate exercise
of Audit Rights with respect to the portions of SBCL's books and records that
relate to the subject of the dispute. In the event that the
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
parties are unable to resolve the disputed matter, the matter shall be resolved
in accordance with Section 16 hereof.
2.3. EMPLOYEE TRANSFERS.
Except as provided in this Section 2.3, throughout the term hereof
(including any renewal period), Healtheon shall not, either individually or
through any affiliate, employee, director, officer, partner, joint venturer or
consultant, directly or indirectly, [*] with SBCL. Healtheon shall be permitted
from and after the date hereof until [*], to [*] to the persons [*] on the list
[*] on such terms and conditions as Healtheon may determine in its sole
discretion; PROVIDED THAT, prior to [*] such person, Healtheon shall [*] to the
SBCL Relationship Manager [*]. Up until [*], SBCL shall not [*] listed [*] to a
[*] from that [*]. Notwithstanding the foregoing, in the event that Healtheon
notifies SBCL [*], SBCL shall be entitled to [*] any such [*] which such [*] to
hold.
Healtheon shall institute a policy which requires that, in the event any
[*] approaches Healtheon regarding [*] and Healtheon, after completion of [*] or
its equivalent, determines that it wishes to [*], Healtheon [*] with [*], or
cause any other Person to [*] on behalf of Healtheon, unless (i) such [*] has
granted permission [*] regarding [*], and (ii) Healtheon has [*].
3. [*]
3.1. AVAILABILITY OF [*].
From and after the Effective Date and until [*], Healtheon shall be
entitled to [*] for delivery of teleprinters, spare parts and supplies to
Connected Providers necessary for the provision of Teleprinter Services to such
Connected Providers in a manner and to an extent [*] for such services; PROVIDED
THAT:
3.1.1 Healtheon shall not [*] to make a delivery other than on such [*]
as determined by SBCL from time to time; and
3.1.2 Healtheon shall not [*] to pick up teleprinters, spare parts or
supplies at other than an SBCL owned or operated location (except to the extent
SBCL [*] at other than SBCL owned or operated locations prior to February 1,
1999).
Notwithstanding the foregoing, SBCL shall (i) not be required to [*] to
make such deliveries to any Site that has only [*] Teleprinters; and (ii)
make available to Healtheon [*] which as of the date of this Agreement is
utilized by SBCL [*] utilized in connection with Agreed Services ("[*]"). [*]
made available to Healtheon shall be available [*] to Healtheon for [*] by
Healtheon, so long as it does not cause SBCL to incur any [*]. Nothing in
the foregoing provisions relating to [*] shall require SBCL to [*], all of
such decisions being in SBCL's sole discretion. In addition, if, in the
ordinary course of business SBCL needs to [*] for its own business needs,
SBCL may do so, and in such case SBCL will use commercially reasonable
efforts to make [*] as a substitute therefore if SBCL has [*].
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
3.2. CHARGES FOR [*]
3.2.1 There shall be [*] for use of [*] for the period from the
Effective Date until [*].
3.2.2 Prior to commencement of the [*], Healtheon and SBCL shall
determine the methods by which data will be gathered from [*] during [*]
regarding the duration, purposes and [*] made [*] for or on behalf of Healtheon
in connection with the provision of Agreed Services under this Agreement and for
and on behalf of SBCL or any other person. [*], (i) Healtheon and SBCL shall
cooperate in gathering such data in accordance with the guidelines so
established [*], (ii) SBCL and Healtheon shall maintain documentation of [*] for
Healtheon, and (iii) SBCL shall require [*] made for Healtheon and all [*].
3.2.3 From [*] through and including [*], SBCL shall [*] Healtheon, not
more frequently than monthly, an amount per month (the "[*]") equal to [*].
In this formula,
(a) "A" is equal to the [*], as determined in good faith by SBCL and with
reasonable documentation therefor available to Healtheon upon Healtheon's
request;
(b) "B" is equal to the [*] by all [*];
(c) "C" is equal to the [*] on behalf of Healtheon in connection with the
provision of Agreed Services under this Agreement during [*]
(d) "D" is equal to the aggregate number of [*] at all Healtheon [*] made
in [*] and
(e) "E" is equal to the aggregate maximum number of [*] (including the
provision of Agreed Services) at [*] during [*].
The [*] shall be dependent upon (i) the guidelines established therefor by
Healtheon and SBCL prior to commencement of the [*], and (ii) the duration and
purposes [*], as well as any other relevant factors which the parties determine
should be [*] prior to the [*]. The above calculations shall be done on a [*]
so that they take into account the [*], availability and usage of [*].
The parties acknowledge that any [*] activities undertaken by any [*]
pursuant to Section 6.5 shall not be taken into account for the purpose of the
calculations required by this Section 3.
3.2.4 In the event that Healtheon's [*] shall change in a material
manner so as to be materially inconsistent with Healtheon's [*] during the [*]
(and the parties acknowledge that a termination [*] in one or more [*] is such a
change), Healtheon shall notify SBCL of the change, with reasonable explanation
as to the reasons therefor, and the parties shall negotiate in good faith an
adjustment (and in the case of a [*]) to the [*] so as to take account of such
change in usage. Nothing in this Section 3 shall restrict SBCL, in the ordinary
course of its business, from making [*] (including, but not limited to [*],
timing [*] provided SBCL gives Healtheon reasonable advance notice (generally
not less than ten (10) days) of any such changes that could reasonably be
expected to affect Healtheon's ability to meet Performance Standards.
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
4. TELEPHONE LINES; TRANSFER, BILLING AND TELECOM FEES
4.1. PHONE LINES FOR NEW TELEPRINTERS.
Subject to Section 4.2, except in the case of a [*] Teleprinter, Healtheon
shall cause SBCL to be the party to whom any bill is sent from the
telecommunications carrier for a Phone Line to a new teleprinter installed
pursuant to Section 1.1.1(d) of this Agreement.
4.2. PHONE LINES BEFORE TRANSFER.
Until transferred to Healtheon in accordance with this Agreement, SBCL
shall remain the party to whom any bill from the applicable telecommunications
carrier for a Phone Line is sent. SBCL shall have the sole obligation to pay
all undisputed amounts owed to telecommunications carriers for which it is the
billing party pursuant to Section 4.1 or 4.2.
4.3. TRANSFER AT HEALTHEON REQUEST.
By written notice to SBCL, Healtheon may [*] request that bill paying
responsibility for any Phone Line be transferred to Healtheon. After
receiving such request for transfer of Phone Lines to Healtheon, SBCL shall use
commercially reasonable efforts to assist in the transfer to Healtheon of Phone
Lines so requested to be transferred; PROVIDED THAT [*] shall be responsible [*]
associated with such transfer.
If Healtheon receives its first bill for a Phone Line transferred pursuant
to this Section 4.3 or Section 4.4 on the first day of the month, such Phone
Line shall be deemed a "Transferred Phone Line" for such month and each month
thereafter. If Healtheon receives its first bill for a Phone Line transferred
pursuant to this Section 4.3 or Section 4.4 on any day from the second day of
the month until the last day of the month, such Phone Line shall be deemed a
"Transferred Phone Line" for the next month and each month thereafter.
4.4. TRANSFER AT SBCL REQUEST.
From time to time (but not to exceed [*] times without Healtheon's express
written consent), SBCL may provide Healtheon with notice that it wishes to
transfer a small number of Phone Lines identified in the notice (not to exceed
[*] without Healtheon's express written consent, which consent will not be
unreasonably withheld) to Healtheon. After receiving the request from SBCL for
transfer of such Phone Lines, Healtheon shall use commercially reasonable
efforts to assist in the transfer to Healtheon of such Phone Lines; PROVIDED
THAT [*] shall be responsible [*] associated with such transfer.
4.5. GENERAL CONDITION.
The transfer of Phone Lines to Healtheon pursuant to Section 4.3 above
shall be conditioned upon the maintenance of the same or higher level of
telecommunications services. SBCL shall not be obligated to transfer Phone
Lines to Healtheon following receipt of a request from Healtheon for such a
transfer if service related problems have
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
occurred upon previous transfers of Phone Lines, unless Healtheon shall have
demonstrated, through trial transfer or other reasonable means determined in
SBCL's sole discretion, that future transfers of Phone Lines can occur with no
deterioration in service.
4.6. YEAR ONE [*] TELECOM FEES.
For [*] during Year One, SBCL shall pay Healtheon a fee equal to the [*]
(other than, subject to Section 6.5[*]; PROVIDED HOWEVER, that for each Phone
Line for which SBCL receives the bill pursuant to Section 4, SBCL shall pay the
telecommunications carrier for such Phone Line directly on Healtheon's behalf
and (i) net such amount from the amounts otherwise due hereunder, and (ii) bill
Healtheon for any [*] included in such bills (other than such fees subject to
Section 6.5 of this Agreement) AND PROVIDED FURTHER HOWEVER, that
notwithstanding the foregoing, for each Transferred Phone Line, SBCL shall pay
Healtheon [*] the [*] Telecom Fee.
4.6.1. CERTAIN DEFINITIONS FOR YEAR ONE TELECOM FEES.
For Year One,
(a) "[*] Telecom Fee" shall mean the Telecom Baseline divided by [*]
Phone Lines used for Teleprinter Services [*] and paid for [*]; and
(b) "Telecom Baseline" shall mean [*] Phone Lines (other than [*]
which are to be included in the [*] used for Teleprinter Services in the
[*].
4.6.2. Time Period for Agreeing on Telecom Baseline.
Healtheon and SBCL shall use their best efforts to exchange information
needed to reach agreement as to the Telecom Baseline no later than [*]. If, by
[*], the parties have not completed the exchange and review of information
needed to reach agreement, or cannot reach agreement the parties shall [*]
between their opposing views and the result (the "Temporary Telecom Baseline")
shall be deemed to be the Telecom Baseline until [*]. In such a case, when the
needed information has been exchanged and reviewed, or the parties agree as to
the amount of the Telecom Baseline, the parties will [*] based on the Temporary
Telecom Baseline as though the Telecom Baseline Amounts had been agreed to prior
to the Effective Date. If the parties cannot agree to the Telecom Baseline by
[*], either party shall have the right to require that the dispute will be
resolved pursuant to Section 16 hereof. Upon the resolution of such dispute,
the parties will adjust for any payments previously made based on the Temporary
Telecom Baseline as though the Telecom Baseline determined through dispute
resolution had been in effect from the Effective Date.
4.7. YEAR TWO [*] TELECOM FEES.
For each month during Year Two, SBCL shall pay Healtheon a fee equal to the
[*] (other than [*] included [*] for such Phone Lines); PROVIDED HOWEVER, that
for each Phone Line for which SBCL receives the bill pursuant to Section 4, SBCL
shall pay the telecommunications carrier for such Phone Line directly on
Healtheon's behalf and (i) net
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
such amount from the amounts otherwise due hereunder, and (ii) bill Healtheon
for any [*] included in such bills; AND PROVIDED FURTHER HOWEVER, that
notwithstanding the foregoing, for each Transferred Phone Line, SBCL shall pay
Healtheon [*] Telecom Fee.
For Year Two, "[*] Telecom Fee" shall mean [*] (other than [*] used for
Teleprinter Services for the twelve months ending [*], divided by the [*] during
such twelve month period.
4.8. YEAR THREE [*] TELECOM FEES.
For each [*] during Year Three, SBCL shall pay Healtheon a fee equal to the
[*] (other than [*] included in [*] such Phone Lines); PROVIDED HOWEVER, that
for each Phone Line for which SBCL receives the bill pursuant to Section 4, SBCL
shall pay the telecommunications carrier for such Phone Line directly on
Healtheon's behalf and (i) net such amount from the amounts otherwise due
hereunder, and (ii) bill Healtheon for any [*] included in such bills; AND
PROVIDED FURTHER HOWEVER, that notwithstanding the foregoing, for each
Transferred Phone Line, SBCL shall pay Healtheon [*] Telecom Fee.
For Year Three, "[*] Telecom Fee" shall mean [*] (other than [*]) used for
Teleprinter Services for the twelve months ending [*], divided by [*] during
such twelve month period.
4.9. YEAR FOUR [*] TELECOM FEES.
For each [*] during Year Four, SBCL shall pay Healtheon a fee equal to the
[*] (other than [*] included in [*] for such Phone Lines); PROVIDED HOWEVER,
that for each Phone Line for which SBCL for such [*] pursuant to Section 4, SBCL
shall pay the telecommunications carrier for such Phone Line directly on
Healtheon's behalf and (i) net such amount from the amounts otherwise due
hereunder, and (ii) bill Healtheon for any [*] included in such bills; AND
PROVIDED FURTHER HOWEVER, that notwithstanding the foregoing, for each
Transferred Phone Line, SBCL shall pay Healtheon [*] Telecom Fee.
For Year Four, "[*] Telecom Fee" shall mean [*] (other than [*]) used for
Teleprinter Services for the twelve months ending [*], divided by [*] during
such twelve month period.
4.10. YEAR FIVE [*] TELECOM FEES.
For each [*] during Year Five, SBCL shall pay Healtheon a fee equal to the
[*] (other than [*] included in [*] for such Phone Lines); PROVIDED HOWEVER,
that for each Phone Line for which SBCL receives the bill pursuant to Section 4,
SBCL shall pay the telecommunications carrier for such Phone Line directly on
Healtheon's behalf and (i) net such amount from the amounts otherwise due
hereunder, and (ii) bill Healtheon for any [*] included in such bills; AND
PROVIDED FURTHER HOWEVER, that notwithstanding the foregoing, for each
Transferred Phone Line, SBCL shall pay Healtheon [*] Telecom Fee.
For Year Five, "[*] Telecom Fee" shall mean [*] (other than [*]) used for
Teleprinter Services for the twelve months ending [*], divided by the [*] during
such twelve month period.
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
4.11. DOCUMENTATION AND AUDIT RIGHTS.
In connection with the periodic calculations of each Monthly Telecom Fee
the parties will provide to each other reasonable documentation of [*] for Phone
Lines (other than [*]) used for Teleprinter Services for the applicable period.
If the parties cannot agree as to the applicable Monthly Telecom Fee, then the
applicable Monthly Telecom Fee shall be the Monthly Telecom Fee as agreed to or
as determined for the prior period until the correct Monthly Telecom Fee has
been agreed to or is determined (including through Section 16). Each party
shall have Audit Rights for each such calculation; and in the event any Monthly
Telecom Fee was incorrectly calculated (or a prior Monthly Telecom Fee was used
pending agreement or determination of the correct Monthly Telecom Fee for a
period), the difference in the correct amount due shall be paid to the party
entitled to it.
4.12. TELECOM FEES UPON RENEWAL.
Telecom fees for any Year after Year Five will be set by negotiation of the
parties in connection with any renewals of this Agreement.
4.13. TELECOM FEES INVOICES AND PAYMENTS.
For the telecom fees for Transferred Phone Lines, Healtheon will invoice
SBCL in the same fashion (e.g., in advance or in arrears) as SBCL was required
to pay the carrier (e.g., in advance or in arrears) prior to the transfer of the
phone line from SBCL to Healtheon. SBCL will pay any undisputed amounts on such
invoices within (30) days after receipt of the invoice.
4.14. TELECOM RECORDKEEPING.
Each of Healtheon and SBCL will use commercially reasonable efforts to
organize its information relating to [*] so that each will be able to provide
necessary information in a reasonably prompt manner to implement the
requirements of this Section 4 relating to [*] Telecom Baseline Amounts and
monthly invoices.
5. TELEPRINTER FEES.
5.1. DEFINITIONS USED IN CALCULATING FEES.
5.1.1 "Baseline Costs" shall mean (i) SBCL's [*] and (ii) SBCL's [*] in
connection with activities and services that would fall within the definition of
Agreed Services if performed by Healtheon after the Effective Date (such as Help
Desk personnel ([*]); and (iii) SBCL's [*] teleprinters.
5.1.2 "Baseline Period" shall mean the [*] period beginning [*] and
ending [*].
5.1.3 "Standard [*] Teleprinter Fee" shall be equal to the [*] divided
by the [*].
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
5.1.4 "Year One [*] Teleprinter Fee" shall mean the result of (i) the
[*], divided by (ii) twelve (12).
5.1.5 "Baseline Denominator" shall mean the [*].
5.1.6 "Teleprinter Baseline" shall mean the [*].
5.1.7 "Year One Denominator" shall mean the [*] during Year One.
5.1.8 "Year One Teleprinter Cost" shall mean Healtheon's [*] (but not
including such [*]) associated with the teleprinters subject to this Agreement
[*] in connection with Agreed Services for Year One, [*]; provided that for the
purposes of this calculation, Healtheon shall (i) [*] and (ii) exclude (A) [*],
(B) [*], (C) increased [*] which are [*] and (D) [*] or which the parties [*] in
the [*]. Healtheon shall provide reasonable documentation for the amount of
such costs and to demonstrate that such costs relate to Teleprinter Services
hereunder. Healtheon shall use its commercially reasonable efforts to keep the
Year One Teleprinter Costs low during Year One. SBCL shall have Audit Rights
with respect to this calculation, and any disputes relating thereto shall be
resolved pursuant to Section 16 of this Agreement.
5.2. TIME PERIOD FOR AGREEING ON TELEPRINTER BASELINE.
Healtheon and SBCL shall use their best efforts to exchange information
needed to reach agreement as to the Teleprinter Baseline no later than [*].
If, by [*], the parties have not completed the exchange and review of
information needed to reach agreement, or cannot reach agreement the parties
shall [*] between their opposing views and the result (the "Temporary
Teleprinter Baseline") shall be deemed to be the Teleprinter Baseline until [*].
In such a case, when the needed information has been exchanged and reviewed, or
the parties agree as to the amount of the Teleprinter Baseline, the parties will
[*] made based on the Temporary Teleprinter Baseline as though the Teleprinter
Baseline had been agreed to prior to [*]. If the parties cannot agree to the
Teleprinter Baseline [*] either party shall have the right to require that the
dispute will be resolved pursuant to Section 16 hereof. Upon the resolution of
such dispute, the parties will adjust for any payments previously made based on
Temporary Teleprinter Baseline as though the Teleprinter Baseline determined
through dispute resolution had been in effect from the Effective Date.
5.3. YEAR ONE [*] TELEPRINTER FEES.
Subject to Section 5.13 and [*] provided for in Section 6 hereof, for each
month during Year One, for each Active Teleprinter subject to this Agreement
SBCL shall pay Healtheon a fee equal to [*] Year One [*] Teleprinter Fee.
5.4. YEAR ONE ADJUSTMENT PAYMENT.
If the Year One Teleprinter Cost [*] the sum of, for all [*] of Year
One, the [*] multiplied by the number of [*], then SBCL shall pay Healtheon
an amount equal to [*] if the term "[*]" were used instead of [*]. If the
Year One Teleprinter Cost is [*]of the [*] paid
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
by SBCL for Active Teleprinters, then Healtheon shall pay SBCL an amount equal
to the [*] were used instead of [*] in [*] of this Agreement and (ii) the [*].
Any payment required to be made pursuant to this Section 5.4 shall be due within
[*] after the date of receipt of the calculation of such difference, together
with reasonable documentation of the supporting information. SBCL shall have
Audit Rights with respect to this calculation, and any disputes shall be
resolved pursuant to Section 16 of this Agreement.
5.5. YEAR TWO [*] FEES.
Subject to Section 5.13 [*] provided for in Section 6 hereof, for each
month during Year Two, for each Active Teleprinter subject to this Agreement,
SBCL shall pay Healtheon a fee equal to [*] Standard [*] Teleprinter Fee.
5.6. YEAR THREE [*] FEES.
Subject to Section 5.13 and [*] provided for in Section 6 hereof, for each
month during Year Three, for each Active Teleprinter subject to this Agreement,
SBCL shall pay Healtheon a fee equal to [*] Standard [*] Teleprinter Fee.
5.7. YEAR FOUR [*] FEES.
Subject to Section 5.13 and [*] provided for in Section 6 hereof, for each
month during Year Four, for each Active Teleprinter subject to this Agreement,
SBCL shall pay Healtheon a fee equal to [*] Standard [*] Teleprinter Fee.
5.8. YEAR FIVE [*] FEES.
Subject to Section 5.13 and [*] provided for in Section 6 hereof, for each
month during Year Five, for each Active Teleprinter subject to this Agreement,
SBCL shall pay Healtheon a fee equal to [*] Standard [*] Teleprinter Fee.
5.9. FEES UPON RENEWAL; OTHER FEES.
Fees for any period after Year Five will be set by negotiation of the
parties in connection with any renewals of this Agreement. In consideration of
its receipt of the Agreed Services and Healtheon's other undertakings set forth
in this Agreement, SBCL has agreed to pay Healtheon as provided in Section 4 and
this Section 5, and provision of services under this Agreement will result in no
other fees, including without limitation, any development, integration or
customization fees chargeable to SBCL, except to the extent expressly set forth
in this Agreement or in a writing delivered pursuant to this Agreement and
executed by both parties hereto.
5.10. INVOICES AND PAYMENTS.
For the fees due under Sections 5.3, 5.5 and 5.6 of this Agreement,
Healtheon will invoice SBCL on the 15th of each month, and undisputed amounts
will be due within (30) days after receipt of the invoice; and for the fees due
under Sections 5.7 and 5.8, Healtheon will invoice SBCL on a basis to be
negotiated prior to the end of Year Three.
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
5.11. DISPUTED INVOICES.
In the event SBCL disputes any amount shown due on any invoice from
Healtheon, SBCL shall send a Dispute Notice to Healtheon. In such event, SBCL
shall timely pay any undisputed amount to Healtheon and shall have Audit Rights
with respect to the portions of Healtheon's books and records that relate to the
subject of the dispute. In the event the parties are unable to resolve the
disputed matter, the matter shall be resolved in accordance with Section 16
hereof.
5.12. INTENTIONALLY OMITTED
5.13. [*]
5.13.1. CERTAIN DEFINITIONS USED IN THIS SECTION 5.13.
(a) "[*] Teleprinters" on the first day of any [*] shall mean [*] any [*]
since the date hereof which [*] to either (i) the [*] (ii) any formerly [*] and
which on the first day of the month are [*] of test results reporting.
(b) "[*] Teleprinters" on the first day of any month shall mean [*] any
[*] since the date hereof which [*] to either (i) the [*], or (ii) any formerly
[*] and which on the first day of the month are [*] of test results reporting.
(c) "[*] Teleprinters" on the first day of any month shall mean [*] the
sum of [*] and [*] which were [*] and which on the first day of the month are
[*] of test results reporting.
(d) "[*] Teleprinters" shall mean teleprinters located at Sites that are
[*].
(e) "[*] Teleprinters" shall mean teleprinters at Sites receiving
Teleprinter Services for the printing of results of [*].
(f) "[*] Teleprinters" shall mean any teleprinter that is not a [*]
Teleprinter.
(g) "Beginning Number" shall mean the actual number of [*] Teleprinters or
[*] teleprinters on the Effective Date as set forth on the final schedule to be
delivered pursuant to 5.1.3(g) to the Asset Purchase Agreement listing such
teleprinters.
5.13.2. YEAR ONE.
If, on the first day of any month of Year One, the number of Active
Teleprinters is less than the sum of [*] (which sum is referred to as the
"[*]"), SBCL will pay Healtheon pursuant to Section 5.3 hereof as though the
number of Active Teleprinters on the first day of such month was equal to the
Year One [*].
<PAGE>
5.13.3. YEAR TWO.
If, on the first day of any month of Year Two, the number of Active
Teleprinters is less than the sum of [*] (which sum is referred to as the "[*]")
SBCL will pay Healtheon pursuant to Section 5.5 as though the number of Active
Teleprinters on the first day of such month was equal to the Year Two [*].
5.13.4. YEAR THREE.
If, on the first day of any month of Year Three, the number of Active
Teleprinters is less than the sum of [*] (which sum is referred to as the
"[*]"), SBCL will pay Healtheon pursuant to Section 5.6 as though the number of
Active Teleprinters on the first day of such month was equal to the Year Three
[*].
5.13.5. YEAR FOUR.
If, on the first day of any month of Year Four, the number of Active
Teleprinters is less than the sum of (i) * (which sum is referred to as the
"[*]"), SBCL will pay Healtheon pursuant to Section 5.7 as though the number of
Active Teleprinters on the first day of [*] was equal to the Year Four [*].
5.13.6. YEAR FIVE.
If, on the first day of any month of Year Five, the number of Active
Teleprinters is less than the sum of (i) [*] (which sum is referred to as the
"[*]"). SBCL will pay Healtheon pursuant to Section 5.8 as though the number of
Active Teleprinters on the first day of [*] was equal to the Year Five [*].
5.13.7. AGGREGATE [*] AMOUNTS.
The fees payable by SBCL for the last month of each Year pursuant to
Sections 5.3, 5.5, 5.6, 5.7, or 5.8 of this Agreement and this Section 5.13, as
applicable to that Year, shall be [*]) so that, for that Year, SBCL shall not
have paid fees under such applicable Section and this Section 5.13 with respect
to a number of teleprinters that is [*] of (i) that number of teleprinters
which is equal to the [*], as applicable, for each of the [*], or (ii) the sum
of the [*] for each month in such Year on which fees would be paid but for this
Section 5.13.
5.13.8. EXAMPLES.
Examples of the application of this Section 5.13 are attached hereto as
EXHIBIT 5.13.8.
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
6. OTHER PROVISIONS AFFECTING PRICING
6.1. STAT INSTALLS.
SBCL may, on a rare and occasional basis, and for reasonable commercial
purposes, request that a Provider receive an installation on a faster basis
than the Performance Standards otherwise requires. Healtheon will accommodate
SBCL's reasonable request for such "STAT" services requested in accordance with
the foregoing sentence. Any incremental out-of-pocket costs (expenses in excess
of those that would be incurred in providing Agreed Services to such Provider
without regard to the request for STAT services) incurred by Healtheon by reason
of SBCL's request shall be paid by SBCL to Healtheon within [*] after receipt of
invoice therefor.
6.2. SCAN SITES.
If a Provider is receiving services under the Prior Services Agreement
for SCAN (as defined in the Prior Services Agreement) and also has one or more
Active Teleprinters subject to this Agreement, SBCL shall [*] the Year One
Monthly Teleprinter Fee for any Active Teleprinter at such Site for [*]. The
Year One Monthly Teleprinter Fee (or the Standard Monthly Teleprinter Fee, as
applicable) [*] Active Teleprinter at each such Site for [*] and for each
month thereafter except to the extent that SBCL shall have provided a
de-installation notice pursuant to Section 1.1.1(d).
6.3..[*]
6.3.1 From and after the effective date of a Reference Contract the
appropriate portion of the Site Fees due under this Agreement shall be [*], to
an amount equal to [*] furnishing clinical laboratory testing results on [*]
teleprinters ("Reference Services") provided pursuant to such Reference
Contract.
"Reference Contract" shall mean any agreement between Healtheon and [*]
pursuant to which Healtheon (i) provides services that include furnishing
clinical laboratory testing results on a [*], or (ii) provides only the service
of furnishing clinical laboratory testing results on [*] at [*] and services
directly related thereto; or (iii) provides services that include furnishing
clinical laboratory testing results on [*] and that [*] that such agreement
shall be deemed a Reference Contract.
6.3.2 On or prior to the earlier of (i) [*] or (ii) the date on
which [*] teleprinter network, the parties shall agree upon the adjustment to
the applicable portion of the Site Fees to be paid by SBCL for the use of [*]
Teleprinters (in the case of (ii), based on the price to be paid by an [*]
Lab for the use of any Active Teleprinter (which will thereby become a [*]
Teleprinter)). Notwithstanding the foregoing, if Healtheon (i) has [*] which
seeks to use teleprinters which are the subject of this Agreement and (ii)
has given SBCL [*], the parties shall endeavor to reach agreement regarding
such adjustment within thirty (30) days after such notice, and if the parties
have not reached agreement regarding such adjustment by a date thirty (30)
days after such notice, either party may identify such dispute for resolution
pursuant to Section 16; PROVIDED HOWEVER, if the dispute is not
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
resolved within [*] after the matter has been identified for resolution
pursuant to Section 16, Healtheon may proceed to [*] and [*] which are the
subject of this Agreement [*]; and the fees paid by SBCL for use of such [*]
Teleprinters shall be set at the [*] until such time as the dispute has been
finally resolved pursuant to Section 16 or by agreement, and thereupon any
fees previously paid by SBCL for the use of such [*] Teleprinters shall [*]
to reflect such resolution or agreement.
6.3.3 In determining whether amounts paid by [*] for Reference Services
reflect [*] the applicable portion of the Site Fees, the parties shall mutually
agree on appropriate means of [*] for Agreed Services and [*]. Any dispute
occasioned by the inability of the parties to so agree shall be resolved in
accordance with Section 16 hereof.
(a) The parties acknowledge and agree that there are multiple methods
which may be utilized to determine [*] pursuant to Section 6.3.1 Such
methodologies may include but are not limited to:
(i) comparison of [*] SBCL to Healtheon hereunder to the [*]; or
(ii) comparison of [*]. If this methodology is used, it shall be
determined by [*] charged by Healtheon on an invoice [*] on the invoice.
(b) The parties will consider, in any such case [*], such as [*] and the
amount, if any, paid by Healtheon to [*] which are used by [*]. If fees charged
by Healtheon to [*] with other fees, then Healtheon and SBCL shall choose a
commercially reasonable approach to [*].
6.3.4 Healtheon's obligations to protect the [*] applicable to [*]
shall be respected in applying this Section 6.3.
6.3.5 In [*] required by Section 6.3.1, the parties shall take into
account the [*] applicable to the Agreed Services and [*]. In the event [*] are
[*] than [*] for the Agreed Services and [*] (taking into account the matters
set out in Section 6.3.3) [*] the [*] the Agreed Services, SBCL shall be
entitled to [*] applicable to the Agreed Services with appropriate [*]
hereunder, as mutually agreed by the parties at the time. In the event that [*]
applicable to [*] are [*] the [*] for the Agreed Services and [*] (taking into
account the matters set out in Section 6.3.3) [*] SBCL shall be entitled
pursuant to Section 6.3.1 to [*] under this Agreement.
6.3.5 When SBCL gains the ability [*] to a [*] pursuant to the Asset
Purchase Agreement and which was [*] pursuant to this Agreement, SBCL will
pay to Healtheon a fee therefor which is [*] (taking into account the matters
set out in Section 6.3.3) [*] by Healtheon [*] for the use of such
teleprinter.
6.3.6 If Healtheon fails to implement this Section 6.3, [*] SBCL the
[*] by Healtheon to SBCL and the [*] if this Section 6.3 had been implemented in
accordance with its terms, plus interest at the Prime Rate.
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
6.4. EFFECT OF REGULATORY CHANGES.
If any Regulatory Change shall occur which materially changes the [*] or
[*] to either SBCL or Healtheon, then the parties agree [*] the Site Fees
payable or other provisions hereunder in a manner that will be fair to both
parties while at the same time [*] of the parties under this Agreement to the
greatest extent possible and in a manner consistent with the Regulatory Change.
Any dispute as to the amendments to this Agreement to be made in the event of a
Regulatory Change shall be settled in accordance with the procedures set forth
in Section 16 hereof.
6.4.1 For purposes of this Section 6.4, a "Regulatory Change" shall
have occurred if any Regulation is modified, implemented, threatened to be
implemented (where the Regulation as threatened to be implemented is generally
followed by those in the industry), or determined to prohibit, restrict or in
any way materially change the [*] to either SBCL or Healtheon.
6.5. [*] INSTALLATIONS.
(a) Notwithstanding anything to the contrary in this Agreement, in the
event the number of Active Teleprinters as of the Effective Date is [*], then
Healtheon shall [*] for each new installation after [*] up to a [*].
(b) In addition, SBCL shall be responsible for the cost of installing any
Phone Line required for such Active Teleprinters for which SBCL is so billed by
Healtheon. SBCL will pay undisputed invoices for such installations within [*]
of the invoice. The invoice shall contain reasonable documentation of the Phone
Line installation costs.
(c) SBCL will arrange and be responsible for the actual installation of
such teleprinters, and all labor costs, travel expenses and similar costs
incurred by SBCL in connection with such installations. The parties expect that
SBCL will use [*] to perform such installations.
(d) If by the end of Year One SBCL has [*] of new teleprinters [*], SBCL
will pay Healtheon an amount equal to the [*] (i) the number of [*] the sum of
[*] and [*] such a teleprinter [*].
(e) If at or prior to the end of Year One, the parties determine that SBCL
has [*] pursuant to Section [*], Healtheon will [*].
(e) If SBCL can demonstrate that the number of teleprinters in inventory
(including new teleprinters received; new teleprinters ordered but not received,
and teleprinters de-installed and available for re-installation) on the
Effective Date was greater than [*] (as described above) [*] then SBCL will be
entitled to [*] in Section [*].
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
7. CHANGES AND DEVELOPMENTS.
7.1. CHANGES.
As used in this Section 7, "Change" means a change to (i) the computer
systems which would affect the provision, or the steps in transmission, of
Teleprinter Services ("Systems Changes"), including without limitation the [*]
Transmissions being directed through [*], (ii) the technology used in providing
Teleprinter Services, (iii) the operational processes through which Teleprinter
Services are provided, or (iv) the telecommunications which are utilized in
delivering test report data to Providers. No Change will be made by either
Healtheon or SBCL that would affect the Agreed Services unless:
7.1.1 With respect to all Systems Changes, and all material Changes
other than Systems Changes, the party seeking to implement the Change gives the
other party both (i) sixty (60) days prior written notice of the Change and (ii)
opportunity to review and approve the Change (which approval shall be required
to be obtained before implementing such Change) and which approval shall not be
given until after any appropriate steps with affected Providers are taken and
reasonable acceptance testing, if applicable, is satisfactorily completed. In
the event Healtheon desires to [*] SBCL send Transmissions over [*] Healtheon
shall provide notice of same to SBCL and the parties shall agree on appropriate
testing and approval steps as well as quality assurance. No such migration to
the Healtheon network shall occur without SBCL's prior written consent. In the
event of any such migration, the confidentiality of Transmissions and the
performance standards for such network shall be consistent with the Network
Standards (as defined in the Prior Services Agreement) and subject to SBCL's
approval.
7.1.2 The Change will not result in any material additional costs to be
incurred by either SBCL or Healtheon under this Agreement.
7.1.3. In the event of such Changes, Performance Standards will be
reviewed, modified and/or expanded to take into account the Change.
7.2. YEAR 2000 COMPLIANCE.
7.2.1 For purposes of this Section 7.2, a "Year 2000 Problem" shall be
deemed to exist if a teleprinter fails to receive or print accurate and complete
test reports because of any problem related to the occurrence of dates prior to,
during, or after the year 2000 and reasonably classified as a "year 2000"
problem.
7.2.2 In the event any teleprinter conveyed to Healtheon under the
Asset Purchase Agreement (each, an "APA Teleprinter") or any part conveyed to
Healtheon under the Asset Purchase Agreement (each, an "APA Part") has a Year
2000 Problem, Healtheon will (i) restore results delivery capabilities to the
affected Site and/or APA Teleprinter in accordance with SBCL's direction, and
(ii) use its commercially reasonable efforts, if SBCL so requests, to remedy
such Year 2000 Problem of such APA Teleprinter or APA Part and notwithstanding
anything in this Agreement to the contrary (but subject
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
to Section 7.2.3 of this Agreement), [*] of Healtheon associated with
restoring results delivery capabilities to the affected Site and/or APA
Teleprinter in accordance with SBCL's directions or incurred by virtue of
Healtheon's commercially reasonable efforts to remedy such Year 2000 Problem
of such APA Teleprinter or APA Part in accordance with SBCL's request, (y)
not hold Healtheon responsible for any Loss (as that term is defined in the
Asset Purchase Agreement) of SBCL by reason of such failure of such APA
Teleprinters, and (z) indemnify and hold harmless Healtheon against any Third
Party Claim (as that term is defined in the Asset Purchase Agreement) to the
extent such claim is alleged to have been caused by such failure of such APA
Teleprinter, in accordance with Section 6.3.2 of the Asset Purchase
Agreement. Healtheon shall not be in breach of this Agreement for failure to
meet any Performance Standards to the extent that such failure is
attributable to a Year 2000 Problem existing in the assets sold to Healtheon
pursuant to the Asset Purchase Agreement or in SBCL systems. Notwithstanding
any Year 2000 Problem of any APA Teleprinter, SBCL shall continue to be
obligated to pay any and all Site Fees for such affected APA Teleprinter as
though there were no Year 2000 Problem for such affected APA Teleprinter (and
Healtheon shall be obligated to pay any and all amounts owed by it) under
this Agreement without regard to provisions providing for liquidated damages
or escrow of such amounts.
7.2.3 Any teleprinter subject to this Agreement which is not an APA
Teleprinter (including software therein and upgrades to such software), any
hardware repairs or upgrades made with parts other than APA Parts, and any
software upgrades in one or more of the APA Teleprinters made on or after the
Effective Date by or at the direction of Healtheon, will not have a Year 2000
Problem. In the event such a teleprinter, hardware repair or upgrade, or
software upgrade does have a Year 2000 Problem, Healtheon will (i) restore
results delivery capabilities to the affected Site where such teleprinter is
located, where such hardware repair or upgrade is located, or where such
software upgrade was made, and (ii) use its commercially reasonable efforts to
remedy such Year 2000 Problem, at Healtheon's sole cost and expense.
7.3. REQUIRED CHANGES.
Healtheon shall be required to develop and implement, at its expense
except to the extent hereinafter provided, as promptly as practicable and in
no event later than thirty (30) days prior to the effective date of any
applicable change to Applicable Laws (including a change which is threatened
to be implemented where such change as threatened to be implemented is
generally followed by those in the industry (each, a "Threatened Change")),
any Change which (i) Healtheon determines are required for teleprinters used
in Teleprinter Services to remain in compliance with all Applicable Laws (or
a Threatened Change), or (ii) SBCL requests in writing to Healtheon for
compliance with Applicable Laws (or a Threatened Change) of such
teleprinters. In the event that an SBCL requested Change pursuant to clause
(ii) of the preceding sentence is ultimately and finally determined not to be
required in order to comply with Applicable Laws (or a Threatened Change),
then SBCL shall reimburse Healtheon for its out-of-pocket costs incurred in
effecting such Change.
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
7.4. DEVELOPMENT WORK REQUESTED OR USED [*]
7.4.1 When Healtheon performs development work that would benefit the
provision of Teleprinter Services at [*], SBCL shall have the right to [*], and
at a price that reflects that Healtheon will [*], but only for so long as
Healtheon has the legal right to offer such work to SBCL and such work is not
proprietary to the contracting party.
7.4.2 When Healtheon performs development work in connection with
Teleprinter Services at the request of SBCL and such work is usable in
connectivity [*] the [*] shall reflect that Healtheon [*].
8. COMPLIANCE MATTERS.
8.1. GENERAL.
Healtheon is a computer technology company which provides electronic
connectivity services, and is not a health care provider. Healtheon
acknowledges that, for a laboratory services provider such as SBCL, the ability
to assure that it complies with applicable laws, rules or regulations
("Applicable Laws"), including, but not limited to, the federal Physician
Self-Referral Law, 42 U.S.C. 1395nn, and the regulations promulgated thereunder
(together, the "Stark Law"), similar state physician self-referral laws and
regulations (together with the Stark Law, the "Self-Referral Laws"), the federal
Medicare/Medicaid Antikickback Law and regulations promulgated thereunder (the
"Federal Antikickback Law"), and similar state antikickback laws and regulations
(together with the Federal Antikickback Law, the "Antikickback Laws"), is of
critical importance. SBCL and Healtheon intend that the outsourcing of the
Teleprinter Services to Healtheon and the subsequent provision of the Agreed
Services by Healtheon to SBCL be done in a manner that allows SBCL to maintain
its compliance with Applicable Laws. Accordingly, SBCL and Healtheon have
agreed to the provisions set forth in this Section 8.
8.2. REPRESENTATION, WARRANTY AND COVENANT.
Healtheon represents, warrants, and covenants to SBCL as follows:
8.2.1 Healtheon will not directly or indirectly provide any
remuneration, as defined in the applicable Self-Referral Laws or Antikickback
Laws, to any Connected Provider to whom any of such Self-Referral Laws or
Antikickback Laws applies on behalf of SBCL, except for direct or indirect
remuneration permitted by such law.
8.2.2 In furtherance and not in limitation of the foregoing, SBCL and
Healtheon may, from time to time, agree upon certain principles, activities,
agreements, standard operating procedures and/or actions (the "SOPs") that one
or both parties, as applicable, will follow or undertake to help SBCL assure its
compliance with Applicable Laws, and each party will follow any such SOPs
applicable to it in the course of conducting its respective business.
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
8.2.3 With respect to any Connected Provider located in the State of
New York to which Healtheon or SBCL, as the case may be, is providing Phone
Lines or a teleprinter or other equipment in connection with the provision of
Teleprinter Services, Healtheon will not permit Shared Use of same unless either
(i) SBCL has informed Healtheon in writing that it is willing to permit
Healtheon to allow such Shared Use and that Healtheon and SBCL have agreed upon
appropriate parameters for such Shared Use; or (ii) the only such Shared Use is
the result of a teleprinter becoming a Generic Teleprinter in accordance with
this Agreement and so long as a fair market value charge is paid by SBCL and
such third party using such teleprinter for the use of such teleprinter. If and
to the extent that Section VI.A.3 of the Prior Services Agreement shall cease to
apply because SBCL shall have informed Healtheon that it is willing to permit
Healtheon to allow the Shared Use contemplated by that Section of the Prior
Services Agreement, then this Section 8.2.3 shall similarly no longer apply.
8.2.4 Healtheon will provide any reasonable assistance that SBCL may
request from Healtheon, including the provision of information or other
assistance, in order for SBCL to fulfill any obligation that SBCL, in its sole
discretion, determines it has under the Integrity Agreement. Notwithstanding
the foregoing, nothing in this provision is intended to or should be interpreted
to mean that Healtheon is subject to any of the provisions of the Integrity
Agreement.
8.2.5 In the event that SBCL becomes aware of an issue with respect to
compliance with this Section 8, SBCL will promptly inform Healtheon of such
issue and Healtheon will promptly address such issue and take action to remedy
any such issue to the reasonable satisfaction of SBCL.
8.3. PHONE LINES.
Healtheon's obligations under this Section 8 shall apply to all Phone
Lines, whether or not Healtheon has billing responsibility therefor, consistent
with the provisions of Section 1.1.5.
8.4. AUDIT RIGHTS.
SBCL shall have Audit Rights, exercisable from time to time in SBCL's sole
discretion, but not more than once per calendar year, with respect to all of
Healtheon's books, records and other materials that relate to any compliance
issues covered by this Section 8 in order for SBCL to determine Healtheon's
fulfillment of its obligations hereunder or under any separately agreed upon
SOPs. In any exercise of Audit Rights under this Section 8.4, SBCL shall give
Healtheon two (2) weeks' prior written notice of any such audit, and shall abide
by reasonable Healtheon security and confidentiality procedures during the
audit. SBCL and Healtheon shall each bear their own expenses associated with
such audit.
<PAGE>
8.5. DISPUTE RESOLUTION.
Notwithstanding any other provision of this Agreement to the contrary,
because of the critical nature of compliance to SBCL's business, disputes
regarding compliance with this Section 8 may not be susceptible to resolution
following normal dispute resolution mechanisms. In the event that SBCL and
Healtheon have a disagreement or dispute regarding compliance with this Section
8, Healtheon agrees to use its best efforts in working with SBCL to attempt to
resolve that dispute as soon as possible. If the parties are not able promptly
to resolve any such dispute, and the parties are not able to agree upon another
mechanism, such as that provided for in Section 16 hereof, to resolve the issue,
SBCL shall have the right to exercise any and all remedies available to it under
this Agreement, including the right to terminate the Agreement.
9. COOPERATIVE RELATIONSHIP
9.1. COOPERATION.
Upon SBCL request, Healtheon will work with SBCL's sales people to generate
connectivity for Teleprinter Services.
9.2. USE OF OTHER PARTIES' NAME.
Each party shall have the right to include the other party's name on its
client or vendor list and to disclose the nature of the services and products
provided under this Agreement, so long as such services and products are
accurately represented; PROVIDED, HOWEVER, that neither party has the right to
use the other's name, trademarks or trade names for other advertising, sales
promotion, or publicity purposes without the other's prior written consent.
9.3. REFERENCE CHECKS.
SBCL shall designate one or two individuals who shall respond to a
reasonable number of reference inquiries and visits (not to exceed two visits in
any calendar month) by customers and potential customers of Healtheon on
mutually agreeable terms. SBCL shall retain the right [*] of SBCL or to [*] who
does not abide by SBCL's policies and procedures. Healtheon shall inform all
customers and potential customers allowed on SBCL's premises pursuant to this
Section 9.3 that they are required to abide by SBCL's policies and procedures.
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
10. EXCLUSIVITY; PREFERRED PROVIDER.
10.1. EXCLUSIVE PROVIDER.
Section VII.D of the Prior Services Agreement related to the freedom of
SBCL to undertake any results reporting services using teleprinters. This
Agreement reflects SBCL's exercise of its right thereunder, and SBCL agrees
that, so long as this Agreement (or any successor agreement hereto) remains in
effect, this Agreement (or such successor agreement hereto) will be SBCL's sole
exercise of such right (subject to the terms of this Agreement). Accordingly,
SBCL hereby agrees that Healtheon shall be the exclusive provider to SBCL of
Agreed Services until the earlier of (i) termination or expiration of this
Agreement, and (ii) such time as more than [*] accordance with [*] hereof.
Notwithstanding the foregoing, if Healtheon fails to meet any of the Performance
Standards in any [*] or any [*] (a "Disqualifying Condition"), SBCL may [*]
Healtheon's [*] of Agreed Services, provided however, if SBCL does not exercise
its right to [*] status within [*] after the date the occurrence of a
Disqualifying Condition is first reflected in a report delivered pursuant to
Section 1.1.1(g) or a notice from SBCL pursuant to Section 1.1.4, SBCL may not
thereafter exercise its [*] as a result of such Disqualifying Condition.
Thereafter, Healtheon shall be [*] of Agreed Services to SBCL except as provided
in Section 10.2.
10.2. LIMITATIONS ON PREFERRED PROVIDER STATUS.
The provisions of Section 10.1 with respect to preferred provider status
shall apply unless and until any of the following occurs:
10.2.1 Healtheon ceases to offer products and services which have
features and functionality which are substantially comparable to other similar
products and services of similar vendors for services in the nature of
Teleprinter Services; SBCL provides written notice of same and, within thirty
(30) days after such notice is given, Healtheon fails to demonstrate to SBCL's
reasonable satisfaction that such determination is not accurate.
10.2.2 [*] for the [*] (including CRTs) to Healtheon made [*] and the
amount of [*] is not [*] (which for purposes of this Section 10.2.2 shall be
deemed to be [*] the number of [*] equal to [*] pursuant to the [*] (as adjusted
for [*] (a "[*]"). The parties agree that, notwithstanding [*] a [*] will not
permit SBCL to [*] as provided [*]. After Healtheon has [*], this Section
10.2.2 shall apply only if the [*] by reason of an [*] by Healtheon that is not
a [*].
10.2.3 Any of the events described in Sections 14.2.1 through 14.2.5
shall have occurred (without regard to grace periods otherwise applicable
thereto and other than an event under Section 14.2.4 which is based upon a
failure of SBCL to pay amounts due from it hereunder).
10.2.4 A Disqualifying Condition occurs (other than the Disqualifying
Condition that [*] under Section 10.1) provided however, if SBCL does not
exercise its right to terminate Healtheon's preferred provider status within [*]
after the date the occurrence of such a Disqualifying Condition is first
reflected in a report delivered pursuant to
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
Section 1.1.1(g) or a notice from DBCL pursuant to Section 1.1.4, SBCL may
not thereafter exercise its right to terminate Healtheon's preferred provider
status as a result of such Disqualifying Condition.
10.3. EXCLUSIONS.
Notwithstanding anything to the contrary contained in this Agreement,
including without limitation this Section 10, SBCL shall be entitled, without
restriction and in its sole discretion, to (i) use or change any result
reporting system for purposes of connectivity between an SBCL Lab and a
Provider, or between SBCL Labs, that does not involve the use of teleprinters;
(ii) pursue future arrangements or relationships for Test Report delivery that
does not involve the use of teleprinters; and (iii) use or change any system
between SBCL Labs and other facilities owned, managed and/or operated by SBCL.
Without limiting the foregoing, SBCL shall be entitled without restriction and
in its sole discretion, to change, continue to use or install new
(non-teleprinter) test results reporting interfaces and devices. SBCL will not
[*] or enter into [*] with [*] for such [*] and [*] opportunity to [*] on the
[*] may make such [*] (if [*] are asked to do so).
10.4. SBCL TRANSACTIONS.
In the event that SBCL merges with or into, or acquires or is acquired by
an entity, owning or operating a clinical laboratory, or sells substantially all
of its assets to or merges or consolidates with (or undertakes a share exchange
with) another entity in a transaction in which this Agreement is assigned to
such entity, SBCL shall have the right to elect to have the preferred provider
status removed with respect to such other entity, PROVIDED THAT the [*] set
forth in [*] hereof shall continue in effect after the date of such transaction.
In addition, in the event of such an SBCL transaction, this Agreement shall, at
the option of the new entity, apply only to Sites existing on the date of
consummation of such transaction.
11..[*]
11.1. [*] USE OF TELEPRINTERS.
Healtheon shall not permit any teleprinter or Phone Line in respect of
which SBCL pays for Agreed Services hereunder to be [*] to become a [*]
Teleprinter unless [*] for such use. Until [*], Healtheon will target for [*]
Teleprinters only those teleprinters [*] which, as of the date hereof, receive
teleprinter result reporting services from [*].
11.2. [*] SITES.
Prior to the Effective Date, SBCL shall [*] (other than sites that have [*]
Teleprinters, [*] , and other than, at SBCL's option, those Sites with a
teleprinter from SBCL and a [*])) which (i) have the [*] from all such Sites and
(ii) represent [*] of the [*] ordered from all such Sites [*]. A preliminary
list of [*] is attached hereto as EXHIBIT 11.2. Such list is true and correct
in all material respects. A final list of [*] shall be delivered to Healtheon
on or before the Effective Date. SBCL may, on a rare and occasional basis,
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
and for reasonable commercial purposes [*] from such list, and substitute a [*]
for such [*], which [*] shall be a [*].
11.2.1 Teleprinters located at [*] shall not be [*] Teleprinters for the
use [*] for at least [*] from the Effective Date, unless SBCL is [*] to the
teleprinters [*] will have to the teleprinter at [*].
11.2.2 Notwithstanding the foregoing, Healtheon may [*] or any other [*]
which is a successor to and comparable[*], provided that access to such [*] or
such other successor solution shall [*] as provided by Section 11.2.1.
11.3. TIMING OF [*] PRINTERS.
[*] will not [*] to (i) an Active Teleprinter (thereby [*] teleprinter a
[*] Teleprinter) or (ii) an Active Teleprinter that [*] Teleprinter, in either
case located at a Site other than a [*], [*] unless [*] is a party to [*] and
SBCL is [*] to the teleprinters that are subject to such Reference Contract, and
in such case [*] of teleprinters to [*] Teleprinters for such [*], and
conversion of such [*] teleprinters to [*] teleprinters for the purpose of
SBCL's access, may be accomplished within a [*] provided that the [*] time for
[*] under this Agreement is [*] for SBCL under such Reference Contract.
12. CONFIDENTIALITY AND SECURITY.
12.1. DATA CONFIDENTIALITY.
Each party agrees that patient clinical records are Confidential
Information and each party shall not disclose or utilize individual lab test
information in any way that would violate any patient confidentiality obligation
or any Regulations. Without limiting Healtheon's obligations regarding
Confidential Information which may be otherwise provided for in this Agreement,
Healtheon shall be responsible to ensure the confidentiality of test results and
patient information transmitted in the provision of Teleprinter Services in
accordance with all applicable Regulations governing such patient confidential
information, including to prevent anyone other than the sender and addressee of
Transmittal Information or their respective authorized employees from
monitoring, using, gaining access to or learning the import or contents of any
Transmittal Information. The foregoing notwithstanding, Healtheon shall not have
any obligation regarding the confidentiality of a Test Report once it has been
printed at a teleprinter.
12.2. DISTRIBUTION AND USE OF DATA.
All Transmittal Information sent by SBCL shall be owned by SBCL and not by
Healtheon. Healtheon shall not capture, aggregate, integrate, compile,
regenerate, merge, manipulate or otherwise use the Transmittal Information for
any purposes and shall not provide the Transmittal Information to any other
person or entity, other than as specifically required or allowed under the terms
of this Agreement to perform the Agreed Services, without the prior written
consent of SBCL. Healtheon agrees that such information cannot be aggregated
for any Provider or among different customers or other
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
health care providers or laboratory service providers for any purpose, without
SBCL's prior written consent.
12.2.1 If Healtheon is served with a warrant, subpoena or any other
order or request from a governmental body or any other entity or person for any
records or files of Transmittal Information, Healtheon will as soon as
practicable, and not in violation of law, deliver to SBCL a copy of such
warrant, subpoena, order or request and will not, without SBCL's prior written
consent, accede to the same unless and until required to do so under applicable
law.
12.2.2 SBCL agrees that Healtheon shall have SBCL Access for [*] and
otherwise to the extent reasonably necessary to perform Agreed Services
hereunder and meet the Performance Standards. Healtheon acknowledges and agrees
that in the event it has access to confidential data relating to a Connected
Provider and/or the Connected Providers' patients, employees and medical staffs,
Healtheon will hold such information in the strictest confidence and will not,
without SBCL's (and, if required, the Connected Provider's) prior written
consent, disclose any such information, including without limitation in any
regeneration, recompilation, or reorganization thereof, or through any
statistical analyses or provision of other excerpts thereof. Without limiting
the foregoing, Healtheon agrees that it shall limit the Healtheon employees who
have access to any patient identifiable health information, including without
limitation, any information relating to a Test Report, if any, to only those
"need to know" employees of Healtheon as is required to perform the Agreed
Services to the level of the Performance Standards set forth herein. Such
employees shall be identified to SBCL in advance of such access and shall have
executed and delivered to Healtheon and to SBCL, an agreement requiring
non-disclosure of confidential information, compliance with all Healtheon
policies and procedures with respect to Confidential Information and security of
the Network (which shall be consistent with the requirements in this Agreement),
if applicable, established by SBCL and shall include an acknowledgment of
immediate termination for breach of such agreement. To the extent any employee
of Healtheon acquires such SBCL Access, Healtheon shall cause such employees to
abide by SBCL's [*] procedures, and shall deliver to SBCL such agreements
reflecting same as may be required by SBCL and identified to Healtheon in
writing from time to time. Healtheon shall be responsible for promptly
notifying SBCL if any employee with SBCL Access is terminated or leaves the
employment of Healtheon.
12.3. TRADE SECRET NONDISCLOSURE COVENANT.
Without limiting the foregoing, Trade Secrets and Confidential Information
and all physical embodiments thereof received by either party (the "RECEIVING
PARTY") from the other party (the "DISCLOSING PARTY") during the term of this
Agreement, including those received pursuant to the exercise of Audit Rights as
described in Section 1.3 hereof, are confidential to and are and will remain the
sole and exclusive property of the Disclosing Party. In furtherance of the
foregoing:
12.3.1 At all times, both during the term of this Agreement and after
its termination, the Receiving Party shall hold all Trade Secrets of the
Disclosing Party in
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
confidence, and will not use, copy or disclose such Trade Secrets, or any
physical embodiment thereof, or cause any of such Trade Secrets to lose their
character as Trade Secrets. At all times during the term of this Agreement and
for a period of eighteen (18) months following the termination of this Agreement
(except where a longer period is required pursuant to this Agreement or
Regulations) the Receiving Party shall hold the Confidential Information of the
Disclosing Party in confidence, and will not use, copy or disclose such
Confidential Information, or any physical embodiments thereof, or cause any of
such Confidential Information to lose its character or cease to qualify as
Confidential Information.
12.3.2 Trade Secrets and Confidential Information shall be maintained
under secure conditions by the Receiving Party, using reasonable security
measures and in any event (i) not less than the same security measures used by
the Receiving Party for the protection of its own Trade Secrets and Confidential
Information of a similar kind, and (ii) any specific security measures required
by this Agreement. The Receiving Party shall not remove, obscure or deface any
proprietary legend relating to the Disclosing Party's rights, on or from any
tangible embodiment of any Trade Secrets and Confidential Information without
the Disclosing Party's prior written consent. Within thirty (30) days after
termination of this Agreement, the Receiving Party shall deliver to the
Disclosing Party all Trade Secrets and Confidential Information, and all
physical embodiments thereof, then in the custody, control or possession of the
Receiving Party.
12.3.3 If the Receiving Party is ordered by a court, administrative
agency, or other governmental body of competent jurisdiction to disclose Trade
Secrets or Confidential Information, or if it is served with or otherwise
becomes aware of a motion or similar request that such an order be issued, then
the Receiving Party will not be liable to the Disclosing Party for disclosure of
Trade Secrets or Confidential Information required by such order if the
Receiving Party complies with the following requirements: (i) if an already
issued order calls for immediate disclosure, then the Receiving Party shall
immediately move for or otherwise request a stay of such order to permit the
Disclosing Party to take measures such as are described in clause (iii); (ii)
the Receiving Party shall immediately notify the Disclosing Party of the motion
or order by the most expeditious possible means; and (iii) the Receiving Party
shall join or agree to (or at a minimum shall not oppose) a motion or similar
request by the Disclosing Party for an order protecting the confidentiality of
the Trade Secrets and Confidential Information, including joining or agreeing to
(or non opposition to) a motion for leave to intervene by the Disclosing Party.
12.3.4 The Receiving Party shall immediately report to the Disclosing
Party any attempt by any person of which the Receiving Party has knowledge (i)
to use or disclose any portion of the Trade Secrets and Confidential Information
without authorization from the Disclosing Party, or (ii) to copy, reverse
assemble, reverse compile or otherwise reverse engineer any part of the Trade
Secrets or Confidential Information (except as permitted herein).
<PAGE>
12.4. PERMITTED DISCLOSURES.
Notwithstanding any provisions of this Agreement to the contrary, SBCL may
disclose to the OIG as part of the disclosures SBCL makes under its Integrity
Agreement the fact that SBCL and Healtheon have entered into the transactions
contemplated by the parties and any information relating to such transaction or
this Agreement which SBCL determines, in good faith upon advice of counsel, is
required or, in light of SBCL's obligations under the Integrity Agreement,
appropriate for SBCL to make, or SBCL proposes to make in response to a request
for such information from the OIG, provided that Healtheon shall be given
opportunity (which shall be reasonable in light of all facts and circumstances)
to review and comment upon the information SBCL intends to include in any such
submission. In the event that any such disclosure that SBCL intends to make
includes any information that constitutes Confidential Information of Healtheon
or Trade Secrets of Healtheon, SBCL will provide reasonable (in light of all
facts and circumstances, including the time frame in which such disclosure is
required to be made) assistance to Healtheon to take reasonable steps to assure
that such Confidential Information or Trade Secrets of Healtheon are maintained
in confidence, including, but not limited to, (i) requesting that the OIG treat
such information as trade secrets, confidential information or financial
information within the meaning of the Freedom of Information Act, 5 U.S.C.
Section 552(b)(4), (ii) requesting of the OIG that SBCL and Healtheon be given
prior notice of any proposed release of such information to persons or entities
outside of the OIG; (iii) requesting that the OIG otherwise assure the
confidentiality of the information provided by Healtheon as if such information
was confidential information of SBCL as provided for in Section 46 of the
Integrity Agreement and taking other reasonable steps that may be requested by
Healtheon and to which SBCL may, in its sole discretion, agree to assure that
the OIG honors its confidentiality obligations in that section; (iv) where such
information is to be provided in response to a request by the OIG, take
reasonable steps to narrow the request for information from the OIG in an
appropriate manner in order to limit the amount of information, if any, that
constitutes Confidential Information or Trade Secrets of Healtheon covered by
such request; and (v) make reasonable efforts to permit Healtheon with the
concurrence of the OIG, to disclose such information directly to the OIG
provided that in any such case, Healtheon shall give SBCL a timely opportunity
to review, comment upon, and approve the information Healtheon intends to
include in such submission. The additional safeguards described in subsections
(i) through (v) above are designed to help assure the confidentiality of
Confidential Information and Trade Secrets the disclosure of which would have a
material adverse impact on Healtheon. These additional provisions are not
intended to interfere with SBCL's ability to meet its disclosure obligations
under the Integrity Agreement.
Each party shall promptly notify the other in the event it receives an
inquiry, investigation, or request for information from the OIG or other
governmental agency into the matters relating to the proposed transaction.
<PAGE>
12.5. EMPLOYEE WAIVERS.
Healtheon shall ensure that all employees or agents who perform customer
support services have signed non-disclosure agreements that, at minimum,
contain provisions prohibiting the disclosure of Confidential Information to the
same extent as is set forth in Section 12 hereof.
13. RELATIONSHIP MANAGERS AND COMMUNICATION PLAN.
13.1. RELATIONSHIP MANAGERS.
Each party will designate a relationship manager ("RELATIONSHIP MANAGER")
for matters pertaining to this Agreement and shall consult with the other before
changing its Relationship Manager. The Relationship Manager for each party
shall be the same as such party's relationship manager under the Prior Services
Agreement.
13.1.1. HEALTHEON RELATIONSHIP MANAGER.
Healtheon will designate a representative responsible for the SBCL account
and who will have decision making authority for Healtheon (the "HEALTHEON
RELATIONSHIP MANAGER"). The Healtheon Relationship Manager will be a member of
the Transition Committee and shall attend planning meetings with SBCL, keep SBCL
updated on feedback from the field with regard to use of teleprinters, potential
for alternative means of results-only reporting, conversion of teleprinters to
Healtheon Dx or other Healtheon solution.
13.1.2. SBCL RELATIONSHIP MANAGER.
SBCL will designate a representative responsible for SBCL's relationship
with Healtheon who will have decision making authority for SBCL (the "SBCL
RELATIONSHIP MANAGER"). The SBCL Relationship Manager will be a member of the
Transition Committee and will coordinate SBCL's activities with Healtheon,
attend planning meetings with Healtheon, and keep Healtheon updated on trends
with regard to use of teleprinters by SBCL.
13.2. COMMUNICATION PLAN.
Within [*] after the date of this Agreement, Healtheon and SBCL shall
prepare a mutually agreeable written plan for communicating [*] the fact of the
transactions and arrangements contemplated by the Asset Purchase Agreement and
this Agreement. Such plan shall contain a mutually agreeable [*] which will
include a statement (consistent with the terms of Exhibit 1.1.1(h)) of the [*]
with respect to Active Teleprinters which will act as an amendment to existing
agreements or creation of a new agreement where no written agreement existed at
the Closing Date.
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
14. TERM AND TERMINATION.
14.1. INITIAL TERM.
This Agreement shall take effect from February 1, 1999 and shall continue
in effect until the last day of Year Five unless earlier terminated as provided
herein or extended pursuant to Section 14.1.1 or 14.1.2.
14.1.1. INITIAL RENEWAL.
SBCL may extend this Agreement for a sixth and seventh Year by giving
Healtheon notice to that effect not less than one hundred eighty (180) days
prior to the end of Year Five unless Healtheon has provided SBCL notice on or
before the last day of Year Four that it is only willing to permit a renewal for
one Year, in which case SBCL may extend this Agreement only for a sixth Year by
giving Healtheon notice to that effect not less than one hundred eighty (180)
days prior to the end of Year Five.
14.1.2. SUBSEQUENT RENEWALS.
This Section 14.1.2 applies unless Healtheon gave the notice referred to in
Section 14.1.1. SBCL may extend this Agreement for successive two Year periods
by giving Healtheon notice to that effect not less than one hundred eighty (180)
days prior to the end of the last year of a two Year renewal period unless
Healtheon has provided SBCL notice on or before the last day of the first Year
of such two Year period that it is not willing to permit another renewal, in
which case SBCL may not extend this Agreement beyond such two Year period and it
shall terminate on the last day of such period.
14.2. TERMINATION.
A party may cause a termination of all rights and obligations of the
parties hereunder, except as provided in this Section 14, as follows:
14.2.1 In the event that Healtheon fails to meet any of the Key
Performance Standards in any [*] during any period of [*] (a "Key Default
Condition"), SBCL may terminate this Agreement [*] by giving written notice of
termination to Healtheon; provided however, if SBCL does not exercise its right
to terminate within [*] after the date the occurrence of a Key Default Condition
is first reflected in a report delivered pursuant to Section 1.1.1(g) or a
notice from SBCL pursuant to Section 1.1.4, SBCL may not thereafter exercise its
right to terminate as a result of such Key Default Condition. In addition,
(a) SBCL will be entitled to liquidated damages equal to [*] of the
Site Fees payable (without regard to the breach) to Healtheon pursuant to
Section 5 hereof for the Sites for which such Key Performance Standards
have not been met. Such liquidated damages shall be payable, in the
absence of termination of this Agreement, by means of offset against
amounts owing to Healtheon under this Agreement for immediately succeeding
periods. In the event of termination
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
of this Agreement, the liquidated damages not paid by means of offset as
provided above, shall be payable in cash to SBCL with interest at the Prime
Rate from the date of termination to the date of payment; and
(b) With respect to any month after Healtheon has not been in full
compliance with the Key Performance Standards for [*], SBCL may, at its
option, pay the fees applicable to the Sites in respect of which Healtheon
is not in such compliance for such month into an escrow account established
with a nationally recognized financial institution selected by SBCL, to be
released (less the liquidated damages above) to Healtheon upon the date as
of which Healtheon shall have been in full compliance with the Key
Performance Standards for at least [*].
14.2.2 SBCL may terminate this Agreement [*] following a breach by
Healtheon of its covenants set forth in Section 8 hereof by giving written
notice of termination to Healtheon.
14.2.3 Either party may terminate this Agreement if the other party
shall fail to pay any amount when due from it hereunder (disregarding for this
purpose any unpaid amount in dispute which dispute is being pursued with
diligence) within [*] after written notice of a failure to pay is provided by
the terminating party to the nonpaying party.
14.2.4 If one party breaches any material provision of this Agreement,
which breach is not described in Section 14.2.1, 14.2.2 or 14.2.3 above (and
which is not a breach of Performance Standards other than the Key Performance
Standards), the nonbreaching party may terminate this Agreement by giving [*]
written notice of termination to the breaching party. If such breach is (in the
reasonable estimation of the terminating party) capable of being cured during
such period and the other party acts diligently and continuously to cure such
breach, the termination shall be suspended during such time, PROVIDED THAT:
(a) such breach is actually cured prior to the end of such period;
(b) during the period from and after the time a breach by Healtheon is
discovered by SBCL, SBCL may, at its election, pay all fees due Healtheon
hereunder into an escrow account established with a nationally recognized
financial institution selected by SBCL, to be released to Healtheon upon the
later of the date within such [*] period when the breach is cured or the date
prior to exercise of the termination right provided in this Section 14.2.4 as of
which Healtheon shall have been not in breach of this Agreement for at [*]; and
(c) If Healtheon proves, to SBCL's reasonable satisfaction, that such
amounts are needed in order to cure the breach, SBCL will release amounts to
enable Healtheon to cure the breach, in which case such released amounts will be
used by Healtheon exclusively for purposes of curing such breach.
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
In addition, if such breach is [*] of an Active Teleprinter to a [*]
Teleprinter in violation of this Agreement, SBCL shall be entitled to the
liquidated damages provided in Section 14.2.1(a) with respect to such Site
until the earlier of (i) such [*] Teleprinter is [*] Active Teleprinter
status, or (ii) the date SBCL consents in writing to such conversion,
regardless of the exercise of any right to terminate this Agreement arising
by reason thereof under this Section 14.2.4.
14.2.5 If one party becomes insolvent, files bankruptcy, or has an
involuntary bankruptcy case filed against it which is not dismissed within [*],
the other party may terminate this Agreement immediately by giving written
notice of termination to the breaching party.
14.3. INTENTIONALLY OMITTED.
14.4. EFFECT OF EXPIRATION OR TERMINATION.
All rights and obligations of the parties hereunder shall cease upon the
expiration or the effective date of the termination of this Agreement except
that (i) the obligations of the parties pursuant to Section 12 (relating to
confidentiality) and, Section 15 (relating to indemnity) and (ii) the
obligations of Healtheon pursuant to Section 14.6 hereof (relating to
termination transition) and, shall continue in full force and effect as set
forth therein. In addition, if SBCL shall have Access pursuant to Section 14.6,
the obligations of the parties pursuant to Section 8 (relating to compliance
with Regulations) shall continue for so long as SBCL shall have Access. In
addition, the parties shall be obligated to make payment of any sums due under
this Agreement but not yet paid, and the parties shall be obligated to complete
the resolution of any disputes pending under Section 16. In the event that
Healtheon has terminated this agreement for SBCL's failure to pay undisputed
amounts due under this Agreement, Healtheon will not be required to perform
services for SBCL or to allow Access unless SBCL pays Healtheon in advance for
such services and Access. Upon expiration or termination of this Agreement, (i)
any amount in escrow pursuant to Section 14 hereof shall be paid to the party
entitled thereto in accordance with Section 14 and (ii) all Phone Lines (other
than those [*] Teleprinters) shall be transferred to SBCL at SBCL's cost, or, if
this Agreement was terminated by SBCL for Healtheon's breach, at Healtheon's
cost.
14.5. [*].
Upon termination of this Agreement by SBCL for breach hereof by Healtheon,
(i) SBCL shall be entitled to [*] (and not [*]) of the teleprinters in respect
of which Healtheon is then providing Agreed Services, other [*] Teleprinters at
the [*] therefor equal to [*]; where "X" is equal to the [*] of this Agreement;
"Y" is [*] in respect of which Healtheon is [*] other [*] Teleprinters; and "Z"
is the [*] respect of which Healtheon is [*] including [*] Teleprinters; and
(ii) all Phone Lines (other than those connected to [*] Teleprinters) shall be
transferred to SBCL at [*] cost.
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
14.6. TRANSITION UPON TERMINATION.
This Section 14.6 shall apply if SBCL does not exercise the purchase option
set forth in Section 14.5. If SBCL terminates this Agreement pursuant to Section
14.2, SBCL shall have Access. For this purpose, "Access" shall mean that, for a
period of [*] days after the effective date of termination of this Agreement,
Healtheon will continue to provide Agreed Services necessary to continue
Teleprinter Services to Providers who are Connected Providers as of the
effective date of termination. SBCL will be charged a Site Fee for such Agreed
Services equal to the Site Fee in effect on the date notice of termination is
given. Healtheon will bill SBCL monthly for such Site Fees, and SBCL will pay
such Site Fees within thirty (30) days after the date the bill is rendered. If
SBCL fails to pay such Site Fees when due (subject to grace periods comparable
to those provided in Section 14 hereof), Healtheon will no longer be required to
provide such services, at which point Healtheon will have no other obligations
to provide Agreed Services to SBCL and SBCL will have no other obligations to
Healtheon hereunder, except as provided in Section 14.4.
15. OBLIGATION TO INDEMNIFY.
15.1. HEALTHEON INDEMNITY.
Subject to Section 15.3 hereunder, Healtheon agrees to indemnify and hold
harmless each SBCL Indemnitee against and in respect of (i) all Losses,
asserted against, imposed upon or incurred by any SBCL Indemnitee by reason of
or resulting from any breach of any representation or warranty or covenant of
Healtheon contained in this Agreement, as well as from any act or omission of
Healtheon constituting negligence or willful misconduct; and (ii) any and all
actions, suits, claims, proceedings, investigations, demands, assessments,
audits, fines, judgments, costs and other expenses (including, without
limitation, reasonable legal fees and expenses) incident to any Loss described
in Section 15.1(i) or to the enforcement of this Section 15.1.
15.2. SBCL INDEMNITY.
Subject to Section 15.3 hereunder, SBCL agrees to indemnify and hold
harmless each Healtheon Indemnitee against and in respect of (i) all Losses,
asserted against, imposed upon or incurred by any Healtheon Indemnitee by reason
of or resulting from any breach of any representation or warranty or covenant of
SBCL contained in this Agreement, as well as from any act or omission of SBCL
constituting negligence or willful misconduct; and (ii) any and all actions,
suits, claims, proceedings, investigations, demands, assessments, audits, fines,
judgments, costs and other expenses (including, without limitation, reasonable
legal fees and expenses) incident to any Loss described in Section 15.2(i) or to
the enforcement of this Section 15.2.
15.3. ALLOCATION OF RISK.
15.3.1 Healtheon shall not be liable to SBCL (or to any person claiming
to have been injured by SBCL) for any lab testing error, billing error, or
other action or failure to
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
act of SBCL, or any error or mistake made by SBCL, and SBCL shall hold Healtheon
harmless from all claims caused by such errors or mistakes to the extent made by
SBCL.
15.3.2 SBCL shall not be liable to Healtheon (or to any person claiming
to have been injured by Healtheon) for any error by a teleprinter (including a
Transmission error not caused by SBCL and related to a teleprinter connected to
a Phone Line that has been transferred to Healtheon pursuant to Section 4
hereof), billing error, or other action or failure to act of Healtheon, or any
error or mistake made by Healtheon, and Healtheon shall hold SBCL harmless from
all claims caused by such errors or mistakes to the extent made by Healtheon.
15.3.3 Neither party shall be liable to the other hereunder for
consequential, special, punitive or exemplary damages of any kind (including,
but not limited to, lost profits, loss of business or other similar damages)
arising out of any action or proceeding except and only to the extent that such
damages arise from or relate to (i) the failure of a party to comply with
Regulations as required by this Agreement, (ii) an action in tort initiated by a
third party against either or both of the parties hereto, or (iii) breach of a
party's confidentiality undertakings set forth herein.
15.3.4 Neither party shall be liable to the other hereunder in
connection with any action or proceeding arising from or relating to a matter
covered by this Section 15, or for breach of this Agreement, for an amount in
excess of [*] for claims arising in such Year; PROVIDED THAT this limitation
shall not apply to any Losses or other damages arising out of or relating to any
action described in [*]. For the avoidance of doubt, if two claims arose in
Year One that were subject to the [*], the maximum liability for those two
claims would be [*]. In no claims arose in Year Two and Year Three that were
subject to [*] there would be no increase in the maximum liability for the two
claims that arose in Year One. Similarly, if three claims subject to the [*]
arose in Year Four, the maximum liability for those three claims would be [*]
even though no claims arose in Years Two and Three.
15.4. HEALTHEON PARTIES.
References to Healtheon in Sections 15.1 and 15.3 above shall include
subcontractors, agents, employees and officers of Healtheon performing services
for or on behalf of Healtheon in connection with Healtheon's obligations under
this Agreement.
15.5. CLAIMS NOTICE.
A Claim shall be made by any Indemnitee within [*] after such Indemnitee
gains actual knowledge of the Claim, and shall be made by delivery of a Claims
Notice to any Indemnifying Party requesting indemnification and specifying the
basis on which indemnification is sought and the amount of asserted Losses and,
in the case of a Third Party Claim, containing (by attachment or otherwise) such
other information as such Indemnitee shall have concerning such Third Party
Claim.
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
15.6. PROCEDURES INVOLVING NON THIRD PARTY CLAIMS.
If the Claim involves a matter other than a Third Party Claim, the
Indemnifying Party shall raise any objection to such Claim within a reasonable
period of time by delivery of a written notice of such objection to such
Indemnitee specifying in reasonable detail the basis for such objection. If an
objection is timely interposed by the Indemnifying Party, the Indemnifying Party
and the Indemnitee shall cooperate in the compromise of the Claim or resolve any
disagreement in accordance with Section 16 hereof.
15.7. PROCEDURES INVOLVING THIRD PARTY CLAIMS.
The obligations and liabilities of the parties hereunder with respect to a
Third Party Claim shall be subject to the following terms and conditions:
15.7.1 The Indemnitee shall give the Indemnifying Party written notice
of a Third Party Claim promptly after receipt by the Indemnitee of notice
thereof, and the Indemnifying Party may undertake the defense, compromise and
settlement thereof by representatives of its own choosing reasonably acceptable
to the Indemnitee. The failure of the Indemnitee to notify the Indemnifying
Party of such claim shall not relieve the Indemnifying Party of any liability
that it may have with respect to such claim except to the extent the
Indemnifying Party demonstrates that the defense of such claim is prejudiced by
such failure. The assumption of the defense, compromise and settlement of any
such Third Party Claim by the Indemnifying Party shall be an acknowledgment of
the obligation of the Indemnifying Party to indemnify the Indemnitee with
respect to such claim hereunder. If the Indemnitee desires to participate in,
but not control, any such defense, compromise and settlement, it may do so at
its sole cost and expense. If, however, the Indemnifying Party fails or refuses
to undertake the defense of such Third Party Claim within [*] after written
notice of such claim has been given to the Indemnifying Party by the Indemnitee,
the Indemnitee shall have the right to undertake the defense, compromise and
settlement of such claim with counsel of its own choosing. In the circumstances
described in the preceding sentence, the Indemnitee shall, promptly upon its
assumption of the defense of such claim, make a Claim as specified in Sections
15.5 and 15.6 which shall be deemed a Claim that is not a Third Party Claim for
the purposes of the procedures set forth herein.
15.7.2 If, in the reasonable opinion of the Indemnitee, any Third Party
Claim or the litigation or resolution thereof involves an issue or matter which
could have a material adverse effect on the business, operations, assets,
properties or prospects of the Indemnitee, the Indemnitee shall have the right
to control the defense, compromise and settlement of such Third Party Claim
undertaken by the Indemnifying Party, and the reasonable costs and expenses of
the Indemnitee in connection therewith shall be included as part of the
indemnification obligations of the Indemnifying Party hereunder. If the
Indemnitee shall elect to exercise such right, the Indemnifying Party shall have
the right to participate in, but not control, the defense, compromise and
settlement of such Third Party Claim at its sole cost and expense.
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
15.7.3 No settlement of a Third Party Claim involving the asserted
liability of the Indemnifying Party under this Section 15 shall be made without
the prior written consent by or on behalf of the Indemnifying Party, which
consent shall not be unreasonably withheld or delayed. If the Indemnifying
Party assumes the defense of such a Third Party Claim, (1) no compromise or
settlement thereof may be effected by the Indemnifying Party without the
Indemnitee's consent unless (a) there is no finding or admission of any
violation of law or any violation of the rights of any person and no effect on
any other claim that may be made against the Indemnitee (b) the sole relief
provided is monetary damages that are paid in full by the Indemnifying Party and
(c) the compromise or settlement includes, as an unconditional term thereof, the
giving by the claimant or the plaintiff to the Indemnitee of a release, in form
and substance satisfactory to the Indemnitee, from all liability in respect of
such Third Party Claim, and (2) the Indemnitee shall have no liability with
respect to any compromise or settlement thereof effected without its consent.
15.8. NO RELEASE FOR FRAUD.
Nothing contained in this Agreement shall relieve or limit the liability of
a party or any officer or director of such party from any Liability arising out
of or resulting from common law fraud or intentional misrepresentation in
connection with the transactions contemplated by this Agreement or in connection
with the delivery of this Agreement. Each Healtheon Indemnitee or SBCL
Indemnitee, as the case may be, shall have a right to indemnification for any
Loss incurred as the result of any common law fraud or intentional
misrepresentation by SBCL or Healtheon, respectively, or any officer or director
thereof.
15.9. PAYMENT.
15.9.1 If any party is required to make any payment under this Section
15, such party shall promptly pay the Indemnified Party the amount so
determined. If there is a dispute as to the amount or manner of determination
of any indemnity obligation owed under this Section 15, the Indemnifying Party
shall nevertheless pay when due such portion, if any, of the obligation as shall
not be subject to dispute. The difference, if any, between the amount of the
obligation ultimately determined as properly payable under this Section 15 and
the portion, if any, theretofore paid shall bear interest as set forth in
Section 15.9.3.
15.9.2 Any items as to which an Indemnified Party is entitled to payment
under this Section 15 may be paid by setoff against amounts payable to the
Indemnifying Party to the extent that such amounts are sufficient to pay such
items.
15.9.3 If all or part of any indemnification obligation under this
Agreement is not paid when due, then the Indemnifying Party shall pay the
Indemnified Party interest on the unpaid principal amount of the obligation from
the date the amount became due until payment in full, at the Prime Rate.
<PAGE>
15.10. INSURANCE.
Healtheon agrees that during the term of this Agreement (including any
extension or renewal of the term pursuant to Section 14) and for a period of
three (3) years thereafter, Healtheon shall maintain insurance policies with
recognized insurers, in such amounts and with such coverage at least as
favorable as set forth in Schedule 3.2.17 to the Asset Purchase Agreement.
16. DISPUTE RESOLUTION; ARBITRATION.
16.1. GENERAL.
Except as otherwise provided in Section 8.5 of this Agreement, disputes
between Healtheon and SBCL relating to the interpretation or application of the
provisions of this Agreement shall be resolved in accordance with this Section
16.
16.2. INFORMAL DISPUTE RESOLUTION.
Any dispute between the parties arising out of or with respect to this
Agreement, either with respect to the interpretation of any provision of this
Agreement or with respect to the performance by Healtheon or SBCL, shall be
resolved as provided in this Section 16.
16.2.1 Prior to the initiation of formal dispute resolution procedures,
the parties shall first attempt to resolve their dispute informally, as follows:
(a) The Relationship Managers shall meet for the purpose of endeavoring to
resolve such dispute. They shall meet as often as the parties reasonably deem
necessary in order to gather and furnish to the other all information with
respect to the matter in issue which the parties believe to be appropriate and
germane in connection with its resolution. The Relationship Managers shall
discuss the problem and negotiate in good faith in an effort to resolve the
dispute without the necessity of any formal proceeding. During the course of
negotiations, all reasonable requests made by one party to another for
nonprivileged information, reasonably related to this Agreement, shall be
honored in order that each of the parties may be fully advised of the other's
position.
(b) If, within fifteen (15) days after a matter has been identified for
resolution pursuant to this Section 16, either of the Relationship Managers
concludes in good faith that amicable resolution through continued negotiation
in this forum does not appear likely, the matter will be escalated by formal
written notification to the SBCL President and the Healtheon President. The
parties will use their respective best efforts to cause the SBCL President and
the Healtheon President to meet to attempt to resolve the dispute.
(c) Formal proceedings for the resolution of a dispute may not be
commenced until the earlier of: (i) the date on which the SBCL President and
the Healtheon President conclude in good faith that amicable resolution through
continued negotiation of the
<PAGE>
matter does not appear likely; or (ii) thirty (30) days after the dispute has
been referred to the SBCL President and the Healtheon President.
16.2.2 The provisions of this Section 16 shall not be construed to
prevent a party from instituting, and a party is authorized to institute, formal
proceedings earlier to avoid the expiration of any applicable limitations
period.
16.3. ARBITRATION.
If the parties are unable to resolve any controversy arising under this
Agreement as contemplated by Section 16.2 and if such controversy is not subject
to Section 8 or Section 16.4, then such controversy shall be submitted to
mandatory and binding arbitration at the election of either Party (the
"DISPUTING PARTY") pursuant to the following conditions:
16.3.1 The Disputing Party shall notify the AAA and the other Party in
writing describing in reasonable detail the nature of the dispute (the "DISPUTE
NOTICE"). The parties shall each select a neutral arbitrator in accordance with
the rules of AAA and the two (2) arbitrators selected shall select a third
neutral arbitrator. The three (3) arbitrators so selected are herein referred
to as the "PANEL."
16.3.2 The Panel shall allow reasonable discovery as permitted by the
Federal Rules of Civil Procedure, to the extent consistent with the purpose of
the arbitration. The Panel shall have no power or authority to amend or
disregard any provision of this Section 16. The arbitration hearing shall be
commenced promptly and conducted expeditiously, with each of Healtheon and SBCL
being allocated one-half of the time for the presentation of its case. Unless
otherwise agreed to by the parties, an arbitration hearing shall be conducted on
consecutive days.
16.3.3 Should any arbitrator refuse or be unable to proceed with
arbitration proceedings as called for by this Section, such arbitrator shall be
replaced by an arbitrator selected in accordance with the rules of the AAA and
consistent with this Section 16.
16.3.4 The Panel rendering judgment upon disputes between parties as
provided in this Section 16 shall, after reaching judgment and award, prepare
and distribute to the parties a writing describing the findings of fact and
conclusions of law relevant to such judgment and award and containing an opinion
setting forth the reasons for the giving or denial of any award. The award of
the arbitrator shall be final and binding on the parties, and judgment thereon
may be entered in a court of competent jurisdiction.
16.3.5 Arbitration hearings hereunder shall be held in Philadelphia,
Pennsylvania, Atlanta, Georgia or other mutually agreeable location.
16.3.6 The Panel shall be instructed that time is of the essence in the
arbitration proceeding. The Panel shall render its judgment or award within
fifteen (15) days following the conclusion of the hearing. Recognizing the
express desire of the parties for an expeditious means of dispute resolution,
the arbitrator shall limit or allow the parties to expand the scope of discovery
as may be reasonable under the circumstances.
<PAGE>
16.4. LITIGATION.
In the event of a breach of the confidentiality obligations set forth in
this Agreement, or in the event a party makes a good faith determination that a
breach of the terms of this Agreement by the other party is such that the
damages to such party resulting from the breach will be so immediate, so large
or severe, and so incapable of adequate redress after the fact, that a temporary
restraining order or other immediate injunctive relief is a necessary remedy,
then such party may file a pleading with a court seeking immediate injunctive
relief. If a party files a pleading with a court seeking immediate injunctive
relief and this pleading is challenged by the other party and the injunctive
relief sought is not awarded in substantial part (or in the event of a temporary
restraining order is vacated upon challenge by the other party), the party
filing the pleading seeking immediate injunctive relief shall pay all of the
costs and attorneys' fees of the party successfully challenging the pleading.
16.5. CONSENT TO JURISDICTION.
Healtheon and SBCL each consent to venue in Philadelphia, Pennsylvania and
Atlanta, Georgia and to the nonexclusive jurisdiction of competent Pennsylvania
and Georgia state courts or federal courts located in Philadelphia or Atlanta
for all litigation which may be brought, subject to the requirement for
arbitration hereunder, with respect to the terms of, and the transactions and
relationships contemplated by, this Agreement.
17. MISCELLANEOUS.
17.1. PUBLICITY.
Each party hereto agrees that neither it, nor or any of its
representatives, shall make any public announcement with respect to this
Agreement or the transactions contemplated hereby without the prior consent of
the other party hereto unless required by law or judicial process, in which case
notification shall be given to the other party hereto prior to such disclosure
and the content of such disclosure approved by such other party, which approval
shall not be unreasonably withheld or delayed. Any such public statement
regarding the transactions contemplated by this Agreement or the Asset Purchase
Agreement as to which advance notice is given to the other party shall have been
approved by the respective parties' appropriate personnel (the SBCL President in
the case of SBCL). Notwithstanding the foregoing, Healtheon agrees that
nothing in this Section 17.1 shall prohibit SBCL from disclosing any information
SBCL is permitted to disclose under Section 12.4.
17.2. ENTIRE AGREEMENT.
This Agreement, including the Exhibits to it, constitutes the entire
understanding between the parties and supersedes all proposals, communications
and agreements between the parties relating to its subject matter. No
amendment, change, or waiver of any provision of this Agreement will be binding
unless in writing and signed by both parties.
<PAGE>
17.3. GOVERNING LAW.
This Agreement will be governed by and construed in accordance with the
laws of the Commonwealth of Pennsylvania applicable to contracts made and
performed therein.
17.4. ASSIGNMENTS.
Neither party may assign this Agreement without the prior, written consent
of the other party, which consent shall not be unreasonably withheld. Any
merger, consolidation or share exchange involving a change of control of more
than 50% of the voting securities of a party shall constitute an assignment for
purposes of this Section 17.4. Notwithstanding the foregoing, (i) SBCL may
assign its rights and obligations under this Agreement without the consent of
Healtheon to any of its Affiliates, or to an acquiror of substantially all of
its business (including by sale of assets, merger, consolidation or share
exchange); and (ii) Healtheon may assign its rights and obligations under this
Agreement without the consent of SBCL to an acquiror of substantially all of its
business (including by sale of assets, merger, consolidation or share exchange)
if, and only if, the acquiror (X) assumes all of Healtheon's obligations under
this Agreement, (Y) provides assurances to SBCL, which SBCL agrees are
reasonable in light of all facts and circumstances (such agreement not to be
unreasonably withheld), that the acquiror will be able to satisfy all of
such obligations and that SBCL will continue to receive Agreed Services on the
same terms and conditions as provided herein; and [*]. Any attempted assignment
(including by merger, share exchange or consolidation) without the requisite
consent or assurances shall be void. If the parties cannot agree upon whether a
[*], the parties shall resolve the dispute pursuant to Section 16. Any
assignment with consent shall release the assigning party from any of its
obligations under this Agreement unless the consent expressly states otherwise.
17.5. NOTICES.
Any notices relating to this Agreement shall be in writing and will be sent
by certified United States mail, postage prepaid, return receipt requested, or
by facsimile transmission or overnight courier service, addressed to the party
at the address set forth below, or at such different address as a party has
advised to the other party in writing and shall be deemed given and received
when actually received:
If to SBCL:
SmithKline Beecham Clinical Laboratories, Inc.
1201 South Collegeville Road
Collegeville, Pennsylvania 19426
Attention: John B. Okkerse, Jr., Ph.D., President
Telephone: (610) 454-6000
Telecopy: (610) 983-2010
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
With a copy to:
SmithKline Beecham Corporation
One Franklin Plaza
16th and Race Streets
Philadelphia, PA 19103
Attention: General Counsel-U.S.
Telephone: (215) 751-5844
Telecopy: (215) 751-5132
If to Healtheon:
Healtheon Corporation
Suite 600 7000 Central Parkway
Atlanta, Georgia 30328
Attention: Nancy Ham
Telephone: 770.352.1626
Telecopy: 7700.352.1928
with a copy to:
Alston & Bird, LLP
One Atlantic Center
1201 W. Peachtree Street
Atlanta, GA 30309
Attention: John C. Weitnauer
Telephone: 404.881.7780
Telecopy: 404.881.7777
If delivered personally, the date on which a notice, request, instruction
or document is delivered shall be the date on which such delivery is made and,
if delivered by mail, telecopy, Federal Express or other overnight courier, the
date on which such notice, request, instruction or document is first received
shall be the date of delivery. Any party hereto may change its address
specified for notices herein by designating a new address by notice in
accordance with this Section 17.5. Failure of any party to send a copy of any
notice to counsel for the other Party shall not affect in any way the validity
of such notice to other party.
17.6. SEVERABILITY.
It is the desire and intent of the parties that all of the material
provisions of this Agreement and the Asset Purchase Agreement be enforced to the
fullest extent permissible and no severability shall pertain thereto. In the
event that any other provision of this Agreement is held illegal, invalid,
prohibited or unenforceable for any reason, such illegality, invalidity, or
unenforceability will not affect any other provision hereof, and this Agreement
shall be deemed modified to the extent necessary to render enforceable the
remaining provisions hereof. Notwithstanding the foregoing, if such provision
could
<PAGE>
be more narrowly interpreted so as not to be illegal, invalid, prohibited or
unenforceable, without invalidating any of the material remaining provisions of
this Agreement or the Asset Purchase Agreement, it shall be so narrowly
interpreted.
17.7. FORCE MAJEURE.
The obligations of the parties under this Agreement (other than the
obligation to make payments) shall be suspended to the extent a party is
hindered or prevented from complying therewith because of labor disturbances
(including strikes or lockouts), war, acts of God, fires, storms, accidents,
governmental regulations, failure of vendors or suppliers or any other cause
whatsoever beyond a party's control. For so long as such circumstances prevail,
the party whose performance is delayed or hindered shall continue to use all
commercially reasonable efforts to recommence performance without delay.
17.8. COUNTERPARTS.
This Agreement may be executed in one or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION THAT MAY BE
ENFORCED BY THE PARTIES.
IN WITNESS WHEREOF, the parties have executed this Services Agreement as of
the date set forth above.
HEALTHEON CORPORATION
/s/ W. Michael Long
-----------------------------------------
By:
Its:
SMITHKLINE BEECHAM CLINICAL LABORATORIES,
INC.
/s/ John B. Okkerse, Jr.
-----------------------------------------
By:
Its:
<PAGE>
EXHIBITS
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
Exhibit A Definitions
- --------------------------------------------------------------------------------
Exhibit 1.1.1(g) Reports
- --------------------------------------------------------------------------------
Exhibit 1.1.1(h) Connected Provider Contract Provisions
- --------------------------------------------------------------------------------
Exhibit 1.2 Performance Standards
- --------------------------------------------------------------------------------
Exhibit 2.1 Transition Committee; Initial draft of
Implementation Plan
- --------------------------------------------------------------------------------
Exhibit 2.3 [*] (initial draft attached, final to be delivered
within five (5) business days).
- --------------------------------------------------------------------------------
Exhibit 5.13.8 Examples of Application of [*]
- --------------------------------------------------------------------------------
Exhibit 11.2 [*]
- --------------------------------------------------------------------------------
</TABLE>
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
EXHIBIT A[*]
DEFINITIONS
"AAA" means the American Arbitration Association.
"Access" has the meaning set forth in Section 14.6 of the Agreement.
"Active Teleprinter" shall mean, for any month, a teleprinter at a Site
that is used in the provision of Teleprinter Services on the first day of a
month.
"Affiliate" means, with respect to any Person, any other Person
controlling, controlled by or under common control with such Person.
"Agreed Services" means the services identified in Section 1.1 of the
Agreement.
"Antikickback Laws" shall have the meaning given in Section 8.1.
"APA Part" shall have the meaning given in Section 7.2.2.
"APA Teleprinter" shall have the meaning given in Section 7.2.2.
"Applicable Laws" shall have the meaning given in Section 8.1.
"Audit Rights" means the right to, or to have representatives,
(a) examine all books of account, records, reports and other papers
except to the extent that such action would, in the reasonable opinion of
counsel, constitute a waiver of the attorney/client privilege or violate
obligations of confidentiality to third parties,
(b) make copies and take extracts from any of the foregoing, except
for information which is subject to a written confidentiality agreement with a
third party,
(c) discuss the affairs, finances and accounts of the party being
audited with such party's officers and independent certified public accountants
(and by this provision such audited party hereby authorizes said accountants to
discuss with the auditing party and its representatives, the finances and
accounts of such entity) and
(d) visit and inspect, at reasonable times and on reasonable notice
during normal business hours, the properties of the other party;
PROVIDED THAT, the foregoing audit rights are in addition to any rights of
a party under the Delaware General Corporation Law, as amended from time to
time, and shall in no way limit such rights; and
PROVIDED FURTHER THAT, the expenses incurred in connection with any such
inspection shall be for the account of the auditing party, except that all
reasonable
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
expenses incurred by the audited party, or any of its officers, employees,
agents or independent certified public accountants, shall be expenses payable
by the audited party and shall not be expenses of the auditing party.
"Baseline Costs" has the meaning set forth in Section 5.1.1 of the
Agreement.
"Baseline Denominator" shall have the meaning given in Section 5.1.5.
"Baseline Period" shall have the meaning set forth in Section 5.1.2 of the
Agreement.
"Beginning Number" shall have the meaning given in Section 5.13.1(g).
"Change" shall have the meaning set forth in Section 7.1 of the Agreement.
"Claim" means any claim for indemnification under Section 15 of the
Agreement.
"Claims Notice" means a written notice of an indemnification claim
delivered pursuant to Section 15 of the Agreement.
"Closing" means the closing of the transactions contemplated by the Asset
Purchase Agreement.
"Closing Date" means the date of the Closing.
"Confidential Information" means information that is (1) confidential to
the business of a party, including without limitation, data regarding the extent
of the Agreed Services provided hereunder to, or fees paid hereunder by, SBCL,
(2) is designated and identified as such by such party, and (3) is not a Trade
Secret; provided, however, that Confidential Information does not include any
information which is or becomes generally known to the public without any breach
by the Receiving Party of its duties to the Disclosing Party. Assuming that the
foregoing criteria are met, Confidential Information also includes information
which has been disclosed to a Receiving Party by another person and which the
Receiving Party is obligated to treat as confidential.
"Connected Provider" means a Provider who or which, at a given time, is a
recipient of Teleprinter Services or a Provider who or which has agreed with
SBCL to become a recipient of Teleprinter Services.
"Contract" means any written contract, agreement, lease, plan, instrument
or other document, commitment, arrangement, undertaking, practice or
authorization that is binding on any Person or its property under applicable
law.
"Disclosing Party" has the meaning set forth in Section 12.3 of the
Agreement.
"Dispute Notice" shall have the meaning given in Section 16.3.1.
"Disputing Party" shall have the meaning given in Section 16.3.
<PAGE>
"[*]" means [*], as that group of [*] may be constituted from time to time.
"[*]" has the meaning set forth in Section 3.2.3 of the Agreement.
"[*]" means the period beginning March 1, 1999 and ending August 31, 1999.
"[*]" has the meaning set forth in Section 11.2.
"Effective Date" means February 1, 1999.
"Federal Antikickback Law" shall have the meaning given at Section 8.1.
"[*]" means a teleprinter for which Agreed Services are rendered and which
is used for any other purpose, including printing test results of
an [*].
"[*]" has the meaning set forth in Section 5.13.1(a) of the Agreement.
"[*]" has the meaning set forth in Section 5.13.1(b) of the Agreement.
"[*]" shall have the meaning given in Section 5.13.1(c)
"Hardware" shall have the meaning set forth in Section 1.1.1(a).
"Healtheon Indemnitee" means Healtheon and its Affiliates, and its or their
respective directors, officers, employees, and permitted assigns.
"Healtheon President" shall mean the President of Healtheon, presently
Michael K. Hoover, or should Healtheon be restructured in any manner, the
officer of Healtheon having top authority over Healtheon's operations.
"Healtheon Relationship Manager" shall have the meaning given in Section
13.1.1.
"Healtheon [*]" shall have the meaning given in Section 3.2.3(c).
"[*]" has the meaning set forth in Section 5.13.1(d) of the Agreement.
"Indemnifying Party" means the party obligated to provide indemnification
pursuant to Section 15 of the Agreement.
"Indemnitee" means a party seeking indemnification under Section 15 of the
Agreement.
"Integrity Agreement" means the Corporate Integrity Agreement between SBCL
and the OIG.
"[*]" means [*]
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
"Key Performance Standards" means action required by Healtheon under the
Problem Resolution section of Exhibit 1.2.
"Liability" means any direct or indirect liability, indebtedness,
obligation, expense, guaranty or endorsement of or by any Person (other than
endorsements of notes, bills and checks presented to banks for collection or
deposit in the ordinary course of business) of any type, whether accrued,
absolute, contingent, matured, unmatured, known or unknown.
"Litigation" means any lawsuit, action, claim, arbitration, administrative
or other proceeding, criminal prosecution or governmental investigation or
inquiry involving or affecting a Party or its business, assets or Contracts to
which it is a party or by which it or its business, assets or Contracts may be
bound or affected.
"Losses" means any and all demands, claims, actions or causes of action,
assessments, losses, diminution in value, damages (including special and
consequential damages), Liabilities, costs, and expenses, including without
limitation, interest, penalties, cost of investigation and defense, and
reasonable attorneys' and other professional fees and expenses.
"[*] Telecom Fee" shall have the meaning given, and as made applicable
therein, in Sections 4.6.1; 4.7; 4.8; 4.9 and 4.10.
"[*]" has the meaning set forth in Section 5.13.1(e) of the Agreement.
"OIG" means the Office of Inspector General of the Department of Health and
Human Services.
"[*]" means a [*] that provides[*] .
"Other Teleprinters" has the meaning set forth in Section 5.13.1(f) of the
Agreement.
"Panel" shall have the meaning given by Section 16.3.1.
"Performance Standards" mean the performance standards set forth on Exhibit
1.2 hereto.
"Permitted Issuance" has the meaning given in Section 10.2.2.
"Person" means any individual, corporation, trust, estate, business trust,
general or limited partnership, limited liability company, limited liability
partnership, unincorporated association or other legal entity.
"Phone Line" means any telephone line at a Site used to receive Teleprinter
Services at a teleprinter subject to this Agreement.
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
"Prime Rate" means the per annum rate of interest published from time to
time by THE WALL STREET JOURNAL (or successor publication if THE WALL STREET
JOURNAL is not longer published) as the prime rate. If more than one such prime
rate is set forth for a given day, the highest such rate designated by such
publication (or successor publication) shall be the Prime Rate for purposes of
the Agreement.
"Prior Services Agreement" means the Services Agreement between ActaMed
Corporation and SBCL dated December 31, 1997, as amended and assumed by
Healtheon Corporation.
"Provider" means a physician, clinic, hospital, patient service center or
other provider of clinical health care services, or, as appropriate, employers
receiving test results via teleprinters for drug screening tests and other
corporate health services, if any.
"Receiving Party" has the meaning given it in Section 12.3 of the
Agreement.
"Reference Contract" shall have the meaning given in Section 6.3.1.
"Reference Services" shall have the meaning given in Section 6.3.1.
"Regulation" means any statute, law, ordinance, regulation, requirement,
order or rule of any federal, state, or local government or other governmental
agency or body or of any other type of regulatory body, or any governmental or
administrative interpretation of any of the foregoing, including, without
limitation, (i) those covering health, safety, environmental, energy,
transportation, bribery, record keeping, zoning, anti-discrimination, antitrust,
wage and hour, and price and wage control matters, (ii) requirements imposed by
any governmental or regulatory body which must be satisfied to qualify for
Medicare reimbursements, and (iii) any and all federal, state and local health
care laws relating to or covering the methods and ways in which Teleprinter
Services, and incidental services or benefits provided to Connected Providers in
connection with the provision of Teleprinter Services, are provided to the
Connected Providers, including, but not limited to, 42 U.S.C. Section 1395nn and
the Clinical Laboratory Improvement Amendments of 1988, as amended.
"Regulatory Change" has the meaning set forth in Section 6.4.1 of the
Agreement.
"Relationship Manager" has the meaning set forth in Section 13.1.1 of the
Agreement.
"[*]" means (i) any employee of SBCL; (ii) any employee of [*]; (iii) any
employee of a [*]; (iv) any employee of [*]; (v) any employee [*].
"SBCL Access" shall mean access to SBCL laboratory information computer
systems.
"SBCL Indemnitee" means SBCL and its Affiliates, and its or their
respective directors, officers, employees and permitted assigns.
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
"SBCL Lab" means any location at which SBCL or its Affiliates provide, or
may in the future provide, clinical laboratory testing services, regardless of
the means used by such lab for lab order entry and results reporting.
"SBCL President" shall mean the President of SBCL, presently John B.
Okkerse, Jr., Ph.D., or should SBCL be restructured in any manner, the officer
of SBCL having top authority over SBCL's operations.
"Self Referral Laws" shall have the meaning given in Section 8.1.
"SBCL Relationship Manager" shall have the meaning given in Section 13.1.2.
"Shared Use" shall mean the use of a Phone Line, teleprinter or other
equipment by or for the benefit of a Connected Provider for any purpose other
than (i) for Teleprinter Services or (ii) receipt of communications from
Healtheon related to Teleprinter Services.
"Site" shall mean a site where a teleprinter used for Teleprinter Services
is located.
"Site Fee" shall mean the total of (i) the [*] Telecom Fee and (ii) either
the Year One [*] Teleprinter Fee or the Standard [*] Teleprinter Fee, as may be
applicable for any [*].
"SOPs" shall have the meaning given in Section 8.2.2.
"Stark Law" shall have the meaning given in Section 8.1.
"Standard [*] Teleprinter Fee" shall have the meaning given in Section
5.1.3.
"[*]" has the meaning given in Section 3.1.2.
"Systems Changes" has the meaning set forth in Section 7.1 of the
Agreement.
"Telecom Baseline" shall have the meaning given in Section 4.6.1.
"Teleprinter Baseline" shall have the meaning given in Section 5.1.6.
"Teleprinter Services" means the transmission by SBCL of clinical
laboratory test results from an SBCL Lab to a teleprinter covered by this
Agreement and the printing of such results by such teleprinter.
"Temporary Telecom Baseline" shall have the meaning given in Section 4.6.2.
"Temporary Teleprinter Baseline" shall have the meaning given in Section
5.2.
"Test Report" means a report generated by an SBCL Lab, setting forth the
results of one or more diagnostic or other laboratory tests performed by an SBCL
Lab at the request of a Connected Provider.
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
"Third Party Claim" means any claim, suit or proceeding (including, without
limitation, a binding arbitration or an audit by any taxing authority) that is
instituted against an Indemnitee by a Person other than a party hereto and
which, if prosecuted successfully, would result in a Loss for which such
Indemnitee is entitled to indemnification hereunder.
"Threatened Change" shall have the meaning given at Section 7.3.
"TopLab" means SBCL's proprietary laboratory systems which facilitate
SBCL's internal automated laboratory test processing and reporting, including
but not limited to SBCL's Total Order Processing Laboratory system.
"Trade Secrets" means information related to a party (1) which derives
economic value, actual or potential, from not being generally known to or
readily ascertainable by other Persons who can obtain economic value from its
disclosure or use, and (2) which is the subject of efforts by said party that
are reasonable under the circumstances to maintain its secrecy.
"Transferred Phone Line" shall have the meaning given in Section 4.3.
"Transition Committee" means the committee described in Section 2.1 of the
Agreement.
"Transition Period" means the period beginning on the Effective Date and
ending on [*].
"Transmission" means the transmittal through the use of Teleprinter
Services of Transmittal Information to a Site.
"Transmittal Information" means information which SBCL transmits to a Site
through use of Teleprinter Services.
"Year" means a twelve (12) month period ending on January 31, such that
"Year One" shall mean the period from February 1, 1999 to January 31, 2000;
"Year Two" shall mean the period from February 1, 2000 to January 31, 2001;
"Year Three" shall mean the period from February 1, 2001 to January 31, 2002;
"Year Four" shall mean the period from February 1, 2002 to January 31, 2003; and
"Year Five" shall mean the period from February 1, 2003 to January 31, 2004.
"[*]" has the meaning given in Section 5.13.5.
"Year Five [*]" has the meaning given in Section 5.13.6.
"Year One Denominator" shall have the meaning given in Section 5.1.7.
"Year One [*]" has the meaning given in Section 5.13.2.
"Year One [*] Teleprinter Fee" shall have the meaning given in Section
5.1.4.
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
"Year One Teleprinter Cost" shall have the meaning given in Section 5.1.8.
"Year Three [*]" has the meaning given in Section 5.13.4.
"Year Two [*]" has the meaning given in Section 5.13.3.
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
EXHIBIT 1.1.1(g)
REPORTS
1. REPORTS HEALTHEON WILL PROVIDE TO SBCL
1.1 REPORTS HEALTHEON WILL PROVIDE TO SBCL:
Beginning with [*] Agreed Services activity, the billing reports
and performance reports listed below shall be provided by Healtheon to SBCL in
accordance with the schedules indicated below. Other reports requested by SBCL
which are reasonably required for billing, [*] and monitoring of Healtheon
performance, and which include only data which is available to Healtheon, will
also be provided to SBCL by Healtheon. Notwithstanding the foregoing, to the
extent information related to new installations is required for such reports,
Healtheon shall institute systems required to collect the necessary information
related to such new installations.
1.1.1 Billing Reports
(a) Monthly summary reports as of the end of each month by the
twentieth (20) day of the following month for each of the
[*] by category ([*]), provided that SBCL provides such
categories in the transferred database or at time of
install:
(i) Total Active Teleprinters
(ii) Total SBCL Sites [*]
(iii) Total New Active Teleprinters
(iv) New SBCL Sites [*]
(v) SBCL Sites [*] Teleprinters
(vi) SBCL Phone Lines Transferred to Healtheon
(vii) TELEPRINTERS de-installed (deactivated) by Reason Code
(viii) ACTIVE TELEPRINTERS [*]
(ix) [*]
(b) SBCL will provide to Healtheon an initial database of
teleprinter Sites, which includes the information described
below that is currently available to SBCL in electronic
form. Thereafter, Healtheon will maintain, on a current
basis, this data [*] for [*] teleprinter Sites and [*]
in an [*] data base of Sites and [*]. Healtheon shall
extract information from this data base monthly for SBCL's
use, which extract shall be in a mutually agreed electronic
format and shall include, by way of example and not
limitation, the following information: status of each Site
(active, inactive, [*] teleprinter [*]), date SBCL
request for teleprinter installation received by Healtheon,
date teleprinter installed/activated, date teleprinter
de-installed or SBCL service discontinued, [*]
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
1.1.2 Performance Reports
(a) All reports necessary to verify and measure the Performance
Standards, including, but not limited to the following:
(i) Monthly help desk reports, which shall include the
number of calls received, [*], type of problem
(detail problem coded) and [*] resolve; and the total
number of problems [*] in accordance with the
Performance Standards. If the collection of any
information required for such help desk reports
reasonably requires the use of an automated problem
tracking computer system, such information will not
be provided until [*]
(ii) Customer Support Standards reports showing actual
performance statistics against the Performance Standrds
as described in Exhibit 1.2 for current month and
rolling prior 12 months.
1.2 REPORTS SBCL WILL PROVIDE TO HEALTHEON
1.2.1 SBCL will provide reasonable access to information
required by Healtheon to perform its obligations under
Section 1.1.1 of this EXHIBIT.
1.2.2 Monthly telecommunications reports [*] that are made
available to SBCL by the various telecommunications
suppliers, including, as available: [*], [*] , carrier
name, carrier phone number, carrier contact, carrier club
bill number, and any [*] information [*]
telecommunications lines.
1.2.3 When requested by Healtheon and when reasonably necessary
to [*] in accordance with [*] SBCL will provide Healtheon
with a report of [*].
1.2.4 Monthly report of [*] all SBCL result reports transmitted to Sites via
Agreed Services. [*]
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
EXHIBIT 1.1.1(h) TO SERVICES AGREEMENT
[*]
ACCEPTED AND AGREED:
- ---------------------------------
("Client")
- ---------------------------------
Address ("Client Location")
By:
------------------------------
Title:
---------------------------
Date:
----------------------------
HEALTHEON CORPORATION
By:
-----------------------------
Date:
----------------------------
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
EXHIBIT 1.2
PERFORMANCE STANDARDS
Healtheon shall provide Agreed Services at a level that, with respect to
each Category below, is equal to or greater than the level of service provided
by SBCL with respect to [*] Performance Standards").
Immediately following the Closing Date, Healtheon and SBCL will [*]
determine the [*] Performance Standards for [*] and [*] by identifying and
defining performance criteria and associated metrics that, with reasonable
accuracy, describe the levels of performance [*]. Healtheon and SBCL will use
the [*] Performance Standards so determined and [*] and set mutually agreeable
performance criteria and metrics for the Performance Standards applicable to
Healtheon under this Agreement [*]
The Performance Standards applicable to Healtheon will include and measure
[*] those categories of performance and/or service that are [*] attributable to
Healtheon's responsibilities under this Agreement. Healtheon will not be deemed
to have failed to achieve the Performance Standards to the extent such failure
is caused solely by circumstances beyond its control, such as [*].
If the Parties fail to agree to and implement Performance Standards [*],
notwithstanding anything in this Agreement to the contrary, either party may
immediately elect to submit the matter to Dispute Resolution in accordance with
the provisions in Section 16.
HARDWARE AND TRANSMISSION PERFORMANCE STANDARDS
HARDWARE AVAILABILITY
The Hardware will, in the ordinary course, be available [*]. For each
month, Healtheon shall maintain a [*] as determined by [*]Availability means
Hardware systems and modems are operational, functioning properly and available
for receiving/accepting report transmissions.
SUCCESSFULLY DELIVERED TRANSMISSIONS
For each month, Healtheon shall maintain a "[*] A Successfully Delivered
Transmission shall mean a call made to a unit of Hardware from any SBCL source
for the purpose of processing Teleprinter Services as to which Hardware
successfully: (i) [*] successfully prints any TEST RESULTS transmitted by SBCL
systems in accordance with applicable specifications. Factors such as [*] shall
be taken into account in determining the performance standard for Successfully
Delivered Transmissions.
Notwithstanding anything herein contained to the contrary, Healtheon will
make commercially reasonable efforts to maintain at least the same successful
connectivity rate for [*] results transmissions whether the transmissions are
made [*].
[[*]] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
CUSTOMER SUPPORT STANDARDS
HEALTHEON HELP DESK
The Healtheon Help Desk for all Teleprinter Services will be staffed [*].
Healtheon will be responsible for all calls related to Agreed Services to
address any aspect of the Agreed Services except for calls from Connected
Providers RELATING TO [*] which will [*]. Healtheon will attempt to resolve any
issues related thereto, including but not limited to supplies requests, "how to"
questions, hardware malfunctions, and [*] difficulties. Issues of any severity
level can be reported to the Help Desk during these times via any one of the
following methods:
[*]
[*]
[*]
The Healtheon help desk will resolve [*] all calls at the time the client
calls, to the extent that the call is resolvable over the phone. By [*] from
the Closing Date, SBCL and Healtheon will have developed and mutually agreed to
processes for Help Desk [*]
HELP DESK RESPONSE TIMES
Healtheon will provide Help Desk support for Agreed Services such that,
[*], levels of [*] calls and [*] shall be no greater than the levels set forth:
[*] [*]
[*]
AFTER HOURS SUPPORT
There shall be after hours support, which is typically limited to issues
that are defined as [*] as further defined below. These include, but are not
limited to, issues that involve [*]after hours transmission is deemed necessary
by the Connected Provider. Non-critical issues such as [*] are handled during
normal Help Desk hours. Service is initiated by calling the main Help Desk [*]
and leaving a detailed voice message. Voice mail left after hours or on holidays
will result in an automatic [*] and immediately initiate investigatory and
corrective actions as appropriate in accordance with the [*].
CALL TRACKING
Beginning [*] for Teleprinter Services, all calls made to the Healtheon
Help Desk will be logged into [*], and will include at a minimum the following
information:
[*]
[*]
[*]
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
PROACTIVE SERVICE MONITORING
Healtheon will use the [*] to determine proactively which Connected
Providers are having difficulty receiving their reports. This proactive
monitoring will be performed [*] the Healtheon Help Desk. Healtheon will
call Site(s) with problems [*] and perform troubleshooting techniques to
resolve the problem(s). All such problems will be logged and a service call
initiated [*].
[*]
Healtheon personnel will need access to certain [*] functions to meet
Performance Standards including, but not limited to, Proactive Service
Monitoring. The following is a representative list of the [*] functions [*] to
support teleprinters. [*] use of these [*] functions, as appropriate
(excluding [*]), will be reviewed and the parties will mutually agree to which
functions are necessary to allow Healtheon to meet the Performance Standards,
and such functions shall be [*] by [*]. Should such [*] not be agreed and [*]
the parties will proceed to dispute resolution in accordance with Section 16.2.
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
[*]
[*]
[*]
PROBLEM RESOLUTION
Working with [*], the Healtheon Help Desk will assess each situation and
immediately take appropriate actions to resolve the problem on the phone such as
to verify that [*] are not the cause of the problem. After the original
assessment has been made and [*] , Healtheon will take such action as required
to resolve the problem, for example, but not by way of limitation: (i) [*]
Help Desk calls will be logged and appropriate actions will be taken based
upon [*] each call. It is the responsibility of the analyst handling the call
to [*] in accordance with the [*]. The definition of [*] and the [*]
DEFINITION: One or more Connected Providers is not properly
receiving results reports through the Hardware.
REQUIRED ACTION: [*] of [*] issues will be resolved within [*]
of the [*]Healtheon will immediately notify the appropriate [*] whenever a [*]
problem is logged and again when it is fully resolved. Healtheon will notify
SBCL immediately of any [*] problem that is not resolved within [*] and provide
an estimate and plan of when the problem will be resolved. A [*] Problem is
resolved when [*]
[*]
DEFINITION: One or more Connected Providers is not receiving
results reports through the Hardware or is experiencing [*], and either of the
following is true: (i) the Help Desk, after [*] determines that to resolve the
problem [*]
REQUIRED ACTION: [*] of [*] problems will be resolved within
[*] of the time it was first received by Healtheon. Healtheon will notify
SBCL immediately of any [*] problem that is not resolved within [*] and provide
an estimate and plan of when the problem will be resolved. When requested by
the Connected Provider, Healtheon will use its reasonable efforts to resolve
[*] problems within [*]. A [*] Problem is resolved when the [*]
MAINTENANCE AND ADMINISTRATION OF TELEPHONE LINES AS SET FORTH IN SECTION
4.5 OF THE AGREEMENT, THE transfer of Phone Lines to Healtheon pursuant to
Section 4.3 shall be [*]
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
NEW TELEPRINTER INSTALLATION/ACTIVATION
In accordance with the agreed upon procedures for installing/activating A
NEW TELEPRINTER FOR A SITE that SBCL requests or approves for Teleprinter
Services, Healtheon will:
If new phone line required, order phone line installation and new service
on behalf of [*] on average within [*] of receipt by Healtheon of a
properly approved and completed NEW TELEPRINTER INSTALL notification
from SBCL and will diligently follow up with the phone company until
such phone is activated and working properly;
Provide Hardware, Hardware installation, Hardware testing [*]coordination
of setup of [*] with SBCL, and training as required under this
Agreement, to properly prepare and set up the new Connected Provider
to use Teleprinter Services within [*] after receipt by Healtheon of
[*] NEW TELEPRINTER notification from SBCL and [*] exists or has
occurred; and
In accordance with Section 6.1 of this Agreement, Healtheon will
accommodate STAT Installations either [*] or [*].
Healtheon shall not be responsible for delays in meeting the time
commitments in this New TELEPRINTER Installation/Activation section: (i) TO
the extent the delay is caused by the [*] in which case SBCL and Healtheon
will mutually develop and agree to an appropriate plan and schedule; or
(iii) [*]installations require [*] or over [*] (in which case the [*]
installation will be completed within [*] after receipt of the appropriate
notice).
DE-INSTALLATION/DE-ACTIVATION
When requested by SBCL [*], Healtheon will (i) de-activate a Connected
Provider from SBCL [*] after receipt of SBCL's [*] notification for
de-activation, and (ii) de-install Hardware from any Connected Provider
within [*] after receipt of SBCL's de-installation request. If appropriate,
Healtheon may [*] in that Site in accordance with this Agreement with the
approval of the [*].
RETRAINING
Healtheon will provide ongoing training support in a manner and at such
frequency [*]Teleprinter Services[*]
CONSUMABLE SUPPLIES
Healtheon will provide, [*] supplies required by all Connected Sites for
use in Teleprinter Services as specified in this Agreement. Healtheon will
deliver or arrange for delivery of these supplies as required for
uninterrupted use of Teleprinter Services.
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
Routine supply orders will have [*] (TAT), i.e. [*]Healtheon will provide
[*] TAT for delivery of supplies. SBCL will cooperate with Healtheon in its
efforts to manage timely distribution of supplies, by for example, [*]
MEASUREMENTS AND PROBLEM TRACKING
Measurement [*] to resolve problems will begin when the problem is
received by the Healtheon Help Desk at which time it will be recorded [*].
Measurement will end when the call is resolved satisfactorily and closed by the
Healtheon Help Desk representative. In the case of calls that [*] for
questions or issues not covered by the Healtheon Help Desk, the Healtheon
analyst will, except in those cases where the problem determination or
resolution is clearly the responsibility [*] because of the nature of the call,
[*]. So long as [*] provides the information needed to resolve such a call,
Healtheon will also document that call and close it out with a detailed
explanation of the final resolution. Where it is not possible for the Healtheon
Analyst to remain [*] it is the responsibility of the [*] to notify the
Healtheon Help Desk if the outcome is to be documented in the help desk system.
The service level call statistics will be at least as comprehensive as
anticipated by Healtheon or in place for [*]. Other measurements that will be
made available on a monthly basis will come from [*]. The variety of reports
available based upon the [*] and [*] will include but not limited to:
Number of calls [*]
Calls [*]
[*]
[*]
[*]
[*]
The [*] calls closed within the time frame objectives will be measured by
[*]by priority level, [*] calls closed within the time frame objectives [*].
The Healtheon Help Desk will use best efforts to accommodate any requests
by SBCL for additional information as long as the collection of the information
does not add significant time and effort in logging the call. The Healtheon
Help Desk statistics will be reported to SBCL on a monthly basis.
CLIENT SATISFACTION SURVEYS
Within [*], Healtheon will conduct [*]client satisfaction survey [*] For
[*] during the term of the Services Agreement, Healtheon will [*]
satisfaction with Healtheon's Agreed Services. The format and content of the
[*] surveys shall be determined by mutual agreement of Healtheon and SBCL.
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
As measured by the results of the [*] satisfaction surveys and additional
surveys and measurements as may be mutually agreed to by the parties from time
to time, client satisfaction must at all times [*] levels established by [*].
Client satisfaction surveys shall include [*] those matters or concerns that
related to Agreed Services or are within the [*] In the event that
satisfaction levels [*] will do the following:
Healtheon will undertake commercially reasonable steps to address any
satisfaction concerns expressed in the surveys.
Healtheon shall present an improvement plan within 20 business days to SBCL
for SBCL's review and approval, which shall not be unreasonably
withheld.
Healtheon will conduct an additional survey in four months, or as agreed,
after the most recent survey to demonstrate the improved levels of
client satisfaction, as may be proposed in Healtheon's improvement
plan(s).
SBCL agrees to cooperate with Healtheon and assist Healtheon in identifying
client concerns to assure that such concerns are [*]Healtheon's delivery of
Agreed Services under this Agreement and not [*]
[*] STANDARDS
[*] Teleprinter Services will not include any [*] Healtheon. Rather, [*]
will [*] the Hardware through [*] provided by [*] or Healtheon. In
accordance with [*] of the Services Agreement, should Healtheon [*] and SBCL
[*], such services will meet the performance standards mutually agreed to by
the parties at such time, but such standards shall be no less than [*].
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
EXHIBIT 2.1
TRANSITION COMMITTEE MEMBERS
<TABLE>
- --------------------------------------------------------------------------------
SBCL Representatives Healtheon Representatives
- --------------------------------------------------------------------------------
<S> <C>
[*] [*]
- --------------------------------------------------------------------------------
[*] [*]
- --------------------------------------------------------------------------------
[*] [*]
- --------------------------------------------------------------------------------
[*] [*]
- --------------------------------------------------------------------------------
[*] [*]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Others as agreed with SBCL Others as agreed with Healtheon
- --------------------------------------------------------------------------------
</TABLE>
Chairpersons of the Transition Committee shall be:
[*]
[*]
Criteria for all members of the Transition Committee:
Each member shall be [*] and shall have available [*].
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
EXHIBIT 2.3
<TABLE>
<CAPTION>
NAME CENTER LAB TYPE PERCENT
------ -------- ----- ------ -------
<S> <C> <C> <C> <C>
[*]
</TABLE>
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
EXHIBIT 5.13.8
TO BE PROVIDED
<PAGE>
EXHIBIT 11.2
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
LABORATORY PHONE ZIP CODE AUTO DIAL GROUP
- ------------- ------- -------- -----------------
<S> <C> <C> <C>
[*]
TOTAL
- --------------------------------------------------------------------------------
</TABLE>
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,526
<SECURITIES> 866
<RECEIVABLES> 6,393
<ALLOWANCES> 130
<INVENTORY> 0
<CURRENT-ASSETS> 12,276
<PP&E> 18,799
<DEPRECIATION> 7,523
<TOTAL-ASSETS> 50,271
<CURRENT-LIABILITIES> 18,331
<BONDS> 0
0
0
<COMMON> 5
<OTHER-SE> 30,221
<TOTAL-LIABILITY-AND-EQUITY> 50,271
<SALES> 0
<TOTAL-REVENUES> 33,231
<CGS> 0
<TOTAL-COSTS> 31,894
<OTHER-EXPENSES> 36,714
<LOSS-PROVISION> 66
<INTEREST-EXPENSE> 361
<INCOME-PRETAX> (35,860)
<INCOME-TAX> 0
<INCOME-CONTINUING> (35,860)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (35,860)
<EPS-PRIMARY> (.74)
<EPS-DILUTED> (.74)
</TABLE>
